CHAPTER 7
The real voyage of discovery consists not in seeking new lands, but in seeing with new eyes
-- Proust
UNDERSTANDING THE PROBLEM OF THE FIRM
The essential problems of the firm -- considered during most of the twentieth century as a command-and-control, employment-contract-dependent structure -- cannot be resolved. The reason is that the problems confronting the firm are products of the very structure of the employment-controlled firm.
The firm is supposed to be a system of transaction-cost management which enables entrepreneurs to develop, produce, market and sell products and services, and thereby make a profit. Control of the firm is theoretically delivered through the employment contract. But the employment-based firm suffers systemically from problems of poor accountability, low transparency, and corruption by executives and underperformance by de-motivated staff. The firm works -- but it is far from ideal.
These problems of the firm are in large measure a direct consequence of employment because, under employment, the individuality and independence of employees must be suppressed if they are to be subject to control by the employer. Suppression of individuality de-motivates employees and creates poor accountability and low transparency. This is enforced by law under the employment contract.
With the suppression of individuality and independence, all power in the firm flows to the executives who sit at the top. They are thus routinely delivered the opportunity and ability to corrupt the processes of the firm to benefit themselves. In effect, they monopolise the benefits of the firm. This problem occurs where the controllers of the firm do not own the firm. It is an endemic problem in firms and is well recognised as the "principal-agent" problem. What is not recognised is that it is a direct product of, and entrenched within, the firm by its employment-dependent control structure.
The extent to which executives makes use of this opportunity to benefit themselves is ultimately determined by their individual sense of probity and goodwill. The constraints on them from within the firm are few. Some executives rort the firm for their personal benefit. Most executives, however, are true to the greater needs of the firm. But the extent to which the firm does not become corrupted by executives is not a product of the employment system of the firm but exclusively the product of the honest and trustworthy behaviour of most executives who run firms. The system of employment control doesn't constrain corruption but constantly creates opportunities for corruption.
Within the employment construct, executives can corrupt the firm because they are at the top of the employment chain of command. They are the delegated employer even though they are employees themselves. Employees below them are not supposed or allowed to question the directions they are given because they are employed. Consequently, the very people who are most able to identify and expose rorting and corruption -- namely, subordinate employees -- are not allowed or required, under the terms of the employment contract, to do anything about it. And the problem of countering this executive opportunity to extort has become a principal but still unfinished task of corporate governance laws which, unfortunately, treat the problem in bandaid form rather than dealing with the root cause. It is one of the great conundrums of the firm as currently conceived.
The other great problem of the employment-based firm is that employees are far too often de-motivated. They see themselves as caught in a bureaucratic machine in which their sense of self-worth and their ambition are suppressed by the machine-like processes they must fulfil. They are trained, cajoled, induced and goaded into accepting their position, and sometimes even convinced that they enjoy it. This is the function of the human resource industry -- to motivate the de-motivated employee. But why motivate? Because de-motivation spawns individual and collective underperformance. Again, it is the system of employment control that is the systemic cause of de-motivation. And all the efforts of the human resource industry don't remove the problem -- they only mask it. Simply, the firm does not belong to employees. They are subject to the dictates of the system of the firm and, despite all the countervailing efforts of the human resource industry to create bonding to the firm, de-motivation must inevitability occur. Human nature is such that people are not innately motivated to commit to things that they neither own nor control.
Both of these problems -- executive corruption within the firm and employee de-motivation -- are consequences of poor accountability, low transparency and bureaucratic control, and both stem from the employment contract. The employment contract is a contract under which the employer tells an employee what to do. The employee is required to accept those instructions and carry them out with diligence. The control process involves a relationship of dominance by the employer over the employee. It requires the employee to be quiet and accept an instruction whether it's right or wrong. If an employee is concerned that the employer's instruction is wrong or even dangerous, the implied terms of the employment contract tell the employee to follow the employer's instructions regardless. Some employees don't follow the instruction, use their judgement and question it. This may be good. But by doing so they are challenging the authority of the employer, and this threatens the system of control within the firm. Most employees, however, simply accept instructions without question. The consequence is that the very people in the firm who are best placed to keep the systems in the firm accountable and transparent -- the employees -- have implicit counter-instructions in their employment contract not to question the system. Since this makes for systemic low levels of transparency within the firm and system-wide low levels of accountability, firms have to develop extensive processes running on top of, and parallel to, the employment contract to create transparency and accountability. Firms are forced to do this to overcome the problems of the employment contract. Government regulators, likewise, are forced to create countervailing regulations imposing external counter-corruption discipline on the firm because discipline fails to operate in the firm. Transparency, accountability, employee motivation and responsible executive behaviour occur despite the employment contract, not because of it.
The conclusion is that the firm, as a command-and-control, employment-dependent structure, works but has systematic weaknesses which cause the firm to underperform when measured against the human potential contained within the firm.
Employment as a cause of these problems, however, is not a topic that is approached or discussed by business theorists, management academics, managers of firms, economists or business regulators. Why? Because the prevailing concept of the firm is so wedded to the necessity of the employment contract that to question the desirability of the employment contract is conceived as threatening the very existence of the firm.
FREE MARKETS PROVIDE RESOLUTION
The problem of the firm as an employment control structure runs parallel to the problem of economies as command-and-control structures.
One of the greatest lessons learned during the twentieth century is that command-and-control economies perform poorly. Command-and-control economies cause the human capital of a nation to achieve well below its potential. Central control of economies by governments has been shown, time and again, to cause human misery in which corruption at the level of government is endemic. Controlled economies enable the controllers at the top of the system to rort it for their personal benefit. These facts are well recognised. But it took most of the twentieth century for that fact to be recognised and accepted. Once it was realised, however, the speed with which command economies were rejected globally, and free markets embraced, provides testimony to the utter failure of command and control at a national level.
What emerged during the twentieth century was a growing recognition of the superiority of free markets and of the appropriate role of government in free-market economies. Free-market economies are based on the recognition that humans have a natural desire to create, grow, discover and advance their personal position in life. People strive to improve their economic well-being and their physical comfort, and to find their own sense of self-worth and identity. Free markets cater to the physical, economic, psychological and, yes, even spiritual ambitions of humans. Free markets recognise that humans achieve these personal objectives through millions of different and changing personal actions and interactions. These interactions cannot be predicted, designed or determined by central planners. And the human desire to achieve, when allowed to occur within free markets, involves complex mixtures of both individual and collective action. It is rare for a human to achieve their ambitions in isolation. Few humans are islands! Humans achieve more by being communal. But free markets, unlike command-and-control economies, do not seek to dictate the communal form. Communal forms emerge from free markets and constantly change under free markets. This is the trick of free markets. They maximise both individual and communal action.
But government under free markets also recognises that people have a natural desire to exert control. Humans will seek to maximise the benefits of their activities for themselves and to maximise the opportunity for realisation of their personal ambitions. In seeking to maximise their personal opportunities, people are inclined to seek to stop others from having opportunity. They fear that other people's quest for achievement can restrict their own personal opportunities. It's a two-edged issue involving both desire for, and fear of, competition.
Under free markets, government has recognised the tension between these two human traits -- to be ambitious and communal in achieving ambition, and also to control and maximise personal benefit by denying others the opportunity to realise those benefits. The role of government in free-market economies is to balance the tension between the two traits. It's a delicate and difficult balance.
Governments in free market societies have a complex task. They must set the framework in which people can achieve their goals without allowing people to exploit one another. Government must deliver laws that allow the human entrepreneurial spirit to seek monopoly but prevent them from achieving it. And in targeting this delicate balance, government must recognise that it has the potential to become the largest of all monopolists and the chief exploiter in a society. Consequently, government in free-market economies has progressively confined its role to social and economic objective-setting and law-creation and enforcement, removing itself from economic service delivery. This process is evolutionary, experimental and often poorly carried out. But the principles are being progressively accepted.
Oddly, however, these free-market lessons of the twentieth century have not been applied to the firm. Firms exist within free-market societies like islands of command-and-control socialism. And within government policy settings and the academic conceptual framework of the firm, the command-and-control socialism of firms is not questioned. Worse, the government's approach to the firm is to reinforce and support that command-and-control socialism. It is an oddity of free-market thinking that the socialist firm is thought so necessary and that the essential link of the employment contract to the socialist firm is not considered. This is why management concepts and government regulation are lagging behind human behaviour in firms.
A FIRM MOVE TO FREE MARKETS
As an employment construct, however, the firm has been under challenge and threat for some time. But the threat and challenge come not primarily from the realm of ideas but from the combined behaviours of people. In effect, command-based, socialist firms are facing internal demise and external competition.
How is the socialist firm being challenged?
The "independent employee" is the great internal threat to the employment firm. Independent employees may accept the command system of the employment firm in which they work, but they are not happy with it and comply with it only as a means to earn an income. And they emotionally react against it. They may become belligerent, aggressive, frustrated or benignly compliant. In extreme cases, they may become whistleblowers if they see wrong in the firm, and as a result they usually suffer exclusion from the firm and usually have their honesty and integrity impugned when the command-based firm seeks to protect itself. Witness Corinne Maier of France! (2) Occasionally the firm invites independent employees to be independent, accommodates them, sometimes even encourages them, because to do so assists accountability and improves the firm's performance. Some of the great inspirational management performance gurus of the latter part of the twentieth century in effect appealed directly to the potential to the firm offered by the independent employee.
But, by whatever means, the independent employee is inevitably breaking down the command-and-control employment structure of the firm.
The external threat to the command-based firm comes from firms that have internal markets. The new type of firm adopts the free-market model, even if it is not done consciously. Like most things in human evolution, the non-command-based firm has developed through minute experimentation, with things that work being adopted, and things that seemed to fail rejected.
The process has been comparatively slow but is evident -- although it has not been recognised academically or theoretically. (3) But the emergence of this new firm is unmistakable. And it's an exciting development. The firm that incorporates internal markets is not dependent on command and control. Even if the language of the employment contract is applied, the principles and operation of the commercial contract direct the internal processes of the firm. Where this occurs -- that is, where "markets in the firm" exist -- it spells the death of the socialist firm.
And it is not something that is brand new, unfamiliar or strange. In fact, it is surprisingly familiar. (4)
Alfred P. Sloan was the leader of General Motors of the USA in the days when GM was at its zenith. Sloan guided GM during the 1940s and beyond, so that GM became the greatest industrial giant of the greatest industrial economy in the world. Sloan had a vision of how GM should operate. This vision carried and guided GM long after Sloan's departure. Generally, it is believed that Sloan was the greatest of command-and-control dictators who constructed systems through GM that perfected command and control. Sloan decentralised GM's operations into discrete business units. However, the decentralised businesses operated under a command-and-control regime. Or so it has generally been considered! According to one commentator, although Sloan wanted GM to be "decentralised" "... he also wanted to run it on 'a principle of coordination' -- the principle it turned out, of central command and control." (5)
But the words of Sloan himself suggest that his model was different from the current command-and-control model. Sloan said, "The most important thing I have learned about management is to make men think and act with individual zeal and initiative, yet cooperating with each other". (6) Near the end of his career, Sloan explained in a speech how GM actually operated under his guidance. He said:
We have never consolidated the various units of personnel ... They have been left free to develop their own initiative so that they feel that it is theirs ... In one type of organisation policies and methods are determined at the top and orders are issued down. The other type of management comes from the bottom up and arouses individual initiative. We choose the coordinated type, the one which would apply even to small businesses ... We do not issue orders. I have never issued an order since I have been the operating head of this corporation ... Two hundred and forty-seven men in one group have each day's pay determined by the number of finished motors that pass the last man in the group ... We put no limit on earnings and the men put no limit on production ... Where do policies come from, if they are to be useful in the business? Out of the business itself ... They must come from the men who are in daily contact with the problems ... Our policies come from the bottom. Everything possible in the organisation comes from the bottom. (1)
According to Sloan himself, his successful management concepts were opportunity and motivation. Motivation was achieved by introducing incentive compensation schemes based on production and cost reduction. This does not sound like an employment-based command-and-control company, but rather one in which the production line workers at least were treated as if they were their own business people who determined production and directly benefited financially from the production they controlled. This looks very much like a basic form of markets operating inside a firm. And if this is what Sloan had applied inside GM, it may be that, after he departed, the coordinating systems he layered through the firm were turned by others into command and control. Whatever happened, GM, along with the other USA car manufacturing giants, became disconnected from the market place and suffered dramatic decline when challenged by the Japanese manufacturers during the 1960s-1980s.
GM has struggled ever since. Based on his description, Sloan's model seemed to be close to the "markets in the firm" concept, even if it was not recognised at the time or maintained after his departure.
What appeared to occur in the car manufacturing sector after the Second World War was that the USA command-based giants became progressively less competitive. But at the same time new business models emerged that took market principles directly into their internal operations. One of the most common of these was the direct selling industry -- modelled along similar lines with many well-recognised brand names. One of the most recognisable is probably Amway.
Amway was formed in the USA in 1959. By 2003 it was valued at around $4.6 billion and was operating in 91 countries with annual global sales of some $US1.2 billion. Amway sells its own brand of household consumable products, including laundry products, vitamins and cosmetics. (7) But these products are not found in any retail stores. Amway is sold by tens of thousands of individuals who operate as independent contractors, usually from their own homes. It is a globally organised, home-based small business organisation in which every Amway distributor receives income based on his or her sales. Amway distributors are, in every sense, self-employed independent contractors operating under commercial contract arrangements with Amway. The independent distributors have to deduct their own operating expenses before arriving at a profit. Their status as independent contractors has been tested in courts in many jurisdictions and found to be self-employment. Tax offices internationally now accept the self-employed, small business status of direct selling. Amway is a prime and obvious example of a firm which uses the principles of free markets in its internal structures. The entire, direct selling, global industry with thousands of businesses and many thousands of brands is organised in this way.
Franchising is another example of markets operating in firms.
Ray Kroc was the genius who created the McDonald's empire. (8) In 1954, at around the age of 53, Kroc was a successful salesman who sold commercial food preparation machinery to hamburger and fast-food outlets throughout the USA. Kroc could have retired, but he came across two brothers, the McDonalds, who ran their hamburger store with military precision like no other Kroc had seen. They sold a better hamburger cheaper and faster than any other. Kroc took the McDonald's operating systems and replicated them, store by store, across North America by developing and applying the modern form of franchising. Eventually this turned McDonald's into the global giant it is today.
The heartbeat of McDonald's is the conglomeration of small businesses operating within the coordinated McDonald's system. This system is franchising, which has been replicated worldwide in thousands of different retail markets unrelated to McDonald's. The core concept of retail franchising is that small business retailers who own and operate their own businesses are close to and understand the customer. They have a passion for, commitment to, and focus on their businesses that cannot be replicated in large command-and-control structures. Retail franchising allows small business persons to operate businesses, but it gives them a successful operating system with which they choose to comply. This is similar to the Amway system. In the case of food, the franchising operating systems will include recipes and products, standardised machinery, hygiene and safety systems, and layer these with bulk-buying power, marketing, training, advertising and so on. Franchising combines the advantages of large corporate operating systems with the advantages of small business commitment. And the real key to understanding this is that the control systems in the firm are dominated by commercial contracts, not employment contracts.
McDonald's franchisees enter a commercial contract with McDonald's. The terms of the contract set out rigorous obligations to comply with the McDonald's' operating systems. But before being granted a franchise, a potential franchisee undergoes extensive training in the systems. This training includes considerable unpaid time working in McDonald's stores and unpaid time at one of several McDonald's hamburger universities located across the globe. (9) Only after extensive training at their own expense do potential franchisees have the opportunity to purchase a McDonald's franchise. The contract between McDonald's and the franchisee is clearly a commercial contract in which the franchisee is fully aware of the contract terms and enters the contract of his or her own free will. The franchise contract is the contract that governs the relationship between the McDonald's company and the franchisee. Even though McDonald's is a hamburger and food retail company, its core business is that of a franchiser that designs, organises and runs the systems that enable its specific food-retailing operation to function. Layered commercial contracts are used to direct the system.
McDonald's as a corporation (as distinct from the franchisees) owns the properties and buildings in which the stores operate, and they charge the franchisees rent. McDonald's corporation is one of the largest landholders in the USA and its share price is underpinned by its land holdings. McDonald's works with manufacturers to design and supply the specialised cooking machinery and leases the machinery to the franchisees. McDonald's works with external food and packaging suppliers who manufacture and supply meat, fries, buns, wrapping and so on. McDonald's doesn't ordinarily manufacture these things itself but has the tasks done to its specification by external providers. All this is governed and controlled by commercial contracts. The core business of McDonald's, as distinct from its franchisees, is not the selling of hamburgers. The franchisees sell hamburgers and McDonald's organises all the commercial contracts that enable the franchisees to sell.
The McDonald's form of the franchise system is now common and used widely in a large number of varied retail businesses worldwide that have nothing to do with McDonald's. It is a principal model of "markets in the firm".
Compare franchising with the traditional command-and-control retail department store business. Retailers' large stores are divided into departments along product category lines. Employed department heads manage each department. The department heads are paid wages. They work under all the elements of control that go with being employed. Head buyers do the buying for the multiple departments spread around the many stores that the conglomerate may own. Sales people, also employed, work on the shop floor under employment control through their department managers. The entire ship is steered from the top, with entrepreneurial direction the preserve of an elite of executives. It's an employment-based command-and-control structure. The system works. It has been hugely successful. But it is under stress. During the latter part of the twentieth century, the command-and-control department stores, worldwide, ran into trouble. Profitability plummeted and many collapsed. These traditional retail conglomerates are like huge ships which, when they get into trouble, can be painfully slow to change direction. And they usually seek to change by bringing in new chiefs who take helm of these ships and try to steer them in different directions. But their entrepreneurial flair is too narrowly constrained by an elite of executives who sit at the top of the employment chain.
Compare this with the internally franchised department store structure which has taken its lead from McDonald's franchising. In Australia, for example, the successful retail conglomerate Harvey Norman has taken important and profitable market share from Australian command-and-control retail giant Coles Myer. Both Harvey Norman and Coles Myer retail white goods, bedding, furniture, electronic and computer equipment, and so on. (10)
The trick with Harvey Norman is that it has taken the franchise model and applied it to each department within its stores. Every product department is a privately-owned small business that utilises bulk buying and marketing advantages available through the Harvey Norman banner and organisation. In the computer section of a Harvey Norman store, its small business owner 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 alert to the fickle and changing demands of consumers. Coles Myer, for example, cannot bring its employee staff to the same level of self-motivation that Harvey Norman can systematically achieve with its shop floor, small business entrepreneurs. And it's this fine and delicate level of contact with the customer that makes a critical difference in the retail sector.
Consumers are unpredictable, fickle, and have little loyalty. What clinches the profitable sale in retail is that little extra care and attention that is shown to the customer on the shop floor. Employees can and do show that extra care but the problem for the retail firm is how to systematically spread it throughout the entire business. As a system, the self-employed, small business model will always out-motivate the employment control system. Systematically nurtured self-employment releases entrepreneurial flair and drive throughout a firm, not just at its top, as is the case with the employment-controlled firm. And in retailing, this makes the difference between those firms that really succeed and those that merely plod along.
In retailing, the consumer is the factor that creates the cut-throat competitive environment of the marketplace. The consumer is the free market, and retail businesses that aim to succeed have to connect seamlessly with the free market. Where the structure of the business is market-orientated, the business is more likely to repeatedly connect with its target markets than if it is based on command and control.
But the franchise system of retailing does not guarantee success. Command-and-control employment retail firms can and do succeed. Command-and-control firms can and do layer human resource and marketing systems on top of the employment contract and achieve high motivation and profit. A marketing genius at the head of a command-and-control retail firm can produce stunning results.
Franchise retail firms do collapse. If a franchise firm is not good at managing the commercial arrangements with its suppliers and franchises, it may fail. Its products, positioning in the market place, and so on may be poor. But further, managing a firm through the use of commercial contracts demands higher levels of managerial skill than do employment contracts. With employment contracts the manager's word is law. With commercial contracts, the manager's word is subject to the terms of the commercial contract, and the franchisees and others can, should, and do question the wisdom, authority, and wants of the contract managers.
This is where franchising opens the firm to high levels of transparency and accountability on a daily basis. No one is master. Egos based on hierarchy collapse. Everyone is equal. Everyone in the firm has a client relationship with everyone else. Everyone is a consumer to everyone else. Under this structure, it's hard to rort or corrupt the system because everyone is watching everyone else. If an executive seeks to rort the system for personal gain, it is often at the expense of someone else with whom he or she has direct dealings. Rorting in the franchise system becomes more difficult than under command and control.
Both systems -- employment contract control and commercial contract control -- enable firms to function. But the questions are: which system is likely to continue to work and which system gives greater chance of success? If the macro experience of managing national economies is any guide, and if the experience of franchising in retail is any guide, then "markets in the firm" is likely to systematically out-compete the command-and-control socialist firm.
But franchising is just one model of markets in the firm and it is not completely structured around the commercial contract. Retail franchising generally still makes use of the employment contract on the shop floor where the franchisee is the employer. The relationship between each retail franchisee and the people who work in the small business operations is normally still dominated by the employment contract.
The next model of markets in the firm involves replacing the employment contract in its entirety with the commercial contract throughout the firm. The terminology for this varies across countries and industry sectors, but is most comfortably embraced by the term "independent contracting". Sometimes it is called freelancing, self-employment, or consulting; but whatever the terminology, there is one key and necessary feature: the legal relationship between the individual and the firm is a commercial contract.
This means that the master-and-servant relationship created via the employment contract does not exist. When this occurs, markets can take full hold within the firm. Once again, this development has become surprisingly familiar in the latter part of the twentieth century, although government regulators and many businesses have not altered their terminology and generally still use the term "employment" to describe it.
In North America, it is common to have to tip waiters, bellhops, and other people working in the hospitality and related industries. It is standard practice that the wages paid to these professionals by their "employers" are comparatively low. Tips constitute a significant and important part of their income. Tips are frequently included as a certain percentage of a restaurant bill, but additional tipping is normal and frequently expected. Tips reflect the value the customer puts on the service delivered personally by a waiter at a restaurant. The waiter may work in the restaurant as an "employee", but a significant part of the "payment for service" relationship inside the restaurant is directly between the waiter and the customer.
What does this say for master-servant employment, even if government might use the term "employee" as a statistical description of the waiter, and the restaurant refers to the waiter as an "employee"? In fact, when tipping arrangements are in place, the waiter almost has an implied commercial contract with the customer, the payment for which is at the discretion of the customer. It's close to being a commercial contract but is without the prior agreement of payment. But it's certainly not an employment contract. The waiter has a contract with the restaurant, probably an employment contract, and many of the features of the contract may reflect employment. But certainly the tipping regime breaks down the legalities of the employment contract by allowing elements of independent contracting to flourish.
In addition, in North America well-positioned jobs as waiter, bellhop, concierge, and so on have a resale value and can be bought and sold for substantial amounts of money involving goodwill. Such jobs therefore look very much like independent contracting or self-employment. These people are running their own small business which has an accumulated potential, if not actual, goodwill.
The housing construction sector in Australia is almost exclusively structured around independent contracting. Bricklayers, plasterers, plumbers, carpenters, labourers and other tradespeople associated with the housing construction sector are predominately independent contractors. Few people who work in the housing sector are employees. The companies that build houses use designers, surveyors, supervisors, sales staff and so on who are also predominately independent contractors. The building companies do not actually build houses but coordinate and organise the contracts and people necessary for construction and delivery of end product to the purchaser of the house.
Herein lies the challenge to the idea of the firm as a transaction-cost minimisation process. The employment control concept of the firm holds that firms exist because, if every small aspect of an economy were organised through commercial contracts, the cost of organising and managing the contracts would be so great as to suppress the level of economic activity; as a result, firms evolve in which the employer controls transaction costs by means of employment contracts. It is argued that employment contracts avoid the transaction costs associated with commercial contracts. This concept of the firm was explained by Coase in the 1930s and is still generally accepted, at least by academic economists. (11) Coase was not wrong on his transaction-cost management theory, but was wrong to assume that transaction cost containment by the firm is dependent on the employment contract.
Employment contracts, certainly in the second half of the twentieth century, have generated significant transaction costs of their own, to the point where employment has ceased to provide any transaction-cost advantage. The case of the Australian housing industry proves that firms exist by managing transaction costs, but can do so by way of either commercial contracts or employment contracts.
The idea that the firm is dependent on the employment contract for its existence is not valid. Control through employment is just one of several models for the structure of a firm.
The information technology sector is another which operates "markets in the firm" based on commercial contracts. Most information technology specialists are, in one form or another, independent contractors. The term "employee" is often used, but this is principally to satisfy outdated government regulation requirements.
The information technology sector is characterised by the management of multiple cascading job contracts, which may vary in length from a day to several years. Commercial contracts apply both within and between IT firms. A large company, for example, needs an IT job done. It issues tenders. A large IT company picks up the tender, and then several things happen. The company may have staff who work internally, normally under commercial type contracts or even as employees. The IT project is split into many components and the people working within the firm may bid for aspects of the job. Groups or teams of different sizes form around particular aspects of the project. Team leaders or coordinators emerge; positions are not necessarily organised around any formal hierarchy. A person may be a team leader of a project one day and work the next day on a project to which he or she is a minor contributor. Teams bid for and seek specific people for specific jobs. Remuneration is largely set according to the laws of demand and supply, and may vary from job to job. Work on the project may also be offered to outside suppliers, which may be individuals or small, medium or large companies. Who is competing with whom becomes blurred. In letting work to outsiders, the IT company regularly uses the services of labour hire companies specialising in the IT sector. Individuals who work for themselves are regularly registered with several IT labour hire companies. They may even do part of a job through one labour hire company and another part directly for the IT firm. Some IT labour hire companies provide wide-ranging services to the IT specialists on their books, such as taxation deduction procedures, organising insurance and superannuation, preparing taxation returns, leasing vehicles, and so on.
To an outsider, the labour hire firm may look like an employer, but it doesn't control any of the work. All that the labour hire firm does is manage the contracts. In the IT sector, the differences in the internal structures of the large IT companies and the relationships between external operators are blurred. The entire industry is a massive mix of cascading contracts in which the external observer has difficulty seeing order and pattern. But to the inside players it's perfectly ordered and logical. Each person knows where he or she is in the mix, and actively markets his or her talents and abilities as an individual business. The IT industry is very much a free market for labour that works both across and between businesses, and internally within businesses. The structure and operations of the industry closely parallel those of a stock exchange or network of stock exchanges in which commercial contracts are at play for peoples' services.
In Chapter Two the words of the sheep shearers in Queensland demonstrated the attitudes of independence and business-mindedness that come with being an independent contractor. The Queensland shearers also happened to work under labour hire arrangements which closely resemble those of the IT sector. Traditional labour hire involves the on-hiring of employees of the labour hire company. But in Australia a particular form of labour hire emerged in the early 1990s as a result of several court decisions. In this "Odco" (12) labour hire form of work engagement, the people supplied are independent contractors in both a legal and a practical sense. (13) Operating in a similar way to the IT sector, Odco labour hire companies place independent contractors into a variety of jobs, including in health care, teaching, manufacturing, and many others occupations. It's a major business in Australia.
The essence of Odco labour hire is that the Odco agency does nothing other than manage contract transactions. Odco agencies are firms in their own right. The workers they supply to clients are self-employed people (businesses) in their own right. The agencies supply self-employed workers to other businesses that need the services. Everyone is a client to everyone else. Several layers of firms are in operation and connected, but no employment exists. Transactions costs are managed to the satisfaction of all parties concerned through the Odco agencies. It is another form of markets operating in firms.
KOCH INDUSTRIES
Perhaps the most startling of all examples of "markets in the firm" is Koch Industries, headquartered in Wichita, Kansas, USA. (14) Koch is unique because not only is it structured around "markets in the firm" principles but it has adopted them consciously. Koch is possibly the only firm in the world that has thought deeply about what free markets are and deliberately sought to replicate the operations of free markets in its internal structures and published information on its approach. Koch Industries has developed a unique, patented management system called Market Based Management (MBM). It funds a unit at George Mason University to study, develop, promote and train people in Market Based Management. Its managers are inculcated in, and operate around, Market Based Management.
Koch is an impressive firm. It is a privately held company that does not release any of its financial statements or data to the public, but was cited in 2000 by Forbes magazine (15) as having annual sales of $US35 billion. The firm began in 1940, and between 1961 and 2002 the value of Koch Industries grew by 1,300 times. By comparison, the average value of the Standards and Poor's top 500 companies grew in the same period by 95 times. (16) By 1996, Koch Industries was the second-largest privately held company in America and currently rates as one of the largest American companies. Rather than one business, it's a conglomerate of businesses. It operates globally in commodity trading, petroleum shipment, asphalt production, natural gas, gas liquids, chemical, plastics, fibres production, chemical technology equipment manufacturing, minerals, fertilisers, ranching, securities and finances, and holds numerous other varied investments. It's big! It's different!
Being as big as it is, Koch Industries has attracted its fair share of media attention, but surprisingly little attention has been paid to its market-based management approach. This is in spite of Koch's Chairman, Charles Koch, stating in 1993: "We are convinced that Koch Industries' success stems primarily from our management philosophy, which we call 'market-based management' ... 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". (17) Koch Industries believes that its utilisation of markets in its firm gives it a critical competitive advantage.
| Koch Industries says: MBM "Requires managers to understand the major features of a market economy, then adapt these features as needed to improve management practice". (18) |
The structure of Koch industries is best described as a series of internal markets where units sell their services internally to one another and externally. The management structure relies on internal markets to allocate internal resources. So-called support groups or profit centres are expected to survive in the internal Koch market by offering services competitively to other such centres. With internal markets, for example, a machinery maintenance depot seeks to service manufacturing sectors in the firm. The manufacturing sectors are not obliged to use the internal maintenance group, which has to win its business in competition with other service providers from both inside and outside Koch Industries. In a further application of market principles, the pay of individual workers in the maintenance group is linked to their commercial success. Similar internal competitive markets can be applied to other activities within the firm, such as accounts, debt control, marketing, training, recruitment, design and planning. For internal markets to work, no profit centre must be allowed any exclusive right to deal with any other profit centre: that is, internal monopolies cannot develop.
| Koch Industries says: "The knowledge needed for sensible business decisions is inherently dispersed among many people". (19) |
In these internal markets, the principles of commercial contract transactions between the units drive the relationships between the units. Koch Industries doesn't divulge everything about MBM or its internal structures, so it's not known how Koch Industries actually constructs or manages the internal contracts, but the principles of MBM certainly could not be applied without substantial freedom to contract. Bureaucratic employment contract, command-and-control systems would not be consistent with relationships between the internal units under MBM.
Certainly, employment contracts may apply within each Koch unit, but given that individual remuneration is significantly tied to the profitability of each unit, the financial motivations for each unit would take on many of the features of small business. That is, the people working in each unit would be fully appraised of the profitability of their individual unit and know that profitability affects their personal income. This close connection between each unit's profitability and the personal incomes of its individual members creates a focus and motivation that cannot be replicated in a command bureaucracy. In effect, the internal price mechanisms resulting from this structure send signals constantly through Koch Industries which focus and drive the behaviour both of the units and of individuals.
Under these arrangements, bureaucratic management, rules and regulations are replaced by market performance, price and behavioural signals. "Management" doesn't have to "order" anyone to do anything, because everyone in the firm becomes a self-manager. Class structure is replaced by performance structure. Performance is not determined by bureaucratic rules but by success in the internal market. Competition exists both within and between the internal units. But so, too, do cooperation and community.
| Koch industries says: "Markets are a complex blend of competition and cooperation. Likewise, a market-based firm should promote cooperation while channeling competition into activities that actually promote the common mission". (20) |
Even though people working in each unit have their incomes tied in part to the success of the unit and need to work as teams, they compete with each other for jobs, position and decision-making authority. This is to be expected because this is the normal way people behave. But because individual success is tied to the success of the unit, people also find that they need to cooperate. They have to create their own community to achieve group success. But this community and cooperation doesn't have to be created artificially through set company rules or processes or demands from superiors. People in free markets naturally find their own processes of cooperation and internal community. If they don't, the risk is that their unit will not succeed and not be profitable. Individual failure to cooperate is not masked by an employment bureaucracy, but is exposed by the failure or limited success of the unit in the internal Koch Industries market.
| Koch Industries says: "The goal is to understand the crucial functions played by private property in a market economy, and then allocate rights and responsibilities in ways that harness independent judgement, provide continuous feedback and capitalise the future impact of current decisions". (21) |
Presumably, within Koch Industries, MBM implies that failing units are allowed to fail. If not, MBM would not truly be an internal market process. But, just as in external free markets, a community still needs services, even if a particular service provider fails. It appears that Koch Industries allows different units to compete for the same internal services; and if one unit fails, another already exists that fills the potential service vacuum. But in any community, people become reliant on a service and don't want failure. So it would be expected in Koch Industries that if a unit is servicing other units badly, signals are quickly sent to the underperforming unit to lift its game. These signals will be price, purchasing decisions and, most significantly, direct discussions between people.
While this occurs, the ebb and flow of success and failure, which is a normal part of free markets, operates within Koch Industries. But, importantly, market signals limit the extent to which the failings of any unit can grow to the point where they infect other units and thus risk creating creeping and endemic structural failure within Koch Industries.
By contrast, bureaucratic command-and-control firms systematically mask failure, and so failure in one section of the firm can grow and infect other sections of the firm to the point where, all too late, the resultant collapse can be huge and life-threatening to the firm. With internal markets, failure is not masked but exposed. Hence failure, which always begins in a small way, is more likely to be discovered while it is still small-scale.
Failure is a natural and a necessary precursor to success. Failure is an essential ingredient of free markets. Free markets treat failure benignly and as "water under the bridge". Tomorrow is another day, when success is always possible. Free markets detect failure early on, allow it to occur while it is small, then do something about it and thus prevent it from growing. In this way, success grows by treating failure as normal. Koch Industries has consciously sought to allow this process to occur naturally inside its firm.
Koch Industries has sought to take these elements of free market operations, understand them and apply them in much the same way as they occur in free markets. No one directs behaviour, but the system of free markets enables human behaviour to lean toward success.
According to Koch Industries, internal markets can have a profound effect on productivity. It claims that introducing the price mechanism to the internal workings of the organisation encourages staff to think and act like smart purchasers. When each unit is allowed to operate independently as a small business, relationships between units take on the features of relationships between firms in supply chains. And supply chains are about people making purchasing decisions. But it would be a mistake to view purchasing decisions as price-oriented. In fact, price is only one factor. More critical to purchasing decisions in supply chains is cooperation.
One of the earliest developed secrets of the success of McDonald's, for example, was the realisation that its suppliers had to make a profit. McDonald's needs products supplied at cut-throat prices. (22) But McDonald's operates on the view that in order to achieve low purchase prices for its supplies it needs to cooperate with its suppliers to achieve required quality and delivery capability. The art lies in identifying preferred suppliers with whom relationships can be developed to achieve these ends. Alternative sources of supply may be available and the buyer may shop around for alternatives to lower the price. But there is always a price in any market below which lower prices will always result in an inferior delivered product. McDonald's knows this and works with suppliers to get the lower price, but with the required quality. This is an unceasing and delicate balancing act involving technical knowledge of production issues, supply chain issues, money and human relationships. Importantly, if the supplier is not making money, its long-term viability is uncertain, thus placing the stability of the buyer at risk. The interdependence between suppliers and the purchaser is strong.
| Koch Industries says: "Accountability must extend to the level of the individual. A person or team is free to utilise local knowledge, make judgements and bear the consequences. Assigning a kind of ownership for every activity, action and result". (23) |
The trick of being a smart purchaser in Koch Industries is to combine all these factors so as to make correct and sustainable buying decisions. In Koch Industries, MBM seeks to encourage staff to think and act like smart buyers. This involves all the processes of service delivery within each unit and between units. It's not a competitive price-driven process, but involves many factors, in particular to do with quality.
| Koch Industries says: "This authority system applies both to internal resource allocation and external purchase decisions, and it has allowed Koch to abolish centrally approved budgets. In place of command and control budgeting, Koch tries to approximate the market's allocation through profit and losses"). (24) |
Take one simple example. The story goes that Koch Industries decided to implement MBM with a head office department that produced company reports. Before MBM, the office operated under a budget and diligently produced reports that were supplied to units across Koch Industries. When MBM was applied, the units suddenly became customers of the office. The units were free to choose to buy the reports. Predictably, after the change, the office soon discovered that many units chose not to buy the reports, and it lost revenue. This prompted the office to try to discover what sort of reports the units wanted: what format, how often, at what price, and so on. In effect, the office undertook market research of its potential customers. The office then redesigned its entire approach to reporting and consequently increased the sales of its products. This simple story demonstrates many of the elements of free markets operating inside the firm.
This process is standard within Koch Industries. Units market-research each other through formal and informal processes, always investigating whether they are satisfying their internal customers. The internal culture of Koch Industries is targeted to being one of intense client focus. That is, everyone in Koch Industries needs to view everyone else in the firm as a client. And this focus is not directed from the centre or confined to specialists within the firm; rather, it's a daily necessity. This presumably means that, when Koch Industries deals with external clients, client focus is natural and immediate. This surely would result in higher-quality external client interface than occurs with command-and-control firms. In command-and-control firms, relationships with external customers have to be different from those within the firm.
| Koch Industries says: "MBM does not mean a mindless copying of external market practices inside the firm ... It does not mean merely turning everyone in the firm loose to do whatever they think will make money". (25) |
Koch Industries makes it clear that market-based approaches to the internal structures and operations of the firm are difficult to implement and cannot always be applied. Safety is one such area. Koch Industries operates a wide range of highly technical production plants involving hazardous and dangerous substances. Environmental safety is a constant obsession with Koch, which claims that MBM does not necessarily work in this area. Presumably, Koch Industries has a number of health and safety manuals that dictate operating instructions. But this does not necessarily detract from the internal market principles. Free markets are an approach to systems of human behaviour and interaction that allows people to maximise their individual choices. But free markets and human choice cannot defy the physical laws of the universe. It is perfectly consistent for free markets to regulate according to the known or believed physical realities but to allow individual choice within those constraints. So Koch Industries has to be cautious about where and when MBM can be applied. Choice is sometimes limited, just as is the speed at which we are allowed to drive our cars.
Further, Koch Industries operates in law-based societies and its systems must comply with the law. As has been discussed in this book, many laws assume that firms are employment-based, command-and-control bureaucracies. By default, those laws sometimes almost impose employment-based command and control. No firm, including Koch Industries, can afford to act in defiance of the law. Indeed, to do so would not be consistent with a "markets in the firm" approach in a market economy. And because Koch Industries operates in many different countries, it would encounter wide international variations in the extent to which employment regulation allowed or inhibited MBM. In the USA, for example, employment regulation is minimal by comparison with Germany, Italy, France and other European nations. It is speculation, but presumably Koch Industries would find MBM easier to apply in some countries than in others, which may have an influence in investment decisions.
| Koch Industries says: "But it would be a mistake to view market-based management as always requiring more decentralised decision making ... misplaced authority can be just as disastrous for an organisation as having top management make all decisions". (26) |
Free markets economies are not unregulated; indeed, they are highly regulated. But one main purpose of regulation is to ensure that the free market can operate and is not corrupted. For example, free market economies have significant laws that seek to prevent monopolies forming. In the USA, "Combines" legislation gives central corporate regulators power to investigate monopoly activity and force the break-up of companies that have become excessively large and dominant. USA regulators have done this on several occasions in the past, and subjected Microsoft to Combines investigation during the 1990s. Eventually Microsoft reached agreement with the regulators to modify certain behaviours to ensure that the USA IT industry remained competitive. Microsoft was not as a consequence broken up in the USA. (27)
Likewise, Koch Industries indicates that there are times when the centre must impose authority. But, as with free market regulation, it is assumed that such central intervention would be to ensure that the principles of MBM were being applied in practice. The Koch Industries' centre would have the same interest as government corporate regulators, that is, to ensure the integrity of (internal) free markets. And like corporate regulators, when to intervene and when to step back can be a fine judgement call. Further, Koch Industries would obviously need to intervene if an internal unit broke or risked breaking national laws. Once again, the judgement of when to allow units to freely operate and when to impose central authority would be difficult. But the difficulty for Koch Industries would be parallel to the difficulty faced by governments committed to free markets.
| Koch Industries says: "The systems a company uses to generate new ideas and select those that will be tried should be designed to avoid as many command-based shortcomings as possible". (28) |
In any society, the difference between success and failure, wealth and poverty, progress and regression is often the extent to which the society allows its members to be creative.
Creativity is not a rare or limited human quality. In fact, creativity is mostly found in the millions of little ways that we all find every day to do things a little better. Creativity is the individualised human "x" factor that free markets release. Creativity is suppressed under command and control and released under free markets.
By exposing everyone to competitive pressures, the "markets in the firm" approach produces results by preventing the destructive and negative game-playing that can poison a company. But more importantly it allows human economic creativity to flourish. On this level, the approach of Koch Industries is even more interesting. For Koch Industries, internal free markets are not just about structures, transactions and money; they are also about how people choose to relate to one another and treat one another. And it's through this interpersonal conduct that creativity is allowed or prevented.
Creativity is a dominant human attribute. In command-and-control economies, creativity is crushed. This is why those economies are stagnant. Creativity is not something that can be "created" or "motivated". It is not the preserve of elites. It is not confined to the arts or to any single activity, but it probably emerges in one of its most common forms in business activity. The act of supplying a good or service demands high levels of creativity involving thousands of integrated actions to achieve a result. In business, the creativity of every person working in the firm is essential to success.
Creativity is not a human attribute that can be predicted or detected before it emerges. It will appear, however, only if given the freedom to appear. It cannot be demanded. When it emerges, it often surprises the individuals or groups from whom it emerges. It is the unquantifiable potential of the human spirit. We do not know how to cause it to emerge, but we do know how to crush it. Command and control is the crushing process. Command and control suggests that creativity is the preserve of those who do the commanding and controlling.
By not seeking to command and control, Koch Industries has consciously sought to provide the environment in which creativity can emerge. And when it does, they let it flourish and grow. This it does in practical ways through the market design of its systems rather than through management control.
The fact that individual Koch Industries units can grow according to their success and that individuals within units can be remunerated according to the success of units is the primary foundation from which creativity can emerge. This replicates the small business unit in the external environment. But it seems that Koch Industries seeks to harness creativity in very real additional ways.
Koch Industries has an investment unit, advertised on its Website, with an open invitation to anyone with an idea to present it to the unit. Once again, Koch Industries doesn't divulge much about the operations of its investment unit, but some things can be surmised.
Applications to the investment unit come from within Koch and also from outsiders. The indication is that numerous applications are made to the investment unit each year, which the unit analyses in detail. For those proposals that fit Koch Industries' business plans, an investment is made in such a way that the new business becomes part of Koch Industries itself. This should be comparatively easy for Koch Industries to do because its internal markets are like external markets. Good ideas or developments that have the potential to compete with Koch Industries are nurtured, developed, encouraged and become part of Koch Industries. Potential competitors become allies -- but within an internal free-market framework.
In this way, Koch Industries is able to embrace new ideas, to be at the leading edge of developments, and to continue to grow. The key to this form of organic growth is that the people who have developed the new idea find it advantageous to work within Koch Industries rather than to compete against it. Koch Industries grows, but it is not a Big Brother. Its internal free markets allow individuals to be self-fulfilling entrepreneurs within a supporting framework. It won't always succeed. It won't be perfect. The process must be combined with astute business decision-making. But internal free markets supply a structure in which business creativity has higher chance of success than in command and control.
| Koch Industries says: "The size and complexity of resource allocation decisions within the firm sometimes rival the size and complexity of decisions in the external marketplace ... An attempt to create internal markets without profit centers and carefully defined roles and responsibilities will create chaos". (29) |
None of this, however, is to suggest that "markets in the firm" creates some new business or social nirvana. It doesn't. It's difficult and "markets in the firm" is better only than the alternatives. Command and control functions on the pretence that perfection in organisational structures can discipline people into a smooth operation. But this denies the reality and vagaries of human nature. Free markets do no more than recognise the oddities and imperfections of human nature and allow humans to decide what they want to do -- but this is done within a structure. This does not create or deliver a perfect society or a perfect firm. Rather, it allows the imperfections of humans to become glaringly obvious. But it also allows the better sides of human nature to emerge.
The structures that enable free markets to operate are more complex than command and control, because they must be created and applied without control. It's a high-order social task. And, like free markets, "markets in the firm" is not chaos. It's structured. And it's demanding and difficult to achieve. Koch Industries insists that its MBM system is an imperfect journey. MBM is not applied to every aspect of its business. It does not assure Koch of success. But it is its preferred structure. And one of the elements of its structure is the way internal markets require specific forms of interpersonal human behaviour.
In this context, an important contribution that Koch Industries has made to the understanding of free markets is to explore the interpersonal relationships that are necessary for a free market to work. Its training manuals place a heavy emphasis on interpersonal skills. To succeed at Koch Industries, it appears, a person needs to behave in a particular way. Inappropriate behaviour would tear its internal markets apart.
It appears that, at Koch Industries, anyone who is brutish, arrogant, rude, pushy or a bully is unlikely to survive. Koch Industries' training manual explains the behaviours and understandings that it believes people need in its MBM approach. Koch Industries' manual (Models Collection) devotes much space to discussing the operations of markets in both a theoretical and a practical way. It discusses markets in a way that relates to everyday life, talking about the processes and events that occur in the servicing of one's motor car, for example. It asks the reader to consider the interaction between the garage and the client. If the business is well run, relations between customer and supplier are highly courteous. This does not mean that people need to assume a bland persona to work under MBM. People's personalities are very much part of the relationship. But Koch Industries says that there are identifiable ways of behaving in interpersonal relationships that enable free markets to operate. They involve, among other things, passion, humility, intellectual honesty, integrity, desire to learn, long-term perspective, respect for self and others, courage and initiative. The manual looks at customer understanding, value-creation processes, vision development, time allocation and so on. It discusses these in the context of functioning free markets. To Koch Industries, the market process is very much a process of human behaviour. It argues that for market principles to work in its firm, human interrelationships must replicate those that make markets work.
Whether or not Koch Industries' processes are right or wrong, whether it has understood market operations correctly or not, or whether its systems perform internally the way they appear to is not the point for the purposes of this discussion. The point is that Koch Industries seems to have studied market operations more than any other firm and has deliberately sought to apply market principles, structures, processes and relationships in its firm. In this, it appears to be unique and to provide at least one obvious model of the process for others to contemplate.
"Markets in the firm" is not some new business guru-led fad. It is, instead, a slowly evolving business structure being quietly driven by several factors. Humans have discovered that free markets are the best model for the forward advancement of the economic well being of societies. Oddly, this works by maximising the choices that individual people are able to make within an over-aching social framework that primarily acts to protect individual free choice. It is a complex and difficult balancing act but, somehow, when it is achieved, effective structures emerge in societies which enable them to function with high measures of success and growth. This idea of free markets has seeped deep into the psychological recesses of the post-World War 2 generations. And, without even thinking, these same generations are taking their culture of success through individuality into the firm, thereby creating structures and business frameworks outside of the prevailing academic frameworks. The development of "markets in the firm" is a process of osmosis driven by values which hold the supremacy of the individual above all else.
In this environment, employment, which requires the individual to be subjugated to the needs of the business, is struggling for relevance and acceptance. Within the core structures of firms we are witnessing a quiet struggle over values. One value holds the firm to be supreme. The other holds the individual to be supreme.
ENDNOTES
1. See "Is slacking the only way to survive the office?", The Scotsman, 16 August 2004; "What's that stench in your office? Inertia", TimesOnline 16 August 2004 at www.timesonline.co.uk
2. The only publication known to this author that is dedicated to discussing markets in the firm is Tyler Cowen and David Parker, Markets In The Firm, The Institute of Economic Affairs London, 1997.
3. Nothing in the following sections of this chapter should be taken as an endorsement of the products, services, general activities or corporate behaviour of the firms and companies discussed. The point of the exercise is to present and analyse the different ways in which "markets in the firm" have developed in different sectors and places around the world. The firms in question are cited merely to illustrate these differences.
4. James Champy, Reengineering Management, Harper Collins Publishers, 1995, page 13.
5. Alfred P. Sloan, "The Most Important Thing I Ever Learned about Management" in Peter Krass (ed.), The Book of Business Wisdom, John Wiley & Sons Inc, New York, 1997, pages 168-174.
6. Ibid.
7. Fiona Carruthers, "Asia icing on Amway cake", The Australian Financial Review, 14 January 2005.
8. John F. Love, McDonalds: Behind the Arches, Bantam Books, USA, 1986.
9. "Because of McDonald's international scope, translators and electronic equipment enable professors to teach and communicate in 22 languages at one time. McDonald's also manages ten international training centers, including Hamburger Universities in England, Japan, Germany and Australia." http://www.mcdonalds.com/corp/career/hamburger_university.html
10. Coles Myer also retails food and other lines which Harvey Norman does not.
11. See R.H. Coase, The Firm, The Market, and The Law, University of Chicago Press, 1988.
12. The name "Odco" was the name of the company involved the court decisions of the 1990s, but by 2005 had become widely used as a reference in Australia to the particular type of labour hire engagement resulting from the legal judgments.
13. Odco Pty Ltd and Building Workers' Industrial Union of Australia. No VG 151 of 1988 Federal Court of Australia.
14. Koch Industries' Website is located at: www.kochind.com
15. Forbes Magazine, October 2000; www.forbes.com.tool/html/00/oct/1002/mu8.htm
16. www.kochind.com/about/financial.asp
17. C Koch speech 1993, "How to succeed in interesting times" from: www.kochind.com
18. Market Based Management Models Collection. A management training manual of Koch Industries Inc., Version 27, August 1998, page 45. Note: all descriptions of KI operating systems based on interpretations derived from Models.
19. Ibid., page 5.
20. Ibid., page 13.
21. Ibid., page 29.
22. John F. Love, McDonalds Behind the Arches, Bantam Books, USA, 1986. Chapter 9.
23. Market Based Management Models Collection, page 30.
24. Ibid., page 31.
25. Ibid., page 12.
26. Ibid., page 47.
27. Microsoft underwent some disaggregation in the EU in the sense that "unbundling" of some software was required and some interoperability issues needed to be overcome if Microsoft was to avoid sanctions. This did not occur in the USA where agreements were reached to improve the competitive environment in different ways.
28. Market Based Management Models Collection, page 50.
29. Ibid., pages 41 and 61.
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