This article is part of a series that discusses the management book Humanocracy. The core of Humanocracy is made up of seven principles that are intended to provide orientation when you have to design organizations or act within them. This article deals with the first principle: the principle of the market.
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The core idea
The principle of the market complements the principle of ownership, which we have already discussed. If all organizational members are turned into quasi-owners and even the small(est) organizational units are given their own P&L responsibility, the question arises as to how to counteract the atomization of individual activities. Hamel & Zanini see the answer in the principle of the market, because it is capable of coordinating these individual contributions. On the one hand, the authors’ view is that the market is the most efficient form of resource allocation. By aggregating a lot of individual information, market mechanisms produce collective intelligence (126ff.).
Unlike bureaucracies, markets enable dynamic coordination and the competitive orientation typical of markets also ensures a disciplinary effect. Specifically, Hamel & Zanini assume that relatively autonomous and small organizational units will independently negotiate contracts with each other in order to define their service relationships. In this context, however, the authors themselves use the case of the Morning Star to describe just how much of a prerequisite curbing the dysfunctional tendencies of market mechanisms is: Long-standing memberships and the ‘law of recurring encounters’ made overreaching unlikely, while openly visible contracts and financial data accessible to all should reduce information asymmetries, counteract tendencies to overreach, and thus ensure that fair contracts are negotiated.
Our considerations
In essence, the authors raise the old question of make or buy. Their answer is unequivocal: it can be more advantageous to internalize parts of the value creation process within a company, but the internalized activities should then be coordinated by (internal) market mechanisms (132). The Morning Star example described by the authors also makes it clear that a decision in favor of markets is not a decision against organizations. Market structures also have to be established in organizational terms. The situation is similar when it comes to competition. The logic of competition may be inherent in market mechanisms, but wherever competition is demanded, there will also be attempts to evade, circumvent, or undermine it.1
Only the organization itself can deal with this problem, not market mechanisms. The importance of good organization is made particularly clear by an assumption made by Hamel & Zanini in that they both assume that organizational members repeatedly encounter each other on an organization’s internal markets and therefore refrain from maximizing their situational advantages. But in view of current developments towards an employees’ market, the expectation of recurring encounters is likely to become increasingly uncertain. You simply no longer know whether the partner you are exchanging with will remain a member of the organization long enough to reciprocate your cooperative market behavior next time around.2
How it could work
Hamel & Zanini themselves point out that not all relationships between all organizational units can be coordinated via the market and competition. Of course, there is no reason to categorically reject internal organizational market mechanisms. In our opinion, however, success and failure are determined by how well you have analyzed and understood your own organization. If the market is the solution, what actually is the problem? And where exactly do you find this problem in your own organization? Where can market mechanisms be applied without doing any harm and where do you need carefully selected competition criteria that perhaps go beyond the direct contributions to the value creation process? And where does efficient competition cause more harm than effective cooperation? All these questions will have to be examined if we are not to be surprised by the unintended consequences of market logic.
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Literature
[1] Arora-Jonsson, Stefan / Brunsson, Nils / Hasse, Raimund (2020): Where does competition come from? The role of organization. Organization Theory 1.
[2] For this classic game-theoretical problem of discounting the future, see Axelrod, Robert (1984): The Evolution of Cooperation. New York: Basic Books.
