My notes on chapter 5 of The Science of Success by Charles Koch:

Quotes

• “When Soviet nail factories had their output measured by weight, they tended to make big, heavy nails, even if many of these big nails sat unsold on the shelves while the country was crying out for small nails.”—Thomas Sowell [Wikipedia]
• “The greatest obstacle to discovery is not ignorance but the illusion of knowledge.”—Daniel Boorstin [Wikipedia]
• “The worth and value of knowledge is in proportion to the worth and value of its object.”—Samuel Coleridge [Wikipedia]
• “Not everything that counts can be counted, and not everything that can be counted counts.”—Albert Einstein [Wikipedia]
• “Don’t measure yourself by what you have accomplished, but rather by what you should have accomplished with your ability.”—John Wooden [Wikipedia]
• “It is one thing to wish to have truth on our side, and another thing to wish sincerely to be on the side of truth.”—Richard Whately [Wikipedia]

Concepts

1. Trade. Primary determinant of society’s prosperity and progress. Mutual gain is at the foundation. Each party expects to be better off, even if one party is later disappointed.
2. Geographic Impact on Innovation.Holland and England became trading centers because they were open with good ports and harbors. Africa, Central/South America, and Eastern Europe were more isolated so development was limited. [This is a drastically oversimplified explanation. Also conflicts with our belief that culture is an important factor. Begs question: what happens when the principle reaches it's final conclusion and we are "one world" under the new world order? Besides this, the idea conflicts with silos and "need to know" approach to information sharing that has become fashionable in the company. The opening paragraphs of this chapter are, therefore, in direct and unambiguous conflict with SRM and GP information management strategy.]
3. Limitation of Internal Means of Improvement.“No company, no matter how capable its employees, can match the pace of innovation and improvement taking place throughout the world solely by internal means.”
4. Knowledge Processes.“A knowledge process is the method by which we develop, supplant, share, and apply knowledge to create value.”
5. Measures.Most fundamental: profit and loss. Knowing why something is profitable can be as valuable as knowing that it is profitable. Successful organizations strive to understand profitability of assets, products, strategies, customers, agreements, employees, and anything else it can.
6. Quantitative vs. Qualitative.Measures should be quantitative when possible, but qualitative/intangible components must be considered.
7. Accuracy vs. Precision.Accuracy is the first consideration in measures. It is often wasteful to develop more detailed information than is necessary. Outcomes can not be predicted precisely, so don’t try.
8. CPV Triangle.Seller’s profit = price – costs. Buyer’s profit = value – price. For voluntary transaction to occur repeatedly, price must be in between seller’s cost and buyer’s value. If below seller cost, seller doesn’t make more. If above buyer’s value, buyer doesn’t buy.
9. Differentiated Products vs. Commodities.Superior understanding of what customer’s value now and later leads to ability to meet demand at higher price (price seeking). Commodity providers, in comparison, are price-takers because their product is undifferentiated from competitors.
10. Waste Elimination.“For example, if, after cutting costs, profitability drops when other factors have not changed, then we know that what was eliminated was not waste.” [Couldn't have said it better! Reducing costs and reducing waste are very different activities.]
11. Marginal Analysis. Weighs costs and benefits of a change. What is the profit of one more unit of production? Larger vs. smaller investment? Must optimize base case before using marginal analysis.
12. Benchmarking.Learn from the best in company (internal), best in industry (competitive), and best in world (world class). Measure in specific functions (IT, sales, operations, etc.) when possible. Requires objectivity and intellectual honesty. Good to benchmark other industries (i.e. airlines measuring against NASCAR pit crews).
13. Opportunity Cost.True cost of any activity is the highest-value activity forgone. Working on profitable activity is waste when an even more profitable activity is passed up. Avoid this waste by rigorously examining all opportunities and alternatives.
14. Profit Centers.Identifiable products, prices, customers, suppliers, and assets for which financial statements can be prepared.
15. Internal Prices.Should represent the weighted average market price of the entire volume.
16. Cost-Based Pricing.Creates faulty profit signals and bad decisions. [Prices should balance supply and demand. Therefore, an internal supplier has their price set correctly when they have as much work as they can handle, but not much more. Less work requires more marketing or lower prices. More work requires higher prices.]
17. Service and Support Groups.Tend to maximize service rather than contribution to profitability. Put services under control of relevant business to avoid this. [Could be applied at SRM by putting maintenance under control of operations leaders.]
18. Free Speech.Enables knowledge creation and sharing through verbal [and written] exchanges. Facilitates discovery and dissemination of knowledge.
19. Republic of Science.When scientists are well informed about the work of others and free to choose which problems to pursue. Coordination by mutual adjustment of independent initiatives is the republic of science.
20. Seeking, Sharing, Discussing, Challenging Ideas.Plays a crucial role in the organization.
21. Trust and Respect.When promoted, employees share ideas and seek the best knowledge from others.
22. Richard Whately onTruth. See Richard Whately quote, printed above.

Source Note and Links

1. Thomas Sowell, Knowledge and Decisions. Basic Books, New York., 1980, p. 215. [Amazon] [Wikipedia]
2. Cited by Carol Krucoff, “The 6 O’Clock Scholar,” Washington Post, January 29, 1984. [Not available online.]
3. Samuel T. Coleridge, Aids to Reflection and the Confessions of an Inquiring Spirit. George Bell and Sons, London, 1893, p. 36. [Amazon]
4. F.A. Hayek, Individualism and Economic Order. University of Chicago Press, Chicago, Ill., 1980, pp. 77 – 91. [Amazon]
5. Cited by Scott Thorpe, How to Think Like Einstein: Simple Ways to Break the Rules and Discover Your Hidden Genius. Sourcebooks, Naperville, Ill., 2000, p. 3. [Amazon]
6. John Wooden and Steve Jamison, Wooden: A Lifetime of Observations and Reflections On and Off the Court. Contemporary Books, Chicago, Ill., 1997, p. 94. [Amazon]
7. No external reference
8. No external reference
9. Michael Polanyi, Knowing and Being. University of Chicago Press, Chicago, Ill., 1969, pp. 50, 51, 54, 55 and 70. [Amazon]
10. Richard Whately, Essays On Some of the Difficulties in the Writings of St. Paul, and in Other Parts of the New Testament. B. Fellowes, London, 1830, p. 33. [Amazon]
11. Cited by Scott Thorpe, How to Think Like Einstein: Simple Ways to Break the Rules and Discover Your Hidden Genius. Sourcebooks, Naperville, Ill., 2000, p. 35. [Amazon]

Common Symptoms and Related Mental Models

“Establishing the Right Climate”

From another document showing what happens when a piece (knowledge processes) of the MBM framework goes missing (click for full size):

The MBM Framework: Knowledge Processes

Applying MBM as a Supervisor: Knowledge Processes

In addition to answering these questions for yourself, how are you ensuring your direct reports are striving to get results with their own direct reports?

MBM Blog (Rooted in Prosperity) Posts in Category “Knowledge Processes”

• Applying MBM 3/24/2011: References “personal knowledge” on the part of leaders on how to apply the concepts of MBM starting with understanding the underlying concepts. Proposes two kinds of starting mistakes: 1) satisfaction with understanding, failing to move to application, and 2) skipping conceptual understanding and progressing immediately to application.
• Forecast: Cloudy With A Chance Of Luck 3/3/2011: Nouriel Roubini earned fame by predicting the great recession. Since then, he has made poor predictions. Lesson: always be leery of success. Sometimes success is random.
• Discovering Experimental Discovery 2/23/2011: Questions how to apply the experimental discovery process in the nonprofit sector. Explores how changing market conditions can switch the top dog and their competitors within a year. Warns against complacency, even when you’re the best.
• Rules vs. Judgment: The Sequel 2/18/2011: More about decision rights than knowledge processes. Compares incremental to categorical decisions. Several examples of zero tolerance-type categorical outlooks (“no child left behind, no one hurt by tainted food, every American goes to college”) which neglect the costs of achieving the vision, the concept of scarcity, and tradeoffs (what must be given up to achieve the end). Compliance matters such as accounting, hiring, manufacturing can not be compromised, but the question is asked whether inflexible policies which are not capable of reasonably quick revision should always be followed: dress code, IT policy, office supply protocol, etc. [Compliance has a particular meaning in MBM and is about following the law. SRM has a culture where every question about rules is or becomes a question of compliance. This needs to change. How can I help that change along?]
• Rules vs. Judgment, Continued 2/17/2011: Covered in the previous Virtue & Talents notes.
• Sea Stories: Shooting the Messenger 2/17/2011: Example of poor knowledge process in tech sector. Key concept: collective action problem (“[Describes] the situation in which several individuals would all benefit from a certain action, which, however, has an associated cost making it implausible that anyone individually will undertake it. The rational choice is then to undertake this as a collective action the cost of which is shared.”).
• Rules vs. Judgment 2/17/2011: Covered in the previous Virtue & Talents notes.
• A Feedback Quandary 2/8/2011: Compares confidential and anonymous feedback. Points out a program with confidential, non-anonymous feedback. Discusses arguments for and against.
• Find Out What it Means to Me! 2/2/2011: Ties respect to value creation. Conclusion: Respect means “a culture in which ‘verbal exchanges lead to the discovery of new and better ways to create value.” [More respect => more knowledge sharing => more value creation]
• The Pleasures of Measures 2/1/2011: Discusses metrics without the luxury of profit-and-loss. Presents summaries of the Kirkpatrick framework, Success Case method, “directionally correct,” constellations, benchmarking, and Program Theory.
• Challenging the Challenge Process: Team Learning 1/20/2011: Review of The Fifth Discipline: The Art & Practice of the Learning Organization. Book advocates “team learning” through “dialogue and discussion.” Differentiates between productive and nonproductive conflict. Productive conflict characterized by lack of defensiveness. Unproductive conflict manifests in one of two ways: lack of any conflict on the surface and rigid polarization. [How can "teams" learn? Food can't be digested in multiple stomachs at the same time, and ideas can not be digested in multiple brains. It seems to me that learning is an individual capability. Perhaps it is valid to consider individuals as learning to work better in teams, but the mental model of "team learning" is counterintuitive to me. Maybe if I read the book it would be more understandable.]
• How Effective is Your Feedback? 1/18/2011: Links to nicecritic.com, a website that allows for anonymous messages for people who are too shy to provide direct negative feedback to people around them. [I think this kind of feedback is more likely to arouse paranoia. Face-to-face is much more effective. The etiquette perspective demands that the dynamics of an interaction favor the comfort of the other person. Giving anonymous feedback is about one's own comfort.] Reviews other mistakes of feedback: too strong so other person shuts down, and not providing enough, which indicates lack of respect (letting the other person fail).
• Challenging the Challenge Process: Order Matters 1/13/2011: Meandering post about the challenge process.
• Internally Providing 1/11/2011: Asks several questions around knowledge processes and associated symptoms for people who serve only internal customers.
• Sea Stories 1/10/2011: Looking for stories about applying MBM.
• Challenging the Challenge Process: Part II 1/6/2011: Covered in the previous Vision notes.
• Get Out Your Pocket Protectors 1/4/2011: Covered in the previous Vision notes.
• Privacy in the Organization1/3/2011: Compares the strengths of organizational transparency vs. opacity. [Quite a relevant post. The "rumor mill" could not operate in a climate of trust and complete transparency. Knowing why a decision, like a promotion or firing, was made could be a source of guidance for employees about expectations. Those who don't like the decision-making process might leave, but that might be a good thing. Benefits of transparency would have to be weighed against matters of personal privacy and compliance.]
• “Failure” 12/27/2010: Wanders around before settling on a question: “How can we lower the social costs of making mistakes in order to create a learning culture?” Interesting comment: “I wonder if we, as humans, tend to chronically overestimate the social costs of making mistakes. A mistake that seems like a big deal to me is usually not at all to anyone else. So is the real question, how do we adjust our perception of what constitutes a true mistake and want constitutes learning to be more in line with how other people perceive us.” [I don't know that we overestimate the social costs. It seems to me that just as often, we underestimate. I suppose it depends which of the two primal emotions dominate. If greed, we underestimate risk and the downside of mistakes. If fear, we overestimate risk and the upside of success.]
• Challenging the Challenge Process: Part I 12/16/2010: Proposes we might spend too much time on the analyzing side of the challenge process and not enough time on the creative side.
• The Success Case Method 12/13/2010: Reviews book The Success Case Method and concludes that this method of measuring the results of training is too expensive and cumbersome for most organizations. 
• Charity Begins at Work 12/9/2010: Meandering post on charity. [Point is unclear to me, but it might have something to do with Cialdini's concept of reciprocity.]
• Theory to Practice Discussion Schedule 11/29/2010: Discussion group notice.
• The Art of MBM: Norman Rockwell 9/29/2010: Meandering piece on freedom of speech and Norman Rockwell.
• MBM Readings 8/3/2010: Covered in the previous Virtue & Talents notes.
• Hunches 5/31/2010: Covered in previous Virtue & Talents notes.
• Coolest Website of the Month 4/2/2010: Links to Wolfram Alpha.
• Science 3/24/2010: Once scientists came together to agree on the definition of a planet, Pluto no longer made the cut. YouTube video explains why. Questions whether this change is an example of Polanyi’s Republic of Science of the Kuhn Cycle.
• Hit the Open Field… The Power of Stories. 10/7/2008: Tell stories instead of blathering through Powerpoints.
• Markets Fail When You Make Them 10/1/2008: Shows humility by admitting previous prediction of having gas in Georgia was wrong because other factors were more important. [While anti-gouging laws were a factor, they were not the only factor. Demonstrates the importance of understanding all of the factors that shape a market. However, stronger anti-gouging laws still would have made the situation worse than it actually was.]
• Why there will be Gas in Georgia 9/12/2008: Georgia has weaker anti-price-gouging laws than neighboring states and is therefore more like to have gas in an emergency. Any shortages would be less severe than in equivalent circumstances nearby.
• Not from the Onion but it belongs there 7/8/2008: There is no futures market for onions since 1958. Since then, prices for onions are more volatile than they were when there was a futures market. Futures markets are valuable knowledge processes.
• The Importance of Vetting Knowledge 7/1/2008: Amusingly, gas pumps in Arizona are sometimes poorly calibrated, and half the time to the detriment of customers. [Reminds me of a Dilbert strip about 40% of sick days being Mondays and Fridays.] Calibrating pumps is $800 and the fine is $300, so owners typically allow the state to inspect their pumps for them, pay the fines, and recalibrate only the pumps found to be faulty. Thus, context makes the 1 out of 11 pumps having problems seem less surprising. [Also surprisingly, the analysis of the post fails to examine the issue from a compliance standpoint. If KII ran gas stations, should they regularly go to the expense of recalibrating their gas pumps to avoid the small fine? Could they stay in business doing so? If not, would this be a reason not to enter the industry? From a reliability standpoint, is this an age-related failure mode? Depending on the accuracy required, couldn't a station owner buy a scientific scale and check his own pumps before the state inspector came or pay someone to do so cheap? But once a pump is found to be not precise enough, isn't it already out of compliance? How could the station owner strive for 10,000% compliance?]
• Do You Have a Bad Job? 5/30/2008: Good and bad jobs are relative, consistent with subjective value.
• Physician, Heal Thyself 9/7/2007: Links to a Slate article on antiquated medical practices. Compares same-day reservations to expensive restaurants to weeks-ahead scheduling of doctor visits due to poor scheduling practices. [Might this apply to our maintenance practices? Do we really need to schedule jobs three weeks after they are identified? The rate at which work is done doesn't change, so what does this delay buy us? This would be an interesting problem to tackle, but there would be many success enablers for same-day maintenance that we do not have in place: good BOMs, good reliability, reasonable "inspection" volume, the right parts in stores or the ability to deliver very quickly, and blocks of time that remain unallocated through the week. Therefore, the premise of this article contradicts parts of our maintenance paradigm of 100% schedule allocation at least a week in advance. This might actually impose disruption costs because disruptions are almost inevitable in an unreliable manufacturing setting anyway.]
• Anchors Away 9/5/2007: Initial opinions are “sticky.” The first piece of information you get on a subject is the most powerful. Cognitive bias is toward early information rather than good information. [Business application is that if you go in a new direction, get it right the first time, because there is no second chance to make a first impression. It is better to spend a little time working through bugs on paper using processes like K-T PPA rather than jumping into an idea and expecting details to work themselves out. If they don't, the project might be irrevocably spoiled for those watching. Recovery could be much more difficult if not impossible.]
• The Five Percent Solution 7/31/2007: Already covered in Vision notes.
• A Challenge Lesson from the Jury Room 6/28/2007: Study finds juries more accurate in assessing guilt than judges. Guesses that juries are better platforms for the challenge process. [The "jury process" has evolved over time. From the time one jury was held prisoner until they agreed to convict William Penn, who was in clear violation of preaching a quaker sermon, and never did, juries have the established right to judge the facts and the law. Jury nullification, which provides precedent to overturn bad or unclear laws, now goes against explicit instructions by judges not to do so. Thus, jurors are misinformed about their rights by courts. Also, the meaning of "jury of one's peers" has been changed over time to become increasingly meaningless as protection for the accused. Finally, some people have more group loyalty that might cause them not to convict the guilty for reasons of similarity or convict the innocent for reasons unrelated to the facts or law. Nonetheless, Thomas Sowell argues in Knowledge and Decisions that juries offer the "best" judgment for the "least" cost and that perfect justice, like anything perfect, costs more than people are willing to pay.]
• The Rule of Law and the Cafeteria 5/3/2007: If the rules apply equally to all, then we will have better rules. [Does it work this way at SRM? Do rule-makers work under the same rules as rule followers? Does anyone get special treatment due to job title or rank the reduces the impact of intrusions?]
• What Can You Learn from a Jar of Spaghetti Sauce? 4/25/2007: Links to Malcolm Gladwell talk from TED (17:33) about spaghetti sauce. [Note: My notes don't do the video justice.] Don’t ask what is the perfect spaghetti sauce. Ask what the most perfect sauces are. Look for clusters in the data. Hence, we have people who like plain, people who like extra chunky, and people who like spicy. Before Prego, there was no extra chunky, but one third of the country wanted it. Prego introduced extra chunky and came to dominate the market. Old assumption: to find out what people wanted, ask them. New assumption: We can’t always explain what we want. Critical point: horizontal segmentation (different products for different people). Cultural authentication is not the one and only way to please customers. Don’t overconcentrate on universals. The difference mean as much as the similarities. Embrace human diversity and offer variety rather than universals.
• Know Thy Knowledge Processes: The Confessions of a Negative Saver 4/24/2007: Even though the author saves, funny data collection and interpretation counts him as a negative saver. Lesson: when you look at measurements, consider what they mean, how the data was collected, and what its limitations are. [The author is obviously way ahead of most people. However, gold does not deteriorate while cigarettes do, so he may want to modify his saving strategy. However, the rate of deterioration is relative. Cigarettes are a perfect medium of exchange in POW situations, but can never be a store of wealth or a medium of large transactions.]
• Who Will Create the Jobs? 4/18/2007: Links to article from the Kansas City Fed about how economic incentives designed to attract large manufacturing firms to a city or state seldom pay off. Recommends fostering a climate conducive to entrepreneurship by people already living in the state.
• The Bracketology of Crowds, Part V: Final Four and Championship Results 4/3/2007: Not much of a point here.
• The Bracketology of Crowds, Part IV: Sweet 16 and Elite 8 Results 3/26/2007: No real point to this one.
• The Bracketology of Crowds, Part III: 2nd Round Report 3/19/2007: No real point to this one.
• The Bracketology of Crowds, Part II: 1st Round Report 3/17/2007: No real point to this one.
• The Bracketology of Crowds 3/16/2007: People with little knowledge make random predictions that cancel each other out. Those who know place the marginal bets that make good market-based predictions.
• Dr. Sneer-Quotes 2/20/2007: Compares fake diplomas and the loss of credibility to the title of “doctor” to consultants who don’t allow challenge process and concludes that titles don’t prove ideas correct. [A better analogy may be to the damage done to MBM when someone speaks the language but misapplies the ideas. Example: using "compliance" to describe anything other than following the laws and government regulations that pertain to the job.]
• Sure you’re smart, but remember others can and should contribute 2/18/2007: Links to an article mostly about decision rights and V&T. Key quote: They should let employees influence decisions and listen when they say the company is getting off course. “If you’re going to make all the decisions, you might as well hire idiots,” says Pfeffer. “They’re cheaper.”
• The Power of Dispersed Knowledge: A Tasty Example 5/12/2005: Points to an article on lobster, including both how the market coordinates individual actions to deliver product, and how government regulations were shaping the industry and causing confusion. Without access to the subscription site and without any personal knowledge of the fishing or lobster industries, the brief synopsis was difficult to follow.

Notes on Other Books

• Personal Knowledge by Michael Polanyi: Explores scientific epistemology and the relationship between language and knowledge. Describes the idea of tacit knowledge: things we know but can not explain (like how to ride a bicycle). Compare tacit knowledge to explicit or articulated knowledge.
• Knowledge and Decisions by Thomas Sowell: As the title implies, explores the ways in which knowledge influences decisions, with emphasis on economic and political decisions. One key idea also ties back to incentives: when there is a feedback loop to the decision maker, more effective decisions are made. Compares scientific truths with consensual truths. Consensual truths might be a bit like Polanyi’s tacit knowledge. Presents classification scheme of ideas by relationship to authentication process:
  

  Kind of Idea	Relationship to Authentication Process
  Theory	Systematically prepared for authentication
  Vision	Not derived from any systematic process
  Illusion	Could not survive any reasonable authentication process
  Myth	Exempts itself from any authentication process
  Fact	Has already passed authentication processes
  Falsehood	Known to have failed, or certain to fail, authentication (includes both mistakes and lies)

• Introduction to Objectivist Epistemology by Ayn Rand: Quite out of fashion for twentieth century thinkers, argues for the existence of objective reality and the capability of reason for understanding it. Focused on the epistemology of philosophy.
• Philosophy as a Way of Life by Pierre Hadot: Emphasizes spiritual exercises as a means to achieve tacit knowledge. Examines Socratic and Hellenistic philosophers (emphasis on Stoics and Epicureans) emphasizing similarities and generally showing some differences to be superficial.

Other Articles with Application in Knowledge

• Are Your Wasting Money on Useless Knowledge Management? 1/20/2011: Offers 2-dimensional mental model of knowledge management: information dispersion (how many know inside and outside firm) vs. codification (explicit vs. tacit). Key image (ignore the acronyms, click for full size):
  
  Generally, value creation opportunities are to codify knowledge that is only held by experts so that non-experts can apply it (moving systems “up”), and to protect movement of systems to the right by protecting trade secrets and intellectual property. [The second opportunity would not apply to social media firms, where the value creation opportunity is to move to the right as far as possible. This incentive strongly contradicts the users who desire privacy.]
• Knowledge Management Below the Radar 1/4/2011: Idea of “pre-emptive” knowledge management, assuming that knowledge will eventually be outdated. Another mental model of knowledge management, this time historical/pre-emptive vs. formal/ad hoc:
  

Team Discussion Questions

• How do you manage all of the information in your life to ensure you have the right information at the right time? To avoid missed opportunities?
• What would our facility look like if we were great at managing and processing knowledge?
• What would be the result for safety/quality/reliability/production if we were great at processing knowledge?
• As a team who practices knowledge sharing, how should we react when we are faced people who are acting like internal competitors? What is in our rational self-interest?
• How much time do we spend in our daily jobs and lives sharing knowledge and seeking out new knowledge for ourselves? How much time should we spend?
• Is it possible to reconcile knowledge sharing and value creation with a “need to know” culture? Should we pursue a need-to-know culture? What does “need” mean in the context of “need to know?”

Related posts:

1. Notes on The Science of Success Chapter 2: The Science of Human Action
2. Notes on The Science of Success Chapter 3: Vision
3. Notes on The Science of Success Chapter 4: Virtues & Talents
4. Weekend Reading: Knowledge Processes, TRIZ, RCA, and People Skills