Over the past few decades politicians and education experts have done all they can to help improve the performance of our primary and secondary schools.  An endless stream of management fads have been imported into education from the private sector in the hope that schools may learn to operate more like world class organisations operating in free and competitive global markets.  A fundamental problem arises however when schools attempt to introduce Total Quality Management (TQM) which involves schools making the essential transition from a producer to a customer driven organization.  Instead of the DfES and schools defining quality and using quality inspection and assurance systems to ensure that these defined standards are maintained.  However TQM will now require schools to look towards parents to determine quality, parents who must be free to vote with their feet if they are not satisfied.  The concept of quality therefore evolves into the pursuit of customer satisfaction.  Unfortunately while 90% ofUKschools remain nationalised this task will be impossible, and the producer (the government) and not the customer (parents) will always be king.

Outside of education however concepts such as TQM have long been surpassed by the more recent focus on the role and management of knowledge, which Peter Drucker believeshas now become the key economic resource and the dominant, and perhaps even the only, source of competitive advantage.  In 1995 Nonaka and Takeuchi published The Knowledge-Creating Company which provideda new explanation of why Japanese companies had been so successful.  The difference was in the way they accumulated knowledge from the external environment, shared it within the organisation, stored it as part of their knowledge base and then ensured that it is utilised by those engaged in developing new products and services.  It is this knowledge conversion process from outside to inside and back outside again which defines the knowledge creating company, whose sole business is continuous innovation.

Further research by Professor Gary Hamel into the entrepreneurial spirit inside Silicon Valley, where the innovation intensity of organizations is extraordinary high, has found that success had not been based on its people and the unique concentration of brainpower (as is usually understood) but on how ideas, financial capital and human talent are allowed to circulate freely and are attracted and locate to where they are most likely to generate innovation and wealth.  This is in stark contrast to the traditional business model where ideas, capital and talent are controlled by a central authority (the senior management team), who decide where they should be allocated and move only when they are instructed to do so.  Real competition in the economy was therefore not occurring between individual companies but between different innovation regimes.  According to Professor Hamel the traditional process of top-down resource allocation wasthe last bastion of Soviet-style central planning,’[1] and recommends that to create the high energy culture found in Silicon Valley, free markets in ideas, financial capital and human talent must be established and allowed to co-exist within organisations.

These findings correspond with a management approach first developed by Koch Industries in the USwho first began describing its management philosophy as Market Based Management (MBM) in 1991.  The concept was subsequently introduced in a 1993 publication by Wayne Gable and Jerry Ellig[2], who defined MBM as a framework that applies market process principles to improve organizational performance and profitability by fully utilising the knowledge of each employee.  According to Koch Industries this is achieved by internalising the beneficial characteristics of a market economy, and eliminating the harmful effects of a command economy.  The importance of this concept was reinforced in 1997 when the IEA published Markets in the Firm by Tyler Cowen and David Parker.  They also suggest that firms can and should draw on some of the efficiency advantages of markets and conclude that if managers try to act like central planners their firms will usually fail eventually for the same reasons that central planning failed in Central and Eastern Europe.  If market economies have proven effective in encouraging learning, adaptation and innovation, then according to Cowen and Parker ‘the challenge today is to design firms that can mimic these attributes of a market economy.’[3]

The question therefore remains – would schools in theUK benefit from introducing MBM and if so how can they be designed so that they mimic the attributes of a free market?  First, it is clear that schools, perhaps more than any other organisation, depend on knowledge as their principle means of value creation.  This suggests they would benefit enormously from introducing MBM.  Second, it is therefore tragic that while 90% ofUKschools remain nationalised, MBM and the concept of a knowledge creating school will remain completely out of their reach.  Finally, with the gradual emergence of chains of private schools around the world, it is perhaps inevitable that MBM will eventually dramatically change the way some of these organisations operate.

[1] Hamel Gary (1999) Bringing Silicon Valley Inside, Harvard Business Review, Sept-Oct 1999.

[2] Gable W, Ellig J (1993) Introduction to Market Based Management, Center for the Study of Market Processes,GeorgeMasonUniversity.

[3] Cowen T Parker D (1997) Markets in the Firm – A Market-Process Approach to Management, Institute Economic Affairs.

An edited version of the article was published in Economic Affairs, September 2006