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Things Go Better With Koch

Thanks to its stellar commitment to free enterprise and democratic capitalism, Koch Industries doesn't have to toot its own horn.

By 5.29.07

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The Science of Success: How Market-Based Management Built the World's Largest Private Company
by Charles G. Koch
(John Wiley & Sons, 194 pages, $22.95)

That's Koch pronounced "Coke" and it's the surname of the family that heads one of the -- if not the -- world's largest private company, Koch Industries, Inc. Chances are you have never heard of it. If so, that's no accident. The company does not go in for self-pats on the back or horn-tooting. It doesn't need to, inasmuch as it does not have to answer to Wall Street's Greek chorus that sets "expectations" for quarterly earnings for publicly traded companies. It considers itself beholden to its customers, suppliers, employees, and shareholders in about equal proportion.

Though publicity shy, Koch Industries now owns, through acquisitions, a number of brand names, such as Stainmaster, Dixie Cups and Northern Tissue (toilet paper and paper towels). It is very big in petroleum refining and transportation and has been for years. Today it does about $90 billion a year in 60 countries with a workforce of 80,000.

Its beginnings were humble. After Fred C. Koch graduated from MIT in 1925, he was invited by a classmate to join forces in a new company they named Winkler-Koch Engineering in Wichita, Kansas. Within two years Fred Koch had developed a thermal-cracking process for converting heavy oil into gasoline. This was an improvement over the process being used at the time by the major producers. The latter engaged in endless lawsuits. Finally, Koch joined a new refinery company and, through growth and mergers, it became in 1967, Koch Industries, Inc. One of his sons, Charles G., then 32, became the chairman and CEO of the company.

Charles Koch now tells the story of this impressive company and the combination of policies, philosophies, and common sense that make up its "secrets" of success in a new book, The Science of Success. Koch wraps all of these elements together into a copyrighted "brand" and an accompanying acronym -- in best MBA-course style. It is "Market-Based Management (MBM)."

He almost puts the reader off in the Preface when he writes (about the "five Dimensions of MGM"), "When these dimensions and their underlying concepts are understood holistically and applied in an integrated, mutually reinforcing manner, the effect is continuously transformative." Huh? Forget this argle-bargle and skip right to the meat of the book, which is written in a clear, straightforward style by a man wholly committed to free enterprise and democratic capitalism. He understands well a business's responsibilities to both when it wants to adhere to such a commitment.

In distilled form, here are some of his guiding principles:

* Give credit where it is due.

* Experiment. ("The key is to recognize when we are experimenting and limit the bet accordingly.")

* Run the company "...as a meritocracy."

* Recognize that even a private company operates in a world with many elements that can affect its future. ("To survive we decided we must build a world-class public sector capability, which we did.")

* Embrace change. ("We constantly pursue innovations and opportunities through internal and external acquisition. Similarly, we shed businesses and assets that are unprofitable or worth more to others. We believe it is essential to drive creative destruction internally, otherwise creative destruction will drive us out of business.")

He goes on to tell us how and why Koch Industries buys and sells elements in its firmament, how it stays competitive, why and how it keeps its people happy and productive, and how it stays consistently profitable for its shareholders (not only members of the family but most of the people who work for the company).

There are a few annoyances (catch-phrases such as "The Science of Human Action," which means Common Sense; and endless sidebars which may be interesting, but break up the reader's concentration on the text). Nevertheless, The Science of Success overall is a good primer for anyone starting a business and as a refresher for those already in it. And, for policy mavens, intent upon proving the validity of the free enterprise system, this is proof positive.

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About the Author
Peter Hannaford was closely associated with the late President Reagan for a number of years. He is a member of the board of the Committee on the Present Danger. His latest book is “Presidential Retreats.”