How Market-Based Management Built the World's Largest Private Company

If you are interested in applied management theory, this is probably the book for you. At first, however, I was not impressed. I thought I had read more updated and sophisticated theory, but after a while the book became more and more fascinating. Suddenly I realized that Koch Industries (KII) actually practice what they preach. You can almost feel it. I have done countless company visits but I’ve never seen anything close to Koch Industries in terms of a coherent corporate culture. It is remarkable.

And it has paid of handsomely. The author, CEO Charles Koch, and a few partners are nowadays the owners of the largest private company in the world. Since he “took office”, some 50 years ago, the book value of the company has increased over 2000-fold. It is quite obvious that Koch Industries has got a huge competitive advantage in how they run their operations. It would be very interesting to see how the stock market would price KII’s ”chain-linked systems”-advantage. And it would be equally interesting to know if Koch & Co would be as successful managing a listed company. I believe they would.

Charles Koch is a devoted reader. Like Charlie Munger, he has created a latticework of mental models from different disciplines, collected from giants like e.g. Ludwig von Mises, Friedrich von Hayek, Thomas Sowell and Karl Polanyi. His holistic approach to these models is summed up in his “Market-based Management”, MBM. “We define MBM as a philosophy that enables organizations to succeed long term by applying the principles that allow free societies to prosper.” Koch has structured his theory in five dimensions: vision, virtue and talent, knowledge processes, decisions rights and incentives. But the secret seems to be to make these dimensions reinforce each other.

My main takeaways are two. Firstly, it is extremely instructive to read about Koch’s intellectual journey in implementing their concepts, especially when the company grew larger. Koch describes the ups and downs during the years in a passionate and humble way, and maybe the journey needed to take several decades to find the necessary balances between different forces. It extends across many areas but the main focus is on operational efficiency and capital allocation. In this regard an attentive “copy-cat” may save oceans of time and money by reading Koch’s book.

My second main take-away is Koch’s huge collection of mental models. Being an avid collector myself, I realize that I’m in Minor League. Koch lists closely to 100 models in the appendix. They are all part of his management theory. Several were new to me. Maybe most fascinating is how he has tried to simplify these as much as possible in order to facilitate the implementation.

The book is written for current and future employees of Koch Industries but also for business readers in general. This dual target audience works fine. Koch’s book is anything but a rush job. Every argument is carefully prepared and easy to grasp, which gives these 150 pages an exemplary less-is-more feeling. Charles Koch is probably more well known for his economic donations to political causes, mainly libertarian, than as a business leader, but the reader will not find anything politically offensive in the book. The book’s title may sound pompous but the author’s stance is actually very modest and he seems to be a believer in people and diversity. It is quite elevating.

Koch’s book has many similarities with another favorite, Jack Welch’s Winning. Koch and Welch are both very action-oriented and it’s understandable why. Strategy guru Richard Rumelt said in this book: “The coordination of action provides the most basic source of leverage or advantage available in strategy.” I don’t hesitate to recommend The Science of Success.

This is a review by investingbythebooks.com

This book tells the management strategy behind the huge success of the world's largest private company. Primarily a management book, it is nonetheless packed with insights that can be applied to your own professional, and even personal, life as well.

Key Points

The strategy outlined by Koch (aka "market-based management") has five distinct pillars. Learn these pillars and you can harness their power them for your own professional journey.

1. Vision - An organization must determine where and how it can create the greatest long-term value, and the same goes for you! Where are your strengths compared to others? How can you best use these to create long-term value in the world and then capture the success that will come along with it?

2. Virtue and Talents - Surround yourself with people with the right values, talents, and capabilities. One of our greatest skills professionally and personally can be to build the right team. Let people play to their strengths. Recognize the unique talents of others and surround yourself with those who are willing to use those talents to create value. Align yourself only with others of integrity, whether for personal or professional relationships.

3. Knowledge Processes - Along your professional journey, you first acquire (or even create!) knowledge. But you must go two steps further, applying that knowledge in a useful way to your life, as well as sharing it with those around you. In addition, you must then track your progress on your knowledge path. Keep benchmarks for yourself and goals for where you'd like to be at different stages of your life. Readjust them as necessary, but don't lose sight of the goals you set for yourself.

4. Decision Rights - Ensure that the right people are in decision roles and are help accountable for their decisions. Stay accountable for your own decisions that you make.

5. Incentives - Reward people according to the value they create. Incentives are one of the most powerful forces driving human action. Use this to your advantage. Give people incentive to work alongside you or to help you. This is not a bribe, but is finding a way to align your goals with theirs. Find incentive for yourself and those you work with to work hard and to work together.

My Take

This book reads best as what it is-- a handbook for bedrock principles to build a highly effective organization or business. However, don't miss the many applications from the business world to your own life. It's full of wisdom, all built around the idea that people are meant to add value to the world. And isn't that what we all want for ourselves? To make the world a little better because we were here?

Note that it includes some economics principles, but more as a bit of background to explain the concepts behind the strategy. It's an easily-digestible read.

Would that Koch, or any company actually worked this way. Nothing wrong with the book, unless you view Ayn Rand's stuff as incorrect. My personal experience with Flint Hills (a Koch subsidiary) didn't look much like this, but it was a recently acquired site and it takes a while to change a culture.

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.

Charles G. Koch is the most important businessman you have never heard of.

For that matter, Koch is likely to prove to be the most significant figure in American business in our lifetimes, and that is saying a lot.

Koch is not the wealthiest man alive--Bill Gates still has that title locked up--but his business achievements are certainly the most remarkable. While Gates has amassed his fortune by being the best businessman in an emerging and vital industry, Koch has built the world's largest private company ($30 billion or so in value) in bread and butter industries such as oil refining, animal feed, and paper products where the competition is fierce and product substitution is easy.

Under Charles Koch's leadership, the family business (appropriately named Koch Industries) has increased in value at a steady clip--ten times faster than the Standard and Poor's 500. In Good to Great (another outstanding business book) Jim Collins used a benchmark of growing three times faster than the Market as the mark of a great company.

Koch has bested that growth rate by about 300%. Not bad.

But what makes Charles G. Koch the most important figure in American business today, or perhaps ever, is not the uniqueness of his achievements at all; it is the fact that Koch argues, mostly successfully, that his achievements are not a fluke at all, or even due to some special genius on his part. Instead Koch argues that his secret, if you could call it that, is that he has followed a Science of Success.

And better yet, Koch has written one of the definitive books on business in order to share his insights with the next generation. The Science of Success ((c) Koch Industries, 2007: John Wiley & Sons) will quickly become must reading for MBA students and others interested in making a go of it in business.

Readers looking for an easy-to-follow recipe for success will be disappointed, however. Success may have a science, but it still doesn't have the easy-to-follow recipe that every self-help book reader is looking for. Instead Koch shares with his readers the basic principles of what works and why, drawing heavily upon the insights of great thinkers such as Thomas Hobbes, Michel Polanyi, F. A. Hayak, Ludwig Von Mises, Peter Drucker--well, you get the idea: anyone and everyone who has had any insight into the human condition and what makes us tick.

Koch synthesizes his insights into an intellectual structure he calls Market Based Management(tm). And while Koch delineates a coherent set of principles and benchmarks to aid the aspiring manager along the path to success, the basic principle is one that ought to be familiar to anyone who has lived through the triumph of market-based societies over socialist and fascist regimes: markets are a very powerful force, and when unleashed are unmatched at productivity and the improvement of the human lot.

Charles Koch's great insight--the foundation of the amazing success of Koch Industries--is that this fact is as true within firms as it is in the economy as a whole. Using a competitive market model as a management structure unleashes the same forces as you see when market economies compete against planned economies.

And most large corporations are planned economies. Autocratic, intolerant of creativity and dissent, and run largely for the benefit of an elite few.

Looked at in this way, is it any wonder that a student of Austrian economists could run circles around the largest publicly-traded companies in the world? Matching Koch Industries up against a large publicly-traded company in today's world is like matching up the Free World against the Socialist World. He couldn't help out competing them, because his company was managed using Market Based Management(tm) (MBM).

My one quibble with the book, if you can call it that, is not so much with the substance of what Koch so generously teaches, but with his unspoken assumption that the tools he is giving us will be enough to vault us to success.

In other words, he takes too little credit for the success of Koch Industries. While it is true that his insights--if understood and acted upon by corporations--will revolutionize how business is done, it is also true that many of his readers will not be up to the task of implementing MBM. It would require the elites who benefit from the nearly socialist structure of today's large corporations to yield power, and I fear that many will never do so.

It will be left to the disciples of Koch and Market Based Management(tm) to consign them to the dustbin of history through their superior productivity and success.

Finally, Austrian economics has triumphed---in the business world! Imagine, a billionaire thanking Ludwig von Mises and Friedrich Hayek for creating the world's largest private company, Koch Industries. Koch's book shows how his "Market-based Management" (MBM) strategy could revolutionize business, government, and non-profits.

Two years ago, Koch established the "Market Based Management Institute" at Wichita State University. Will it not be long before MBA students at Harvard and Stanford are assigned Mises's Human Action or Hayek's Individualism and the Economic Order? There's nothing like a big success story to transform the B school's pedagogy.

And there's nothing bigger on the scene today than Koch Industries, which has transformed itself into a giant commodity and financial conglomerate. The company has grown as fast as Warren Buffett's Berkshire Hathaway. Is the next paradigm shifting from Omaha to Wichita?

Economics of late has transformed itself from the dismal science to the imperial science, invading politics, finance, history, law, religion, and now business management. In Koch's MBM guidebook, the Austrian concept of opportunity cost of capital is now "Economic Value Added (EVA)," property rights has become "decision rights," and Hayek's rules of just conduct translates into "principled entrepreneurship." Koch's book is an essential translation of Austrian theory into business practice.

Charles Koch is a shy man. Unlike Buffett's company, Koch Industries is a private company, a situation Koch prizes. He doesn't have to worry about Sarbanes-Oxley, nor how quarterly earnings and executive stock option compensation distort the stock price. "Perverse incentives make managing a public company long term extremely difficult," he writes.

Undoubtedly, many businesses and B schools have matched Koch's performance by incorporating such MBM concepts as incentives, integrity, internal profit centers, local autonomy, economic value added, sunk costs, comparative advantage, and marginal price analysis. At Columbia Business School, John Whitney taught MBM for years, and I followed in his footsteps using Koch Industries, Whole Foods Market, and Agora Publishing as case studies. These companies are run by libertarian CEOs who apply market strategies to "create long-term value." Koch doesn't have a monopoly on these market concepts.

Koch has trademarked MBM throughout the book, which can only be justified by his unrelenting systematic application of its principles, and the work is peppered with numerous examples of successes and failures. In this respect, his book is too short for my tastes. In only 194 pages, there's not enough space to determine how much of Koch's success is due to MBM and how much to engineering brains, business experience and just plain luck. For instance, in a 15-page summary of the evolution of Koch Industries, he states, "Thanks to my brother David's leadership, KII has grown its process equipment and engineering business more than 500-fold." Amazing, but how was it achieved? Charles doesn't tell how David used MBM principles to accomplish this monumental goal.

Is "Success" a science? Koch goes to great lengths to prove that his MBM methodology is universal and objective, but Koch is not without controversy. My course at Columbia was rated highly by the MBA students, but an illiberal department chair refused to renew the course, calling it "too political." (At Columbia, can anything be "too political"?) Charles Koch's politics are libertarian, and he has been a major contributor to free-market foundations such as the Cato Institute and the Institute for Humane Studies at George Mason University. For many business schools, it's hard to separate science from politics.

Koch is no Keynesian businessman. According to his book, he is no fan of meaningless make-work projects, guaranteed employment, automatic pay raises, seniority, centralized planning, or running to the government for subsidies or trade protection. Most employees are Koch Industries are union, but must be flexible if they are going to survive. Koch aggressively searches for only "A" or "B" grade employees; those rated "C" either must improve or are let go. Koch Industries doesn't tolerate failure for long. I like his anti-Marxist slogan, "From each according to his ability, to each according to his contribution." Now that's marginal analysis at work!

Though anti-statist to the core, Koch reveals in his book some things that will surprise libertarians. For example, most libertarians practice "minimum" compliance with state rules, but Koch teaches "maximum" compliance with environmental and other government regulations. In today's litigious society, it is suicide to act otherwise: Koch Industries faces 159,000 lawsuits and employs 125 full-time lawyers.

Until now, Koch's Market Based Management, Principled Entrepreneurship, and other trademarked management techniques were taught to company officials and employees, and there was always a shroud of mystery about his guiding principles. His new book "Success" is a giant step in the right direction. Charles Koch has lived up to Ben Franklin's line, "It is incredible the quantity of good that may be done in a country by a single man who will make a business of it."

Forty years ago, Charles Koch returned home to Wichita, Kansas to take the reins of the oil and gas company that his father had established and was threatening to sell.

Today, Koch is chairman and CEO of the largest privately-held company in the world, with 80,000 employees in 60 countries and annual revenues greater than Microsoft. It is still in the oil business, but has added pipelines, refineries, jet fuel, and asphalt to its capabilities...along with fertilizer, chemical technology, commodities trading, municipal finance, ranching, carpet, spandex, and toilet paper.

How did Koch achieve such phenomenal success - multiplying its book value 2,000-fold in the course of 45 years, outpacing even the S&P 500 index by orders of magnitude - with what seems to be an irrational hodge-podge of businesses? He took the analytical mindset he developed as an engineer, dedicated himself to intense study of some of history's greatest free-market economists, crafted his own system of Market-Based Management, and set out to drill that philosophy into all of his employees.

Koch has now made his system available to the masses through his new book, "The Science of Success: How Market-Based Management Built the World's Largest Private Company."

"As an engineer, I understood the natural world operated according to fixed laws," Koch writes in the introduction. "Through my studies, I came to realize that there were, likewise, laws that govern human well-being. I learned that prosperity is only possible in a system where property rights are clearly and properly defined and protected, people are free to speak, exchange and contract, and prices are free to guide beneficial action. Allowing people the freedom to pursue their own interests, within beneficial rules of just conduct, is the best and only sustainable way to promote societal progress."

If that sounds familiar to students of the Austrian School of economics, it should. Koch's business philosophy (and personal philanthropy) is influenced heavily by the writings of Ludwig von Mises, F. A. Harper, and other leaders of that movement.

Koch's Market-Based Management system is based on five dimensions: vision, virtue and talents, knowledge processes, decision rights, and incentives.

Vision is about "determining when and how your organization can create the greatest long-term value." One of the key concepts that Koch embraced from the Austrian School was Joseph Schumpeter's creative destruction - that the destruction of existing structures was necessary to promote innovation and economic growth. "We must continually drive constructive change in every aspect of our company or we will fail," Koch says. "We believe it is essential to drive creative destruction internally, otherwise creative destruction will drive us out of business." That begins to explain how Koch Industries has bought 37 businesses and exited from pizza dough and 41 others over the years.

Virtues and talents relate to "helping ensure that people with the right values, skills, and capabilities are hired, retained and developed." Here, Koch embraces Friedrich Hayek's rules of just conduct, which include both the rule of law and norms of behavior. One of the guiding principles of MBM is 10,000% compliance - 100% of employees complying 100% of the time.

Knowledge processes involve "creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability." In one case, a failing Koch company discovered that 60 percent of the volume of one product sold to a few large customers generated only 20 percent of the profit. With this knowledge, the sales force switched its focus away from these large customers to the smaller, more profitable customers.

Decision rights "ensur[e] the right people are in the right roles with the right authorities to make decisions and holding them accountable." Koch makes a compelling case for private property rights, pointing out that when people own a resource, they both realize the benefits and reap the costs of consuming it. Where there is no ownership (e.g., the oceans), the consumers realize the short-term benefit without paying the cost, and thus the resource is often depleted.

Finally, incentives "reward people according to the value they create for the organization." Koch stresses the importance of aligning each employee's individual interests with the overall interests of the company. He also labels conventional compensation systems - with their automatic raises and pay classification scales - as "destructive." At Koch, employees are compensated based on the value they add to the company.

"The Science of Success" figures to become a must-read for business students and aspiring entrepreneurs, as well it should be. But those in government and politics will also benefit from reading Koch's work. At a minimum, Koch's quotes and footnotes can form a reading list on some of the most important influences on modern free-market theory. But beyond that, Koch's illustrations can point out the inherent flaws in government bureaucracies - particularly how they view their missions, evaluate their performance, and compensate their employees - and how government policies can have unintended consequences on private-sector behavior.

Charles Koch has made a huge impact through his leadership of Koch Industries and his stalwart support of free-market institutions. Through "The Science of Success," Koch adds eight chapters to that legacy.

I really enjoyed the mixture of science and measuring success that Mr. Koch writes about but I am still trying to figure out how I can apply it to my way of management. I really allign myself with many of his beliefs about the individual and the markets so I knew I would enjoy the book but I am struggling to step to the next level and apply some of his learnings to improve my businesses. I guess Mr Koch's philosophy and holistic look at management should be more important than trying to copy his system. It's a short book and I wish he would have went into much more detail about his philosophy and business but it's worth the time to read.

One of the foundational lessons Adam Smith teaches us (and which virtually everyone forgets) is that businessmen are not capitalists, not in the philosophical sense. While they are certainly enabled by the free-market system, Smith professes and history proves that two businessmen need barely sit down for coffee before they begin conspiring to restrain trade for their private benefit, usually seeking the power of government to aid them. This is one of the main reasons why so many business people around the world are socialists or close to it: there's a lot of money to be made in backing the right statist scheme.

So it's all the more amazing to read the words of Charles Koch -- perhaps the most successful private businessman alive and certainly head of the largest private company -- as he extols the virtues of the market, not only in broad philosophical terms, but as an applied science of management. Imagine a business where decision making is truly decentralized, where empowerment is a reality not a slogan, and where the ideas of market-based societies (as opposed to fascist/communist centralization) are rigorously applied at all levels. Sound like chaos? Well, think again, because under Koch's guiding hand, Koch Industries has grown 2,000%, has increased value at ten times the rate of the S&P 500, and has reached $90 billion in annual sales. When Koch attributes his success to Mises and Hayek, we should listen.

All of this seems counterintuitive on a number of levels; but so does the idea of the "invisible hand". And Koch is not alone in his thinking: reading "The Science of Success" reminds me very much of my experience at PayPal, where another business titan, my friend Peter Thiel, created the world's dominant online payments system against all odds (and plenty of opposition) in the internet crash years and along similar principles. Peter is a fine writer and a staunch libertarian, with degrees in economics, philosophy and law: I have no doubt that, had he written a book about his PayPal odyssey, it would have taught many of the same lessons as Koch.

But Peter never wrote that book, and Charles Koch did; and an excellent read it is, from cover to cover. One need not be entrenched in the "old economy" -- or in the new -- to benefit greatly from this rarity, a business book that's a page-turner. Koch has produced what may well prove the foundation of a new approach to the science of management; and should he succeed, he will have greatly advanced the philosophy and the cause of liberty in the process.

WHO WILL LIKE THIS BOOK: Business people, libertarians, fans of limited government and enemies of bureaucracy

WHO WILL NOT LIKE THIS BOOK: Those uninterested in business, those intrigued with collectivism and redistributive economics

The Science of Success: How Market-Based Management Built the World's Largest Private Company lays out the principles upon which Koch Industries was founded. It is a short read, I would have loved this book to have been longer.

I found this book to be fascinating. It clearly and succinctly lays out what Koch believes to be the essentials of business success. He refers to his philosophy as Market Based Management. It is grounded in a libertarian view of the world and I found myself nodding my heard throughout. If you believe politics and bureaucracy are positive and should control resource allocations in the economy this book is not for you.

As with any book on business philosophy, implementing the ideas presented is the difficult part. I would love to see a follow-up with more specific examples of implementation of the principles.

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.

Before reading The Science of Success, I had heard of Koch Industries and Charles Koch in passing, but had never really thought about the company, its people or, most importantly, their philosophy. After reading it, however, I've come to understand, just a bit, why Koch and his company are so successful in every way.

His Market-Based Management is much more than a recipe for success. It's a distinct, ethical and principled worldview in a world and age often lacking in well-thought out and much-less adhered to worldviews. I am not a businessman and work for myself. Nevertheless I found The Science of Success far more than just a book which explains why the company is so successful. The worldview expounded upon by Koch involves an understanding of history, human nature, the economy, culture and politics, among others. He draws on these as he explains, in greater detail, his Market-Based Management and how it applies to Koch Industries. But I believe it can be applied not only to business, but individuals as well and how we live our lives. The subjects of vision, virtue and talents, knowledge processes, decision rights and incentives (the five dimensions which make up MBM), can all be applied to us as we go about our busy lives, in our interactions with family, friends, co-workers, bosses, and others. It is this philosophy which makes The Science of Success an important read to those wanting to make a positive impact on the world around them.

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!

The idea is this: the same principles that make societies prosperous can also make companies prosperous.

In the Science of Success, Koch Industries CEO Charles G. Koch calls this idea Market Based Management (MBM), and he shows how he used it to grow his company into the largest privately owned company in the world, with over $100 billion in revenues in 2009.

Part-philosophy, part-economics, and part-management science, The Science of Success should be read by every executive of every company in the world. In it Koch discredits command-and-control corporate hierarchies, functional departments, and old-school compensation plans based on education and/or experience. Koch argues that in order to be successful, companies should be planned like free societies, where each individual is free to pursue his or her rational self-interest within certain mutually accepted rules of conduct.

This revolutionary idea is applied through 5 Dimensions, which Koch describes in the book:

1. Vision: Determining where and how the organization can create the greatest long-term value.
2. Virtue and Talents: Helping ensure that people with the right values, skills and capabilities are hired, retained and developed.
3. Knowledge Processes: Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability.
4. Decision Rights: Ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable.
5. Incentives: Rewarding people according to the value they create for the organization.

For this blog post I will describe how MBM handles the concepts of Decision Rights and Incentives differently from traditional companies.

DECISION RIGHTS

Koch correctly points out that the biggest problems in society have occurred in those areas thought to be best controlled in common: the atmosphere, bodies of water, air, streets, the body politic and human virtue. This is known as "tragedy of the commons", because when there are no clearly defined property rights in a society, no one has an incentive to take care of the thing they use.

In an attempt to replicate the positive effect of property rights in a company setting, MBM uses the idea of decision rights. Decision rights should reflect an employee's demonstrated competitive advantage, meaning he or she can perform an activity more effectively at a lower opportunity cost than others. The key point is that this authority is based on the degree to which an employee has demonstrated a competitive advantage in that area, NOT arbitrary factors like experience, education, seniority or being chummy with the boss. For example, an employee who has demonstrated a superior ability in accounting would have significant authority to approve financial statements. However this would not automatically grant him a similar authority to hire and fire junior accountants. Contrast this with the situation in many corporations, where technical excellence can get you promoted to a management position in which you are responsible for leading a team of people, despite demonstrating absolutely no management ability.

INCENTIVES

Abraham Maslow stated that the central problem of management is, "how to set up social conditions in any organization so that the goals of the individual merge with the goals of the organization." That means that every employee in MBM is considered an entrepreneur, and is paid a portion of the value they create for the company. That means no cost-of-living adjustments, no automatic promotions or bonuses due to seniority, and no golden parachute severance packages if you run the company into the ground (I'm looking at you Wall Street).

Compensation in an MBM company is based on the long-term, real value you add to the company. If you take unnecessary risks that lose money for the company, your compensation will be decreased accordingly. On the other hand, if you are the leader of a project that is financially successful in the long-term, your compensation will be increased accordingly. Compensation isn't set in stone, so employees cannot rest on their laurels but must continually strive to add value.

Also, MBM strives to tailor incentives for each employee. What any individual employee values is highly subjective and includes both financial and non-financial components. Just as in a free society, some citizens may value a high salary, some may value time freedom, and some may value a remote working agreement. The variations are endless. In MBM, compensation packages, where feasible, are tailored to the individual and may be different for different employees. Some employees may be awarded with company stock, increased vacation time, or the ability to bring their kids to work. It all depends on the unique situation surrounding the employee.

Those are only two of the vast number of differences between a traditional company and an MBM company. To get the rest, you'll have to read the book.

Koch's principled and visionary approach to business is like a breath of fresh air in the stodgy marketplace of business books. His practical implementation of economic principals and the scientific methodology behind his initiatives shows that good people can make good ideas work. Legislators are too often goaded on by the parochial constituencies that are merely promoting the business solution de jour. MBA students are often seduced by management fads and gimmicks rather than high integrity committed efforts.

The brilliant success of Koch's firm is clearly built upon the five dimensions of MBM. Continuity of vision in combination to the alignment of incentives drive his business to thrive while so many public companies furiously change stripes to indulge the whimsy of management experts. This book teaches us that in business, you need integrity, vision and the passion to consistently and effectively execute.

Charles' humility when talking about their failed business initiatives is as instructive as it it humorous. His candor is truly refreshing. How many times have we heard senior managers in large public companies speak about the acceptance of failure associated with risk, while all the managers present can barely refrain from bursting out laughing. Our public companies are becoming overburdened with regulations that remediate nothing and actually betray any underlying potential for true trust and authenticity. Meanwhile, students of MBM will be able to catapult their businesses to the front of the line. Is it any wonder that private equity funding is exploding?

Mental models and decision trees show the reader how businesses should be run. Koch rightly points out that society benefits as businesses with integrity and vision make products and services that actually improve the quality of our lives. Not only do we benefit from the products, but think of the tens of thousand of jobs that are created by entrepreneurs like Koch.

Though Koch sites Mises and Harper as his greatest influencers, I think it was Schumpeter's creative destruction that has allowed his vision to be relentlessly driven to improve his company and have a wonderfully positive influence on our world.

The idea is this: the same principles that make societies prosperous can also make companies prosperous.

In the Science of Success, Koch Industries CEO Charles G. Koch calls this idea Market Based Management (MBM), and he shows how he used it to grow his company into the largest privately owned company in the world, with over $100 billion in revenues in 2009.

Part-philosophy, part-economics, and part-management science, The Science of Success should be read by every executive of every company in the world. In it Koch discredits command-and-control corporate hierarchies, functional departments, and old-school compensation plans based on education and/or experience. Koch argues that in order to be successful, companies should be planned like free societies, where each individual is free to pursue his or her rational self-interest within certain mutually accepted rules of conduct.

This revolutionary idea is applied through 5 Dimensions, which Koch describes in the book:

1. Vision: Determining where and how the organization can create the greatest long-term value.
2. Virtue and Talents: Helping ensure that people with the right values, skills and capabilities are hired, retained and developed.
3. Knowledge Processes: Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability.
4. Decision Rights: Ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable.
5. Incentives: Rewarding people according to the value they create for the organization.

For this blog post I will describe how MBM handles the concepts of Decision Rights and Incentives differently from traditional companies.

DECISION RIGHTS

Koch correctly points out that the biggest problems in society have occurred in those areas thought to be best controlled in common: the atmosphere, bodies of water, air, streets, the body politic and human virtue. This is known as "tragedy of the commons", because when there are no clearly defined property rights in a society, no one has an incentive to take care of the thing they use.

In an attempt to replicate the positive effect of property rights in a company setting, MBM uses the idea of decision rights. Decision rights should reflect an employee's demonstrated competitive advantage, meaning he or she can perform an activity more effectively at a lower opportunity cost than others. The key point is that this authority is based on the degree to which an employee has demonstrated a competitive advantage in that area, NOT arbitrary factors like experience, education, seniority or being chummy with the boss. For example, an employee who has demonstrated a superior ability in accounting would have significant authority to approve financial statements. However this would not automatically grant him a similar authority to hire and fire junior accountants. Contrast this with the situation in many corporations, where technical excellence can get you promoted to a management position in which you are responsible for leading a team of people, despite demonstrating absolutely no management ability.

INCENTIVES

Abraham Maslow stated that the central problem of management is, "how to set up social conditions in any organization so that the goals of the individual merge with the goals of the organization." That means that every employee in MBM is considered an entrepreneur, and is paid a portion of the value they create for the company. That means no cost-of-living adjustments, no automatic promotions or bonuses due to seniority, and no golden parachute severance packages if you run the company into the ground (I'm looking at you Wall Street).

Compensation in an MBM company is based on the long-term, real value you add to the company. If you take unnecessary risks that lose money for the company, your compensation will be decreased accordingly. On the other hand, if you are the leader of a project that is financially successful in the long-term, your compensation will be increased accordingly. Compensation isn't set in stone, so employees cannot rest on their laurels but must continually strive to add value.

Also, MBM strives to tailor incentives for each employee. What any individual employee values is highly subjective and includes both financial and non-financial components. Just as in a free society, some citizens may value a high salary, some may value time freedom, and some may value a remote working agreement. The variations are endless. In MBM, compensation packages, where feasible, are tailored to the individual and may be different for different employees. Some employees may be awarded with company stock, increased vacation time, or the ability to bring their kids to work. It all depends on the unique situation surrounding the employee.

Those are only two of the vast number of differences between a traditional company and an MBM company. To get the rest, you'll have to read the book.

Koch's principled and visionary approach to business is like a breath of fresh air in the stodgy marketplace of business books. His practical implementation of economic principals and the scientific methodology behind his initiatives shows that good people can make good ideas work. Legislators are too often goaded on by the parochial constituencies that are merely promoting the business solution de jour. MBA students are often seduced by management fads and gimmicks rather than high integrity committed efforts.

The brilliant success of Koch's firm is clearly built upon the five dimensions of MBM. Continuity of vision in combination to the alignment of incentives drive his business to thrive while so many public companies furiously change stripes to indulge the whimsy of management experts. This book teaches us that in business, you need integrity, vision and the passion to consistently and effectively execute.

Charles' humility when talking about their failed business initiatives is as instructive as it it humorous. His candor is truly refreshing. How many times have we heard senior managers in large public companies speak about the acceptance of failure associated with risk, while all the managers present can barely refrain from bursting out laughing. Our public companies are becoming overburdened with regulations that remediate nothing and actually betray any underlying potential for true trust and authenticity. Meanwhile, students of MBM will be able to catapult their businesses to the front of the line. Is it any wonder that private equity funding is exploding?

Mental models and decision trees show the reader how businesses should be run. Koch rightly points out that society benefits as businesses with integrity and vision make products and services that actually improve the quality of our lives. Not only do we benefit from the products, but think of the tens of thousand of jobs that are created by entrepreneurs like Koch.

Though Koch sites Mises and Harper as his greatest influencers, I think it was Schumpeter's creative destruction that has allowed his vision to be relentlessly driven to improve his company and have a wonderfully positive influence on our world.

Born out of a life-long study of economics, science, philosophy, psychology, political theory and history, MBM is essentially a practical business application of the principles that have led to innovations and the most prosperous, peaceful, robust economies in history. Here are four take-away quotes from the book:

1. "Societies are most prosperous when knowledge is plentiful, accessible, relevant, inexpensive and growing."

2. "The discovery and application of knowledge leads to the improved use, allocation and consumption of resources."

3. "Decisions should be made using economic and critical thinking, logic and evidence, rather than emotion or gut feeling. Elegantly articulated but complicated mental models, arguments and ideas that do not deliver profitable results have no value."

4. "Even when well-intentioned and motivated people are eager to succeed, they still face the challenge of understanding where and how to focus their time and effort."

[...]

If you are looking for "management" book that recycles the organization scripts that appear in many other books, look elsewhere. Mr. Koch's book successfully links the performance of the individual employee, the company, and societal progress in the battle for more freedom and less control. This is a novel connection.

While all of the Market-Based Management dimensions are worth study, decision rights and incentives are two that really struck home. Giving employees the freedom to make decisions is earned by good performance. Employee performance is what decides compensation. Many others preach this, but Koch Industries has proved it.

Incentives must be aligned by the manager to match up: What is good for me (employee)?, What is good for the company/organization?, and What is good for society? This is a difficult task and requires critical thinking, but crucial and often overlooked.

This book works for those in the private sector as well as the non-profit world. I highly recommend it for anyone looking for a fresh take on management.

"The Science of Success" is an excellent book for anyone working in 'Corporate America' or any small business. It was inspiring to learn about the many ideas implemented by Charles Koch that enabled the company to become such a tremendous success for owners, management and staff. With so many corporate environments moving in direct contrast to the key principles outlined in Market-Based Management, it was especially encouraging to learn how Koch Industries continues to move forward achieving greatness from new ways of empowering people and implementing ideas.

Among the many ideas that stand out in this book is the value created for the community and the corporation by aligning the interests of the individual and the company through incentives. The author references a story about prison ships headed to Australia (page 140 & 141) as a clear example of the positive and negative side of incentives. Another great idea is the offer of 'decision rights' to leaders within the organization, empowering people to try new ideas and take risk.

The book really drives home the point about value creation for society through the empowerment of the right individuals with the right core values to take risk. The contrast to Marx and the logic of the approach is fantastic and exemplifies the integrity of the capitalist system as it is truly embodied by Koch Industries. It must be an exceptional place to work.

If you believe in the free market and are interested in learning how to apply its principles to your working life, Charles G. Koch's The Science of Success is a must-read.

As chairman and CEO of Koch Industries since 1967, the author built the largest and most profitable privately held company in the world. In The Science of Success he shares the management philosophy behind his many successes, an ingenious application of free-market principles to the internal functioning of organizations. He calls his approach market-based management (MBM).

The whole of MBM, according to Koch, ultimately rests on one simple question: "Is this creating value?" The five dimensions of MBM, all of which relate back to value creation, are vision, virtue and talents, knowledge processes, decision rights, and incentives.

With the support of excellent research in the fields of science, philosophy, and economics, Koch describes in clear terms how the principal insights of free-market economics can be applied, through MBM, within organizations of all sizes. While he focuses primarily on his own company, and therefore on the for-profit sector, there are lessons here that are highly valuable for the public and non-profit sectors as well.

Charles Koch did a great service to aspiring business owners and society as a whole by writing this book. So often we get books that offer techniques and strategies to exploit temporary trend. This book is just the opposite. Koch shares the principles that underlay the long-term success of Koch Industries. He originally wrote the book for employees, but thankfully decided to publish it to the world (even though I'm sure some of his managers might have argued that he should not "share the secrets" that have made the company successful).

The book paints a portrait of corporate America that is much different than the worn out stereotypes. Koch sincerely believes building successful products benefits individuals and society as a whole. Unlike government subsidized industries, a business operating in the free market must continually innovate to deliver products and services create real value for individuals. In this sense, a profitable business can at times be a more noble pursuit than even a government job.

In a time when corporate leaders are frequently vilified--even by our president--a book like this is a welcome contrast highlighting the honorable efforts that characterize a large majority of the people running successful businesses.

Charles Koch's book is not only an excellent book for the for-profit sector, but is an outstanding book for nonprofit executives.

Applying the five "dimensions" Market-Based Management (MBM) to either a for profit or a nonprofit organization will not only improve the operation of the non-profit but will also enable the organization to better market the organization's accomplishments.

By having each division within the organization constantly asking "is this creating value" helps refine the mission of the organization and results in the organization focusing on the critical elements of successfully accomplishing the mission.

Charles Koch's book describes in clear terms how to implement the principles of free market economics to a business. The five dimensions of MBM are vision, virtue talents, knowledge processes, decision rights and incentives and if effectively applied will greatly improve the operation of any organization.

This book is a welcome addition to the literature of best business practices. It transcends two popular genres of books that have stressed either revolutionary change or incremental improvement as the driver of success.

As I understand it, Koch's market-based management (tm) can encompass either remaking a business (coming up with an entirely new means/ends framework) or practicing rabid incrementalism within a known framework (however brief). The common denominator is identifying what is appropriate to make the best of a market opportunity. But here is the main point: the different aspects of the presented framework need to be practiced together and not a la carte.

If there is a science of success, there is also a science of failure. As a former Enron employee and a student of that company's debacle, I have come to appreciate what can spawn failure despite the best of intentions and aspirations. Needless to say, Enron employed business practices that failed--and were antithetical to the ideas of the book under review.

There are case studies that accompany the principles in this book, but there need to be many more from Koch Industries and other companies to help the framework come alive for the noninitiated. To this end, I hope this book is just a beginning to better understand the timeless principles behind success.

As someone who wants to see classical liberal policy ideas get out to the kind of people who read books on management, I think the book is fantastic. I like the way he drops "the French writer Frederic Bastiat" into the middle of the chapter on virture and talents. Now, if I were reading the book as someone who wanted to get-rich-quick, I'm not sure I would have learned anything that I feel would get me there. If I were that kind of reader, I would probably be intrigued by the paragraph on page 66 about the kinds of "intensive, systematic, global study" that Koch Industries does, and I would be wondering, "When is he going to tell me HOW to do that kind of study?" Of course, I don't really believe that get-rich-quick is a viable lifestyle... So, I think it's a great book for someone starting off in business, or for someone getting an MBA--or for someone who has lost his bearings (and/or principles/ethics) and who needs to step back and look again at his vocation as a creator of value.

Readers of Charles Koch's book will not find earth-shattering secrets of success that will enable them to build business empires overnight. What they will find instead are commonsense applications of free-market principles that are often bandied about in academic circles and business schools, but rarely applied in practice over a sustained period of time.

It is said that "personnel is policy." Koch's chapters on selection and evaluation of employees as well as value inculcation and motivation are especially valuable, as is his "exit strategy" for those products and service that do not make up core strengths of an organization.

One certainly cannot argue with the result: 2,100-fold growth since 1961 and an annual turnover of more than $80 billion.

Charles Koch is sharing his secret to success, and we should listen. Koch, listed by Fortune as the largest private company, has grown more than 2,000-fold since the early 1960 when Charles Koch took over his father's business. His success is directly attributable to his unique management approach called Market-Based Management, which is based on the principles of free society and market economy. Charles Koch's approach is a "discovery process" based on spontaneous order and coordination through mutual adjustment, rather than coordination through centralized planning. It is striking how the new science of complexity theory is applicable to the science of success. This book could be the link between this new science of complexity and management that we have been waiting for.

Those giving low ratings to this book and the management philosophy described within are simply ignorant so can't be blamed for their error. Charles Koch readily admits he didn't "create" anything in developing his Market Based Management philosophy. Instead, what he did was separate the management "wheat" from the chaff. The truth is that great leadership isn't complicated and that great leaders throughout history have applied a set of common principles. Koch has simlpy studied history, identified what works best, then developed those concepts into a management philosophy that WORKS.

Try it yourself. Imagine you're starting a business. Your first step will be to develop a Vision of what you're in business to do and what you hope to accomplish. Step One in the MBM process is to create a vision. Step Two? Get the right people.

This is oversimplified, but get the book and try it. If you apply it correctly, you will be successful

"Steak. No Sizzle" is the thought that came to my mind in describing Koch Industries and the success that Charles Koch has had in growing his company for the past 40+ years.

The business section of book stores are full of quick-fix books that are loud with sizzle, but leave one wondering where the steak is. Charles Koch's book, the Science of Success, is the steak. Written from the very successful Chairman and CEO of the world's largest private company, Koch gives good, core insight into the philosophy that he uses to operate and grow his business, Koch Industries.

That philosophy, called Market-Based Management (MBM) gets the focus set squarely on the bottom line of value added. It's that focus on the value added impact that makes the book and Koch's philosophy so valuable.

While it would take readers years to perfect the application of Koch's MBM philosophy, Koch would surely say that his approach is not a quick fix or an approach for everyone. Rather, it is an approach for those who are dedicated enough to want to make a valuable difference in their own life, profession or business.

I can't imagine it's easy being humble after having grown a business more than 2,000-fold, but Koch not only mentions that he's had his share of colorful failures, but also mentions frequently and with great emphasis that he and the business succeeded with great people around him.

No doubt that some of the great people in his life that he mentions, such as his wife Liz, his brother David, and one of his top officers, Rich Fink, have grown in their knowledge of MBM and have made a significant impact on the company by applying Mr. Koch's philosophy.

Readers looking for a straight forward and hearty approach to a value-adding philosophy will find it here, like the person looking for a good steak dinner who savors a hearty steak.

This story is better than Reality TV because it is about things that should matter, like increasing efficiency of production, creating an innovative and entrepreneural work place, and making the world a better place. Charles Koch shares enough of his own life with us to help us get to know him a little better. That was a nice aspect of the story too. He gives credit to his staff and the method for company success. This book has become my favorite gift to business friends. There are many "methods" for business and personal success. This one is reasonable. As they say, simple to describe, difficult to practice.

The Science of Success is an excellent book for anyone who interesting in business, the mechanics of business, economics, and perhaps most importantly, anyone who is interested in making a good bit of money the old fashioned way.

The book would be excellent not as a text book, but for collateral reading in business college coursework, college economics, and financial and business seminars.

The reader will see that Mr. Koch's approach to business is firmly grounded in ethics, morality, and adherence to law. Additionally, the discipline and tough-mindedness of Market Based Management practices are clearly stated or implied throughout the book.

This is a must read for a solid business background.

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.

[...]

There are thousands of business books published each year, many of them by authors with little or no personal record of producing positive, measurable results for businesses in the real world.

This is not the case with author Charles Koch. Since becoming Chairman and CEO of Koch Industries in 1967, Koch has transformed the company from a small concern to a behemoth with 80,000 employees and $90 billion in revenues. Koch Industries stock value has advanced 2000% in book value during his tenure, despite the fact that it operates in mature industries (such as commodities) where competitive pressures typically result in narrowing margins.

Koch's book, "The Science of Success: How Market-Based Management Built the World's Largest Private Company" details the management approach behind Koch Industries stunning success. Drawing on a variety of disciplines, Koch's "Market-Based Management" approach takes the same dynamics, incentives and mechanisms that propel successful free market economies and retools them to manage business organizations.

The book is a fascinating read and offers valuable, actionable insights for business leaders. It deserves a place on every executive - and entrepreneur's reading list.

The Science of Success is the most important book about governance, leadership and management since Drucker's magnum opus in 1974. This statement is not a casual claim but is the result of my close study of Charles Koch's Market Based Management during the past six years. MBM ® was an integral part of my course, Managing in a Market Economy at the Columbia Business School and has been the focus of my academic research as well as my service as a consultant and director of several public corporations. The book is short and seems deceptively simple but that is also true of the United States Constitution. Every sentence in the Constitution and every concept in The Science of Success evokes profound thought: it is based on principles rather than prescriptions - not "how to do" but rather "how to decide".

The age-old arguments about decentralization, delegation, incentives, acquisitions, divestitures, sunk costs, opportunity costs, vision - indeed almost every quandary a manager faces - are cast in a bright new light. Make no mistake, however. Even though Charles Koch might seem short on prescriptions he is strong on principle. He has synthesized his study of history, political science, psychology, philosophy and economics (augmented by his 40 years leading Koch Industries, the world's largest and one of its most successful private companies) into a clearly articulated applied science. He draws heavily on the work of the "Austrian School" economists - Menger, von Mises, Hayek, as well as Schumpeter and Drucker. These were the men who most clearly articulated the immutable laws of markets based on their observation of humans in action rather than esoteric mathematical models. Their articulation of marginal utility put the human being at the center of economics which, in turn, established the concept of free and open markets and provided a foundation for individual liberty rather than autonomous authority.

My admiration for Charles Koch's book is not based solely on my academic experience. I was a lecturer, course chairman and Associate Dean at the Harvard Business School, and for 18 years was Professor of Management Practice at the Columbia Business School. However, half of my professional career has been in the business world as COO, CEO and Chairman of start-ups and turnarounds, public and private, large and small. I am convinced that if, early in my career, I had read, understood and applied the principles in The Science of Success I, too, would be in Fortune Magazine's list of the world's richest men.

Very few people ever have the opportunity to sit down with one of the world's greatest and most successful entrepreneurs and listen to him discuss what works, and doesn't work, in business. This book is one such opportunity. If you read it and do not get at least several valuable new ideas and perspectives, then you're probably already very familiar with Koch Industries and Market Based Management, or you're not thinking enough as you read.

Charles Koch is uniquely qualified to write a `how to succeed in business' book. Koch's record as a businessman and entrepreneur is second to none. He has built the largest privately held company in the world, and made himself and his partners billionaires many times over. Although his company is not publicly traded and never has been, his record of compounding is comparable to that of Warren Buffett.

Unlike most businessmen, Koch has always been intensely interested in ideas. His office in Wichita has more books in it than all but a handful of professors' libraries. And I would bet that he has read, and understood, most if not all of them. And although Koch's formal training was in engineering, he knows more useful economics than most economists, professors, consultants or other alleged experts.

Koch, as befits his engineering background, is interested in applying ideas to the real world. Market Based Management, which he was instrumental in developing, is his synthesis of the best and most applicable ideas from economics, law, ethics, psychology, and other areas. Unlike so many involved in academic writing and theorizing, he always tests his ideas in the crucible of the marketplace. In this book, he recounts some of these successes, as well as failures with candor and humor.

With this book, for the first time I believe, the public has the opportunity to learn from this great master of his trade. Most books with `success' in their title are not worth reading. But this is no pie-in-the-sky get-rich-quick book. There is no rah-rah motivational nonsense. There are few wasted words. What you do get is the distilled, time-tested business wisdom of one of the very best businessmen in history in a well written, easy to read format. So read it. Twice. A+.

Roger Silk

Charles Koch's "The Science of Success" is more art than science. A more appropriate title would be "The Principles of Success." Koch outlines what has made his company the world's largest private company fusing best practices in busines with disciplines within the Humanities.

There is even a small nugget that most readers would miss about Koch's connection with J. Howard Marshall II. Mr. Marshall is the elderly gentleman who married the late actress, Anna Nicole Smith, that embroiled into a fight over his riches.

Of course, Koch doesn't bring this out in his book (and shouldn't), but the relevancy to Pop Culture shouldn't be missed.

Edward Brown

Core Edge Image & Charisma Institute, Inc.

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.

This book provides a candid perspective on the economic fundamentals that drive enterprise success. It is refreshing to see the principles of comparative advantage and opportunity cost unabashedly presented as the foundation for optimal business decisions. The clarity of the presentation is enhanced by selected references to classical and modern scholars who have laid the foundation for successful management practice. This book is a must read for students and managers who are interested in understanding the linkage between economic theory and profitable business practice.

This book was featured at the one hundred seventy-third session of the LIBERTY READING CIRCLE, a grassroots organization of conservative hearts combining as one to read the same book, enjoy the same snacks, and engage in the same manful discourse about liberty and freedom.

This was a very special session indeed, one that shall never be forgotten. Not only did we read a tremendous book by American hero CHARLES de GANAHL KOCH, we did so while enjoying the 11th annual LRC CRAB RACE. This is a worthwhile event that brings MEMBERSHIP closer together and allows racers to show off the season’s hottest new crabs. Many felt it was especially important for this year’s event to be a success because last year turned into a debacle when SUPER MIKE-MIKE disemboweled CRAB MITT at the starting line. As MITT staggered helplessly about, people began accusing MIKE-MIKE of treachery, and the room soon descended into a melee. Emotions always run high at these races, for there is real affection for the crabs. In the end, we had to disqualify all the competitors in that heat, and then sadly sweep up the lost pieces of crab.

This year, the track featured much better starting gate dividers.

There was some concern that this exciting event fell on the same day we read CHARLES D.G. KOCH’s tome, because it can be hard to concentrate on the nuances of great works of literature while watching crabs run competitively on a track. We thought about postponing, but the LRC prides itself on its traditions like PAPER TOWEL EXTRAVAGANZA and EAT! GO! GO! The spring Crab Race is perhaps the most important day on the calendar, and we felt sure the great KOCH would respect our decision. We felt sure that, if he had a crab, he would race it too.

To bring the great man closer to us in spirit, five worthy crabs were named in his honor. There was a young aspirant named CHARLIE K, a feisty scurrier from the bay ready to make a name for himself on the junior circuit. There was a watchful crab called THE CEO who quietly scanned the competition from atop his gently waving eyestalks. There was THE KOCHA-KOLA KRAB, whose shell had been painted a rich brown to also honor cola. There was MEGAKOCH, a formidable mutant stone crab who had grown big and meaty by subsisting on honeybaked ham and dead crickets. Lastly, there was one classic crab simply called CHARLES de GANAAHL KOCH. He was perfectly proportioned with an air of confidence and certainty. This was the kind of crab who could probably model professionally if he wanted to.

Thus the pairing of CHARLES KOCH and the crab race was a winning one. The room was abuzz with talk of all that the great man had done for our country, and how his personal qualities of drive, will, and fortitude were embodied in these worthy entrants. Obviously there was no single crab that possessed ALL of his qualities, because CHARLES D.G. KOCH is a human being, and a very special one at that. Still, it was good for the soul. And, as if they knew there was something special in the air, the racers gave us some of the most exciting tilts we have seen in 11 years. One of the races was so close that the judges had to go to the video replay where they could see that THE CEO had inched out his rival by the slimmest of margins. It was a good thing he won too, because while the judges were all huddled around the replay booth, THE CEO dismembered second-place finisher, SCOOTIN’ DOUG. It would have been disheartening to give the blue ribbon to a legless, dying crab.

In the third heat, CHARLIE K had what looked like an insurmountable lead over THE ELIMINATOR, who took his time coming out of the starting gate. But, inexplicably, CHARLIE stopped short of the finish line and began waving his claws in the air. “Go,” the crowd yelled, “keep going!” Everyone was roaring, but this just made CHARLIE wave his claws more triumphantly. As he sat there showboating, THE ELIMINATOR slowly marched up the track until, amazingly, he passed him! CHARLIE realized his error, because he dropped his claws in a crestfallen way, and looked at the crowd. “Now,” someone said to him, “you understand.” MEMBERSHIP reflected that the crab had been misnamed, for CHARLES deGANAHAL KOCH would never stop prematurely to wave his limbs at the crowd. He always goes until he wins.

After the races were over, the victors were stowed in their boxes so they could savor their accomplishments and eat worms. In the kitchen, the giant cauldron slowly came to a boil, and the fallen were honored by being transformed into a savory bisque. In time, MEMBERSHIP repaired to the CIRCLE OF LAWNCHAIRS on the back patio with full stomachs and open minds.

As luck would have it, the LRC boasts a distant cousin of the great man, ASSOCIATE RANDALL L. DeKOCK, a lanky, shrimp-hued man who owns a chain of successful Christian-themed loan operations in Dedham, Newton, and North Attelboro. The KOCHS, it seems, are descended from the DeKOCKS (pronounced DEEZ-koochez, from the Dutch DEESHKOOCHEZ meaning “to render uninhabited”), who cleared New York in the early 16th century. Back then, all the DeKOCK clan wanted was a little quiet space to perform their avant garde medical procedures and think of new financial instruments that could help the common man.

We thus thought it would be appropriate for ASSOCIATE DeKOCK to offer his thoughts about his cousin’s book, the races, and life in general. He was, like his namesake, a modest man, a philosopher, who preferred to speak humbly and quietly from the shadows rather than hog the limelight.

“So you want me to speak,” the man intoned from deep in his lawn chair, “What is there to say? Some crabs are alive. Some crabs are dead.” He spat onto the patio. “A crab is an insect.”

MEMBERSHIP grew quiet as it took in these reflections. Overhead, the moon rose.

“This book,” he went on, “you think a man like KOCH cares if you succeed? You think he wants you to succeed? Why would he? More for you means less for him. You’re all crabs to him.”

“Did you try the bisque?” someone asked after a few moments.

“Why,” DeKOCK continued, “do you even need a book? You want someone to tell you what success is? Success means I win, you lose. Simple. It means you want to keep it, but I come and take it.” He snorted. “I come and take it. There’s your book.”

The moon was swallowed by a passing cloud and in the more total darkness, you could hear the sound of various associates chewing the ice in their soda glasses meditatively.

“Seems,” someone said, “rather short for a book.”

“Oh you want more?” he asked. There was mirthless snort, then a thin, bio-luminescent hand emerged from the darkness to point at us. “How about this. When I come to take it from you, I will make you like it.”

He began laughing.

“I will make you like it.”

The laughter grew into a series of hard, cough-like cackles. Some segments of MEMBERSHIP tried to laugh along with him, to be helpful, but it’s hard to laugh naturally when you’re a little bit afraid and there’s really no joke.

I think it would have been a good idea at this moment for someone to roll out the great sponge cake and put on some salsa music. But no one stirred. It was like we had been partially narcotized by the commanding eloquence rising like incense from the shadowy depths of the patio.

DeKOCK’s laughter finally subsided into a humming sound, and then a sigh. “Death, you know, just goes on and on.”

“Now wait just a minute,” someone said.

“Once it gets hold of you, it doesn’t let go. It goes on and on and on and on and on.”

He laughed, but no one else did.

“That’s the last chapter of the book. It never ends. Now is it long enough for you?”

Then came the sound of the great man rising from his lawn chair.

“All of this,” he said as he stood, stretching forth his glowing limbs to encompass the yard, the houses, the trees, the grass, the flowers, the bushes, the wind, the night sky, “all of this will disappear when I do. I think about that sometimes.”

Then we listened as he shuffled down the path and then creaked open the back gate. A few minutes later came the sound of his jetblack minivan starting up, then driving off into the distance. MEMBERSHIP relaxed its grip on the armrests. He must have been speaking metaphorically, we reasoned.

Then it was time for ASSOCIATE SUTHERLAND to pass out the sparklers. Each member got a sparkler. It was the customary way to end a crab race, sparklers raised high to honor the victors and remember the fallen. There was something somber about it this time, something solitary, possibly because of ASSOCIATE DeKOCK. He didn’t seem like he’d had a very fun time at the crab races.

But things grew more cheerful when, departing from tradition somewhat, we lit two pounds of jumping jacks in the center of the patio to honor CHARLES dEGAANAHAHAL KOCH. It was, we agreed, the most appropriate firework for the great man, for he is much more than the pop of a firecracker, more than the bang of a M-80, more than the creeping magic excrescence of a lead snake. He is actually most like a roman candle, what with all the terrific ideas firing forth regularly from the top of his head. But those draw too much attention, and fireworks are illegal in Massachusetts. So we decided on jumping jacks, which are multicolored, spritely, and mobile. These little men light up and then go exploring their world in all directions. We watched as they flared and jumped and then fizzed on the bricks. Then we clapped.

When it was over, MEMBERSHIP found itself back in the dark again, each man enjoying the quietude and meditating on all that he had seen.

“Is it true,” someone finally asked, “what he said?”

“No,” someone else said, “a crab is not an insect.”

They are arthropods.

A conservative classic. A must read for those seeking to improve their life, their business or their society. Highlighting the driving force of a free market and free society versus the stifling impact of centralized government control.

By putting complex philosophical ideas into a practical context, Charles Koch's primer for prosperity demonstrates that voluntary exchange and individual responsibility are at the heart of success. Koch recognizes that his investment is in people--and that encouraging each employee find his inner entrepreneur creates value for the organization. Businessmen and bureaucrats alike will benefit from Koch's reasoned and readable discussion of how markets foster transformation, innovation, and ultimately, a freer society.

This is a clear, easy-to-read introduction to Market-Based Management that explains how the application of free-market principles can help businesses succeed. In the book, Charles Koch credits this management system for the tremendous growth of Koch Industries into a $90 billion company. However, the five dimensions of MBM can be applied easily by small businesses, non-profits and entrepreneurs. This is a short book with big concepts. You will undoubtedly want to read it more than once.

Reading this book is like sharing a scotch with a rich uncle. He lets you into his mind, and displays his reason. Mr. Kochs humility as a business man helps myself identify with his writing more than any other. Starting off with a brief history of the company he sets the stage of decision making in Koch Industries. Getting into the heart of the book you wonder if someone has gotten into your head and printed your thoughts. On more than one occasion I found myself pacing with agreement only to see my wife shaking her head in bewilderment. The seventh chapter on Incentives has what I believe the greatest value for society. During a time of government wage increases, cost of living adjustments, and payment based on tenure, it is refreshing to see a successful company utilizing incentives to evenly trade for value.

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.

Mr. Koch describes a fascinating method for developing and managing an organization. Just an interesting is the real life story of how he leveraged `Market Based Management' to build the planet's largest private company.

I picked up this book not knowing what to expect and finished it (in short order, I might add) wanting more. The Science of Success is unlike other "management" titles found on books shelves today. Charles has actually practiced MBM, with extraordinary success, for decades.

I have already gotten an extra copy for a co-worker.

The book discusses a number of general principles, which I found to be quite basic. What I was hoping to learn from this book were the implementation details, but there are none. For example, compensating people based on the actual value created by them is a great principle, but by no means it is groundbreaking and what would actually be interesting is how to implement it in practice.

The Science of Success packages a lifelong study of the conditions that support or conversely, stymie greater prosperity for all, adding a new dimension to the definition of corporate responsibility. I will continue to recommend this book to young, promising entrepreneurs who not only seek success but more importantly desire to add value to society.

I thoroughly enjoyed this book - a good discussion of where Koch came from and the strategic thinking behind the genesis of the world's largest privately held company. Sometimes books of this genre can be dry, but this book is good reading and enlightening.

Koch delivers sound business principles with simplicity. Anyone that Forbes estimates is worth $12B must have done something right in business. Sometimes simplicity comes from years of complexity. A foundational text for a capitalist.