Leadership Corner: Charles Koch on the Science of Success

ASK OCE — May 29, 2007 — Vol. 2, Issue 3

As the CEO and Chairman of what may be the largest private company in the world, Charles G. Koch has a highly developed idea of what it takes to build a successful enterprise.

In his forty years at the helm of Koch Industries, Charles Koch has overseen the 2000% growth of his company, which had $90 billion in revenues in 2006. He credits a great deal of this success to the company’s management approach, which he calls Market-Based Management (MBM). Koch was trained as an engineer — he received master’s degrees from Massachusetts Institute of Technology in both mechanical and chemical engineering — and his methodology reflects a lifetime of experience in technical management as well as an extensive background in classical economics and history.

In his new book The Science of Success: How Market-Based Management Built the World’s Largest Private Company, he outlines the five dimensions of MBM:

Vision — determining where and how to create value for the organization.

Virtue and Talents — attracting, developing, and retaining people with the right values, skills, and capabilities for the organization.

Knowledge Processes — creating, acquiring, sharing, and applying knowledge.

Decision Rights — ensuring that roles, responsibilities and accountability are clear and delegated appropriately within the organization.

Incentives — rewarding people according to the value they create.

Calling it a “science of human action,” Koch emphasizes that MBM is not a cookie-cutter approach to management, and he cautions against turning it into a set of buzzwords. “Its real power is in the underlying philosophy and its integrated application, not in the form or the parts,” he writes. “Those who have gained only a conceptual or procedural understanding, not personal knowledge, tend to misapply it.”

He is frank about its misapplications within his own organization, citing an instance in the 1980s when a team of electrical engineers spent a great deal of time creating what they referred to as “charts for Charles” rather than doing actual engineering work. The lesson Koch drew from this was to remain focused on improvements that yield results, not on the concepts and tools of MBM.

The key to long-term success, he concludes, is nothing more or less than innovation. “Innovation begins with a passionate preoccupation with a problem and the courage to pursue a solution. It demands personal commitment and a great deal of focused intellectual and emotional energy.”