Market Based Management®
Philosophy and Principles Market Based Management® is a value system and framework for action that encourages employees to think and act like principled entrepreneurs. (The Principled Entrepreneur, 2007) The MBM philosophy was (and continues to be) developed by Charles Koch, chairman and CEO of Koch Industries. It is used by all Koch companies such as STAINMASTER® carpet, LYCRA® spandex, Quilted Northern® tissue, and Dixie® cups. Charles Koch credits the success of Koch Industries, one of the world’s largest privately held companies, to the application of this unique way of doing business. (Koch C. , 2007) MBM is a large set of ever-evolving “mental models” that are organized by, and interpreted through, a framework of five interdependent and mutually reinforcing dimensions: vision, virtue and talents, knowledge processes, decision rights and incentives. The MBM Guiding Principles, which are a model within the virtue and talents dimension, form the MBM culture. (Tapscott, 2007) This material is used by leaders and employees of Koch companies to get results. Market Based Management® (MBM) is rooted in the Science of Human Action (Mises, 1949), and is defined by five dimensions: * Vision – determining where and how the organization can create the greatest long –term value * Virtue and Talents – helping ensure that people with the right values, skills and capabilities are hired, retained and developed * Knowledge Processes – creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability * Decision Rights – ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable * Incentives – rewarding people according to the value they create for the organizationWhen these dimensions are applied in an integrated, mutually reinforcing manner, they create continuous transformation and positive growth. Any organization – corporation, small business, nonprofit, government agency – can apply these proven principles.The MBM Guiding Principles center on a company driving change internally to survive and prosper. In order to achieve such prosperity, it requires the business entity and its employees to live by a set of Guiding Principles that includes: integrity, compliance, value creation, principled entrepreneurship, customer focus, knowledge, change, humility, respect and fulfillment. (Geiszler-Jones, 2006) (Koch Industries, Inc., 1999-2008) It is imperative that each principle is defined and understood to be used in life as well as the workplace. | | | Integrity requires each of us to conduct all affairs lawfully and with integrity. Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not. This is part and parcel to keeping your obligations and promises. You must try if possible to do business with honorable people; and, build a positive reputation based on reality, or others will create one based on speculation or animus.
Compliance means that each employee must strive for 10,000% compliance, with 100% of employees fully complying 100% of the time. This includes ensuring excellence in environmental, safety, and all other areas of compliance. Stop, think and ask! Striving to comply with every law does not mean agreeing with every law. But, even when faced with laws we think are counter-productive, you must first comply. Only then, from a credible position, can you enter into a dialogue with regulatory agencies, for example, to demonstrate alternatives that are more beneficial to your businesses.
The third principle is value creation – in simple terms, creating real long term value by economic means. This is done by understanding, developing, and applying Market Based Management® to achieve superior results and eliminating waste. An effective business vision begins and ends with value creation, which is the only reason any business should exist. In a true market economy, for a business to survive and prosper long term, it must develop and use its capabilities to create real, sustainable superior value for its customers and for society. Value creation involves making people’s lives better. It is contributing to prosperity in society. We create value by providing products and services our customers value more highly than available alternatives. We do this while consuming fewer resources, leaving more resources available to satisfy other needs in society.
Principled entrepreneurship is demonstrated by the sense of urgency, discipline, accountability, judgment, initiative, economic and critical thinking skills, and the risk-taking mentality necessary to generate the greatest contribution to the company. As Thomas Edison once stated, “Opportunity is missed by most people, because it is dressed in overalls and looks like work.” (Edison, 1994-2007) Principle entrepreneurs maximize the long-term profitability of the business by creating real value in society while always acting lawfully and with integrity. The sense of urgency is at the nucleus of principled entrepreneurship. Urgency prevents opportunities from getting past you. However the discipline to stay connected to reality must be a partner to urgency. You cannot allow emotion and wishful thinking to trump reason. This principle could actually be its own octet and the remaining six pieces are: accountability, judgment, initiative, economic thinking skills, critical thinking skills and a risk-taking mentality.
Customer focus requires an understanding and development of relationships with customers to profitably anticipate and satisfy their needs. It is natural to think that if customers don’t complain, they are satisfied. But thinking this way can lull us into complacency and make us vulnerable to creative destruction. Customers seldom know what they will value until they see it. (Rahn, 2007) This essential insight is fundamental to success. While it is important to ask customers what they will value in the future, the process cannot end there. Focus groups and customer surveys tend to reveal information about tomorrow’s needs based on today’s alternatives. Answers anchored in today’s alternatives are likely to be wrong just for that reason. It is difficult to say what you will choose in the future if you don’t know what the choices will be.
The sixth principle is knowledge. You must seek and use the best knowledge and proactively share your knowledge while embracing a challenge process. Seeking, sharing, discussing or challenging ideas and plans plays a crucial role inside an organization. None of us has all the knowledge to consistently make the best decisions or discoveries. Communication that fosters value creation requires constructive disagreement. An organization in which people work in isolated silos without a culture that promotes constructive challenges is one that will lose ground to competitors. If people only communicate good news, or if everyone pretends to agree, much less knowledge is generated and fewer discoveries are made. To be most effective, a challenge process must include people with different perspectives, kinds of knowledge and expertise.
Embracing change is the seventh principle. It requires that you envision what could be, and to challenge the status quo. The world never stands still. Competitors are constantly improving and what customers value is constantly changing. No matter how superior your products and services, we cannot stay in business unless we make improvements and innovations at least as fast as our competitors. To do this successfully requires that you apply the process of experimental discovery and creative destruction to our vision, strategies, products, services and methods. In other words, we must constantly innovate. Each of us must help foster an environment that invites challenge and embraces change. Humility, the eighth principle, requires the practice of modesty and intellectual honesty. While practicing this principle you are constantly seeking to understand and constructively deal with reality to create real value and achieve personal improvement. The quality of a challenge process depends on our willingness to respectfully engage in open, honest and objective debate, to challenge the status quo, and to consider humbly any challenges to our own beliefs, proposals and actions. This applies just as much to the challengers as to those being challenged. As Mohandas K. Gandhi once said, “It is unwise to be too sure of one’s own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err.” (Gandhi, 2006) The definition of respect is admiration, reverence or to be held in high esteem. The ninth principle is respect. It is treating others with dignity, honesty and sensitivity. In the workplace as in life it demands an appreciation of diversity; as well as encouraging teamwork. In order to work effectively as a team an understanding of respect is the first step. Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational goals – that is teamwork. Teamwork is the energy that lets people reach uncommon results. Finally, the tenth MBM principle is fulfillment or accomplishment. Fulfillment produces results that create value to realize our full potential and find satisfaction in your work. To achieve the greatest fulfillment, we must passionately learn, challenge and experiment as we apply sound theory and practice in every aspect of our lives. To do meaningful work is to contribute, to create value. Appropriately recognizing achievement encourages employees to lead productive lives, realize their full potential and find satisfaction and fulfillment in their work. Market Based Management® is a business philosophy that enables organizations to succeed long term by applying the principles that allow a society to prosper. We know from history, economics and many other disciplines that prosperous societies have rules and values encouraging entrepreneurial innovations that tend to make its members better off over the long term. The MBM approach is to draw on these lessons and apply them to a business. MBM is a scientific approach to management that integrates theory and practice, and provides a framework for dealing with the ongoing challenges of growth and change. There really is a science behind the success, and it can be applied to any organization. (Koch C. G., 2007) Developing the ability to apply these Principles routinely and instinctively to achieve results requires constant practice and reflection. Many companies have similar principles, but fewer take systematic steps to ensure that every employee understands and is committed to thinking and acting in harmony with them. These steps are essential if such principles are to truly affect workplace culture. Otherwise, they are nothing more than empty slogans.

Works Cited:

Edison, T. (1994-2007). The Quotations Page. Retrieved February 12, 2008, from Quotations by Author: http://www.quotationspage.com/quotes/Thomas_A._Edison/

Gandhi, M. K. (2006, June). Ask.com. Retrieved February 17, 2008, from BrainyQuote: http://www.brainyquote.com/quotes/authors/m/mohandas_gandhi.html

Geiszler-Jones, A. (2006, September 22). Inside WSU. Retrieved February 15, 2008, from Inside WSU Online Edition: https://webs.wichita.edu/dt/insidewsu/show/article.asp?723
Koch Industries, Inc. (1999-2008). Retrieved February 20, 2008, from MBM Institute: http://mbminstitute.org

Koch, C. G. (2007). The Science of Success. In C. K. Charles G. Koch, The Science of Success (pp. 37-38). Hoboken: John Wiley & Sons, Inc.

Koch, C. (2007). Koch Industries . Retrieved February 12, 2008, from Koch Industries: http://www.kochind.com/default.asp

Mises, L. V. (1949). In L. V. Mises, Human Action: A Treatise on Economics (p. 13). Vienna: Yale University Press.

Rahn, R. W. (2007, March 25). Success and the State. The Washington Times , p. 1.

Tapscott, M. (2007, November 12). Power Profile: Charles G. Koch. Retrieved February 27, 2008, from The Washington Examiner: http://www.examiner.com/printa-1043176-Power_Profile_Charles_G._Koch.html

The Principled Entrepreneur. (2007, July/August). The American, p. 105.