The Economy of the Firm – Russ Ackoff

Russ Ackoff had an incredible eye for looking at things we all take for granted and see the systems implications behind them.  As we gear up for another election year, and hear both parties share their vision for what democracy means this year, Russ reminds us to compare the dictatorships we live in 8-12 hours a day at work with the espoused form of capitalism that our country stands for.  This quote from Management in Small Doses captures his insights.

“A curious contradiction is present in the ways we run our national macroeconomy and the microeconomies of the business enterprises within it.  At the national level we favor a market economy that is regulated as little as is compatible with national interests.  The economies of most of our business enterprises, however, are run much like the national economy of the Soviet Union.  They are centrally planned and controlled, transfer pricing is imposed on the parts, and when internal sources of products or services are available the are usually run as bureaucratic monopolies.

“What would a corporation look like if it were run like the American economy?

“Each component would be a profit center free to buy and sell products and services wherever it wanted to—free, but subject to as little regulation by corporate management as required for the good of the whole.  Corporate management would have the function of government within the firm.  Moreover, each unit would have to pay corporately imposed taxes on its profits, interest, or dividends on the capital obtained from the corporation, and, unless the corporation believed in free trade, duties on some imports to, and exports from, the corporation.

“Only a few corporations approximate this way of operating.  Why?

“Two reasons are usually given.  First, centralized planning and control are said to maximize synergy between the parts of the corporation.  But there is no lack of synergy between suppliers, producers, and consumers in the national economy.  Many corporate producers experience less conflict and more cooperation with external suppliers and customers than with those that are internal.

“Second, it is argued that some economies of scale enjoyed by corporations would be lost in a “free corporate economy”; but such losses are not necessary.  Parts of a corporation can form buying, producing, and selling cooperatives just as independent enterprises do in the national economy.  This cooperation can be encouraged by corporate management, just as it is by governments of most free national economies.

“Moreover, a market economy within the firm can avoid some diseconomies of scale.  Large internal monopolies are often no more efficient than those that are external and tend to be less sensitive and responsive to their customers than smaller internal units that must compete with external suppliers for internal business.

“It is possible for corporate management to intervene in the transactions of the units reporting to it as our government can but seldom does.  Suppose headquarters wants one internal unit to buy from another internal unit but the buying unit does not want to because the internal supplier demands a higher price than an external source.  Corporate management can pay the buying unit the difference.  Unless it did, the buying unit would be free to use an external source.  This requirement would discourage corporate management from arbitrarily restraining external trade.  It would have to pay for these restraints and therefore would not be likely to impose them unless it believed the corporation as a whole would benefit.

“In a corporate market economy corporate headquarters would receive income from taxes on unit profits, import and export duties, and interest or dividends from units for funds it provided.  It would pay for any profit-reducing constraints it imposed on internal units and for any services it obtained from them.  This would make it possible for the headquarters itself to be a profit center.  Its profits or losses would not be the same as the corporation’s.  Therefore, effectiveness of corporate management could be evaluated in the same way as that of business units.

“Isn’t it time for corporations to practice the same type of economy they preach to the nation?”

This entry was posted in Content with Context, Quotes, Russ Ackoff, User Experience, WUKID. Bookmark the permalink.

3 Responses to The Economy of the Firm – Russ Ackoff

  1. Pingback: Advice to a Non-Technical CEO of a Software Startup | On the Way to Somewhere Else

  2. Pingback: Graduate Students – Best Knowledge Transfer System | On the Way to Somewhere Else

  3. Pingback: Flipping My Perspective | On the Way to Somewhere Else

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s