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The Science of Success: How Market-Based Management Built the World's Largest Private Company Hardcover – February 26, 2007


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Product Details

  • Hardcover: 208 pages
  • Publisher: Wiley; 1 edition (February 26, 2007)
  • Language: English
  • ISBN-10: 0470139889
  • ISBN-13: 978-0470139882
  • Product Dimensions: 5.8 x 0.8 x 8.8 inches
  • Shipping Weight: 13.6 ounces (View shipping rates and policies)
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (158 customer reviews)
  • Amazon Best Sellers Rank: #15,663 in Books (See Top 100 in Books)

Editorial Reviews

Review

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)

From the Inside Flap

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:

  • Vision—Determining where and how the organization cancreate the greatest long-term value
  • Virtue and Talents—Helping ensure that people with theright values, skills and capabilities are hired, retained anddeveloped
  • Knowledge Processes—Creating, acquiring, sharing andapplying relevant knowledge, and measuring and trackingprofitability
  • Decision Rights—Ensuring the right people are in the rightroles with the right authority to make decisions and holding themaccountable
  • Incentives—Rewarding 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 organization—corporation, small business,nonprofit, government agency—can 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.

Customer Reviews

The book is easy to read and understand.
Conrad M. Von Igel
This book is a must read for students and managers who are interested in understanding the linkage between economic theory and profitable business practice.
Amazon Customer
Vision is about "determining when and how your organization can create the greatest long-term value."
David Guenthner

Most Helpful Customer Reviews

62 of 66 people found the following review helpful By John Whitney on March 7, 2007
Format: Hardcover
The Science of Success is the most important book about governance, leadership and management since Drucker's magnum opus in 1974. This statement is not a casual claim but is the result of my close study of Charles Koch's Market Based Management during the past six years. MBM ® was an integral part of my course, Managing in a Market Economy at the Columbia Business School and has been the focus of my academic research as well as my service as a consultant and director of several public corporations. The book is short and seems deceptively simple but that is also true of the United States Constitution. Every sentence in the Constitution and every concept in The Science of Success evokes profound thought: it is based on principles rather than prescriptions - not "how to do" but rather "how to decide".

The age-old arguments about decentralization, delegation, incentives, acquisitions, divestitures, sunk costs, opportunity costs, vision - indeed almost every quandary a manager faces - are cast in a bright new light. Make no mistake, however. Even though Charles Koch might seem short on prescriptions he is strong on principle. He has synthesized his study of history, political science, psychology, philosophy and economics (augmented by his 40 years leading Koch Industries, the world's largest and one of its most successful private companies) into a clearly articulated applied science. He draws heavily on the work of the "Austrian School" economists - Menger, von Mises, Hayek, as well as Schumpeter and Drucker. These were the men who most clearly articulated the immutable laws of markets based on their observation of humans in action rather than esoteric mathematical models.
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95 of 105 people found the following review helpful By Wayne Gable on March 5, 2007
Format: Hardcover
The Science of Success is a rare opportunity to learn how Charles Koch built one of the most successful companies in history. Think about it. This company:

1. Didn't have a sexy product or build a national image

2. Didn't get jump-started with a technological breakthrough, or create a new industry

3. Didn't rely on political connections or Wall Street gurus to help sell its products

4. Didn't, as a privately held company, have access to expansion capital from stock sales, and

5. DID face stiff competition from some of the largest and most competitive companies in the world.

Yet under the guidance of Charles Koch, Koch Industries grew from a relatively small company to the largest privately held firm in the country, along the way building a record of profitability that leaves most companies you thought were successful in the dust.

If you haven't heard of Koch Industries, you're not alone. This story really hasn't been available to the public until now. How did Koch do it? With Market-Based Management, the business philosophy he lays out in this book. The book includes a thorough discussion of what MBM is and how it was used to create phenomenal value for the owners, employees and customers of Koch Industries.

I'm usually highly skeptical of books "written" by successful businessmen. How many truly successful people are really willing to share their secrets? How many really take the time to write a book? But I have some experience with Koch Industries (I'm a former employee and still do some consulting for the company), and I can verify that these are the same concepts Charles Koch has been teaching his employees, from top management on down, for at least 20 years.
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30 of 31 people found the following review helpful By M. Skousen on May 20, 2007
Format: Hardcover
Finally, Austrian economics has triumphed---in the business world! Imagine, a billionaire thanking Ludwig von Mises and Friedrich Hayek for creating the world's largest private company, Koch Industries. Koch's book shows how his "Market-based Management" (MBM) strategy could revolutionize business, government, and non-profits.

Two years ago, Koch established the "Market Based Management Institute" at Wichita State University. Will it not be long before MBA students at Harvard and Stanford are assigned Mises's Human Action or Hayek's Individualism and the Economic Order? There's nothing like a big success story to transform the B school's pedagogy.

And there's nothing bigger on the scene today than Koch Industries, which has transformed itself into a giant commodity and financial conglomerate. The company has grown as fast as Warren Buffett's Berkshire Hathaway. Is the next paradigm shifting from Omaha to Wichita?

Economics of late has transformed itself from the dismal science to the imperial science, invading politics, finance, history, law, religion, and now business management. In Koch's MBM guidebook, the Austrian concept of opportunity cost of capital is now "Economic Value Added (EVA)," property rights has become "decision rights," and Hayek's rules of just conduct translates into "principled entrepreneurship." Koch's book is an essential translation of Austrian theory into business practice.

Charles Koch is a shy man. Unlike Buffett's company, Koch Industries is a private company, a situation Koch prizes. He doesn't have to worry about Sarbanes-Oxley, nor how quarterly earnings and executive stock option compensation distort the stock price. "Perverse incentives make managing a public company long term extremely difficult," he writes.
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More About the Author

Charles G. Koch is Chairman of the Board and CEO of Koch Industries, Inc., a position he has held since 1967. Since then, the company has been transformed into a dynamic and diverse group of companies in refining and chemicals, fibers and polymers, commodity and financial trading, and forest and consumer products. Familiar Koch company brands include STAINMASTER carpet, LYCRA spandex, Quilted Northern tissue, and Dixie cups. Koch has continuously supported academic and public policy research (including numerous Nobel Prize winners) for more than 40 years, and has helped build a number of market-based organizations. Koch received a bachelor's degree in general engineering and two master's degrees-in mechanical and chemical engineering-from the Massachusetts Institute of Technology.