I finished reading Good Profit by Charles G. Koch. Last year I read Koch’s The Science of Success (I believe those are his only two books). Both books are guides to Koch’s management philosophy, Market-Based Management. Market-based management attempts to use economic knowledge to apply the tools which allow free market economies to prosper (property rights, free exchange, profit and loss) within the contexts of a firm.
Koch is Chairman and CEO of Koch Industries. Along with his brother David, Charles is one of the wealthiest people alive. Koch is also a classical liberal who has dedicated a lot of time and money to classical liberal causes such as the Charles Koch Institute and the Institute for Humane Studies.
In the first section of the book, Koch writes of his early years from his childhood to his first days in business. He particularly focuses on the lessons of his father, who left behind the family business to his sons.
The bulk of the book details the five core components of market-based management: Vision, Virtue and Talents, Knowledge Processes, Decision Rights and Incentives. A firm should have a clear vision that expresses how it will use its capabilities to improve people’s lives. Employees should have the right virtue and talents to contribute to the firm (virtue is more important than talent). Firms should be structured such that the right information is available to the right people. Employees should have clearly defined rights over the decisions they can make based on their ability to contribute to the firm’s long-term profit. Policies and compensation should be set so that employees face incentives which encourage them to act in the interests of the long-term profits of the firm.
In the final section, Koch runs through four brief case studies of applied market-based management.
Whereas The Science of Success reads like a how-to manual for implementing market-based management, Good Profit definitely reads like Koch’s manifesto. The book did not address my reasons for skepticism of market-based management. To try and summarize those concerns very briefly, my gut tells me that market-based management is a misapplication of economic concepts to the wrong contexts. Firms exist because of transaction costs, a concept I don’t find addressed by the structure of market-based management.
Koch doesn’t address criticisms of market-based management in the book, but presents the tremendous success of Koch Industries as a testament to the power of his business philosophy. Besides Koch’s two books, I have encouraged market-based management in working with organizations supported by Koch such as the Charles Koch Institute. I find some concepts (decision rights) more compelling than others (incentives). I would be really interested to have the opportunity to experience market-based management working in a firm that fully embraces it, especially in a for-profit context.