- The Washington Times - Saturday, March 31, 2007

THE SCIENCE OF SUCCESS: HOW MARKET-BASED MANAGEMENT BUILT THE WORLD’S LARGEST PRIVATE COMPANY

By Charles Koch

Wiley, $22.95, 208 pages

REVIEWED BY ED FEULNER

Bold, audacious moves make headlines. And Charles Koch has been making headlines in the business pages for four decades.

The notion that a company the size of Georgia Pacific should be taken private? Preposterous. Or that an oil, coal and gas company could take over a consumer products operation and run it successfully? Ridiculous. But Mr. Koch and his colleagues have done those things — and more — as they’ve built Koch Industries into the world’s largest privately held company. How? Mr. Koch reveals his methods in his new book, “The Science of Success.”

In it, the man who has helmed Koch Industries since 1967 — increasing its revenues from $45 million then to $90 billion in 2006 — outlines the unique management structure behind it all. Mr. Koch’s “Market-Based Management” approach makes every employee an entrepreneur and holds every employee responsible — not only for performance in his or her role, but also for money the company might have earned, but didn’t, because the employee didn’t aggressively pursue alternative investment ventures.

Mr. Koch has made a fortune by knowing when to be bold and when to hold back. And I should note here that my outfit has benefited directly from his ability to make the right call: Mr. Koch serves as a trustee of the Claude R. Lambe Charitable Foundation, an organization that supported the work of The Heritage Foundation.

Of course, no one makes the right call all the time. “A market economy is an experimental discovery process,” Mr. Koch observes, so “business failures are inevitable.” But “the key is to recognize when we are experimenting and limit the bet accordingly.” Experimentation has allowed Koch industries to expand the range of products it offers and let the customer decide which ones survive.

Along the way, Mr. Koch has maximized profits by knowing when to hold on to a division and when to liquidate it. “In general, an asset should be sold when a buyer will pay more than the owner’s estimate of its remaining value,” he advises. Indeed, many companies have gone out of business because they held on to core assets too long instead of diversifying to find new opportunities.

This slim volume is practical enough to influence good management aficionados, and theoretical enough to recommend itself to MBA faculty. It can be read by a layman who wants to learn what undergirds a truly successful global company, or by a big-picture thinker who wants to discuss Joseph Schumpeter’s notion of creative destruction and Friedrich Hayek’s notion of the disbursed array of knowledge.

For Mr. Koch, “back to basics” doesn’t mean simply reinforcing the down-home, word-to-the-wise insights of a Peter Drucker or Brian Tracy. It means getting back to the fundamental principles uncovered by Schumpeter, Hayek, Ludwig von Mises and Michael Polanyi. Their insights explain human interaction and outline the creative opportunities available to companies willing to take prudent risks to come out on top of the heap.

Mr. Koch also explains the importance of creative destruction. “We must continually drive constructive change in every aspect of our company, or we will fail,” he writes. Any company that doesn’t change from within is likely to be destroyed from without, so Koch Industries is constantly attempting to “shed businesses and assets that are unprofitable or worth more to others.”

Mr. Koch has made a living identifying the threats that companies face, so one of his observations is especially important. In today’s world, “the uncertainty of politics has replaced the uncertainty of the marketplace,” he writes. In other words, government, with its myriad laws and regulations, is more likely to harm a company than the company’s competition is.

This concept, while frightening, makes sense to conservatives. After all, we realize that markets are made up of people with understandable interests. If a company can “give the people what they want,” it will almost always prosper. At the same time, it’s difficult — if not impossible — to determine how to please a bureaucracy. Still, Mr. Koch has succeeded so far in applying Market-Based Management to government regulators.

If the book has a fault, it’s that it leaves a reader wanting more. For example, Mr. Koch could have provided more details about succession planning under his system and how best to apply his system to nonprofits or government operations.

But, for a primer on a whole new way of looking at how to organize for success, whether as a multinational service and manufacturing company or as a modest entrepreneurial startup, “The Science of Success” is a two-hour project that will richly repay the reader.

Ed Feulner is president of The Heritage Foundation.

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