1. The Science of Success
Brain 1-2

2. History Koch Industries Inc.
Winkler-Koch Engineering is formed in Wichita, Kansas
1940s - Koch begins acquiring different companies, most dealing with the refining of oil and wood.
Charles G. Koch became chairman and CEO of Rock Island Oil & Refining Company, Wood River & Refining Company
1967 Fred C. Koch dies.
Brian 1-3

3. Koch Industries Inc.
Rock Island Oil & Refining Company is renamed Koch Industries, Inc
1980’s – Koch begins to diversify, acquiring companies that deal with natural gas, nitrogen and coal.
1993 – The first Market-Based Management (MBM) handbook is published.
JD 3-4

4. Koch Industries Inc.
Forbes magazine names Koch Industries, Inc. as the largest private company in the U.S.
2007 – The Science of Success: How Market-Based Management Built the World’s Largest Private Company was published.
Today – Over $100 Billion in Revenue and over 60,000 employees world-wide.

5. Charles G. Koch
Charles Koch born on November 1, 1935 in Wichita, Kansas
Owns 42% of Koch Industries
Brothers
Frederick R. Koch
David H. Koch
William I. Koch
Erin 5-6

6. Charles G. Koch
Net Worth:
$31 Billion
Of which $25 billion comes from Koch Industries
Tied 6th with his brother David Koch on the top 100 billionaires in the world
Chairman of the board and chief executive officer of Koch Industries, Inc.

7. Education Bachelor of Arts / Science Master of Science
Massachusetts Institute of Technology
Master of Science
Bruce 7-9

8. Norming

9. Norming Increased cohesion More collaboration Emerging trust
Appreciation of differences
Open communication
Positive/Constructive feedback

10. Market Based Management(MBM)
A philosophy that enables organizations to succeed long term by applying the principles that allow free societies to prosper.
5 dimensions of MBM:
Vision
Virtue and Talent
Knowledge processes
Decisions Rights
Incentives
Austin 10-19

11. “Where there is no vision, the people perish.” Proverbs 29:18

12. Vision
A system of spontaneous order that maximizes choice, creating sustainable prosperity and societal progress

13. Vision in Business
Determine where and how the organization can best create value long-term through a process of experimental discovery
An effective business vision begins and ends with value creation for the business.
The vision must be specific enough to guide action.

14. Vision guidelines for Business
Enlightened Self-interest
Embracing change
Experimental Discovery
Anticipation and Innovation
Setting Priorities

15. Enlightened Self-Interest
Self-interest is either cooperative or aggressive
Businesses must encourage cooperation while punishing destructive self-interest
People in the team benefit themselves by benefiting other members of the team

16. Embracing Change
Over time competition erodes the profitability of every product or innovation.
Business must strive to slow down this decay
Business must continually replace products that have reached the end of there life-cycle.
Business can slow this decay by developing good customer relations, maintaining a strong quality brand, developing hard to duplicate distribution channels, and protect intelectual property with patents. Dispite all this a product will eventually reach the end of its life cycle, customers wants are constently changing and no matter how superior a companies products it cant stay in business without making changes and improvements.

17. Experimental Discovery
The driving force for embracing change
How business adapt to the future
Experiments must be limited in size and scope, to help minimize risk.
Experimental discovery creates a process that encourages new improvements, strategies, and innovations.
Business change through experimental discovery. By trying new things and creating new products businesses can stay ahead of competition. Experimental discovery is inherintly risky. Businesses must evauluate the cost of creating or trying a new product or strategy. Businesses must be careful not to overspend and a new product before its success is known. This is a fine line businesses must walk in order to continue growing.

18. Anticipation and Innovation
Companies and customers gain when a company anticipates new opportunities.
When a business’ rate of decline overcomes the owner’s ability to innovate the business should be sold.
Companies shouldn’t just react to a customers wants but should seek to anticipate what they will desire in the future.

19. Setting Priorities
A business needs to develop and implement strategies that enable it to maximize its long-term value.

20. Virtues and Talents
There is a natural aristocracy among men. The grounds of this are virtue and talents. – Thomas Jefferson

21. Norming and Virtues “Rules of just conduct.”
How we act and how we except others to act.
Norms of Behavior + Shared Virtues = A Groups Culture

22. MBM Guiding Principles
Integrity - conduct all affairs ethically
Compliance - %10,000 compliance. Stop, think, ask.
Value Creation – create real, long term value by economic means. Eliminate waste.
Principled Entrepreneurship – demonstrate the need to generate the greatest contribution to the company and society.

23. MBM Guiding Principles
5. Customer Focus – Understand and develop relationships to satisfy need. 6. Knowledge – Seek, use, and share the best knowledge. 7. Change – Embrace It. Drive creative destruction. 8. Humility – Practice intellectual honesty and constructively deal with reality.

24. MBM Guiding Principles
9. Respect – Appreciate diversity and encourage teamwork. 10. Fulfillment – Produce results the make you realize your full potential.

25. Knowledge Processes
“The greatest obstacle to discovery is not ignorance
but the illusion of knowledge.”
—Daniel Boorstin

26. Overview
Market economies are successful because they are superior at creating useful knowledge
Sharing & implementing knowledge
Measuring and Tracking Profitability

27. Trade
People Make exchanges because they expect to improve their well being
Sources of gain from trade:
Goods move from people who value them less to people who value them more
Specialization allows greater consumption, production, and variety.
High volume production leads to lower production cost

28. Trade Trade within a business:
A Company must quickly come up with ways to become aware of changes taking place in the marketplace

29. Measures Profit & Loss- What products produce profit?
Marginal Analysis- Profit of adding one extra unit of product
Benchmarking- examining practices from other places around the world
Opportunity Cost- Cost of giving up the next best thing

30. Profit Centers Helps track products & profits directly tied to them
Profitability of individual employees should also be measured
Not all units within an organization can be tracked as profit centers.
Services within a business that don’t generate own revenues (Research Dept.)

31. Free Speech
Societies that value freedom & prosperity facilitates the discovery of knowledge
Knowledge can be created by challenging others ideas
“Republic of Science” example

32. Truth
At Koch Industries, truth is what gets results consistent with the principles they set for themselves
Challenge process: continually questioning & brainstorming to find a better solution
Uses constructive improvement rather than opposition

33. Virtues and Talents
There is a natural aristocracy among men. The grounds of this are virtue and talents. – Thomas Jefferson

34. Norming and Virtues “Rules of just conduct.”
How we act and how we except others to act.
Norms of Behavior + Shared Virtues = A Groups Culture

35. MBM Guiding Principles
Integrity - conduct all affairs ethically
Compliance - %10,000 compliance. Stop, think, ask.
Value Creation – create real, long term value by economic means. Eliminate waste.
Principled Entrepreneurship – demonstrate the need to generate the greatest contribution to the company and society.

36. MBM Guiding Principles
5. Customer Focus – Understand and develop relationships to satisfy need. 6. Knowledge – Seek, use, and share the best knowledge. 7. Change – Embrace It. Drive creative destruction. 8. Humility – Practice intellectual honesty and constructively deal with reality.

37. MBM Guiding Principles
9. Respect – Appreciate diversity and encourage teamwork. 10. Fulfillment – Produce results the make you realize your full potential.

38. Decision Rights
“Markets maximize benefits [when they are] supported by externally enforced property right rules that prohibit taking without giving in return”
-Vernon Smith

39. Decision Rights
Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable.
Change over time
Decision rights can be thought of as property rights in an orginization

40. Division Of Labor
Specialization of roles that improves the productivity in an organization.
The power of the division of labor is diversity Variations in skills, knowledge, culture
Human Cooperation

41. Roles, Responsibilities, and Expectations
Used to Define general areas of responsibility and accountability
Used to avoid inaction and finger pointing.
Focus on maximizing contributions
Focused on value creation

42. Principled Entrepreneurship
Wide spread value creation
Decision rights are earned
Interaction in face to face discussion
Knowledge Sharing

43. INCENTIVES
“The only combination of rewards and feedback that seems to improve motivation is rewards that depend not only on doing the task, but upon how well it is done plus informational feedback.”
-Charles Murray

44. Human Action
Three requirements must be present for individuals to act:
Unease or dissatisfaction with the present state of affairs
A vision of a better state
Belief that they can reach the better state
By Ludwig von Mises

45. Perverse Inventive
Incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers or company.
Examples:
10 percent across the board reduction in budgets or people.

46. Aligning Incentives
Incentives that make the employee benefit and the company also benefit from the incentives.

47. Marginal Contribution
Portion of value created that can be assigned to a specific change, factor or individual.