Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies - Hardcover

Koch, Charles G.

Hardcover

ISBN 10: 1101904135 ISBN 13: 9781101904138

Publisher: Crown Currency, 2015

Synopsis

THE REVOLUTIONARY MANAGEMENT SYSTEM BEHIND ONE OF THE MOST SUCCESSFUL COMPANIES OF OUR TIME
 
In 1961, Charles Koch joined his father’s Wichita-based company, then valued at $21 million. Six years later, he was named chairman of the board and CEO of Koch Industries, Inc. Today, Koch Industries’ estimated worth is $100 billion -- making it one of the largest private companies in the world. Koch exceeds the S&P 500’s five-decade growth by 27-fold and plans to double its value on average every six years.
What exactly does this company do and why is it so remarkably profitable? Koch’s name may not be on your stain-resistant carpet, stretch denim jeans, the connectors in your smart phone, or your baby’s ultra-absorbent diapers but it makes them all. And Koch’s Market-Based Management® system is what drives these innovations and many more. 
Based on five decades of interdisciplinary studies, experimental discovery, and practical implementation across Koch businesses worldwide, the core objective of MBM is to generate good profit. Good profit results from products and services that customers vote for freely with their dollars, products that improve people’s lives.  It results from a culture where employees are empowered to act entrepreneurially to discover customers’ preferences and the best ways to satisfy them. Good profit is what follows when long-term value is created for customers, employees, shareholders, and society.
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 MBM to show how to apply its framework to generate more good profit in any business, industry, or organization of any size.  Readers will learn how to: 
·         Craft a vision for how to thrive in spite of increasingly rapid disruption
·         Select and retain a workforce possessing both virtue and talent
·         Create an environment of knowledge sharing that prizes respectful challenges from everyone at every level
·         Award employees with ownership and decision rights based on their proven contributions, not job title
·         Motivate all employees to maximize their contributions by structuring incentives so compensation is limited only by the value they create
 
A must-read for any leader, entrepreneur, or student, as well as anyone who wants a more civil, fair, and prosperous society, Good Profit is destined to rank as one of the greatest management books of all time.

About this title

About the Author:

Charles G. Koch is chairman of the board and CEO of Koch Industries, Inc., a position he has held since 1967. He is renowned for building Koch Industries into the second-largest private company in the nation -- currently valued at $100 billion-- making him the fourth wealthiest man in America, according to Forbes.

           Wichita, Kansas-based Koch Industries, Inc. began as Wood River Oil and Refining Co. in 1940. Koch employs more than 100,000 people in about 60 countries worldwide, with 60,000 of those in the United States. Since January 2009, Koch has earned more than 1,000 awards for safety, environmental excellence, community stewardship, innovation, and customer service.
 

Excerpt. © Reprinted by permission. All rights reserved.:

Chapter 1

The Glorious Feeling of Accomplishment

Life Lessons from My Father

I should regret very much to have you miss the glorious feeling of accomplishment and I know you are not going to let me down. Remember that often adversity is a blessing in disguise and is certainly the greatest character builder.

—Fred Koch1
You can tell the Dutch," my father would joke about himself, "but you can't tell them much." Square-jawed, determined, and persistent certainly described Fred Koch, who plunged headfirst into countless ventures--some profitable, some not. His own father, Harry, was also a risk-taker--emigrating as a teenager from the Netherlands with very little money and a head full of stories about America's "Wild West."

Whether their reputation for stubbornness is deserved or not, the Dutch emerged from Spanish rule in 1581 with a thirst for peace, tolerance, knowledge, and new ideas. During the Dutch Golden Age of the seventeenth century, they created the first stock exchange, generated the highest standard of living in the world, excelled in arts and science, and sustained a flourishing culture. The Dutch thrived thanks to freedom and a system of mutual advantage, while their less free European neighbors endured bloodshed and poverty.

Harry Koch arrived in New York as a printer's apprentice and brushed up on his English skills while working at Dutch newspapers in Michigan and Chicago. His work led him to travel down the Mississippi to Louisiana, and then to Trinity, Austin, and Galveston, Texas. In 1891 he followed the railroad to Quanah, where he bought a print shop and struggling weekly newspaper called the Chief. Quanah was in a very poor area, so many of Harry's customers paid, in part, with barter. They valued the news and advertising space his paper offered, and he valued their patronage. In an example of good profit at work, what is now the Tribune-Chief is still published today.

Harry had a thick Dutch accent and pronounced the name "Koch" with a soft, guttural "ch." The West Texan pronunciation sounded more like a crow's "caw." Years later, someone paged my father at a train station and mispronounced his name over the microphone as "Fred Coke." My father had never liked the West Texas version, so he adopted that pronunciation on the spot, thereby making a significant contribution to American phonology.

Fred played varsity football for Quanah's high school, and was an excellent orator and student. He attended the Rice Institute in Houston (an all-scholarship school at that time), where he was elected class president. Always ready to take any risk that might pay off, he transferred to MIT in Cambridge, Massachusetts, upon learning it had created the first-ever chemical engineering program. MIT's tuition at the time was about $300 a year. Before he moved from Texas to Boston, Fred spent the summer mopping decks on a tramp steamer--a merchant ship with no set schedule--sailing between New York and London.

Chemical engineering suited Fred Koch. His bachelor's thesis at MIT addressed environmental issues at a paper mill in Bangor, Maine, which was, coincidentally, later owned by Georgia-Pacific. (GP sold that mill but still owns the Acme gypsum plant near Quanah where my father held a summer job.) The opportunities presented by the Bangor mill--including the profitable recycling of waste products as well as energy conservation, both of which improved the environment--were important to my father and remain important to Koch, because they are mutually beneficial to our company and our communities.

At MIT, Fred, having been taught by his father to box, became captain of the boxing team. While my mother--a golfer, fly fisher, hunter, and jewelry designer--possessed excellent eye-hand coordination, Fred more than got by on his quick reflexes and competitive spirit. He encouraged all four of his sons to develop some boxing skills.

While boxing is one of my favorite Olympic sports, none of us pursued it. My brother Frederick always preferred the arts to athletics, eventually studying humanities at Harvard and drama at Yale. I had some of the most fun of my life playing rugby at MIT on a team that won two championships. My brothers David and Bill joined the MIT basketball team. David became its captain and was a small college all-American. In 1962 he set a record by scoring 41 points in one game--a record he held for forty-six years.

After college, my father got a job with Texaco (then called the Texas Company) as a research chemist at its refinery in Port Arthur, Texas. He then worked briefly as a chemical engineer for the Gasoline Products Company, a leading refinery process development firm in Kansas City.

Fred's big break as an engineer came in 1924, when his MIT classmate, Carl de Ganahl, recommended him for a job designing and constructing a refinery in England owned by de Ganahl's father, Charles. Like the Kochs, the de Ganahls had emigrated from Europe in the 1800s and eventually settled in Texas.

Charles de Ganahl was an amazing person--an outstanding entrepreneur with great integrity and compassion. His mentorship of my father, who was a twenty-four-year-old with very little business experience and even fewer connections, changed Fred's life. My father had tremendous respect for de Ganahl, so much so that he named me after him. That respect was mutual. "Fred Koch is the soundest chemical engineer in the world," de Ganahl wrote years later, "with as brilliant a pair of brain lobes as are worn by any young man of my acquaintance."2

My father gravitated toward quality people and genuinely made a good impression on them--whether it was the wealthy de Ganahl family or Sterling Varner, whose father and grandfather were oilfield mule contractors. He didn't care about social status; he treated everyone in a manner consistent with his values. It's probably a reflection of his character that good people wanted to be around him too and offered him opportunities for work.

In 1925, Fred's MIT experience, brilliant lobes, and way with people paid off again. Another former classmate, Dobie Keith, invited him to join an engineering and construction firm in Wichita, Kansas, which Keith had started with Lewis Winkler. Fred accepted, paying $300 to become an equal partner. Three months later, after Keith abruptly left to pursue another opportunity, the Winkler-Koch Engineering Company was formed.

The first two years were rough for Winkler-Koch. Because the firm lacked any proprietary technology or the capital to sell complete jobs (entailing design, equipment purchase, and construction management), small engineering fees were all Winkler-Koch could command. For a while my father was, as he put it, "dead broke" and had to sleep on a cot in the office.

Business improved in 1927 when Fred developed a better thermal cracking process for converting heavy oil into gasoline, one that was less expensive, provided higher yields, and involved less downtime than competitive processes. After a successful installation at L. B. Simmons's new Rock Island refinery in Duncan, Oklahoma, Winkler-Koch sold an average of one new installation every seven weeks for the next two years.

Winkler-Koch's success in selling this process to independent refiners inevitably caught the attention of the major oil companies, who had pooled their gasoline-making processes to control the technology. This combine, dubbed the Patent Club, charged the independents a royalty of 30 cents per barrel at a time when gasoline sold for a little over $3 per barrel (retail).

My father's new process, by contrast, was royalty-free, further enhancing its appeal to independent refiners. In 1929, the Patent Club--worried about the increased competitiveness of independents--filed forty patent infringement suits against Winkler-Koch and almost all its customers. These suits crippled the company's business in the United States and in much of Europe.

Winkler-Koch's survival as a company depended on building plants in other countries--particularly the Soviet Union, where it constructed fifteen cracking units between 1929 and 1931. As a result of that Soviet contract, Winkler-Koch enjoyed its greatest financial success during the early years of the Great Depression. Even so, Fred was very suspicious of the Soviets and demanded 90 percent payment up front.

The Soviet engineers who worked with my father confirmed his fears about doing business in the Soviet Union (and of Communism in general) when they told him about their methods and plans for world revolution. Stalin eventually purged almost all of Fred's Soviet counterparts, along with tens of millions more of his own people. My father described the Soviet Union as "a land of hunger, misery and terror." Because of his experiences there, he became a staunch anticommunist for the rest of his life--even joining the John Birch Society and encouraging me to as well. (I agreed but only stayed for a few years because I felt, like Hayek, that Communism was more of an "intellectual error" than a conspiracy that needed to be exposed.)

The Patent Club spent twenty-three years suing Winkler-Koch but was successful only once. And even that verdict was overturned after it was discovered that a judge had been bribed. This shocking behavior and the resulting scandal caused the majors to donate their process development company, Universal Oil Products, to the American Chemical Society. Winkler-Koch countersued, settling in 1952 for $1.5 million.

Despite winning, my father's advice to me was: "Never sue--the lawyers get a third, the government gets a third and you get your business destroyed." I've tried to follow his advice and have filed very few lawsuits. Unfortunately, he forgot to tell me how to keep from being sued--even by members of my own family. But more on that later.
The Founding of Koch Industries
The late 1930s brought more hard times for my father's engineering business. The Great Depression was ongoing, and the Patent Club lawsuits prevented him from reaping benefits from his thermal cracking process in the United States. So Fred stepped up his search for other business opportunities.

Once again, his good reputation served him well. Globe Oil and Refining Co. (one of the largest independent refiners and one of Winkler-Koch's best customers) decided to build a 10,000-barrel-per-day refinery on the Mississippi River near Wood River, Illinois, about fifteen miles upstream from Saint Louis.

Globe's owner, I. A. O'Shaughnessy, wanted partners to reduce the risk and bring additional capability to the venture. He first attracted Hank Ingram, owner of one of the largest barge fleets on the Mississippi, who could facilitate movement of crude oil and products in and out of the refinery. He then approached Fred to design and operate the plant.

My father agreed, on the condition of owning a substantial interest in the company. Fred paid $230,000 in 1940 for 23 percent of the Wood River Oil and Refining Co., Inc., the company that would eventually become today's Koch Industries. O'Shaughnessy and Ingram each owned 33 percent, and two Globe employees (involved in crude oil supply and product sales for Wood River) owned 5 percent each. The refinery was completed and began operating in 1941. Its owners could not have known what would come next.

World War II prompted Congress to pass four "excess profit" tax bills between 1940 and 1943, with rates ranging from 25 percent to 95 percent. As a result, during the war years, Wood River's income tax rate averaged nearly 70 percent.

This confiscatory rate did not prevent the government from pressuring Wood River to produce ever-larger quantities of high-octane aviation fuel. Also, like every other resource at the time, crude oil was difficult to obtain because of wartime shortages. No surprise, then, that conflicts arose among the primary stock-holders.

One of those conflicts was inherent in the structure of the deal: The employees of Globe Oil who supplied crude oil for its refineries and those who sold Globe's products were to also help supply and assist sales for Wood River. This caused suspicion among the non-Globe partners that Wood River wasn't receiving equal treatment. Whether this was true or not, the lesson is that whenever conflicts of interest are built into an agreement, it is unlikely to work--for long. In 1944 the Globe Oil group agreed to transfer their shares at cost to my father and Ingram to settle the differences. Fred and Ingram became equal owners as a result.

In 1946, Wood River acquired the 8,000-barrel-per-day Rock Island refinery in Duncan, Oklahoma, and its 10,000-barrel-per-day crude oil gathering system (gathering systems transport crude oil from the wellhead to a major pipeline) for $600,000, plus the right for L. B. Simmons, Rock Island's owner, to purchase a 10 percent interest in Wood River. These assets were placed in a new subsidiary named Rock Island Oil and Refining. Although the Oklahoma refinery was shut down in 1949, its gathering system became the foundation for Wood River's largest business.

Wood River lost money in 1949, prompting the sale of its Illinois refinery to Sinclair Oil for a gain of $4 million. That sale enabled a buyout of the remaining stockholders, except for my father and L. B. Simmons (who had exercised his option to buy stock). They kept the Wood River name and in early 1954 made plans to build a new refinery near Chicago, but soon gave up on the idea.

My father was smart, entrepreneurial, successful, respected, and principled. And yet he was unfailingly humble. In 1948, he wrote to a friend in Pittsburgh, "This oil business of ours has grown so big that it needs a smarter man and a better organizer to handle it."3

Fred suffered physically, not just from the high blood pressure and heart problems that would eventually take his life. In 1940, a doctor suspected a growth on my father's palate was malignant and treated it with radium needles that destroyed the roof of his mouth. After that, Fred's speech deteriorated, and eating in front of others became painfully embarrassing for him. He worried he would need a new business--one that wouldn't require much interaction with others. Ranching seemed to fit that bill.

So in 1941 he bought most of the acreage for what became Spring Creek Ranch in the Flint Hills of Kansas, where he planned to work in isolation. "It was just a dreadful experience," my mother recalled four decades later.

"He couldn't work. He couldn't do anything." My mother was a very sensitive person who took others' suffering to heart. "He lived that way and didn't complain, but he would tell me sometimes, when he couldn't stand the pain," she said.

Thankfully a gifted doctor in Saint Louis found a way to repair my father's palate, and he slowly recovered. Spring Creek then served a much happier purpose for Fred. He became fascinated by the science of ranching and would spend weekends there with all of us staying in the family cabin. Among other innovations, he helped develop the artificial salt lick, an inexpensive way to ensure cattle got sufficient salt.
1. Letter from Fred Koch to his sons, January 22, 1936.

2. Letters from Charles de Ganahl to his son Carl, dated April 26, 1930, and published in The Life and Letters of Charles Francis de Ganahl (Richard R. Smith: New York, 1949), p. 380, and to Mr. Wilson Cross, dated March 17, 1933, contained in Vol. II, p. 667.

3. Letter from Fred Koch to Dr. Walter F. Rittman, January 30, 1948.

About this edition

• Publisher: Crown Currency
• Publication date: 2015
• ISBN 10: 1101904135
• ISBN 13: 9781101904138
• Binding: Hardcover
• Edition number: 1
• Number of pages: 288