The Science of Success: How Market-Based Management Built the World's Largest Private Company (Hardcover)

~ (Author)
Key Phrases: Koch Industries, Koch Engineering, Guiding Principles (more...)

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)

Product Description

Praise for THE SCIENCE OF SUCCESS

"Evaluating the success of an individual or company is a lot like judging a trapper by his pelts. Charles Koch has a lot of pelts. He has built Koch Industries into the world's largest privately held company, and this book is an insider's guide to how he did it. Koch has studied how markets work for decades, and his commitment to pass that knowledge on will inspire entrepreneurs for generations to come."
—T. Boone Pickens

"A must-read for entrepreneurs and corporate executives that is also applicable to the wider world. MBM is an invaluable tool for engendering excellence for all groups, from families to nonprofit entities. Government leaders could avoid policy failures by heeding the science of human behavior."
—Richard L. Sharp, Chairman, CarMax

"My father, Sam Walton, stressed the importance of fundamental principles—such as humility, integrity, respect, and creating value—that are the foundation for success. No one makes a better case for these principles than Charles Koch."
—Rob Walton, Chairman, Wal-Mart

"What accounts for Koch Industries' spectacular success? Charles Koch calls it Market-Based Management: a vision that nurtures personal qualities of humility and integrity that build trust and the confidence to enhance future success through learning from failure, and a culture of thinking in terms of opportunity cost and comparative advantage for all employees."
—Vernon Smith, 2002 Nobel laureate in economics

"In a very thoughtful, creative, and understandable way, Charles Koch explains how he has used the science of human behavior to create a culture that has produced one of the world's largest and most successful private companies. A must-read for anyone interested in creating value."
—William B. Harrison Jr., Former Chairman and CEO, JPMorgan Chase & Co.

"The same exacting thought, rooted in the realities of human nature, that the framers of the U.S. Constitution put into building a nation of entrepreneurs, Charles Koch has framed to build an enduring company of entrepreneurs—a company larger than Microsoft, Dell, HP, and other giants. Every entrepreneur should study this book."
—Verne Harnish, founder, Young Entrepreneurs' Organization, author of Mastering the Rockefeller Habits, CEO, Gazelles Inc.

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Product Details

• Hardcover: 208 pages
• Publisher: Wiley (February 26, 2007)
• Language: English
• ISBN-10: 0470139889
• ISBN-13: 978-0470139882
• Product Dimensions: 8.6 x 5.5 x 0.9 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 4.7 out of 5 stars  See all reviews (72 customer reviews)
• Amazon.com Sales Rank: #26,591 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

45 of 47 people found the following review helpful:

5.0 out of 5 stars Rare Opportunity, March 5, 2007

By	Wayne Gable (Pensacola, FL) - See all my reviews (REAL NAME)

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.

Obviously Charles Koch, as a billionaire, doesn't need money from book sales. He truly believes in the principles and applications in this book, and he's genuinely interested in sharing them with anyone who will take the time to read and learn.

Again, a rare opportunity to learn from a master.

48 of 51 people found the following review helpful:

5.0 out of 5 stars What Works For Economies Works For Organizations Too!, February 28, 2007

By	Lawrence W. Reed (Midland, MI USA) - See all my reviews (REAL NAME)

Charles Koch's core premise is universal and elemental, one that should prompt any reader to have a "V-8 moment," like the characters in the old television commercials. That premise is this: We know what makes an economy successful -- private property; the rule of law; individualism; risk and incentive; innovation; entrepreneurship; profit and loss; competition; and Schumpeter's "creative destruction." In other words, a market economy. Why shouldn't those very principles be the foundation of an organization's success? The challenge, as Koch puts it, is to "develop the mechanisms" that allow a firm (or any organization) "to harness the power of the market economy within the company."

Koch's book is more than a management guide. It's a refresher on the critical pillars of market economics. The reader is reminded of concepts he might have either forgotten or never learned -- opportunity costs, sunk costs, marginal utility, subjective value, comparative advantage, imperfect knowledge and numerous others. The author admits to being greatly influenced by some of the giants of economic scholarship, from F.A. Hayek and Joseph Schumpeter to Milton Friedman. He attributes the success of Koch Industries to the leadership's concerted effort to meld management principles with the principles of the market economy, and much of the book explains how that translated into real-world decisions, strategies and directions that built the company over the years.

Koch drives home that even in the for-profit business world, where markets exert a great deal of discipline, plenty of firms really still don't understand the power that market principles can have in their own operations. For instance, in looking at a private business, how many times have you noticed excessive bureaucracy, short-term thinking, ossified decision-making and reward structures that pay for tenure rather than entrepreneurship? How many times have you witnessed supervisors afraid to bestow real authority on those they supervise? And how many times have you observed a corporate culture beset from the top down with corner-cutting on both quality and integrity?

In most cases, what poor managers need is a reality check. If they don't comprehend the miraculous workings of a market economy, don't expect them to be diligently implementing its principles within their organization's operation. If they're managing as if they were Soviet central planners, they're probably reaping Soviet results.

Nonprofits sometimes behave more like unresponsive, unaccountable and nonentrepreneurial government outfits than they do for-profit firms. MBM can work well here, too, with the right leadership that knows how to implement the spirit (and not just the letter) of MBM principles. I'm proud to say that as I read Koch's book, I realized that my nonprofit organization, the Mackinac Center for Public Policy, has succeeded in great measure because of MBM-like ideas, though that wasn't fully apparent to me until I read the book.

The answer to what ails poorly-led organizations is Koch's principles of "Market-Based Management," or MBM, spelled out in very readable fashion in this new book.

Koch knows what he's talking about. He is CEO of Koch Industries Inc., a star performer of a company that boasts $90 billion in annual sales and 80,000 employees. Since the late 1960s, Charles, his brother David and their business associates have taken the oil firm that Koch's father started more than half a century ago and fashioned it into a privately held global conglomerate. It produces more "stuff" than I could describe if I had your attention for an afternoon, including things you eat, walk on, drink from or put in your car -- oil, beef, carpet, asphalt, disposable cups and paper towels, to name a few.

[...]

39 of 41 people found the following review helpful:

5.0 out of 5 stars An Extraordinary Book, March 8, 2007

By	Jeff D. Sandefer (Austin, Texas USA) - See all my reviews (REAL NAME)

Charles Koch has quietly and humbly built one of the most successful companies on the planet, in industries that most entrepreneurs would find challenging, to say the least.

Market Based Management distills the ideas and beliefs that have made America the strongest, richest and most virtuous country in history into a set of principles that can be applied to business.

You won't find any "One Minute Manager" type advice in this book, which may disappoint people who are used to chasing the latest business fads. It's more like reading Peter Drucker or Jim Collins...you know it's true, but wish someone could transplant all of the ideas neatly into your business. Unfortunately, that's what great leaders do, and even Charles Koch can't be expected to reduce that sort of magic to a simple set of recipes for a management cookbook.