The Science of Success3/27/2007 By Charles G. Koch |
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Book Review Several years ago I was teaching “Managing in a Market Economy” at the Columbia University Business School, and one of my students, an IHS alumnus, mentioned that my syllabus was strikingly similar to a concept Now, Charles Koch, chairman and CEO of the phenomenally successful company, has made that information widely available in The Science of Success. His systematic synthesis of economics, political science, psychology, and philosophy, articulated with the discipline of an engineer, is perhaps the most important contribution to the science of management, leadership, and governance since Peter Drucker’s 1974 magnum opus, Management: Tasks, Responsibilities, Practices. Drawing on the theoretical work of Austrian economists Menger, Mises, and Hayek as well as Schumpeter and Drucker, philosopher Michael Polanyi, the Founding Fathers, and many others, Mr. Koch has transformed theoretical constructs into an applied science not only for business management but also for principled leadership and governance in all walks of life. The importance of governance cannot be overemphasized. A few years ago, I wrote a piece titled “Governance—the Sixth Factor of Production,” acknowledging the three classic factors—land, labor, and capital—and tipping my hat to J.B. Say and the contemporary historians Rosenberg and Birdzell, who suggested, respectively, that entrepreneurship and innovation are the fourth and fifth factors. None of these factors, however, exists in a vacuum. The ways in which they are used defines their success or failure. What else can explain the differences between entities with similar resources, talents, and abilities—whether countries, businesses, nonprofits, or societies in general? Examples abound: Hong Kong and Mao’s China, South and North Korea, Argentina and the United States, 20th century East and West Germany, today’s Germany and Ireland, Toyota and Ford, Boeing and Airbus, the Salvation Army and the United Way, and last but not least, the differences between Koch Industries and the S&P 500 (2,000-fold growth since 1967 versus 123-fold). This relatively young company now has revenues exceeding $90 billion, making it the largest privately held firm in the world and one of the most successful, private or public. The differences between Koch and less-successful enterprises are explained not by chance and fortune, not by luck, geography, raw materials, or other resources, but by governance. The governance concepts in Charles Koch’s Science of Success are presented in the rubric of Market-Based Management and are anchored to the immutable law of markets: voluntary, mutually beneficial exchange directed by the price system rather than the state. The law of markets, however, is directed not only by economic theory but also by political science, psychology, and philosophy, none of which is a stranger to Mr. Koch. Although his formal training was in engineering (two degrees from MIT), as he began his career at Koch Industries he immersed himself in an eclectic study of the social sciences. The Austrian economists were among his early literary mentors, and the Austrian School, of course, did not limit itself to arcane economic theory but instead drew heavily on all the social sciences with a special focus on the activities of humans (hence Mises’s 885-page 1949 masterpiece Human Action). This focus directed the Austrians in their development of the theory of marginal utility and put the individual, rather than the state, at the center of the economic sphere. And, with the individual in charge, free, open markets as well as individual liberty and freedom were sure to follow. Individual freedom along with its absolutely necessary concomitants, responsibility and accountability, are at the core of Market-Based Management. In this respect, at Koch, as in society, freedom is paramount but is not free. Responsibility and accountability are essential. The fundamental requirements are clearly spelled out in the ten MBM® Guiding Principles:
One might expect to find these or similar words in any corporate manifesto, but the way they are defined, applied, and monitored at Koch makes a huge difference. For instance, “Knowledge” embraces what Koch calls the challenge process. Koch managers are expected to ask their peers and subordinates to challenge key decisions, thus helping them to avoid egregious errors or, alternatively, to anticipate problems. Humility is one of Charles Koch’s hot buttons. Recognizing that it is “hard to be humble” when a company enjoys great success, Koch insists that managers practice intellectual honesty and “constantly seek to understand and constructively deal with reality.” Important as they are, however, guidelines alone are insufficient requirements for enduring success. The culture in which they reside and the framework in which they are applied also are vital. The Science of Success casts this culture and framework in five dimensions. Rather than paraphrase, I will quote directly from the book’s dust jacket. MBM is rooted in the Science of Human Action, and is defined by five dimensions: Vision—Determining where and how the organization can create the greatest long-term value. Virtue and Talents—Helping ensure that people with the right values, skills and capabilities are hired, retained and developed Knowledge Processes—Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability Decision Rights—Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable Incentives—Rewarding people according to the value they create for the organization When these dimensions are applied in an integrated, mutually reinforcing manner they create continuous transformation and positive growth. Any organization—corporation, small business, nonprofit, government agency—can apply these proven principles. Readers will be tempted to pick and choose from the ideas in this book and, it is possible that this tactic will be rewarding. But as Charles Koch reiterates constantly, MBM is an integrated, mutually reinforcing system. As a student of Market-Based Management over the past six years, I can assure you that he is right. I suggest that you read the book, make notes, and read it again. Although governance might be the Sixth Factor of Production, The Science of Success spells out its first principles, relevant, to repeat, in all walks of life. John O. Whitney is Professor Emeritus in the Practice of Management at the Columbia School of Business. He also spent six years at Harvard University as Lecturer, Course Chairman, and later as Associate Dean of the Business School and in half of his professional life has been an entrepreneur, COO, CEO, or Chairman of companies large and small. A note from the Institute for Humane Studies: Mr. Koch is Chairman of the Board of the Institute. Related Links |
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