The Science of Success: How Market-Based Management Built the World's Largest Private Company / Edition 1

Overview

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.

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Editorial Reviews

From the Publisher
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)

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Product Details

Meet 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.

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Table of Contents

Preface.

Acknowledgments.

Chapter 1. Evolution of a Business.

Chapter 2. The Science of Human Action.

Chapter 3. Vision.

Chapter 4. Virtue and talents.

Chapter 5. Knowledge Processes.

Chapter 6. Decision Rights.

Chapter 7. Incentives.

Chapter 8. Lessons Learned.

Appendices.

Partial List of MBM Models.

Notes.

Bibliography.

Index.

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Customer Reviews

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Sort by: Showing all of 5 Customer Reviews
  • Posted April 24, 2012

    more from this reviewer

    The “science of human action” and “market-base

    The “science of human action” and “market-based management” (MBM) form the core ideas of the libertarian business philosophy and the successful commercial operating principles of Charles G. Koch, chairman and CEO of Koch Industries Inc. (KII). Following these principles, Koch has enjoyed astounding success: A $1,000 investment in KII in 1960 would now be worth $2 million (with a reinvestment of dividends). During most of this period, Koch himself planned KII’s strategy and ran the company. Here, with a few jargon pitfalls, he details his business methods and operating practices. Koch is known for his heavy financial support of conservative political causes and candidates, but this is not a political book. It is, in fact, more a work of business philosophy than a hands-on manual for Koch’s MBM system, which he describes as an approach and attitude based on a selection of “mental models” and not as a linear path. getAbstract recommends Koch’s thoughtful exposition to all 80,000 KII employees and to business executives who want some clues about emulating KII’s success.

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