Since 1967, Charles Koch has been CEO of Koch Industries. He inherited the company from his father at a value of $21 million and has grown it to be the 2nd-largest privately held company in North America, with a value of $100 billion. Koch Industries has a presence in 60 countries and employs more than 100,000 people. It is one of the world’s biggest commodities traders, operates three ranches covering over 460,000 acres, processes 600,000 barrels of crude oil a day, and is involved in the production of numerous other products such as energy-efficient windows, electronics, fiber optics, and paper products.
Koch Industries estimates that since 1960 its value has increased over 4,500 times, outpacing the S&P 500 by a factor of 30. Interestingly, Koch attributes his company’s success to the application of a management philosophy based off of the knowledge and insight from Austrian economics and classical liberal political theory. Koch has named and trademarked it as “Market-Based Management” or “MBM”.
What MBM does is take the conditions that are necessary for a free and prosperous society and applies them to the internal structures of the company and how the company should operate and organize itself.
The very foundation of MBM’s philosophy is held up by these underlying beliefs:
- “Long-term business success comes only from creating long-term value for customers and society, not the illusion of value.
- The world is creating an unprecedented (and accelerating) rate of change.
- To create value amid this change requires a well-founded understanding of what people value and how the world works.
- Throughout history, the framework that leads to the greatest value creation is one based on economic freedom, individual responsibility, and the rule of law.
- A market system based on private property and economic freedom has proven to be the most effective and efficient system for creating prosperity and social progress.”
From those foundational underlying beliefs the management philosophy establishes the 5 dimensions that are used as different lenses to understand and overcome challenging problems. The 5 pillars are:
- “Vision: Koch companies constantly seek opportunities, in any industry, for which their capabilities will create superior value.
- Virtue and Talents: Integrity, humility, teamwork, intellectual honesty and the desire to create real value are necessary values for a free society to function properly. Talented people who embody these virtues are an important driver in an organization’s success.
- Knowledge Processes: A key driver of prosperity is understanding what people value and how to satisfy those values. Thus, Koch companies strive to create a culture and the measures necessary to build the relevant knowledge.
- Decision Rights: Creating superior value requires that decisions be made by those who have demonstrated the ability to get results. Therefore, authorities are set more by comparative advantage than by hierarchy.
- Incentives: Koch companies try to reward their people like entrepreneurs, paying them a portion of the long-term value they create.”
Through the use of this management philosophy Koch Industries is able to navigate markets extremely flexibly, quickly cutting ties with what it is failing at and effectively identifying opportunities where it can create value. MBM also fosters a connected and engaged culture where people respect one another, honest feedback and empowerment can take place, people are rewarded based upon the value they create, and where people can feel a strong sense of fulfillment in their work. Having studied Market-Based Management, it certainly can have useful applications in navigating your personal and work life, especially if you’re in a leadership or management role. I do recommend reading more about it.
It will be interesting to see if any other successful companies grow from the use of MBM or similar management philosophies centered around the principles of free societies, economic freedom and the economics of creative destruction and innovation, especially after seeing the massive long-term growth Koch has experienced where it has hit its goals of 12% growth per year and doubling profits every 6 years.