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

As Charles G. Koch explains in the Preface to this book, Market-Based Management® (MBR®) has enabled Koch Industries, Inc. (KII) to become one of the largest and most successful companies in the world, with a 2,000 fold growth since 1967, now employing 80,000 people in 60 countries, with $90-billion in revenue in 2006. MBR consists of five dimensions: vision, virtue and talents, knowledge processes, decision rights, and incentives. No surprises there, nor are there any head-snapping revelations throughout Koch's narrative. The great value of the material, rather, is derived from the clarity with which Koch explains each of the interdependent, mutually reinforcing core concepts, and, by how skillfully he illustrates them in real-world situations while examining the evolution of KII. Based on the Science of Human Action, these core concepts are relevant to any organization, regardless of size or nature.

According to Koch, these are the questions that must constantly be asked?

1. Where and how can the organization create the greatest long-term value?

2. Are we hiring, developing, and retaining the people who have the right skills?

3. Are we creating or acquiring, then sharing and applying relevant knowledge, and measuring and tracking profitability?

4. Do we ensure that the right people are in the right roles with the right authorities to make decisions? Do we then hold them accountable for their performance?

5. Are we rewarding people according to the value they create for our organization?

As indicated earlier, there are no head-snapping revelations in this book, nor does Koch claim to offer any, and these questions offer a case in point. Of course, these are questions which decision-makers in all organizations should ask every day. In fact, few do...and even fewer obtain or provide correct answers. As explained by Koch, MBM is all about "blocking and tackling" effectively in business...and in life...in order to succeed.

I especially appreciate Koch's skillful use of a reader-friendly device throughout the text that features relevant information within a boxed, pale blue background. For example, quotations, brief explanations, definitions, and graphics. Beyond its visual appeal, this device serves two practical purposes: it highlights key points, and, it facilitates periodic review of them later.

The material of greatest interest to me is provided in the last chapter, "Lessons Learned." It is important to keep in mind that Koch has obviously learned a great about business and about life during his central involvement in the evolution of his company. However, he also learned a great deal from his exploration of remarkably eclectic sources that are indicated in the Notes and Bibliography sections. In the final chapter, he shares what he has learned about "the science of success," hence the title of this book. It is possible, Koch notes, that people will gain a conceptual or professional understanding of MBM but lack sufficient personal knowledge and experience. As a result, they tend to misapply it.

"For this reason, before an organization can successfully apply MBM, its leaders must gain personal knowledge through a dedicated commitment to understanding and holistically applying MBM to achieve results. Gaining this personal knowledge involves self-modification that starts with understanding the underlying concepts. It also requires seeing how the concepts contribute to long-term profitability, and then repeatedly applying them over time."

To be successful, MBM requires a culture of what Koch characterizes as "principled entrepreneurship, "one in which everyone is engaged in a passionate pursuit of innovation "toward an unknown future of ever-greater value creation." Moreover, innovation only thrives within a system of discovery, ""of spontaneous order, of mutually adjusting individual initiatives." Koch cites Michael Polanyi analogy, which compares such a system of innovation with a group trying to solve a giant jigsaw puzzle. "The rate of discovery is highest when everyone works together in sight of each other, so that every time a piece fits, the others are alerted to opportunities for the next step. The rate of discovery is lower when the solution is centrally directed or when each person works the puzzle separately."

Those who share my high regard for this book are urged to check out Bill George's Authentic Leadership and True North, Michael Ray's The Highest Goal, Jason Jennings' Think Big, Act Small, Thomas Kelley's The Ten Faces of Innovation, Frans Johansson's The Medici Effect, Thomas K. McCraw's Prophet of Innovation, Lynda Gratton's Hot Spots, and Ram Charan's Know-How.

The privately held Koch companies have compounded their book value by about 20 percent a year since 1967, an enviable record that's made even more impressive by realizing the diversified nature of the enterprises the companies include. At the time of the writing, the combined firms account for $90 billion in annual revenues and employ 80,000 people in 60 countries. That's big-league success. What's more remarkable is that the author, Charles G. Koch, has headed these operations for 40 years while this success was accomplished. When Mr. Koch speaks, wise people should listen.

In The Science of Success, Mr. Koch describes the management philosophy and methods he has employed to direct his organizations. A well-read and thoughtful engineer, Mr. Koch's methods are not unique to him, nor are they originated by him. Rather the philosophies and methods are ones that he has combined in a novel way that few companies pursue.

Mr. Koch is a bigger thinker than that, seeing his methods (Market-Based Management) as a stepping stone between how individual performance can be improved and how liberty can free societies to accomplish more.

In focusing on Market-Based Management, Mr. Koch describes five key elements that need to be combined with one another for full effectiveness:

1. Vision (using experimentation to improve value delivered for customers based on a sense of what the best opportunities are and what the organization can most effectively accomplish)

2. Virtue and Talents (attract and retain people who want to follow the right principles with appropriate talents for the tasks)

3. Knowledge Processes (systematically add to, disseminate, and apply knowledge related to profitability)

4. Decision Rights (encourage people to become better decision makers after they have developed their skills and to be accountable for the decisions they make)

5. Incentives (reward employees as much as possible by the long-term value they have helped deliver for the organization)

Several things are noteworthy about the book that will interest you. Today, many organizations have "vision statements" which encourage everyone to do good while doing well. Mr. Koch finds that statements inadequate: He encourages instead that employees find out what improvements will expand sales and profits the most and focus on those . . . that's what he means by vision. Back when strategic planning was being formulated, that was the original meaning of vision . . . a meaning that's mostly been lost since then. I endorse Mr. Koch's view as an important one.

Another of Mr. Koch's valuable perspectives is to measure by opportunity cost: When you picked up a dime while a $5 bill rolled by, you didn't gain a dime . . . you lost $4.90. In today's quarter-by-quarter drive for profits among public companies, opportunity cost is all but ignored. That's a major mistake.

Mr. Koch is also a believer in being sure that the message is heard and understood. He points out how often when introducing new practices that no improvements followed because people didn't understand the purposes of the initiatives.

I found his concern about how success hobbles organizations matches my own research on the stalls (bad mental models and habits) that plague successful organizations . . . and turn them into unsuccessful organizations.

If you decide to read only one book about how to be an effective business leader this year, I encourage you to make it this one.

I also suggest you go further and visit Mr. Koch's company. You won't really understand what he's talking about until you see people applying this management philosophy.

Bravo, Mr. Koch!