Before diving into Charles Koch's The Science ofSuccess
, you must understand two things: Koch is anengineer, born and raised in the Midwest, and he's an autodidact,with a passion for the free market theories of Austrian economistLudwig von Mises.
Combine the two and you get a management philosophy book long onhard-edged statements where the author professes an almost Marxistfaith in the "fixed laws" that "govern human well-being." His"Market Based Management" (the term is trademarked), is "TheScience of Human Action."
Since taking over his father's refining business in the early1960s, this M.I.T.-trained engineer has grown Koch Industries morethan 2,000-fold, expanding into petrochemicals, fertilizer, tradingand, most recently, the $21 billion purchase of Georgia-Pacific.Along the way, Koch notes, there have been huge failures, includinga foray into shipping and an attempt to build acattle-feed-to-steaks agribusiness.
Both fit with Koch's libertarian philosophy of allowing people tomake decisions and reap the rewards or penalties that result.Employees are given "decision rights" according to theirdemonstrated ability to make choices that result in lower costs orreturns that exceed the company's "opportunity cost," which Kochdefines as the returns from investing in the best alternative. "Anyemployee who is not creating value does not have a real job in theMBM sense of the word," Koch writes, although a worker on theassembly line might consider his weekly paycheck real enough.
Failure isn't necessarily penalized, unless an employee overlookedsome necessary detail or put self-interest ahead of thecorporation. "Business failures are inevitable, and any attempt toeliminate them only ensures overall failure," Koch writes.
The grandson of a Dutch immigrant who settled in hardscrabble WestTexas, Koch can sound like a Calvinist minister at times. Heexcoriates as "destructive compensation schemes" such commonpractices as granting cost-of-living adjustments or automaticraises when employees achieve certain levels of education orseniority. Putting his own spin on Marx, he proposes the maxim"from each according to his ability, to each according to hiscontribution."The Science of Success
is short on concrete examples, andKoch acknowledges that implementing his Market Based Management canbe difficult because of the hazy connection between, say, propertyrights and the day-to-day decisions of a midlevel manager in chargeof a fertilizer plant. The book is especially obtuse when Kochdescribes his system for grading employees, a four-box "virtue andtalents matrix" that balances "values and beliefs" against theskills needed to run the business.
Sprinkled throughout are miniature case studies from Koch's ascent,however, including his advice to be extremely cautious aboutentering partnerships and to do so only with an "exit mechanism" incase it doesn't work out. (The book is dedicated in part to thefamily of the late J. Howard Marshall, whose own marriage to AnnaNicole Smith spawned a bitter legal battle that will probablycontinue beyond her recent death).
Performance measures like energy costs should be measured againstan ideal, not a budget, he says, and when divisions transferproducts among themselves they should be at market prices for theentire amount of goods being "sold," not just a portion. Otherwiseone division might wind up subsidizing another, denying Koch thechance to invest the money at a higher return elsewhere.
A graphic example of Koch's clear-eyed approach to opportunity costis the Iowa asphalt plant Koch moved when the land under it provedmore valuable, on a present-value basis, than the foreseeableearnings from the asphalt production. "There is now an AmeristarCasino and Hotel where the Council Bluffs asphalt plant oncestood," Koch writes proudly.
Readers expecting a recipe book for business success will bedisappointed, but those of a more philosophical bent will findKoch's observations fascinating. Not only has he digested theentire Ayn Rand syllabus of free market theory, but he's had thechance to put it to work from his headquarters on the plains northof Wichita.
It's hard to argue with the results. The question is whetheranybody but Charles Koch could pull off a similar feat.(Forbes.com
, February 26, 2007)
“Unlike many management books, which are little more thanover-heated and overspun drivel, this one deserves as wide anaudience as possible.” (The Business, Saturday 9thJune 2007)
Charles Koch may very well be the most successful businessmanyou've never heard of. Under his leadership, Koch Industries hasbecome a dynamic and diverse enterprise that Forbes called "theworld's largest private company."
This groundbreaking book includes the same material used by theleaders and employees of Koch companies to apply Market-BasedManagement (MBM) to get results. In it, Charles Koch outlines theunique management methodology developed and implemented by KochIndustries. Koch credits MBM for its 2,000-fold growth since 1967,with today having 80,000 employees in 60 countries and with $90billion in revenues in 2006. MBM is a scientific approach tomanagement that integrates theory and practice, and provides aframework for dealing with the ongoing challenges of growth andchange. There really is a science behind success, and it can beapplied to any organization.
MBM is rooted in the Science of Human Action, and is defined byfive dimensions:
- VisionDetermining where and how the organization cancreate the greatest long-term value
- Virtue and TalentsHelping ensure that people with theright values, skills and capabilities are hired, retained anddeveloped
- Knowledge ProcessesCreating, acquiring, sharing andapplying relevant knowledge, and measuring and trackingprofitability
- Decision RightsEnsuring the right people are in the rightroles with the right authority to make decisions and holding themaccountable
- IncentivesRewarding people according to the value theycreate for the organization
When these dimensions are applied in an integrated, mutuallyreinforcing manner, they create continuous transformation andpositive growth. Any organizationcorporation, small business,nonprofit, government agencycan apply these provenprinciples.
In addition to an in-depth discussion of MBM's five dimensions,this book also draws on Koch's candid examples of his company'ssuccesses and failures. Born out of a life-long study of economics,science, philosophy, psychology, political theory and history, MBMis essentially a practical business application of the principlesthat have led to innovations and the most prosperous, peaceful,robust economies in history. Let this book show you how to applythe same management philosophy that has served Koch Industries soeffectively. MBM will benefit you, your company, your customers andyour employees. For more information about Market-Based Management,visit www.mbminstitute.org.