Tuesday, February 12, 2013

Review of "The Science of Success" by Charles G. Koch

I picked up a copy of The Science of Success: How Market-Based Management Built the World's Largest Private Company. It's a quick read, at under 200 pages, and I'll post a brief synopsis of my thoughts on the book here.

Science of Success starts with an overview of the history of Koch Industries, its early development and business moves, and then quickly moves into the "meat" of the book which is a discussion of market-based management (MBM). Inspired by the Misesian tradition in Austrian Economics, MBM has five aspects:

  1. Vision - locating where the greatest value can be generated by the organization
  2. Virtue and Talents - getting the right people in the right places
  3. Knowledge processes - recording and applying relevant information
  4. Decision rights - empowering and holding decision-makers accountable
  5. Incentives - giving rewards based on value-creation

(paraphrased from a list on p.26).

The fact that such a book can be written I think illustrates a strong point for Austrian Economics vis-a-vis its competitors. If one believed strongly in the Neo-Classical paradigm, with a Walrasian auctioneer who engineered prices to achieve constant social equilibrium, what role would there even be for effective management or entrepreneurship? Neo-Classical economics does have some powerful tools for predicting or forecasting social behavior, but it's not particularly useful in a non-academic setting (at least in its most common academic applications). Of course, if Koch Industries had followed the most extreme strands of Austrian thinking which are hostile to measurement and quantification, it's also unlikely they would have been so successful. However, the Austrian emphasis on entrepreneurship and discovery does make an interesting kernel for a management strategy.

As a handbook on management, The Science of Success has many aspects that you would expect: examples of successful and failed corporate experiments, dealing with people, and product development within a competitive market. I found the parts on how to work within a regulated market to be particularly interesting because those seem like areas that an Austrian economic approach, which appeals strongly to free markets, might struggle. I just wish the section on "Practicing MBM in a Political World" had been a big longer and more detailed.

In many ways, the book is directed more toward helping people understand the philosophy which has driven Koch Industries, rather than necessarily showing how to implement it in other contexts. As described in the introduction, The Science of Success is primarily aimed at current or future Koch Industries employees who want to know how the company thinks and operates, and only secondarily toward a more general audience. So, if you're the CEO of a young start-up company this should still probably be on your reading list, but maybe not as the first title.

In addition to its core Austrian influences, other management thinkers are also featured in The Science of Success. Michael Polanyi is quoted several times, and W. Edwards Deming's idea of continuous improvement is also a driving influence. While some might read it as an ideological screed, The Science of Success also sticks to mainstream best practices. Many of the ideas expressed in Austrian economic jargon could probably also be found in other management handbooks, just phrased differently.

I do have some small technical criticisms. A chart on p. 27 compares a $1000 value of Koch Industries growing since 1960 vs. $1000 in the S&P 500 over that time -- the divergence is notable. However, that difference is somewhat driven by survivorship bias; there were many small natural resource companies an investor might have chosen from in 1960, but many of them are now defunct, and their former CEOs have no reason to write a book on management. Similarly, entries in the S&P 500 have changed over that time, always reflecting relatively "mature" companies which have already reached a stable size and stopped growing quickly. If you were to pick, say, Microsoft or Xerox from its inception and track it against the S&P 500 over that same time period you'd see the same sharp returns curve, but that's because you're comparing a company known in hindsight to have been successful (information not available to investors at the time) against an index representing a safe return. It's not a fair comparison.

Overall, The Science of Success is worth reading because it lays out the intellectual driving forces of Koch Industries. Given the prominent role that the Koch brothers have taken in the world of ideas regarding libertarian economics and public policy, this is useful background knowledge for anyone engaged in those discussions. To keep a semi-balanced perspective, perhaps I'll pick up some of the authorial works of George Soros next...

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