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Break Down Internal Monopolies!

Bram van der Lecq
Written by Bram van der Lecq January 20, 2021

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!?

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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!
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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…

Internal monopolies

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!
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Breaking Monopolies

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?
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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

Want to learn more about Haier's unique way of working? Soon we'll publish an entire book on Haier's Rendanheyi model. Subscribe here for more information:

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!

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