Tuesday, May 22, 2007

Success Book and Podcast - Two Remarkable Men

I recently came across the works of two business leaders that had two major qualities in common: 1) They both run enormously successful businesses that are not, in general on the “radar screen” of many of us interested in business success, and 2) They are both scholars who have explicitly transferred free-market economic principles from the textbook into the infrastructure of their companies. And the results speak for themselves.

Charles Koch is Chairman and CEO of privately-held Koch Industries, a $90 billion giant involved in petroleum, chemicals, fiber, minerals and other basic industries. His current book is The Science of Success: How Market-Based Management Built the World's Largest Private Company.

John Allison is Chairman and CEO of BB&T a $120 billion bank holding company largely based in the South. Allison’s recent address to the Atlas Club can be heard here, and his appearance on EconTalk can be heard here.

What is fascinating about both men is their broad, “top-down” view of their business, and their determination to treat their business as a model of free-market economics. Normally, one envisions the economic principles of Hayek, Mises, Ayn Rand, and others as operating between individuals, companies or countries. On the other hand, one might normally envision the”inside” of a business to be more dominated by a strong leader, and more-or-less static systems, and run, perhaps, as a “survival of the fittest” where the hungriest, but perhaps not the most ethical , manager can win.

Nothing could be more further from the truth in the worlds that these men have created. Here are a few of the principles that they seem to have both used to grow their business and their people.

Reality. As Allison says, “What Is, Is”. You can’t “fake” value creation. You have to measure. You have to know when to “fold ‘em”. The “nicest guy in the world” has to go out the door if value is not being created. The most brilliant idea in the world has to be discarded if the customer hates it.

Only Reason can promote survival and growth. This might mean exhaustive analysis of a business before entering it (such as Koch does). This might mean using the concept of “comparative advantage” (usually found in the textbooks in the area of country-versus-country) to select the right businesses, the right people, and the right product mix. Allison remarked recently that even though Bill Gates’ contribution to charity through the Gates Foundation might contribute mightily to the world, his comparative advantage is clearly as the founder of Microsoft. At Microsoft, he changed the world and created value across countless industries on a truly historic scale, that has yet to unwind. Gates the philanthropist, Allison argues, Is unlikely to make the same revolutionary impact.

Reality is constantly changing. Static systems cannot work in an evolving world. Koch echoes Hayek and Mises in that business is a process of discovery and experimentation. In fact, Koch explains that he watches “opportunity cost” as closely as other costs. If an employee ignores a $100 million opportunity it is the same as if that employee cost the company $100 million Another example is picking the right new avenues for busines sgrowth. Economics is often concerned with the “marginal transaction”... the next sale, the next purchase, the next thing a consumer will choose to buy. Clearly Koch scrutinizes carefully each marginal event. There is where the “diamond lens” must focus, for that is the leading edge of the future. It is the willingness to drive change, to cope with it, and to be a part of it, that keeps these huge businesses in a constant state of renewal.

Also, Koch is a champion of “internal creative destruction”…the same force that trashed our black-and-white TVs when color came along, and trashed our cathode-ray tubes when Plasma and LCD appeared on the screen. But Koch demands that this creative destruction” (a concept attributed by most to Joseph Schumpeter) take place within the company. Only by consciously destroying and renewing from within can a company survive and grow to the gigantic proportions of a BB&T or a Koch Industries.

The basic unit is the individual. As in the larger society, the individual is the core unit of value. The individual must live within principles, act in their own long-term self-interest, and constantly be measured as to the value they contribute. As a corollary , these leaders impose no artificial limits on the compensation of the individuals in their companies, instead relating that compensation to the overall value contributed.

Business and a free market are sources of good. The free trading of goods and services among free people is the greatest engine of well-being and prosperity ever conceived, and the only known method by which both buyer and seller can benefit simultaneously. I particularly sensed from Allison his conviction that a successful business can affect far more lives in far better ways, than even the best-run government program or charity.

Long-term thinking is also a quality reinforced by both men. Each of them has been at the helm of their company for the better part of a generation. Koch frequently mentions decisions to buy or sell a business based on long-term analysis and praises the long-term views of his partners. And Allison mentions that ethics take on much more clarity as time goes by. The ability to “fool people” diminishes after you have been around a person for a while. And, he mentions, he has never m t a financially successful person who routinely takes advantage of people, and is enjoying a happy life. It catches up with you one way or another.

There are many more details in the book and mp3s I have mentioned. These concepts just scratch the surface, but it is remarkable how deeply these men have read and studied, and equally remarkable that they have applied their studies with such relentless rigor. I strongly Recommend reading Koch’s book, and listening to Allison’s mp3’s.

For more top Success Books please check out John Allison

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