As anyone in business knows the world of doing business has become unpredictable, unstable and uncertain. Internal business environments have changed. Jobs for life have gone. Loyalty is rare. Big companies collapse as easily as small ones. Mergers, acquisitions and constant flux are the order of the day. Business vision appears short term. The old and comforting idea of the firm protecting the people who work in it seems to have disappeared. We feel threatened. How do we cope?
Often the people who cope the best are the ones who understand their environment the most. And there is a new business paradigm that explains a lot.
What's having a dominant impact on business, is that as the vestiges of command and control economies are being deconstructed into fully developed free markets the key elements that enable free markets to operate are entering the internal structures of firms. Firms in effect are developing into mini free markets.
This simple idea that firms are moving away from being command and control pyramids and operating as if they are free markets themselves is central to understanding the new environment.
Free markets are an annoyance. They are unpredictable, forever changing, don't care about the emotions or needs of suppliers and are entirely focused on the needs of customers. Free markets are difficult to comprehend, only appear to have form and structure when looked at in retrospect and change as soon as we seem to understand them. Free markets are scary because they appear to control us rather than we controlling ourselves.
Why would firms want to operate as internal free markets? How can firms operate like free markets? Wouldn't this create chaos? Does this mean that firms no longer have responsibilities to the people who work in them? Is this a dangerous new world?
What we forget about free markets however is that for some reason they have proven to be the system that delivers the highest quality economic and social outcomes to all in a society. Free markets see through politics and focus on results. We individuals are the free market. We demand results. We are unpredictable. We have changing needs and wants. But oddly when we are allowed to operate with lots of other individuals as free markets, we cooperate, coordinate, function as teams and pull together as a whole. We do this as free markets because we want to. Individuals come together as powerful but changing collectives under free markets.
So to it is with the new firm. The same cooperative, self motivating human dynamic of free markets is the key element that enters firms when firms become internal free markets.
But what do free markets businesses look like? Surprisingly they are familiar. Traditional firms are pyramid structures of command and control. Employees are supposed to do what employers want. Free markets inside firms deconstruct employment control systems replacing them with wide varieties of commercial contract type relationships. Under commercial type arrangements human dynamics inside firms are client rather than employment focused.
The processes are most readily recognisable in the retail sector. Coles Myer is a traditional command and control company, steered from the top with entrepreneurial direction the preserve of an elite class of managers. Like a huge ship, when it gets into trouble it can be slow to change. This compares to the internally franchised structure of Harvey Norman which has taken important and profitable market share from Coles Myer.
The trick with Harvey Norman is that each department within their stores is a privately owned small business that utilises bulk buying and marketing advantages available through the Harvey Norman banner. Go into the computer section of a Harvey Norman store and the small business owner of the computer department will be on the shop floor watching, coordinating and serving. This small business structure coordinated through Harvey Norman's franchise rules, keeps Harvey Norman intimately alive to the fickle and changing demands of consumers. Coles Myer cannot motivate its employee staff to the same level of self motivation that Harvey Norman systemically achieves with its shop floor, small business entrepreneurs.
The system doesn't assure Harvey Norman success, but it does mean that Harvey Norman's thousands of shop floor entrepreneurs can out-compete the few command and control entrepreneurs running Coles Myer.
But retail is not alone. Information technology and housing construction also operate on internal free market business principles.
Most think however this development is not possible in traditional industrial sectors. But one of the most startling examples of a free market firm is the little known, US giant Koch Industries. This privately owned, media shy conglomerate began in Kansas in 1940, is now rated as one of the largest business in the USA, operates in 30 countries and has annual sales exceeding $US35 billion. Koch Industries operates in oil and gas refining, shipping, chemical, plastics and feedstock, manufactures pollution control equipment, home furnishing components, seatbelts and tyres and runs cattle ranches to name some of their activities.
Their structure and management processes are built around their patented Market Based Management system which is their process of applying free-market dynamics inside their business. In effect their business is a series of internal markets where units sell their services internally and externally. Their management manuals emphasise the human behaviors required to make free markets work. Arrogance is out!
Significantly, Koch Industries claim Market Based Management is the reason for their success stating "Command-based societies have found themselves unable to survive when faced with market-based alternatives, and command-based companies will suffer the same fate when confronted with market based competitors".
Is this the way of the future then? The likely answer is yes but principally in societies dedicated to driving their economies down the free market path. In free market economies, free market businesses are probably a natural and almost inevitable consequence in the human evolutionary story. Command and control firms will survive but they face a powerful competitor.
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