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Speed Review: Good Profit

Speed Review: Good Profit

Speed Review: Good Profit

How Creating Value for Others Built One of the World’s Most Successful Companies

by Charles G. Koch

Here, drawing on revealing, honest, and previously untold stories from his nearly six decades in business, Koch walks the reader through the five dimensions of Market-Based Management® system to show how to apply its framework to generate more good profit in any business, industry, or organization of any size.

Review

One Businessman’s Secret to Success

Although known mostly for his conservative political activism, Charles Koch is also the CEO and chairman of a privately owned company that he has grown from a $21 million valuation in 1961 to $100 billion today. In his new book, Good Profit, Koch introduces a management framework called Market-Based Management, or MBM, which consists of five elements:

Vision. Create products and services that profit the consumer and society as a whole. The title of his book, Koch writes, comes from this viewpoint; good profit is good for all.

Virtue and Talents. Hire people that adhere to the values of the company first and foremost, before focusing on specific skills or knowledge.

Knowledge Processes. These are processes that enable the sharing of knowledge. Organizational structures that encourage collaboration, both internally and with external partners, are vital. Measurement processes, such as benchmarking, are also key. Finally, knowledge-sharing also depends on open two-way communication between employees and supervisors — specifically in allowing employees to “challenge their bosses respectfully if they think they have a better answer.”

Decision Rights. This is the business equivalent of the economic concept of “property rights” — in other words, ownership. The importance of ownership is another familiar but important component of good management. The more employees feel an ownership stake in what they are doing, the more care and conscientiousness they will apply to the task.

Incentives. Motivate employees to “maximize their contribution.” Koch uses Maslow’s hierarchy of needs, specifically the culminating need of “self-actualization,” as inspiration. Employees must feel that when the company benefits, they benefit. For Koch, there is no self-actualization motivation in automatic raises, including COLA raises.

Politics and Management

The unfettered free-market politics of Koch, which is detailed in the first part of the book, along with a revealing history of the company founded by his father, is for the most part similar to most political books. If you agree with the author’s position, you will find these pages compelling; if you do not, you will find much that can be countered.

Koch most likely believes, however, that applying MBM requires accepting his conservative principles. The “M,” after all, stands for “free market” (the “free” is understood).

One response is that there are certain elements that can be easily adapted. The first two elements, vision and values, are subjective. Companies are free to define the vision and values they wish to pursue.

More importantly, although Koch may not believe this, both right and left share a belief in free market principles. The difference is whether government has any role to play or not.

For example, both sides believe in ownership of property; the difference lies in whether the government should be able to curtail some of those rights in the interest of society. Or, to put it another way, home ownership is not restricted to conservatives, and thus arguing the benefits of ownership of one’s work is not a politically tainted argument.

In fact, Koch uses political arguments to frame his management advice but unwittingly reveals that management is apolitical.

Even the conservative slogan of “creative destruction,” which is one of the major underlying principles of the book, proves to be, at the company level, apolitical. Koch offers a good example of creative destruction in business, through the innovation of Georgia-Pacific (the company in the Koch conglomerate that contributes most of the examples in the book) in motion-sensored paper towel dispensers, at the expense of its own paper business. At the macroeconomic level, creative destruction calls for zero tolerance for government helping businesses to succeed — a kind of law-of-the-jungle approach to economics.

It seems a stretch to argue that if you believe companies should try to replace obsolete products rather than propping them up, then you believe in a return to a purer form of the laissez-faire capitalism of the 19th century. You may… but that opinion has nothing to do with paper towels.

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