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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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Editorial Reviews

Review

Before diving into Charles Koch's The Science of Success, you must understand two things: Koch is an engineer, born and raised in the Midwest, and he's an autodidact, with a passion for the free market theories of Austrian economist Ludwig von Mises.
Combine the two and you get a management philosophy book long on hard-edged statements where the author professes an almost Marxist faith in the "fixed laws" that "govern human well-being." His "Market Based Management" (the term is trademarked), is "The Science of Human Action."
Since taking over his father's refining business in the early 1960s, this M.I.T.-trained engineer has grown Koch Industries more than 2,000-fold, expanding into petrochemicals, fertilizer, trading and, most recently, the $21 billion purchase of Georgia-Pacific. Along the way, Koch notes, there have been huge failures, including a foray into shipping and an attempt to build a cattle-feed-to-steaks agribusiness.
Both fit with Koch's libertarian philosophy of allowing people to make decisions and reap the rewards or penalties that result. Employees are given "decision rights" according to their demonstrated ability to make choices that result in lower costs or returns that exceed the company's "opportunity cost," which Koch defines as the returns from investing in the best alternative. "Any employee who is not creating value does not have a real job in the MBM sense of the word," Koch writes, although a worker on the assembly line might consider his weekly paycheck real enough.
Failure isn't necessarily penalized, unless an employee overlooked some necessary detail or put self-interest ahead of the corporation. "Business failures are inevitable, and any attempt to eliminate them only ensures overall failure," Koch writes.
The grandson of a Dutch immigrant who settled in hardscrabble West Texas, Koch can sound like a Calvinist minister at times. He excoriates as "destructive compensation schemes" such common practices as granting cost-of-living adjustments or automatic raises when employees achieve certain levels of education or seniority. Putting his own spin on Marx, he proposes the maxim "from each according to his ability, to each according to his contribution."
The Science of Success is short on concrete examples, and Koch acknowledges that implementing his Market Based Management can be difficult because of the hazy connection between, say, property rights and the day-to-day decisions of a midlevel manager in charge of a fertilizer plant. The book is especially obtuse when Koch describes his system for grading employees, a four-box "virtue and talents matrix" that balances "values and beliefs" against the skills needed to run the business.
Sprinkled throughout are miniature case studies from Koch's ascent, however, including his advice to be extremely cautious about entering partnerships and to do so only with an "exit mechanism" in case it doesn't work out. (The book is dedicated in part to the family of the late J. Howard Marshall, whose own marriage to Anna Nicole Smith spawned a bitter legal battle that will probably continue beyond her recent death).
Performance measures like energy costs should be measured against an ideal, not a budget, he says, and when divisions transfer products among themselves they should be at market prices for the entire amount of goods being "sold," not just a portion. Otherwise one division might wind up subsidizing another, denying Koch the chance to invest the money at a higher return elsewhere.
A graphic example of Koch's clear-eyed approach to opportunity cost is the Iowa asphalt plant Koch moved when the land under it proved more valuable, on a present-value basis, than the foreseeable earnings from the asphalt production. "There is now an Ameristar Casino and Hotel where the Council Bluffs asphalt plant once stood," Koch writes proudly.
Readers expecting a recipe book for business success will be disappointed, but those of a more philosophical bent will find Koch's observations fascinating. Not only has he digested the entire Ayn Rand syllabus of free market theory, but he's had the chance to put it to work from his headquarters on the plains north of Wichita.
It's hard to argue with the results. The question is whether anybody but Charles Koch could pull off a similar feat. (Forbes.com, February 26, 2007)

“Unlike many management books, which are little more than over-heated and overspun drivel, this one deserves as wide an audience as possible.” (The Business, Saturday 9th June 2007)

From the Inside Flap

Charles Koch may very well be the most successful businessman you've never heard of. Under his leadership, Koch Industries has become a dynamic and diverse enterprise that Forbes called "the world's largest private company."

This groundbreaking book includes the same material used by the leaders and employees of Koch companies to apply Market-Based Management (MBM) to get results. In it, Charles Koch outlines the unique management methodology developed and implemented by Koch Industries. Koch credits MBM for its 2,000-fold growth since 1967, with today having 80,000 employees in 60 countries and with $90 billion in revenues in 2006. MBM is a scientific approach to management that integrates theory and practice, and provides a framework for dealing with the ongoing challenges of growth and change. There really is a science behind success, and it can be applied to any organization.

MBM is rooted in the Science of Human Action, and is defined by five dimensions:

  • Vision—Determining where and how the organization can create the greatest long-term value
  • Virtue and Talents—Helping ensure that people with the right values, skills and capabilities are hired, retained and developed
  • Knowledge Processes—Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability
  • Decision Rights—Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable
  • Incentives—Rewarding people according to the value they create for the organization

When these dimensions are applied in an integrated, mutually reinforcing manner, they create continuous transformation and positive growth. Any organization—corporation, small business, nonprofit, government agency—can apply these proven principles.

In addition to an in-depth discussion of MBM's five dimensions, this book also draws on Koch's candid examples of his company's successes and failures. Born out of a life-long study of economics, science, philosophy, psychology, political theory and history, MBM is essentially a practical business application of the principles that have led to innovations and the most prosperous, peaceful, robust economies in history. Let this book show you how to apply the same management philosophy that has served Koch Industries so effectively. MBM will benefit you, your company, your customers and your employees. For more information about Market-Based Management, visit www.mbminstitute.org.

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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 (150 customer reviews)
  • Amazon Best Sellers Rank: #14,979 in Books (See Top 100 in Books)

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.

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

61 of 65 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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94 of 104 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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