Archives for posts with tag: decentralization

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For the sake of scaling, enterprises tend to create internal service divisions that are bureaucratic and monopolistic: Accounting, Procurement, R&D, Human Resources are usually run as subsidized monopolies. The pool that pays for their services is covered by an overhead charge imposed on the units served.

In general, subsidized monopolies are generally insensitive and unresponsive to the users of their services, but they are sensitive and responsive to those who subsidize them. Subsidizers are often not users of the service, hence less aware of the services’ deficiencies from the users’ point of view. In addition, bureaucracies try to ensure their survival by becoming as large as possible; they operate on the (not unreasonable) assumption that the larger they are, the more important they are and the more difficult they are to eliminate.

Centrally controlled corporations stimulate the increases in costs of internally provided products and services because the supplying units do not need to compare their costs and prices with those of external suppliers. How can you value a subsidized internal unit? It’s impossible. In a market controlled enterprise, users, not subsidizers, evaluate suppliers and express their evaluation in a way that counts – by their purchases.

As organizations of any kind become larger and more complex, the ability of centralized controllers to know all they need to know to manage their organizations effectively diminishes. Thats’s why an enterprise based on market economy works better in large systems: it disperses economic control among many enterprises that must compete with others in order to survive. And survival requires meeting or exceeding the expectations of customers and consumers.

Market Enterprise

A few requirements are important for an internal market economy to work within an enterprise:

  • Every unit within the enterprise has to be either a profit center or a cost center that is part of a profit center that is responsible for the cost center’s performance. Profit Centers are not always expected profitable but they have to be accountable.
  • Profit Centers have the freedom to buy any service or product they want from whatever source they want, and to sell their outputs to whomever they want at whatever price they want or are are willing to accept.
  • A corporate unit that reduces the value of the corporation shouldn’t be part of it no matter how profitable it is when looked at separately. For that reason, the enterprise has the ability to intervene in a unit’s purchases and sales bot only when it benefits an organization as a whole.
  • If there any executive reasons to buy services from internal resources even though outside suppliers are cheaper, the executive can force the unit to buy from within but has to pay the difference out of his own unit’s budget. This means that a selling unit will never have to sell its output at a price lower than it wants to and can.
  • A manager doesn’t tell his or her subordinate units what to buy and sell unless a negative effect on other parts of the corporation or the corporation as a whole can be perceived.
  • The executive units receives income from two sources: a) it charges for the operating and investment capital it supplies to subordinate units b) it imposes a tax on the profitability of each unit.
  • Each profit center can accumulate profit up to a certain level that all stakeholders agreed on. Profits in excess of the specified amount will be passed up to the corporate level for its use.

Why a market enterprise?

Every enterprise unit operating within an internal market economy becomes a profit center. Therefore, for each unit the same success metrics can be applied. It allows managers to hone their skills better since they have a lot of autonomy and it gives each stakeholder an opportunity shine. Managers will be more concerned to get all the information they need to run a profitable unit and offering that information to other units to improve interactions.

The biggest challenge in implementing this system is the tendency of managers to withhold information. They fail to see that empowering all stakeholders might decrease their stranglehold on information and power but, at the same time, empowers all stakeholders to run a much more profitable organization. And an organization everybody is invested in. It is often recommended to remove managers that are more concerned with their own power base and not the overall health of the organization.

These managers often form connections with units that are unable to compete effectively or are no longer needed in the enterprise. While dealing with these challenges, the enterprise should never forget that without converting to a market enterprise, the whole organization might become extinct.

In the next installment, we will talk about organizational structures.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8.

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There are systems that are machines; there are systems that are organisms; and there are systems that are social systems. You would be really stupid to treat a machine as an organism. No machine has any goals of survival or growth. But, for some reason, we do treat organisms as machines. Actually, most companies continue to do so.┬áTreating organisms as machines or social systems as machine might be somehow useful. But it doesn’t deliver the multitude of benefits when looking at a social system as a social system.

One of the unintended consequences of this thinking is the tendency to make people behave as though they were machines. Dehumanizing work has led to alienation from institutions, one of the biggest challenges for companies. The reductive doctrine just goes against anything humans believe in: Holistic medicine, the Earth as a global ecosystem, our planet as part of a bigger universe. We’re living in an age of expansion: To understand anything, we have to look at larger systems. Sure, we might never completely understand everything but our understanding increases when we look at the larger picture, reflecting on the largest systems our mind can comprehend.

But, first, let’s have a look how we got here:

From Industrial Revolution to modern corporation

The Industrial Revolution was about the mechanization of work. First thing we did is to take each task apart. Reducing work to elementary tasks. The next step was to mechanize those tasks. We separated tasks into two piles: tasks machines could do and tasks people were assigned to (because it was too complex for machines, human labor was cheaper, etc.). Once we completed the analysis, we aggregated our findings and developed a workflow of elementary tasks performed by men and machines. These are the basics of a modern factory.

In the early stages of industrialization, an enterprise was created to serve an owner. The only reason of existence for the enterprise was to provide the owner with a return on his investment. The worker was a machine: Input equals Output. As the size and complexity of organizations increased, it became less effective to manage them as though they were machines. Decentralizing control became necessary which was incompatible with a mechanistic conception of an organization.

The next step in organization structures was to separate the body (Corpus, meaning body), the operating unit, and the brain, management. This was a fairly easy way to manage an organization’s growth and increase the diversity of its outputs. The body was mindless. It had no choice. It was still a tool, a lever to be pulled.

In the 60’s, various civil movements (civil liberties, environmental, etc.) formed outside of social systems, insisting that their interests be better served by the systems that affected them. Ethics and social responsibility became cornerstones of successful corporations. The command and control management culture changed during that time, focusing more on managing interactions and enabling people to do their jobs better.

While a lot of progress was being made during that time, companies had to react to the advances in information technology and communication. The common belief was (and often is) that people would react mechanistically to information, meaning more and more information and better communication structures would increase the performance of businesses dramatically. As we all experienced during the Great Recession and the demise of various financial models, humans don’t react deterministically to the information they receive.

Shareholder Value vs Stakeholder Value

The main challenge for modern enterprises is to transform from a shareholder-centric to a stakeholder-centric point of view. It’s not enough anymore to create wealth for a limited amount of shareholders; modern enterprises are tasked to create and distribute wealth throughout society. The primary task for each modern enterprise is to provide productive employment with purpose. Companies have to develop communities of purpose focusing on a common cause, which emanates from common values, vision, and passion.

Sharing a common purpose helps companies to deal effectively with increasing information overload and intensifying conflicts. A social enterprise is capable of continuously dissolving conflict while increasing choice. This requires a new organizational concept that sees evolution as its most important objective. Evolution doesn’t always mean growth: Growth may occur without evolution and vice versa. This new organizational model needs to be based on the pillars of democracy, must be multi-dimensional (function, output and stakeholders), agile planning and an optimization system.

In Part 3, we’ll discuss what new forms of management are needed for the social enterprise based on the principles of Human Business Design.

In case you missed it, Part 1 talked about the nature of systems.