Break Down Internal Monopolies!
Most of us know monopolies are bad. “They have no incentive to deliver better products or to get more efficient.” And if a monopoly can do whatever it likes, the victim is likely to be the customer. If it exists outside an organization, measures can be taken to end that. Within organizations, creating monopolies seems standard practice, but why!?
The problem with monopolies
Recently, talk about monopolies has increased. Companies like Amazon, Google and Facebook have been mentioned—and the pandemic makes that discussion more relevant. But what exactly is the problem with monopolies? Emily Stewart skillfully explains. She shares that the price of her internet bill had been increasing monthly without explanation or service improvement. She called the company to ask why. “The woman on the phone knew something I did not. I didn’t really have other service options available in my area. So, no, my bill would not be reduced.”
Emily didn’t have any choice, and her internet provider realized they didn’t need to worry about losing her as a customer. The result was a provider that could increase costs for no reason other than making more profit.
Creating monopolies seems standard practice in organizations, but it can be done differently!
This pattern is found in many monopolies. Once they’ve established themselves there is no incentive to create better products or offer a more competitive price or truly care for customers. Companies become lazy, inefficient and lack the motivation to improve. You can’t blame them. And judging by their bank accounts, they’re doing a great job. The sufferers are the customers who, like Emily, get terrible service at higher prices and have no choice…
Most of us have been in Emily’s shoes, especially if we have worked in large corporates, where monopolies can thrive. Departments like HR, IT, Legal, and Finance often enjoy an internal monopoly. Their customers, be they teams or entire departments, have nowhere else to go. No matter how poorly the internal monopolies do their job, they don’t need to worry about being fired, or beaten by competition.
The result is often a lack of intrinsic motivation to improve their ways of working. Instead, they will add your file to the pile and ask you to wait until they find the time to help you. Many of us have have had such experiences—departments acting as though they are untouchable. Often, that’s for the simple reason that they are…
Internal monopolies can make HR, IT, Legal or Finance departments like they are untouchable! Usually because they are!
In normal market conditions governments step in to address monopoly situations. They can take over a company, regulate it, break it into smaller pieces, or ensure in some way that competition is enabled. The customer gets choice again. Within organizations however, something different seems to happen. Instead of introducing competitors or breaking up the monopolies, they can receive even more authority, or a bigger budget, and keep doing their work. Why? The rest of the organization is dependent on them.
Often, real change will only occur when top management decides it’s time to reorganize these departments, or the entire organization. What follows is a period of stress and internal politics. Employees are fearful of losing jobs. Productivity and motivation drop. No new talent is attracted. Pay rates are frozen. This is a painful and costly process. Even more painful, it often doesn’t result in an organization model that solves the problem, or just hides it temporarily. The result? Another reorganization. Sound familiar?
Breaking internal monopolies: Give more choice!
Luckily, there are ways to transform internal monopolies. One of the simplest is to give the customer more choice! Let teams/departments decide where they want to source their services, even if that means they’ll pay a company outside. This can be done, as we found out when researching one of our bucket-list companies.
Are you allowed to choose or is your only choice the internal monopoly?
Haier fighting internal monopolies.
Haier has divided their entire organization into thousands of smaller companies called Micro-Enterprises (MEs) and several larger Platforms. Each ME and each platform has its own P&L statement. They are responsible for their results and can make autonomous decisions. Every ME has the right to buy services from anyone, including outside suppliers.
This introduced market dynamics to departments that were previously internal monopolies. Now their behavior needed to change. Sensitivity to needs of the units they served became a must. If not, they would quickly see a decline in demand, meaning they could even cease to exist.
It’s exactly such (economic) feedback, (as was summarized in Paul Bernstein's "Essential Components of Workplace Democratization") that influences employee behavior, as they learn if their services are appreciated at the price they charge. Without it, employees usually do not feel ownership. With it, employees learn the business of doing business.
For such systems to work, employees must be able to influence the outcomes of their work. They need the power to decide things themselves, to negotiate contracts with clients, and develop new products without having to convince managers three layers up. Their income is influenced by their success. If customers don’t buy what the ME is making, their P&L statements reflect that, as does their remuneration.
When freedom of choice was introduced, Haier’s old internal monopolies adjusted rapidly. The new feedback loops highlighted when they needed to change services. Some failed and ceased to exist. Others survived and kept providing for their customers. Some even reached ‘Unicorn’ status.
From internal monopoly towards Unicorn
RRS Logistics was one of the latter. They were Haier’s old logistics department, responsible for delivering Haier products to customers. When we interviewed their leader for our book on Haier (More info on that here!), he explained that RRS had grown from an ME to a platform and now provided jobs for hundreds of thousands of people. Think of it as Uber for packages. They realized they could compete in the market, and others valued their services as well. Today, only 40% of the products they deliver are made by Haier. The rest are products made by competitors!
What was at first an internal monopoly the company couldn’t do without, transformed into an entirely new business once it was introduced to competition. And Haier’s ME’s moved from not having choice in choosing the companies with the best services.
A book on Haier
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FYI; This blog is part of a series and is the result of a research collaboration between Haier & Corporate Rebels. Want to know more? Find all our related blogs here!
Hey Robert, thanks for the suggestion! Much appreciated!
I think the point I'm trying to make is that Monopolies have no motivation to improve their quality anymore once they've established that position. Leaving the customer with no choice to buy overprized products, or products that aren't as good as they could be. So indeed they might be, from one perspective, the "best" in their job, that doesn't automatically mean that its a good thing.
KYOCERA Corporation is using the amoeba system since their foundation in 1959. it was established by the founder Dr. Inanori. This system is using Department p&l, too.
In the restructuring of the Japanese Airline JAL under chapter 11 years ago it made them the highest profitable Airline Inlay after 2 years.
Thanks - this is an interesting concept. I can certainly see where this may have some good success stories. I am curious about the amount of time spent by internal employees constantly having to price their services or negotiate contracts with support departments? With every internal department required to 'negotiate' and price services, could this not end up to significant work
As long as the monopoly is contestable it has a very strong motivation to stay a monopoly. What you mean is a monopoly that can actually excerise its monopoly power without having to fear to lose this power. This is usually the case with legal protection (e.g. patents) or some structural factors (e.g. infrastructure). Otherwise enjoying monopoly powers is only temporary until the others catch up.
Very good insights on Internal Monopolies. I have witnessed them in all 4 of my employers over a period of 40+ years. They are always the groups who do not actually make the money, but, have made themselves essential services - which would be ok if those services supported the functions making the money. Instead they have morphed into self-perpetuating bureaucracies.
I have always worked in Project Execution and have an obsession with getting the job done by focusing on enabling the people who form the project team, as they do the real work, while I can only assist as Project Manager.
Legal Dept - you must use our services, but we are too busy to help you. I hired in my own Legal adviser. The monopoly did everything possible to block it. Successful project and I made an enemy
HR dept - no suitable staff available and we cannot provide hiring services at your location, so your people must just wait and do 60 to 80 hour weeks. I engaged outside professionals who sorted it out.
HR dept - we haven't the time to sort out Health Insurance for your Construction Site Team, wait. I got a local insurance package organised immediately.
I have many more examples - not surprising after so many years.
The point is that WE allow these monopolies to grow and dominate by not challenging them and finding ways around them. We CAN find alternative services, which are very often better and cheaper, in my experience.
And, yes, I do still have Legal and HR friends as those monopolies often hide very good people inside them just dying to break out of the straight jacket they work in.
Thank you very much for sharing such interesting insights!
I am working for a multinational, managing the inland marine fleet (in Europe), which is a very specific and small world.
I would love our inland marine department to be an ME. However, I am not sure how I will be able to find customers outside the multinational I am working for due to competitiveness.
Who would hire my ME to do a trip for them? I would get access to the trips they do, the products they produce and transport, the customers they have, the systems they use,... etc.
How are the ME's of Haier handling this challenge?
Thanks for the reply, and happy to hear you thought it was an interesting read! That sounds super interesting indeed, and potentially a good way to go. I feel as if there are many more details to take into account before I can answer your question in a way that helps you, can you send me a mail with your questions and some more background info to email@example.com? I look forward to seeing it!
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