Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!
Koch Industries would grow in a way that reflected Sterling Varner’s approach to business. Varner was “opportunistic,” in a way that Koch employees used the word, meaning that he was always looking for new deals that were connected to businesses in which he already operated. When Koch was shipping natural gas, for example, Varner pushed the company to build a specialized natural gas refinery in Medford, Oklahoma, to process the gas into liquid by-products. In this way, Koch could expand while building on the skills it already possessed. The gas refinery, or “fractionator” as they called it, became a huge moneymaker. Varner encouraged his senior managers, like Williams, to think the same way. Williams was told that his job wasn’t just to keep his head down and run his division—his job was to keep his eyes on the horizon, to scan the environment of his business for new opportunities. Even more important, Varner told Williams to pass this mentality on to everyone who worked for him. The pipeline employees, the engineers, the oil gaugers—all of them needed to look for new deals as they went about their daily work. Everybody was supposed to act like an entrepreneur who worked in the mergers and acquisitions department. “When you get that idea spread among your people, then you’ve got gaugers out there with their eyes open. The ideas come in. If you’ve got a couple of thousand [employees] looking for things, you’re going to get some stuff that comes in that’ll be all right.” Williams said. Charles Koch and Sterling Varner held quarterly meetings to evaluate how managers like Williams were doing in this regard. Williams was expected to report on his pipeline business and also to bring up new “high-quality investments” that he had spotted in the field. A ritual was formed at these meetings. A manager like Williams would propose the idea for some new investment. And then the questions would begin. Charles Koch’s questions were relentless, seemingly never ending, and the managers understood that they must be prepared to answer all of them. If a manager didn’t have the answers, the topic was dropped until he could return with them. The rhythm of corporate life at Koch Industries began to revolve around these quarterly meetings. And the rhythm beat a steady message into every manager and every employee below them down the chain: grow.
- During one meeting on budgets, Markel was surprised when Brooks made a simple proposal: “Why not do away with them?” Charles Koch loved the idea, and so did Markel. Getting rid of budgets would instantly dispose of hours’ worth of drudgery that defined a financial controller’s life. Koch invented a new set of metrics to replace budgets. And the numbers that the company focused upon were telling. Charles Koch didn’t care much about sales or costs—he cared about profits. He wanted to know how profitable any line of business was and how profitable it could be under the right management. He steered all of his managers to think this way. The key thing they needed to focus on was the return on investment, or ROI—what was the best use of Koch Industries’ money? Soon each division was writing a profit goal for the quarter, rather than a budget. Sales, costs, and prices could veer wildly, but what mattered was whether a division hit its profit goal for the year. And Charles Koch was thinking in terms of years, not quarters. This was critical for a company in a highly volatile business. A graph showing Koch’s sales and costs and the price of oil might spike and dip violently from week to week. But Charles Koch was only interested in whether the return on investment climbed steadily over the years. “You didn’t know what the exact trajectory was going to be. But you knew it was up, and to the right,” Markel recalled.
To keep things moving up and to the right, Charles Koch had an unwavering philosophy about debt. He was rigid in his belief that debt should be kept as low as possible so that interest payments didn’t eat up Koch’s cash. The reasons for this were strategic. Every downturn brought opportunities for companies that were prepared. Downturns weakened competitors and made them ripe for takeover. Downturns made assets cheaper to buy. For this reason, Markel and his team were discouraged from borrowing large sums even if banks were more than willing to lend it.
Charles Koch invited one of the brightest young business consultants in the nation to speak in Wichita, a Harvard professor named Michael Porter. Porter published a book in 1980 called Competitive Strategy that offered a new framework for how to run a business. The book provided a detailed plan for companies to analyze the market in which they operated. Porter visited Koch Industries multiple times, accompanied by a team of consultants. The team helped Koch’s managers look into their own business lines and apply Porter’s ideas, using good data to figure out the best path toward boosting profits and growing. Porter helped Koch executives learn how to analyze their competitive advantage, analyze their competitors, and come up with the best plan to capitalize on the company’s market position. Then Charles Koch began to teach the classes himself. He led sessions with smaller class sizes, maybe a dozen or so senior managers. This intimate setting helped Charles Koch give more attention to each manager. But he wasn’t content for his teachings to reach only the senior leaders. Charles Koch wanted to multiply his efforts. After they attended Charles Koch’s lectures, executives like Markel were expected to return to their offices and repeat the lectures to their own employees—executives were even given pamphlets and slideshows to help them. In this way, Charles Koch’s lectures were passed down through the chain of command, from his senior managers at headquarters out to the most remote branch offices. The managers who attended Charles Koch’s seminars began to call them “Koch University.” Charles Koch wanted to ensure that every new employee learned how things were done at Koch Industries. He also wanted to ensure that the company culture could endure over time. Sterling Varner, for instance, was the father figure who guided Charles Koch after Fred Koch’s death. Varner was the company’s living library. But Varner was getting older and wouldn’t be at the company forever. Charles Koch wanted to codify Varner’s teachings before he left.
- Running the fertilizer division might have seemed like an insignificant job to people outside of Koch. But Watson knew better. The fertilizer plant was an example of Koch’s strategy for “rapid prototyping,” a phrase that Watson used to describe Koch’s business experiments. Rapid prototyping was the process of trying new ventures on a small scale to see how they worked. It was the method that Koch used to branch out into different industries. Failure would be part of the process, so Koch kept its initial ventures small. Divisions like the fertilizer business were all learning laboratories. Koch Industries learned a lot with its fertilizer business. Among other things, the company learned that American agriculture had slowly and quietly turned into a fossil fuel business. This strange fact would launch the largest expansion effort in Koch’s history. It was nothing less than a play to take over a vast portion of America’s food system.
- Charles Koch sat and listened as his business leaders explained their most recent quarter. He interrogated them and looked for soft spots in their presentations. It was always understood that chaotic market forces were slamming against their front door, and everyone would be accountable for their reactions. If a division lost money, the division’s president needed to provide a detailed vision for regaining profits over the long term.