History Koch Industries Inc.
 1925 - Winkler-Koch Engineering is formed in
Wichita, Kansas
 1940s - Koch begins acquiring different companies,
most dealing with the refining of oil and wood.
 1961 - Charles G. Koch became chairman and CEO of
Rock Island Oil & Refining Company, Wood River &
Refining Company
 1967 Fred C. Koch dies.
Koch Industries Inc.
 1968 - 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.
Koch Industries Inc.
 2006 - 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.
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
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.
Education
 Bachelor of Arts / Science
 Massachusetts Institute of Technology
 Master of Science
 Massachusetts Institute of Technology
 Norming
Norming
 Increased cohesion
 More collaboration
 Emerging trust
 Appreciation of differences
 Open communication
 Positive/Constructive feedback
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:
1.
2.
3.
4.
5.
Vision
Virtue and Talent
Knowledge processes
Decisions Rights
Incentives
“Where there is no vision, the people perish.”
Proverbs 29:18
Vision
 A system of spontaneous order that maximizes choice,
creating sustainable prosperity and societal progress
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.
Vision guidelines for Business
 Enlightened Self-interest
 Embracing change
 Experimental Discovery
 Anticipation and Innovation
 Setting Priorities
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
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.
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.
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.
Setting Priorities
 A business needs to develop and implement strategies
that enable it to maximize its long-term value.
There is a natural aristocracy among men. The
grounds of this are virtue and talents. – Thomas
Jefferson
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
MBM Guiding Principles
Integrity - conduct all affairs ethically
2. Compliance - %10,000 compliance. Stop, think, ask.
3. Value Creation – create real, long term value by
economic means. Eliminate waste.
4. Principled Entrepreneurship – demonstrate the need
to generate the greatest contribution to the company
and society.
1.
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.
MBM Guiding Principles
9. Respect – Appreciate diversity and encourage
teamwork.
10. Fulfillment – Produce results the make you realize
your full potential.
“The greatest obstacle to discovery is not
ignorance
but the illusion of knowledge.”
—Daniel Boorstin
Overview
 Market economies are successful because they are
superior at creating useful knowledge
 Sharing & implementing knowledge
 Measuring and Tracking Profitability
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
Trade
 Trade within a business:

A Company must quickly come up with ways to
become aware of changes taking place in the
marketplace
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
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.)
Free Speech
 Societies that value freedom & prosperity facilitates
the discovery of knowledge
 Knowledge can be created by challenging others ideas
 “Republic of Science” example
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
There is a natural aristocracy among men. The
grounds of this are virtue and talents. – Thomas
Jefferson
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
MBM Guiding Principles
Integrity - conduct all affairs ethically
2. Compliance - %10,000 compliance. Stop, think, ask.
3. Value Creation – create real, long term value by
economic means. Eliminate waste.
4. Principled Entrepreneurship – demonstrate the need
to generate the greatest contribution to the company
and society.
1.
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.
MBM Guiding Principles
9. Respect – Appreciate diversity and encourage
teamwork.
10. Fulfillment – Produce results the make you realize
your full potential.
“Markets maximize benefits [when they are] supported
by externally enforced property right rules that
prohibit taking without giving in return”
-Vernon Smith
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
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
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
Principled Entrepreneurship
 Wide spread value creation
 Decision rights are earned
 Interaction in face to face discussion
 Knowledge Sharing
“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
Human Action
 Three requirements must be present for individuals to
act:
Unease or dissatisfaction with the present state of
affairs
2. A vision of a better state
3. Belief that they can reach the better state
1.
By Ludwig von Mises
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.
Aligning Incentives
 Incentives that make the employee benefit and the
company also benefit from the incentives.
Marginal Contribution
 Portion of value created that can be assigned to a
specific change, factor or individual.