Markets in the Firm: A Market-Process Approach to Management

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Markets in firm.qxd:Layout 1Tyler Cowen & David Parker

1. Information is now the critical factor of production: firms need to be able to sense the need for change and respond before their competitors do.
2. Use of market principles within a firm can help it learn and adapt.
3. The days are numbered when rigid ‘Taylorist scientific management’ principles could usefully be applied. Markets now demand more variety and quality. Companies are decentralising to cope with the uncertainty and pace of change of markets.
4. ‘Looser-coupled’ firms, however, run the risk of anarchy. Means of maintaining the ‘coherence and strategic direction of the firm’ are required.
5. Economists from Ronald Coase onwards have been interested in why firms exist. Viewing the firm as a ‘nexus of contracts’ focuses attention on the similarities between resource allocation in markets and firms.
6. Some companies have applied market principles ‘to unlock the problems of management’. Koch Industries Inc. in Kansas has been particularly successful.
7. Its success appears to have been achieved by an integrated system of mission statements, decentralised management (profit centres and crossfunctional teams), and definition of property rights within the firm so as to provide appropriate incentives.
8. ‘Command-and-control’ methods are as inappropriate within a firm as they have proved to be outside it. Firms need to harness the ability of markets to ‘flex and change, assimilating and processing information speedily and accurately, attributes that are essential to the learning organisation’.
9. The ‘command firm’ is ‘subject to all the disincentives of planned economies, including the hiding of resources, aggravated shortages, the over- or under-use of inputs and the resulting inefficiencies of production’.
10. Market economies have been effective in ‘encouraging learning, adaptation and innovation’. The challenge is to ‘design firms that can mimic these attributes of the market economy’.

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