ILLUSTRATION BY RUTH MACAPAGAL
Family businesses have long been the backbone of the global economy, embodying the essence of entrepreneurship, commitment and personal touch in their operations. I know from our many family business clients around the globe that scaling such businesses, while maintaining the core values and ensuring sustainable growth, can be a challenge.
One remarkable example of success in this domain is Koch Industries, led by the Koch brothers, Charles and David Koch. Their journey went from a medium-sized business to one of the largest privately owned companies in the world, and the second largest privately owned company in the United States.
Their strategy offers many invaluable lessons for family business owners and CEOs aiming for growth and longevity. I will share some practical insights drawn from the Koch brothers’ approach to business management, innovation and leadership.
Secret No. 1: MBM
Market-based management (MBM) is a business philosophy that has been the cornerstone of Koch Industries’ remarkable success. Developed by Charles Koch, MBM is not just a set of management practices but a holistic approach to managing organizations that seeks to harness the power of market mechanisms within internal operations.
Its goal is to create organizations that are as efficient, innovative and customer-focused as the free market itself. MBM is structured around five key dimensions that guide the behavior of individuals within an organization and shape its overall culture.
5 dimensions of MBM
1. Vision: Developing and articulating a clear vision that guides long-term efforts while fostering a culture of compliance and integrity.
2. Virtue and talents: Emphasizing integrity, compliance, capabilities and a willingness to transform oneself in alignment with the organization’s vision and values.
3. Knowledge processes: Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability.
4. Decision rights: Ensuring that the right people are in the right roles with the right authority to make decisions and holding them accountable.
5. Incentives: Rewarding people according to the value they create for the organization.
Practical applications of MBM
To practically apply MBM, organizations should focus on aligning their internal practices with these principles and dimensions. This could involve:
• Redefining decision-making processes: Decentralizing decision-making authority to those closest to the work or the customer, thereby speeding up response times and encouraging a sense of ownership among employees.
• Creating value-based incentives: Designing compensation and reward systems that align with the value an individual or team contributes to the organization, encouraging innovation and efficiency.
• Establishing a culture of continuous learning: Implementing systems and practices that promote continuous learning and knowledge sharing, including regular training sessions, workshops and a culture that celebrates experimentation and learning from failure.
• Fostering an entrepreneurial spirit: Encouraging employees to take initiative, pursue new opportunities and think like entrepreneurs within the framework of the organization’s goals and values.
Secret No.2: Invest in continuous innovation
The Koch brothers believed in the power of continuous innovation, not just in products but in processes, business models and technology. This relentless pursuit of improvement allowed them to diversify into different industries, from manufacturing and refining to finance and technology.
With the advent of artificial intelligence (AI), this has become even more important. I see around the world that most companies fail to apply AI properly because they do not yet understand the secrets behind innovation and the creative process. When we optimize innovation with our clients, we make sure we install innovation channels, a system to collect ideas from everyone in the organization, filter and prioritize them, and make sure top management knows what ideas are worth executing.
Secret No.3: Decentralize decision-making
Decentralized decision-making is a pivotal aspect of MBM and serves as a key driver of agility, innovation and efficiency within an organization. This approach moves away from traditional top-down decision hierarchies, empowering individuals at all levels of the organization to make decisions that are closer to their areas of expertise and responsibility.
Decentralizing decision-making is empowering those closest to the work to make important decisions. This not only speeds up the decision-making process but also boosts employee morale and engagement.
In a family-owned manufacturing firm, this could mean allowing plant managers the autonomy to make decisions on production schedules or operational improvements without waiting for approval from the top. This empowers managers who are most familiar with the day-to-day operations to implement changes swiftly and effectively.
Secret No.4: Long-term thinking
In my global experience of interacting with and advising companies—from multinationals to Fortune 500 and family businesses, from medium-sized businesses to multibillion-dollar giants—I have seen that one of the major advantages of family businesses is that they can take a long-term strategic approach to business, growth and strategy.
Resist the temptation to be too short-term focused. Remember: Your unique advantage lies in your ability to play the long game. The best bets, the ones with the highest payoff, come from long-term plays. This requires patience and a focus on long-term gains over immediate profits.
A family-owned tech firm might invest in research and development for a new product that may not be profitable for several years but has the potential to revolutionize the market. The Koch brothers applied long-term vision, often investing in projects and technologies that would only pay off in the distant future.
Secret No.5: Building a network of political influence
Beyond their monumental success in the business realm, the Koch brothers have also been known for their significant continued impact on the political landscape in the United States. They followed a clear multifaceted strategy to maximize their influence, spread their beliefs and influence policy, legislation and political decision-making.
You may question the ethics of this approach but its success is undeniable. From strategic donations and building influential networks to investing in policy research and mobilizing grassroots support, their methods offer valuable insights for business leaders and individuals looking to make an impact beyond their industries.
Beyond financial contributions, the Koch brothers have excelled in creating a network of like-minded individuals, organizations and businesses.
Which one of the Koch secrets will you use to build your global empire? INQ
Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email Tom.Oliver@inquirer.com.ph.