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The Science Of Success

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  • 1. Executive Summary of the book Charles G.Koch’s “The Science of Success” by Ramakrishnan ( Ramki) ramaddster@gmail.com
  • 2. About the AuthorCharles G. Koch is Chairman of the Board and CEO of Koch Industries, Inc.,a position he has held since 1967. Since then, the company has beentransformed into a dynamic and diverse group of companies in refining andchemicals, fibres and polymers, commodity and financial trading, and forestand consumer products. Familiar Koch company brands includeSTAINMASTER carpet, LYCRA spandex, Quilted Northern tissue, and Dixiecups. Koch has continuously supported academic and public policy research(including numerous Nobel Prize winners) for more than 40 years, and hashelped build a number of market-based organizations. Koch received abachelors degree in general engineering and two masters degrees—inmechanical and chemical engineering—from the Massachusetts Institute ofTechnology
  • 3. BackdropForty years ago, Charles Koch returned home to Wichita, Kansas to take the reins of the oiland gas company that his father had established and was threatening to sell.Today, Koch is chairman and CEO of the largest privately-held company in the world, with80,000 employees in 60 countries and annual revenues greater than Microsoft. It is still inthe oil business, but has added pipelines, refineries, jet fuel, and asphalt to itscapabilities…along with fertilizer, chemical technology, commodities trading, municipalfinance, ranching, carpet, spandex, and toilet paper.How did Koch achieve such phenomenal success—multiplying its book value 2,000-fold inthe course of 45 years, outpacing even the S&P 500 index by orders of magnitude—withwhat seems to be an irrational hodge-podge of businesses? He took the analytical mind-sethe developed as an engineer, dedicated himself to intense study of some of history’sgreatest free-market economists, crafted his own system of Market-Based Management,and set out to drill that philosophy into all of his employees.
  • 4. PreludeWhat is behind the success of Koch companies? It is Charles Koch’s unique and transformativemanagement philosophy Market-Based Management.Developed by Charles Koch, chairman and chief executive officer of Koch Industries, Inc., MBM( Market based Management) is defined as a philosophy that enables organizations to succeedlong term by applying the principles that allow free societies to prosper.As MBM became the foundation upon which Koch companies grew, the challenge of sharing itinternally and externally led to the creation of "The Science of Success."In the book, Mr Koch presents the evolution of Koch Industries and the "Science ofHuman Action" upon which MBM is based. He also provides a systematic view of MBM at workwithin Koch companies by outlining five dimensions: Vision, Virtue & Talent Knowledge process Decision rights Incentives.
  • 5. “ The solution of the economic problem is a voyage ofexploration into the unknown, an attempt to discover new ways of doings things better” by F.A.Hayek
  • 6. Market Based ManagementWhat is MBM MBM is a holistic approach to management which integrates theory & practice It prepares organizations to deal successfully with challenges of growth & change It is rooted in the Science of human actionHow ? Best achieved through purposeful behaviour It draws on the disciplines of Economics, Ethics, Social Philosophy, Psychology, Sociology, Biology, Anthropology ( study of humanity), Management, Epistemology ( means of acquiring the knowledge) and Philosophy of science Draws lessons learned from successes & failures of humans to achieve peace, prosperity & social progress.
  • 7. MBM- Through five dimensions Vision Virtue & Talents M B Knowledge Processes M Decision Rights Incentives
  • 8. VisionVision is about “ determining when & howyour organization can create the greatestlong-term value “Creative destruction Destruction of existing structures is a need to promote innovation & economic growth Drive the creative destruction internally which will enable constructive change, if not you are out of business Is your vision based on your competitive advantages? Will it generate significant value for customers and society?
  • 9. Virtue & TalentVirtue & Talent— Helping ensure thatpeople with the right values, skills, andcapabilities are hired, retained anddevelopedHere, Koch embraces Friedrich Hayek’srules of just conduct, which include boththe rule of law and norms of behaviour.One of the guiding principles of MBM is10,000% compliance—100% ofemployees complying 100% of the time Do your people possess the virtue & talents necessary to advance your vision ?
  • 10. Knowledge & ProcessesKnowledge Processes — Creating, acquiring,sharing, and applying relevant knowledge, andmeasuring and tracking profitabilityIn one case, a failing Koch company discoveredthat 60 % of the volume of one product sold toa few large customers generated only 20% ofthe profit. With this knowledge, the sales forceswitched its focus away from these largecustomers to the smaller, more profitablecustomers. What systems do you have to discover how your employees and practices can become more profitable?
  • 11. Decision RightsDecision Rights — Ensuring the right people arein the right roles with the right authority to makedecisions and holding them accountableKoch makes a compelling case for privateproperty rights, pointing out that when peopleown a resource, they both realize the benefitsand reap thecosts of consuming it. Where there is noownership (e.g., the oceans), the consumersrealize the short-term benefit without paying thecost, and thus the resource is often depleted. Do you base authorities on a job title or on an employees comparative advantage and proven ability to create long- term value?
  • 12. IncentivesIncentives—Rewarding people according to thevalue that they create for the organizationKoch stresses the importance of aligning eachemployee’s individual interests with the overallinterests of the company. He also labelsconventional compensation systems—with theirautomatic raises and pay classification scales—as “destructive.” At Koch, employees arecompensated based on the value they add to thecompany. Is employee compensation based on time in the organization and job title, or is it based on evidence of long as well as short-term value creation ?
  • 13. Interaction between Incentives , Knowledge & Decision right Motivated workers generate more knowledge With more Incentives knowledge , Knowledge monitoring is easier, Processes and incentives are provided more effectively Decision Right Ease of comparison Decentralization affects cost of enables use of local monitoring & knowledge , but may providing Incentives inhibit coordination
  • 14. Points which really hit home 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.
  • 15. Points which really hit home 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.
  • 16. Points which really hit home Decision Rights – This term is used as an analogue 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. 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.
  • 17. Points which really hit home Principled Entrepreneurship – 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.
  • 18. Happy Reading, Learning & Application Mail your comments to ramakrishnan@gmrgroup.in