Koch Industries is the second largest privately held company in the world. In “The Science of Success,” the C.E.O. talks about the management philosophies that his company uses to be so successful.

 

In short, the techniques called “Market-based Management” (MBM) described in the book are string of very sensible ideas. The true power of the book is that it shows how to join these sensible ideas together into a cohesive and effective management strategy. In this review, I’ll briefly describe the points that really hit home with me.

  1. Opportunity Cost – Surely everyone knows that an opportunity cost is “the cost of the best alternative forgone to do something.” Koch stresses how this simple principle is under-utilized in most companies, and that by paying close attention to the opportunity cost of EVERY action, companies can be sure to work on the most valuable thing.
  2. Comparative Advantage – Here, Koch reiterates the idea that each person should do what adds the most value. This builds on the idea of opportunity cost saying that appropriate distribution of tasks causes people, teams, divisions, and companies to work on what they do best and not forgo their comparative advantage. Doing this all the time at all levels ensures minimal waste.
  3. Decision Rights – This term is used as an analog to “property rights.” By distributing the “ownership” of decision making privileges in the same way that property might be distributed, decision makers have clear responsibility for decisions they make. This means that they will reap all of the benefits for good decisions as well as the repercussions of bad decisions. Allowing a person’s decision rights to grow based on how well they use them makes more sense than allowing them to grow based solely on seniority or rank.
  4. Appropriate Incentives – Finally, Koch describes how incentives are put in place to encourage long-term growth and value creation. A quote I particularly liked was that a company should, “take from each according to their ability and give to each according to their contribution.” Thus, incentives are firmly rooted in how much an employee actually contributes rather than being fixed to seniority, rank, or title.
  5. Principled Entrepreneurship – Furthermore, Koch suggests rating performance not just on contributions but also on missed contributions. Hence, if an employee misses an opportunity to make $1 million, that should be judged as if the employee lost $1 million by failing in any other way. This encourages employees to take prudent risks and remain entrepreneurial at all times.

All in all, a very interesting, but quick read. It seems that these principles really work as evidenced by Koch Industries success. I fear that established companies would be very hard pressed to start incorporating these ideas, but new managers or managers with a great deal of freedom should read this book twice before starting to plan how their company or group will operate!

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