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Charles Koch Reveals the 'Science of Success'

Monday, 26 March 2007 12:00 AM

The key to unlocking the secrets of success is found in the "science of success," so says Charles G. Koch, chairman of Koch Industries.

You may know some of Koch Industries brands — Angel Soft, Quilted Northern, Brawny, Dixie, Stainmaster Carpets, and Lycra spandex. The Wichita-based Koch Industries is identified as No. 1 in the Forbes largest private companies.

In fact, Koch has a new book out with the same title: "The Science of Success: How Market-Based Management Built the World's Largest Private Company" (John Wiley & Sons) that is a must read for business leaders who want to grow their companies from good to great, from small to giant [

Today Koch Industries is one of the world's great industrial giants. But as he notes, it wasn't always so.

In that depressing year of 1929, the Kansas-based Winkler-Koch Engineering Company was crippled by a patent infringement lawsuit over improvements in a process called "thermal cracking" that was royalty-free.

The suit was brought by the Universal Oil Products Company's Patent Club, which represented major oil companies' pooled interest in refinery process development, through which high royalties were enjoyed.

Its U.S. business handcuffed, Winkler-Koch survived — amid the years of the Great Depression — by building plants in Europe, especially in the Soviet Union, where it built 15 cracking units. Consequently, the company enjoyed its first real financial success, carried on, and continued to fight for its business in America.

Today, the outgrowth of that company is known as Koch Industries, Inc., of Wichita, with $90 billion in 2006 revenues — more than Microsoft — arguably the largest private company in the world, with 80,000 employees in 60 countries.

Koch's "The Science of Success" attempts to show how guiding principles led to the evolution of his titanic corporation.

For starters, the Koches are fervent free-market libertarians. Charles' brother David ran in 1980 as vice president on the Libertarian ticket.

Their strong devotion to freedom comes from their father, Fred C. Koch, the engineer co-founder of Winkler-Koch, discovered the Soviet Union to be "a land of hunger, misery, and terror." The Soviet engineers he worked with were virtually all purged by Stalin, who also exterminated tens of millions of his own people.

The experience, combined with what communists told him about their plans and methods for world revolution, led Fred to become a staunch anti-communist.

Business books abound, from Ogilvy's through Trump's to Welch's and many others. They often are self-aggrandizing, centering on "how I (the author, frequently in conjunction with an unnamed ghost writer) did it," and they suggest that by following their leadership style, you too can become successful (rich and famous) in one's work and career. This is not the case with "The Science of Success."

Charles is modest, even humble as he details the mistakes along the way. He credits many others along the pathways of KII's evolution and accomplishments, and he is also candid.

He is given to understatement, is practical and precise, and he stresses learning over "preaching." In his opus Charles does not seek glory; but rather, describes how principled businesses and individuals with integrity can create long-term values that enable them to survive and prosper. He feels those traits would also enable government leaders to make nations more successful.

KII is run by its engineer-author, and amazingly for this age, is not a high-tech organization. It consists primarily of businesses in mature, even unglamorous industries, with such products ranging from fertilizers and toilet tissue, to cattle operations and chemicals, minerals, pipelines, finance and more. Much of the book is devoted to a philosophy, market-based management (MBM), which Charles credits for the continued growth and long-term success of the company.

The current MBM framework was articulated in the early 1990s, but it evolved from older concepts and models. Charles, who has three engineering degrees from MIT, developed MBM from "studies of history, economics, science, philosophy, psychology, and other disciplines" and his business experience, of course. He concluded that to build a prosperous and great company, there had to be an integration with the principles that allow a free society to prosper.

His MBM has five dimensions: vision; virtue and talent; knowledge processes; decision rights (the levels of responsibility and authority accorded employees); and incentives, and is more than the sum of its parts.

Vision itself is considered to be a dynamic concept of goals and aspirations that change as customer and societal values change. It is the determination of where and how the organization can create the greatest long-term value.

Virtue and talents require helping to ensure people with the right values, skills, and capabilities are hired, retained, and developed. That dimension may well be as challenging as any other. Michael Bruce, president of McFrank & Williams, a New York-based recruitment advertising agency, has a concept called "hire power" that addresses the competition among organizations for top talent.

"Companies should identify and leverage the position and corporate advantages to a promising, qualified candidate who in turn is probably thinking, "Why should I accept this job instead of another?" He explains that someone who thrives on clear direction and structure prefers an authoritarian manager — and would be the wrong choice for a company looking for a creative, self-starting person who functions best under little supervision.

Virtually all recruitment is a gamble, so organizations should try their best to adjust the odds as much in their favor as possible. Knowledge processes, according to Charles Koch, involve creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability. At the top of this discipline is trade, which Charles defines, somewhat idealistically, as a foundation for mutual gain — where trade is informed and free of fraud and force.

According to Charles, "Goods move from those who value them less to those who value them more"; greater production and consumption and a greater variety of goods and services are made possible by specialization; higher volume production by individual producers leads to improved productivity of labor and lower production costs."

With regard to the "decision rights" discipline, Barbara Whitmore, formerly an assistant director of The Research Institute of America, New York, suggested that "Authority may be delegated, but not responsibility." Appropriately, MBM's decision rights discipline defines the areas of responsibility and accountability; specific expectations accompany the responsibilities within a given role.

People are accountable if they will bear the consequences, good or bad, of a decision. Both the person making the decision and the person delegating are held accountable.

Charles defines the incentives discipline as "rewarding people according to the value they create for the organization."

Incentives are used to attempt to align the long-term interests of each employee with the long-term interests of the company and of society. Touching on what he terms "perverse incentives," Charles notes the pressure the managers of public companies face to meet quarterly earnings forecasts. This focus precludes maximizing long-term values. And, it explains why Koch Industries treasures its private status.

"The Science of Success" is chock full of real-world examples, of both successful outcomes and failures, for the company and of different societies over time, which add to its perspective. The author has a number of guiding principles, some of which seem obsessive, some naive, some harsh; but all are based on a determined view of what constitutes the "greater good."

Integrity and compliance are at the head of the list, which includes humility, respect, teamwork, and fulfillment. Charles is strongly opposed to guaranteed lifetime employment, automatic pay raises, seniority for its own sake, and the entitlement mentality rampant in heavily unionized organizations and even in some big businesses. His book, besides serving as a valuable guide, also provides some precious insights that make the reader long for bygone times in business. For example, he relates his father's advice to "never sue; the lawyers get a third, the government gets a third, and you get your business destroyed."

He notes, "Unfortunately, my father forgot to tell me how to keep from being sued."

Some of this insight sheds light on outside factors that affect business: "Industry was unprepared by the rapid increase in regulation, politicization, and litigation. These changes have damaged the ability of businesses to create real value and contribute to societal well-being." And, "the uncertainty of politics has replaced the uncertainties of the marketplace."

He describes how, particularly in a diverse society, people tend to pursue their own interests; but in a true market economy, prosperity comes by providing others with what they value.

Perhaps with activist courts and political correctness in mind, Charles opines that the rule of law [should] bound government power and limit its authority to change laws arbitrarily, even when desired by the majority. Equality of treatment, not equality of outcome, (a mantra of insidious political correctness) ensures individual freedom and discretion, and leads to behavior that is beneficial to society. Norms of behavior, such as respects for others and their property (regrettably ignored in the Kelo v New London overextended eminent domain decision), and general rules of conduct, as opposed to specific commands, more effectively guide a society.

Charles optimistically believes there is a science behind success, applicable to any organization. That view may be challenged: Business is more of an art, and its successful "artists" are many with all sorts of philosophies. Some scientific principles may be applied however, and his philosophy does go a long and clear way for dealing with the ongoing challenges of growth and change.

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The key to unlocking the secrets of success is found in the "science of success," so says Charles G. Koch, chairman of Koch Industries. You may know some of Koch Industries brands - Angel Soft, Quilted Northern, Brawny, Dixie, Stainmaster Carpets, and Lycra spandex. The...
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Monday, 26 March 2007 12:00 AM
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