Market-Based Management enables organizations to succeed in the long term by applying the principles that allow free societies to prosper - from the Charles Koch Institute. This is a summary of the key concepts of market-based management: vision, virtues and talents, knowledge process, decision rights, and incentives. This principles enable well run organizations.

1. Market Based
Management
Getting Results From
Your Organization
Quentin Christensen
Quentin.Christensen@live.com

2. Agenda
 Vision
 Owner goals
 Corporate vision
 Virtues and Talents
 Corporate Principles
 ABC Process
 Knowledge Process
 Profit centers
 Benchmarking
 Decision rights
 Roles, responsibilities,
& expectations
 Commitments
 Principled entrepreneurship
 Incentives
 Maximizing value
 Personal property
 Perverse incentives

3. Vision

4. Example:
Koch Industries Vision
 MBM: Vision, virtue and talents, knowledge processes, decision
rights, incentives, the guiding principles, MBM models
 Innovation: Creative destruction, disciplined freedom,
discovery process, R&D, technology, networks, benchmarking,
acquisitions, marketing and branding, IP strategy
 Operations Excellence: Compliance, EHS, performance and
cost effectiveness, benchmarking, capturing value bets
 Trading: Point of view, strategy development, buying and
selling assets, optionality, risk management, execution
 Transaction Excellence: Opportunity identification, origination
network, Decision Making Framework, due diligence, portfolio
optimization, structuring
 Public Sector: Legal, communications, community relations,
philanthropy and public policy

5. Corporate Vision
 What are the goals of our business?
 Where will the business be in 10 years? 20?
 What are each of our goals as owners
and managers?

6. Virtues and Talents

7. Example:
Koch Industries Principles
 Integrity: Conduct all affairs lawfully and with integrity
 Compliance: Strive for 10,000% compliance, with 100% of employees fully complying 100%
of the time. Ensure excellence in environmental, safety, and all other areas of
compliance. Stop, think, and ask.
 Value creation: Create real, long-term value by the economic means. Understand,
develop, and apply MBM to achieve superior results. Eliminate waste.
 Principled entrepreneurship: Demonstrate the sense of urgency, discipline, accountability,
judgment, initiative, economic and critical thinking skills, and the risk taking mentality
necessary to generate the greatest contribution to the company and society.
 Customer focus: Understand and develop relationships with customers to profitability
anticipate and satisfy their needs.
 Knowledge: Seek and use the best knowledge and proactively share your knowledge
while embracing a challenge process. Measure profitability wherever practical.
 Change: Embrace change. Envision what could be, challenge the status quo, and drive
creative destruction.
 Humility Practice humility and intellectual honesty. Constantly seek to understand and
constructively deal with reality to create real value and achieve personal improvement.
 Respect: Treat others with dignity, respect, honesty, and sensitivity. Appreciate the value
of diversity. Encourage and practice teamwork.
 Fulfillment: Produce results that create value to realize your full potential and find
fulfillment in your work.

8. Example:
Microsoft Success Factors
 Long-Term Approach: Takes long-term approach to business, technology, people, customers,
geography; thinks and acts strategically; defines, communicates, and stretches the scope of his
or her contribution; aligns efforts with higher-level direction, strategies, commitments; keeps the
"big picture" in mind; able to sort through the information flow and identify what is critical and
what is not.
 Results: Gets results; stays focused and driving for results; relentless in pursuit of great results; sets
and communicates clear, compelling goals and priorities for his or her area of responsibility;
monitors progress and makes timely corrections when necessary; stays on track when distractions
or problems arise; stabilizes and focuses quickly when changes occur.
 Passion for Products & Technology: Demonstrates passion for creating great software, putting
technology to work for people, and driving technology and product innovation; understands
Microsoft business and technology; understands and interprets implications of broader trends (for
example, in the economy, markets, competition) and relevant technologies for his or her work;
stays abreast of what is happening in the business and industry.
 Customer Feedback: Builds and uses feedback loops with customers; asks, listens, learns, adapts
in order to create customer value; committed to meeting customer needs; works to establish and
maintain clear and open communication with customers; gives priority to activities that provide
value to Microsoft customers.
 Individual Excellence: Works hard; thinks, questions, challenges; learns new things quickly and
puts them into action; works until it is right; is creative and imaginative; demonstrates a high level
of expertise in his or her work; takes responsibility; learns quickly from mistakes; takes informed risks
in order to learn and achieve more; seeks out tough challenges and learns from them.
 Teamwork: Works hard to achieve group goals; works efficiently with others in his or her group
and with other people and groups across the company; takes interests of other people and
groups into consideration when making decisions or taking action; is respected and trusted by
others; engages in constructive conflicts.

9. ABC Process
A level: Top 15%
Employees whose performance and contribution in their current roles provide significant
competitive advantage over those employees in similar roles at principal competitors and,
therefore, are exceptional contributors to long-term profitability. These employees are usually
among the top 15% of their peers throughout the industry in their current role. A business should
ensure it doesn’t lose them. KII is constantly in the market for A-level employees and must
continually improve its ability to identify and recruit these competitively advantaged individuals.
B Level: Top 15%-50%
Employees whose performance and contribution in their current roles have proven to be at
least as good as that of their peers at principal competitors. They tend to be between the top
15th and 50th percent of performers throughout the industry in their current roles. B’s are solid
contributors who consistently meet expectations and who may exceed expectations in many
areas of performance. B-level employees are, collectively, critical to a company’s success. They
are not an afterthought, living in the shadow of A performers. However, they should be
challenged to grow and improve.
C level: Bottom 50%
Employees whose performance and contribution in their current roles put us at a competitive
disadvantage by being below-average relative to their peers at principal competitors. C-level
employees are not meeting expectations. They may be in the wrong role, meaning they could
contribute at a B or even an A level if they were in a role that better leveraged their
comparative advantage. But if their performance cannot be improved to a B level, either by
finding a suitable role or through development, they should not be retained. Inability to create
value at one company does not mean the same will be true elsewhere. Employees may be
much more successful in another organization that has needs or a culture better suited to their
talents and values.

10. 20/70/10 Process
Top 20%, middle 70%, bottom 10%
 Based on annual and mid year reviews
 Managers rate each of their directs
 Managers compare the performance of their
directs with peer managers
 Employees are ranked based on:
 Performance against commitments
 Future potential
 Top 20 get 200% bonus
 Middle 70 get 100% bonus
 Bottom 10 get 0 bonus

11. Knowledge Process

12. Profit Centers
 Created wherever there are identifiable
products, market prices, customers, suppliers,
and assets such that financial statements can
be prepared
 Internal transfer prices should reflect market
alternatives
 Businesses that cannot be made profitable on
their own should be sold or closed
 Use benchmarking to track performance

13. Benchmarking
 Benchmarking: Identifying, understanding, and
adapting outstanding practices from anywhere in
the world that help us improve.
 Marginal analysis: Measure the benefits and
associated costs with a specific change rather
than at the average or at the whole. Before
estimating the profitability of an investment to
improve efficiency, the current waste should be
eliminated from the base case.
 Opportunity cost: The true cost of an activity is the
highest valued activity forgone. Waste is
eliminated by prioritizing and according to
profitability, adjusted for risk and time.

14. Decision Rights

15. Decision Rights
 Employees earn the rights to take action
 Roles, responsibilities, and expectations
are clearly defined
 Decision rights are increased based upon
performance and achievement of
specific goals

16. Roles, Responsibilities &
Expectations
 Define the areas of responsibility and
accountability for employees.
 People should bear the consequences of
their decisions.
 Give employees honest and frequent
feedback.

17. Example: Microsoft Commitments
 4-7 commitments
 Each includes goal, execution plan,
accountabilities
 Evaluated every 6 months
 Used to measure performance annually
and determine annual bonus and raise
 Meet with direct manager weekly, discuss
progress against commitments every 1 – 3
months

18. Example Commitment
Ship High Quality Features
Execution Plan:
 Ensure that my feature teams ship features that balance quality, user experience, and functionality
by prioritizing changes and bug fixes. Feature areas include:
 I will monitor my team’s workload, adding and cutting as required to derive the optimum efficiency
from the team while also makings sure my team has appropriate challenges and work-life balance.
 I will coordinate interdependences with other teams.
 I will make the best decisions for SharePoint as a whole by considering quality aspects, design
options, and balancing costs with customer benefits.
 Maintain high churn and quick close time for bugs.
 I will aggressively triage bugs to ensure we spend as little time as possible on bugs that we will not
take.
 I will identify important bugs and DCRs and raise awareness so that we fix bugs that would block
important scenarios.
Accountabilities:
 Features interoperate with other related features on the team and with partner teams.
 My team will be assigned a fair and appropriate amount of work, the work will be sequenced
correctly for team efficiency, and will take into account cross-area or cross-team dependencies.
 Scenarios we have identified will be met and delivered upon.
 I will meet with my doc set feature crew at least once per week and all other features crews bi-
weekly.
 Features will ship with a high level of quality for Beta2 and RTM.
 Dev and test feedback will reflect that I successfully drove issues to resolution.
 Always current on the status of my features.
 The number of active and resolved bugs is kept to a minimum and I maintain an average of less
than 1 bug assigned to myself.

19. Principled Entrepreneurship
1. Decisions rights are earned, not granted or
bestowed
2. The lack of authority is not considered an
excuse for inaction in the face of a problem
that needs to be corrected or an
opportunity that should be pursued.
3. Employees need to raise awareness,
propose solutions and find a way to address
the problem or capture the opportunity.

20. Incentives

21. Maximizing Value
 Management must have a risk of loss as well as a share
of long-term gains in value
 Tie pay to value building performance – compensate
unit managers on EBITDA, but require servicing high
levels of dept.
 Discipline managers to control assets tightly, maximize
returns and reduce debt.
 Give management the opportunity for significant wealth
on business unit exit
 Executive compensation requires attention to three
areas:
 Understanding the market for talent in key areas
 Ensuring a link to the business strategy
 Frequent monitoring of value

22. Personal Property
 People manage assets better when they
have an invested interest

23. Perverse Incentives
 An agency problem is created because
principals want what is in the best interest of
the principal and the agent wants what is
best for the agent.
 Employees may be extremely risk averse
because they are not rewarded for risk taking
and they are penalized for mistakes.
 The result is a play it safe culture. Value
creation should be rewarded and losses
penalized only when appropriate.