Austrian economics offers a wide range of knowledge and applications for better business performance. One of them is the design of high-value organizations (see Mises.org/E4B_109_PDF).
Austrians understand the function of entrepreneurial businesses in the economy is to pursue and generate new economic value. That value is subjective, experienced by individuals as an improvement in their feelings of well-being. We also understand that subjective value applies not only to consumers but also to producers, including employees in firms whose purpose is value facilitation.
To fully realize the skills and talents of their employees in the pursuit of the organization’s visions and goals, entrepreneurial businesses look for the best ways to empower employees to utilize their Hayekian individual knowledge for the innovation and adaptation that leads to marketplace success.
Dr. Desmond Ng uses the term Entrepreneurial Empowerment to describe this approach to designing an organization that best unleashes the creativity of its entrepreneurial employees.
Austrian economics is particularly suited to addressing the organizational challenges faced by today’s entrepreneurial firms.
Businesses understand that they need to be more responsive to customers and the market. Firms are moving from a top down decision-making structure and searching for ways to move to a more decentralized firm structure. They are aiming to take advantage of all the different knowledge experiences that may be inside the firm, to be more adaptive to changing market environments and to acknowledge the importance of empowering employees.
Austrian economists like Friedrich Hayek fully recognized the benefits of decentralization in adapting to changing market processes. Today, Austrians can apply that same understanding at the firm level, in the pursuit of unleashing the subjective experiences and individual knowledge of each employee to greatest economic effect.
The organizational design tool to achieve maximum decentralized value generation is Entrepreneurial Empowerment (EE)
A firm that organizes using Entrepreneurial Empowerment focuses at the leadership level on clearly defining the ends of the company (which can be packaged in the form of vision or mission or goals or objectives) and on ensuring that internal communications are strong enough and effective enough to ensure complete and fully distributed understanding and buy-in among the employee base.
The means for each individual to contribute to the achievement of these ends are left open to employees; they are not dictated or bound with managerial or administrative constraints. Leadership in an entrepreneurially empowered firm is non-interventionist, free of the strictures of central planning.
EE has two components: the first is structural empowerment (SE).
The structural empowerment element of EE refers to the communication structure that delivers employee empowerment. Se informs them about their opportunities for taking action and making decisions, and provides support for them to utilize their own knowledge in doing so.
Professor Ng used the example of design firm IDEO, which provides a fully-available repository of all the firms designs and ideas from all its engineers and teams, along with information about how past teams tackled the solutions to design problems, with what outcomes. Designers on today’s teams can utilize this shared knowledge, learn from the pooled experiences, and enjoy the freedom of embarking on new design paths by combining their own knowledge and skills with the corporate knowledge repository.
Structural empowerment also requires a policy to regard failure as an acceptable part of the innovation process, in order to foster greater risk-taking behavior among employees, and a greater willingness to experiment with new and unproven ideas. SE is a process that leaders and managers must actively and persistently support. The danger is that leaders may succumb to the temptations of power and control, and to seek to centralize their authority. This can be fatal to entrepreneurial empowerment and negate all its benefits.
The second core component is psychological empowerment (PE).
Employees perform best, innovate best and contribute the most creativity when they enjoy psychic rewards from their work. One important aspect of psychic reward is the search for and successful achievement of meaning and purpose. Research is clear that these high values are found in work when it is conducted in an environment that encourages their development. Professor Ng used Chick-Fil-A as an example where, because the company subscribes to a set of values, employees in what might appear to observers as the simplest and most repetitive service and production jobs can find meaning in their work. The result is unrivaled customer service ratings. Psychological empowerment comes from leadership conveying a set of principles.
Monetary incentives, rewards and the awarding of titles can not match psychological empowerment in effectiveness for motivating employees. The Austrian perspective delivers some quite revolutionary policies and approaches for organizational design.
Rethinking the concept of leadership.
In recent years, business schools have commanded a lot of attention by marketing and selling leadership studies, with products ranging from executive education to books and online courses. However, Austrian economics suggests skepticism about the underlying concept of leadership in business. Firstly, structural empowerment and psychological empowerment are the antithesis of business school style leadership — they suggest non-leadership, letting go of control, and abandoning hierarchy.
Secondly, as Professor Ng pointed out, the centralized authority suggested by business school style leadership tends to lead to the corruption of seizing power and control, clouding the ethical considerations that are at the heart of entrepreneurship, and undermining the trust of employees lower down the hierarchy. The results can be both a loss of legitimacy for the bosses and a loss of business performance for the firm.
The Austrian perspective on organizational design and management can lead us to a higher performing firm, a more innovative firm, a firm that facilitates purpose and meaning for those individuals who work there, and trust and legitimacy for founders and executives.
Additional Resources
“Entrepreneurial Empowerment” (PDF): Mises.org/E4B_109_PDF
Professor Ng’s Research Paper Entrepreneurial Empowerment: “You Are Only as Good as Your Employees” (PDF): Mises.org/E4B_109_Paper
