The Science of Success
The Science of Success is the groundbreaking work by the Charles Koch on business strategies, that leads the business to the ladder of success and help it to move upwards pushing up towards the achievement and fame.
Charles Koch was born in November 1st, 1935. He is the CEO of the United States’ second biggest private organization, the Koch Industries. He is a graduate in engineering and post graduate in mechanical engineering from Massachusetts Institute of Technology. “Charles Koch is popular because of its political activities, providing large portions of funding for hard-line conservative groups such as the Cato Institute. His brother, David Koch, was the Vice Presidential candidate in 1980 on the Libertarian Party's ticket. In more recent times, it has become common knowledge that the Koch are major contributors to the United States' "Tea Part" movement, as well as lobbying groups engaged in efforts against global warming policy, health care reform, and economic stimulus. He was also a member of MIT Corporation from 1977 to 1982.” (Kosmix, 2010) and (Forbes, 2010)
In his famous book, Charles unveiled the issues about business success. In the introduction Charles portrays a very impressive thought with the tip to success. According to him:
“As an engineer, I understood the natural world operated according to fixed laws,” Koch writes in the introduction. “Through my studies, I came to realize that there were, likewise, laws that govern human well-being. I learned that prosperity is only possible in a system where property rights are clearly and properly defined and protected, people are free to speak, exchange and contract, and prices are free to guide beneficial action. An allowing person the freedom to pursue their own interests, within beneficial rules of just conduct, is the best and only sustainable way to promote societal progress.” (Koch, 2007)
In his book, The Science of Success: How Market Based Management Built the World's Largest Private Company, Charles Koch discusses Market Based Management and its implication to the business.
Market Based Management (MBM) is a practical approach to the business management that combines or integrates with different theories and practices that strengthen the business to face the rivalry, tough competitions and other challenges. If theory of Market Based Management is analyzed, it reveals its linkage with the human actions and human science. This linkage is described by Charles Koch in a very artistic manner. Charles Koch pointed out five core elements that are the main ingredients of success. These elements are:
2. Virtue and Talents.
3. Knowledge Processes.
4. Decision Rights.
In this book, Charles Koch discusses all the elements or dimensions in detail that comprises of the real life experiences, business challenges and strives to get peace and calm inside the individual and organization. To explain the ideas and thoughts, he also takes the help of supporting and key subjects like government, technology, history, politics, science and economics. Here it should be noticed that all of these subjects have strong relations with the business growth and individual success. Furthermore, business is run by the individual or group of individual(s) who have strong relationship with all of these subject areas (Koch, 2007).
Now following is the important discussion about the element:
“Vision is the creative idea and artistic though about the future planning. Vision is “determining when and how your organization can create the greatest long-term value.”Vision is about how an organization creates the value about it product and about its goodwill. According to the Charles Koch vision is the catalyst that defines the business life and success both in short term and long term; he stated that “in a true market economy we can only prosper by providing others with what they value.” One of the important concepts that Koch embraced from the Austrian School was creative destruction of Joseph Schumpeter that the destruction of existing structures was necessary to promote innovation and economic growth. “We must continually drive constructive change in every aspect of our company or we will fail,” Koch says. “We believe it is essential to drive creative destruction internally, otherwise creative destruction will drive us out of business.” That begins to explain how Koch Industries has bought 37 businesses and exited from pizza dough and 41 others over the years. In Market Based Management the vision is the reflection of core competencies and the maximization of the creation of values.
Virtue and talents are about the human resource and to maximize it, in other words recruiting, retaining the best talent or workforce and to keep polishing them to face the business challenges. Charles Koch focused the importance of virtue, complete compliance and integrity. According to Koch “any employee who is not creating value does not have a real job...their performance puts other team members and the entire organization at risk” And “helping ensure that people with the right values, skills, and capabilities are hired, retained, and developed.” Here, Koch focused the Friedrich Hayek’s rules about just conduct, that include the rule of law and norms of behavior both . One of the key guiding principles of Market Based Management is 10,000% compliance 100% of employees complying 100% of the time.
Knowledge processes is managing and replicating the market news and information system inside the company. According to Koch “In a truly free economy, profit and loss is the market’s objective measure of the value a business is creating in society”…. “Creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability.” Inside the organization it is critical to promote and create the accountability and discipline about internal market. Koch further argues that it is critical to utilize the prices for internal dealings, rather than cost-based pricing to be able to analyze the units’ profitability in the company.” (Guenthner, 2007) & (americansforprosperity, 2010)
Koch has attempted to apply the quality management techniques of W. Edwards Deming as:
"The electricians there were spending a large portion of their time measuring activity and drawing charts instead of doing electrical work. Our people referred to this as "charts for Charles." Many employees thought I wanted charts or descriptions of activity as an end in itself, rather than a means to improve results. Unfortunately, measurement and chart-drawing became the focus rather than improving performance and eliminating waste." (Koch, 2007)
In one case, Koch’s company discovered that 60 percent of the volume of one product sold to a few large customers generated only 20 percent of the profit. With this knowledge, the sales force switched its focus away from these large customers to the smaller, more profitable customers.” (Guenthner, 2007) & (americansforprosperity, 2010)
Decision rights are the technique of introducing property rights within an organization. The idea is to convey the responsibility and authority among the members of organization proportionate with their proven achievements by giving them merit based ownership over their domains. The expectations should be open-ended, aimed in the direction of increasing and maximizing the value and output rather than meeting fixed deadline and targets. “Koch makes a compelling case for private property rights, pointing out that when people own a resource, they both realize the benefits and reap the costs of consuming it. Where there is no ownership (e.g., the oceans), the consumers realize the short-term benefit without paying the cost, and thus the resource is often depleted.” (Guenthner, 2007) & (americansforprosperity, 2010)
Koch further elaborates about Decision rights as:
"Clear decision rights allow employees to allocate, consume or conserve the company's resources as they attempt to create value. They also enable employees to know what they are responsible for and to be held accountable, just like owners. Decision rights expand for those who consistently make sound, value-adding decisions and contract for those who do not." (Koch, 2007)
Incentives are the tools that used to encourage and reward the risk-taking and value creation properly. The example of how to use enticements efficiently is that Koch pays sales commissions not as a little percentage of the total sales but as a big percentage of the price above the opportunity cost. Koch provokes his thought about Incentives that:
"The problem typically takes one of two forms. In the first, employees are extremely risk-averse, generally due to leadership failing to reward profitable risk-taking, while excessively penalizing losses from prudent risk-taking...In the other extreme, employees take imprudent or even unauthorized risks. In these cases, individuals hope to make a great deal of money for themselves by going for broke, even if it puts the company at risk...This behavior is minimized by selecting and retaining employees, foremost, on values and beliefs, appropriately setting and enforcing decision rights and having effective controls." (Koch, 2007)
To promote more risk-taking entrepreneurially, Koch cites Marx’s famous rule: “From each according to his ability, to each according to his contribution.” And “reward people according to the value they create for the organization.” Koch stresses on the importance of aligning each employee’s individual interests with the overall interests of the company. He also labels conventional compensation systems with their automatic raises and pay classification scales as “destructive.” At Koch, employees are compensated based on the value they add to the company.” (Guenthner, 2007) & (americansforprosperity, 2010)
How do individuals and organizations achieve success?
After discussing Market Based Management’s elements, one thing is clear. Always treat employees with humanity and focus on the core values, mission and vision.
The man or organization without vision is nothing because vision(s) is the main catalyst to stimulate the person and organization to struggle to achieve the goals and target. This struggle comprises the tools, techniques and stimulus that keep motivating the variables that are the agents to bring this vision into real world.
Here, it would be better to talk about the Whole food market and its management vision and mission that made this market a giant in its domain:
“The market is registered in NADAQ and trades as a WFMI. It is the chain of supermarket that started its journey in 1978 by college dropout John Mackey and Rene Lawson Hardy, the two young boys who borrowed $45,000 from family and friends to open the doors of a small natural foods store called Safer Way in Austin, Texas. Two years later, John and Rene partnered with Craig Weller and Mark Skiles to merge SaferWay with their Clarksville Natural Grocery, resulting in the opening of the original Whole Foods Market on September 20, 1980.” (Wholefoodsmarket, 2010)
“Now the whole Food Market shaped itself as a giant in the supermarket domain in United States. The company is still growing and got third place in the list of U.S. Environmental Protection Agency regarding Top 25 Green Power Partners.” ( The Wall Street Journal, 2007)
First, it should be remembered that, the organization itself is the artificial thing as per its existence is concerned. People are the engine or catalyst that maintain and grow the organization. As far as the individual success is concerned, he, as a human being, has feelings, thoughts and imagination that play the important role to keep him motivated.
Incentives play a major role to formalize the feelings and imaginations to pursue the goals. If one have a concrete imagination and/or knowledge about the potential incentive, may it be a good job, lucrative money, prosperous future, healthy food and environment and so on and so forth, this imagination of incentives play key role to formalize the future vision. According to Ludwig von Mises, “three requirements must be present for individuals to take action. These are: (1) unease or dissatisfaction with the present state of affairs, (2) a vision of a better state, and (3) belief that they can reach the better state.” (Mises, 2009).
These points completely support the Market Based Management’ elements as discussed above. The failure of above points will be the cause of dissatisfaction, de-motivation, hopeless thoughts and action.
In conclusion it can be said that failure to deal with the human nature and feelings is the cause of individual and organizational failure both, because individual respond by feeling that are formalized by financial and nonfinancial (encourage, hope, incentive, appreciation etc) benefits. Always remember, organizations are managed by people not by superficial things.