This week I’m going to do something different. I’m going to review a management advice book a bit more thoroughly, and analyze it’s content in a bit more detail than I normally do.

That’s right. Instead of just picking out a paradoxical comment or two, as has been my habit (for examples, please see my “Paradox of the week” series of posts), I’ll take a closer look at what the author has to say (or not say) about good management and its practice.

And the book I’ve chosen is Good Profit (2015) by Charles Koch.

 

Profit that is good

The Koch name is one you probably recognize.

As CEO of Koch Industries, Inc., Charles Koch oversees what is currently the second largest privately held company in the US.[1] This multinational corporation—which Koch inherited from his father—employs approximately 100,000 people worldwide, and boasts an annual revenue of around $115 billion.[2] It is involved in a variety of industries, including petroleum production, chemical manufacture, pipelines, cattle ranching, and finance.

But Koch’s notoriety does not stem from his business acumen, or organizational prowess, oddly enough. Instead, he is perhaps best known for his political activism. Koch is an outspoken conservative, and the Super PAC he oversees with his brother, David—the Freedom Partners Action Fund—has spent heavily in previous election cycles, and is expected to exert similar influence this year.[3]

Political leanings aside, however, it stands to reason that because of his success Charles Koch might—or at least should—have something meaningful to say about running a business.

 

3 contradictions

For those of you who follow my blog, you are by now probably well aware of my primary complaint when it comes to management-advice books. They’re just too full of contradictory statements and paradoxical assertions to be in any way helpful to the practicing or aspiring manager.

(For more on why this happens, please see my series of posts “Why you can throw out that management advice book – Parts 1,2&3.”)

In this regard, Koch’s own text does not disappoint. For instance:

  • On page 7 of Good Profit, Koch insists that his company “opposes government subsidies, such as special tax breaks, import tariffs…including those that would seem on the surface to be beneficial to us.” And yet on the very next page, he admits that when push comes to shove, “like virtually everyone, we take advantage of lawful tax breaks.”
  • On page 101, Koch argues that “…every company, no matter what size or type, should strive to develop and clearly communicate a unique vision of its own.” But later, on p. 116, and after offering one of multiple permutations of his own company’s vision,[4] he adds: “Surely this is a vision that everyone can embrace [my emphasis in both cases].”
  • And on page 123, Koch muses “Imagine how productive business would be if everyone acted with complete integrity, with their word as their bond, never doing anything they wouldn’t want exposed to the whole world.” Well, never mind for a moment that Koch has played host to what’s been described as a “secret billionaire summit,”[5] when it comes to his own company’s performance ranking system—the purpose of which is “not to elevate or stigmatize anyone”— Koch admits, “we discourage disclosure of these ratings” (p. 138).

So, contradictions: check.

Koch also does something that I’ve encountered so frequently it’s become a pet peeve of mine. One way CEOs tend to demonstrate their credibility as an “expert” on managing is to point out how much an early investment in their company, made when they took over, would be worth today (or at the end of their tenure). Koch does this as well, noting that:

“…an investment of $1000 in our company in 1960 [when Koch became CEO] would have a book value of 5$ million today…a return 27 times higher than what a similar investment in the S&P 500 would have achieved.” (p. 4)

Point taken; not only are you a successful CEO, you’re pretty wealthy too. And not only am I a lousy manager (otherwise I wouldn’t be reading your book, I suppose), apparently I’m not a very savvy investor either, or I would have put some money in your company somewhere along the line.

In this instance, however, this argument strikes me as a bit disingenuous. After all, the Koch family business is, and always has been, a privately held company – something that seems to have momentarily slipped Mr. Koch’s mind. The only way for you, or I, or anyone else to invest in Koch Industries, Inc would be on the personal invitation of Charles Koch himself, or possibly its board of directors.[6]

 

The heart of the matter

With that out of the way, let’s take a closer look just what exactly Mr. Koch wants to get off his chest about owning and operating a successful, for-profit business, starting with the book’s title: Good Profit.

On page 4, Koch defines “good profit” as follows:

“What I consider to be good profit comes from…creating superior value for our customers while consuming fewer resources and always acting lawfully and with integrity.”

The act of “creating superior value” in this way he furthermore refers to as Principled Entrepreneurship™ (a phrase Koch has trademarked) – and on the next page, Koch takes pains to differentiate “good profit” from “bad profit”:

“We don’t lobby the government to mandate or subsidize what we’re selling. That creates bad profit. Instead we earn profit by creating value—for consumers, society, our partners, and every employee who contributes. That is good profit.”

It perhaps goes without saying that Koch believes his company’s profits are solely of the “good” variety. Whether this is true or not, I’ll leave to others to decide; I personally am in no  position to make this sort of judgment one way of the other.[7] Besides, my own interest lies solely in Koch’s book, his own take on managing, and what he thinks is responsible for his company’s success.

 

The vision thing…

According to Koch, his company’s success can be credited to something he calls Market-Based Management® (also a registered trademark).

Market-Based Management® (or MBM), he insists, is a “unique business management framework,” and not “just another buzzword management system that accomplishes nothing” (p. 10). Furthermore, this framework has five key “dimensions,” each of which Koch devotes an entire chapter to. They are (1) vision, (2) virtue and talents, (3) knowledge processes, (4) decision rights, and (5) incentives.

In the chapter devoted to “vision”—a “guide to an unknown future,” as Koch puts it (p. 95)—he points out that this is “foundational for the other four dimensions” (p. 98). Koch furthermore reveals that his own company’s vision is dependent on something he refers to as creative destruction, which he defines by quoting 20th Century economist Joseph Schumpeter:

“The…process of industrial mutation…incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one. This process of creative destruction is the essential fact of capitalism” (p. 56).

So Koch’s a capitalist. Got it. And part of his company’s vision seems to be acknowledging the competitive nature of markets; that the products and services that we buy today may be obsolete—and therefore unwanted—tomorrow. Or as Koch writes, understanding that “consumer needs and desires are constantly evolving” (same page).

Understood.

Another distinction Koch makes between his company’s vision and that of many others is it’s emphasis on compounding which, according to Koch, is “sometimes called ‘the most powerful force in the universe’” (p. 96).

Sounds important – yet strangely enough, Koch only mentions it once more in his entire book (I had to consult the index), and the concept is not defined there, either. So I googled it. According to Investopedia, “compounding” is:

“…the ability of earnings to generate earnings, which are then reinvested in order to generate their own earnings. [Or]…generating earnings from previous earnings.”

Okay – it’s sort of like compound interest. By putting some of your profits back into your business, you can grow your company. Not sure why all the obfuscation was necessary – nor am I convinced that this is something unique to Koch Industries. In fact, I suspect a lot of other, unsuccessful companies probably try (or tried) something similar – provided they were able generate a profit in the first place, of course. So maybe Koch is talking about how to sustain profitability here, not how to become profitable? Let’s read on…

On page p. 102, Koch tells us that “several steps are necessary when developing a vision,” the first of which is “creating a view of how the organization can create superior value for its customers and society…” Excellent – this is beginning to sound “actionable,” or like advice that I or anyone else who owns and operates a business might be able to put into practice, or imitate.[8]

According to Koch, the key is coming up with a “capabilities-focused” vision. For his company, these capabilities include the following: commercial excellence, operations excellence, talent, innovation, a trading mentality, and public sector effectiveness (p. 102).

Well, at least things were sounding promising.

But really, calling “commercial excellence” a “capability”? To be honest, this strikes me as a bit jargon-y – especially considering MBM® isn’t supposed to be “another buzzword management system.” Also, I can’t help but believe that commercial excellence is probably something else that plenty of other companies strive for – and again, whether they are ultimately successful or not. I mean, I can’t think of a company off the top of my head that strives for “commercial mediocrity,” can you? So Koch seems content here to simply describe things about running a business that most people probably already know, or could easily figure out for themselves. How hard is it to recognize, for instance, that the right “talent” might be important to the success of your business? What about any of this is “unique” to Koch Industries, if that is indeed Koch’s point?

But hold on – let’s get back to the vision-thing for the moment, and those “capabilities.” According to Koch, the “overarching capability…vital to achieving Koch’s vision” [my emphases] is…Market-Based Management®.” (p. 102)

So…wait a second. Let me see if I have this straight so far:

  • According to Koch, to generate “good profit” using Market-Based Management®, “vision,” the first of MBM’s five dimensions, requires that I base that vision on something called my company’s “capabilities.”
  • Identifying those capabilities are but the first step in in figuring out how to create value for my customer via Principled Entrepreneurship.™
  • And in the case of Koch Industries at least, one of the capabilities “critical” to realizing that vision is…Market-Based Management®?

So the successful implementation of MBM® hinges on the successful implementation MBM®?

???

No, wait – I take that back. Koch also writes:

“Other businesses have different capabilities, and understanding what those are and how they can create superior value are key to developing an effective vision”(p. 102).

So according to MBM®, MBM® may not be a critical “capability”…even though dismissing MBM® as “capability” is entirely consistent with MBM® as well.

 

You spin me round

So I hope you see what I’m getting at here.

Koch’s advice seems to fold in on itself. Putting MBM® into practice seems to require practicing MBM®, which to me would appear to be a circular argument of the highest order.

And bear in mind that we’re only on the first step of the first “dimension” of MBM®; there are four more dimensions to cover.

But that’s not all. There’s also MBM®’s “Guiding Principles” to discuss, of which there are ten.[9] Then there’s a “three-step rule” that is helpful in applying MBM® to your organization. But wait, you’ll need the “MBM® Toolkit” to “holistically apply MBM [my emphasis].” There’s also a “Decision-Making Framework” which includes eight elements (not all of which seem to be necessary in each and every circumstance), and no less than ten “decision traps” to know and avoid. Oh yeah – there’s the “CPV Triangle” (Cost-Price-Value) to be aware of…and a “Talent Management Process” to master which, according to Koch, is “critically important,” and involves assessing a person’s intelligence based on eight talent types. Let’s not overlook the “Talent Planning Process” either (really an A-B-C performance rating system), and finally there’s a “Code of Conduct” to keep in mind. Koch describes this code as “critical for good profit in the long-term” – and yet not so critical as to actually include it in the text itself.

But no matter. The 72 page book can be viewed online.

 

…and 3 insights

First, I think I need to apologize.

I led you to believe I was going to review Koch’s entire book in this post, but I just couldn’t do it. There’s just too much to unravel. Too much jargon, too much contradiction, too much paradox, and too many circular arguments.

And to be completely honest, my heart was never really in it to begin with. You see, Koch lost me way back on page 11, when I read the following:

“… [MBM®] requires being able to conduct business activities without even having to think about the mechanics of MBM.”

In other words, if you have to think about MBM®, then you’re already not doing it right.

Sure – and the emperor’s new clothes are beautiful.

So no – I can’t recommend Koch’s book to you. It’s garbage™®©, in my opinion. He may know something about how to run a successful multinational corporation, but he hasn’t a clue as to how to communicate those skills to anyone else.

Actually, let me repeat this, if I may – because it’s an important point:

It’s not that I believe that Koch—or any of the CEOs who write these books—don’t know anything about managing. Quite the contrary, in fact. But what they certainly don’t know is how to explain what they know about managing in any sort of meaningful way.

And it’s a shame really, because Koch comes tantalizingly close to offering some genuine insight on a couple of occasions. For example:

  • “In any complex business, deciding the order in which to do things can be just as important as deciding what things to do” (p. 113). (Sound familiar? It should if you read my post: “It’s not what you do. It’s when you do it.”)
  • “Leaving the particulars to those doing the work encourages discovery and enhances their ability to adapt to changing conditions.” (p. 120)
  • And critically, “Customers come first…because without them there is no business.” (p. 124)

Had he been able to put these three things together, Koch might have gotten somewhere. Instead though, he comes up short – in all likelihood because the one thing he thinks he knows about managing is wrong.

A manager’s job isn’t to tell employees what to do, like Koch and everyone else seems to assume.[10] It’s really the other way around.

The job of a manager is to listen to your employees…

And then do what they tell you to do.

 

 

See you next week.

 

 

Endnotes

[1] “America’s Largest Private Companies 2015” by Andrea Murphy. Forbes (online) Oct. 28, 2015. http://www.forbes.com/sites/andreamurphy/2015/10/28/americas-largest-private-companies-2015/#668368a23095. Retrieved by July 13, 2015.

[2] “Koch Industries passes 100,000 employee milestone” by Daniel McCoy. Wichita Business Journal, Jan. 31, 2014. http://www.bizjournals.com/wichita/news/2014/01/31/koch-industries-passes.html. Retrieved by July 13, 2015.

[3] According Sourcewatch, Koch’s Super PAC raised and spent $256 million in the 2012 election season. For this years figures, please see: https://www.opensecrets.org/outsidespending/summ.php?chrt=V&type=S.

[4] Despite Koch’s insistence that businesses should “clearly communicate” their vision, at various points in his book he offers all of the following as part of his company’s “vision”:

  • “…to become the leading crude oil purchaser by being the most aggressive, providing the best service, and developing the best relationships with crude oil producers.” (p. 41)
  • “…to innovate, grow, and reinvest in order to maximize long-term value by applying our core capabilities.” (p. 96)
  • “…to maintain a growth rate of roughly 12 percent or higher.” (p. 96)
  • “…buying and upgrading distressed properties…” (p. 97)
  • “Consumption drives Koch’s vision.” (p. 98)
  • “…focused on value creation and people.” (p. 100)
  • “By educating and mobilizing key constituencies to advocate market-based policies that improve human well-being, together we can help people improve their lives through new and better jobs, new business opportunities, and safer communities in which people are mutually supportive.” (p. 116)
  • And finally, although Koch argues that a company’s vision “is absolutely critical to get right at the outset” (p. 92), Koch Industries was “updated” in 2013 to reads as follows:

The role of business in society is to help provide improve their lives by providing products and services they value more highly than their alternatives, and do so while consuming fewer resources. To the extent a business does this by the economic means, its profits are a measure of the value it creates in society. Creative destruction is inherent in a market system, so a business must not only continually improve the value it creates for customers and society, but to so significantly faster than its competitors.

Thus, to continue to succeed, our Vision is to improve the value we create for our customers more efficiently and faster than out competitors, This should enable us to generate the return on capital and investment opportunities needed to achieve a long-term growth rate that double earnings, on average, every six years. This necessitates significantly accelerating the application of MBM®, becoming much more forward-looking in talent acquisition and development, remaining private and continuing to reinvest 90 percent of earnings, while conducting all affairs lawfully and with integrity.”

[5] “Exclusive: Inside the Koch Brothers Secret Billionaire Summit” by Lauren Windsor. The Nation (online), June 17, 2014. http://www.thenation.com/article/exclusive-behind-koch-brothers-secret-billionaire-summit/. Retrieved May 20, 2016.

[6] In an interview with The Economist magazine, Koch said that his company would go public “over my dead body.” “Dissecting the Kochtopus.” The Economist, June 7, 2014. http://www.economist.com/news/business/21603437-fascinating-peek-inside-successful-and-idiosyncratic-private-company-dissecting. Retrieved July 13, 2016.

[7] “Good profit” or not, what we do know is that from 1999 to 2003, Koch Industries was assessed “more than $400 million in fines, penalties, and judgments” according to Bloomberg. In 2000, Koch paid what was at the time the largest civil fine ever imposed on a company under any environmental law for the illegal discharge of petroleum products and crude oil. [From the Koch Industries Wikipedia entry.] Furthermore, in Koch’s own telling, his company has on occasion struggled with internal fraud (p. 180), compliance issues with its asphalt production (p. 204), and mill safety (p. 237).

[8] I use “actionable” here based on a definition offered by organizational theorist Chris Argyris in Flawed Advice and the Management Trap (2000):

For advice to be helpful, it must specify the intended outcomes or objectives to be produced, the sequence of actions required to produce them, the actions required to test for any errors or mismatches, and the actions required to correct such errors and mismatches.

Actionable advice, in other words, is something that one might do, or a behavior one might actually engage in or imitate. For example, that a manager should be willing and able to “make decisions” qualifies as actionable because relative to “not making decisions” it requires initiative or action to be taken on the part of that manager. On the other hand, making good decisions does not qualify because it is virtually indistinguishable—in terms of the action itself—from making decisions, or making bad decisions. (For more on this, and why it’s important, please see my post “Throw out that management book (Part 2).”

[9] MBM®’s “Guiding Principles” are: (1) integrity, (2) compliance, (3) value creation, (4) Principled Entrepreneurship™, (5) customer focus, (6) knowledge, (7) change, (8) humility, (9) respect, and (10) fulfillment.

[10] On page 178 of Good Profit, Koch alludes to the underlying hierarchical nature of his organization, arguing that “decisions should not be made by those in closest proximity, but rather by those with the comparative advantage to make sound decisions, including the best knowledge.”