Koch Industries’ Market-Based Management

Koch Industries employs a rigorous approach called the Market-Based Management philosophy to run the business. CEO Charles Koch has perfected his management playbook over the decades, and in 2007, published a book called “The Science of Success”, explaining how the system works at Koch.

MBM, as Koch employees call it, lies at the heart of how Koch operates every day. MBM is significant for the reason that it unites Koch’s employees, giving them a common language and a common goal. There is not a lot of art on the walls in Koch’s headquarters, but everywhere you turn, there is a copy of MBM’s 10 guiding principles hanging from the wall. When employees get a free cup of Starbucks coffee in the break room, the principles are printed on the disposable cup.

Five Dimensions of Koch Industries’ Market-Based Management

Companies owned by Koch Industries strive to bring the productive power of the free market into their operations by systematically applying Koch’s market based management philosophy through these five dimensions:

1. Vision: Determining where and how the organization can create the greatest long-term value.
2. Virtue and Talents: Helping ensure that people with the right values, skills and capabilities are hired, retained and developed.
3. Knowledge Processes: Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability. (Read, “Knowledge sharing in action,” from Discovery newsletter.)
4. Decision Rights: Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable.
5. Incentives: Rewarding people according to the value they create for the organization.

The Kochs Brothers consists of Charles Koch and David Koch. Two other brothers, William and Frederick, cashed out in 1983 and no longer have a stake in the company. The Koch brothers became heir to their father’s company in Kansas, and Koch Industries into the second-largest privately held company in the nation. The conglomerate makes a gamut of products including Dixie cups, chemicals, jet fuel, fertilizer, electronics, toilet paper and much more.

Guiding Principles of Koch Industries’ Market-Based Management

Market-Based Management has ten guiding principles that set the standards for evaluating policies, practices and conduct, establishing norms of behavior and building the shared values that guide individual actions. These guiding principles also serve as rules of just conduct along with shared values and beliefs. Koch’s focus and hard nosed thinking combined with his application of economics to management decision making, have enabled his firm to grow into a nimble, large company that keeps performing excellently.

1. Integrity: Conduct all affairs with integrity, for which courage is the foundation.
2. Compliance: Strive for 10,000% compliance with all laws and regulations, which requires 100% of employees fully complying 100% of the time. Stop, think and ask.
3. Value Creation: Create long-term value by the economic means for customers, the company and society. Apply MBM to achieve superior results by making better decisions, pursuing safety and environmental excellence, eliminating waste, optimizing and innovating.
4. Principled Entrepreneurship: Apply the judgment, responsibility, initiative, economic and critical thinking skills, and sense of urgency necessary to generate the greatest contribution, consistent with the company’s risk philosophy.
5. Customer Focus: Understand and develop relationships with customers to profitably anticipate and satisfy their needs.
6. Knowledge: Seek and use the best knowledge and proactively share your knowledge while embracing a challenge process. Develop measures that lead to profitable action.
7. Change: Anticipate and embrace change. Envision what could be, challenge the status quo and drive creative destruction through experimental discovery.
8. Humility: Exemplify humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create value and achieve personal improvement. Hold yourself and others accountable.
9. Respect: Treat others with honesty, dignity, respect and sensitivity. Appreciate the value of diversity. Encourage and practice teamwork.
10. Fulfillment: Find fulfillment and meaning in your work by fully developing your capabilities to produce results that create the greatest value.