Notes on The Science of Success Chapter 3: Vision

The Science of SuccessMy notes on chapter 3 of The Science of Success by Charles Koch:

Quotes From the Book

  • “Einstein went on to generalize his vision further and to derive from it a series of new and surprising consequences.”—Michael Polanyi [Wikipedia]
  • “Where there is no vision, the people perish.”—Proverbs 29:18
  • “Columbus cherished a vision of another world, and he discovered it; Copernicus fostered the vision of a multiplicity of worlds and a wider universe, and he revealed it; Buddha beheld the vision of a spiritual world of stainless beauty and perfect peace, and he entered into it.”—James Allen [Wikipedia]

Concepts From the Book

  1. Value Creation. The role role of business in a market economy. More value is created when fewer resources are consumed to create that value. Businesses with unattractive returns will be sold or restructured.
  2. Self-Interest. An enlightened regard for ones self constantly prompts one to assist others. Enforcement of beneficial rules of exchange is prerequisite: right of possession, transference by consent, performance of promises.
  3. Spontaneous Order. Without central planning, order emerges because only then can dispersed knowledge be put to productive use. [This principle implies that the more complex a society, organization, or enterprise, the more ineffective central planning becomes.]
  4. Change. More here on the inevitability of change and creative destruction. Strategies to slow decline are: developing good customer relationships, maintaining strong brand backed by quality and consistency, hard-to-duplicate distribution channels, advantaged long-term sales/supply contracts, developing new applications, protecting IP, and improving quality/cost relationship more than competitors.
  5. Experimental Discovery. Exploring the unknown by feeling it out before jumping in head-on.
  6. Anticipation. Successful product development requires anticipating customer demand. [Surveys are notoriously inaccurate here. Beyond lack of basic needs, consumers often don't know what they want next or are open to persuasion.] Just because customers don’t complain doesn’t mean they are satisfied.
  7. Innovation. Ability to innovate must work against and overcome the rate of decline characteristic to all businesses due to change/creative destruction.
  8. Core Capabilities. Koch industries has six: MBM, Innovation, Operations Excellence, Trading, Transaction Excellence, Public Sector.
  9. Setting Priorities. Critieria Set 1: actions required to stay in business. Critieria Set 2: gap analyses that estimate risk-adjusted present value of opportunities relative to resources consumed.

What is a Vision? Every vision should answer the questions, “What should we be striving to do? and “How do we do it?”  Our vision must guide all our actions.  An effective vision is the genesis of long-term success.

Source Note and Links

  1. Michael Polanyi, Personal Knowledge, University of Chicago Press, Chicago, Ill., 1974, p. 144. [Amazon]
  2. James Allen, As a Man Thinketh, Andres McMell Publishing, Kansas City, Mo., 1999, p. 58. [Amazon]
  3. No external reference.
  4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Liberty Fund Inc., Indianapolis, Ind., 1981, p. 26-27. [Amazon]
  5. Alexis de Toqueville, Democracy in America. Harper and Row Publishers, New York, 1969, p. 526. [Amazon]
  6. Vernon Smith, “Constructivist and Ecological Rationality in Economics,” Nobel Prize lecture, Stockholm, Sweden, December 8, 2002.
  7. Richard Epstein, “Coercion vs. Consent,” Reason, Vol. 35, No. 10, p. 40-50.
  8. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Liberty Fund Inc., Indianapolis, Ind., 1981, p. 456. [Amazon]
  9. F. A. Hayek, The Fatal Conceit. University of Chicago Press, Chicago, Ill., 1989, p. 77. [Amazon]
  10. George Will, “How Houston Slipped on the Oil Patch,” Washington Post, January 17, 1988. [Not available online.]
  11. F. A. Hayek, Individualism and Economic Order, University of Chicago Press, Chicago, Ill., 1980, p. 101. [Amazon]
  12. 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. 149. [Amazon]

MBM Blog (Rooted in Prosperity) Posts in Category “Vision”

  • Objectives 2/21/2011: Describes the SMART (Specific, Measurable, Achievable, Realistic, Time specific) criteria for goals.
  • Finding the Right Passion 2/14/2011: On missionaries versus mercenaries in the organization. Touches on people who are “too passionate” and the issue becomes personal and teamwork is lost.
  • Vision Statement or Vision? 2/9/2011: Points out the difference between vision statements and the vision process. Very insightful comment by David McGinnis: “Be careful about your desire to instantly warm the hearts of others with words. I’m not sure those people who can be instantly warmed are the ones that would survive a properly executed selection process.”
  • The Art of MBM: Cosmos and Taxis 1/21/2011: Strange post about kindergarten-quality art that reflects the principles of spontaneous order and MBM. Didn’t get it at all.
  • (More) Nonprofit Capabilities 1/12/2011: Strange story about programmers who want to work in the economic freedom movement. The lesson I get is that a programmer should know how to solve problems, then apply computer technology, rather than grab the tool (computer technology) and search for a problem to solve with it.
  • Sea Stories: Tales from a High School Entrepreneur 1/10/2011: Cautionary tale of how a promising company died because they took on a job that they didn’t have the V&T for.
  • Get Out Your Pocket Protectors 1/4/2011: Primarily about paradigms in the scientific community. Video describes “normal science” as a conservative activity, not one of experimental discovery. Paradigms are accepted unquestioningly. Clip is from this video:The structure of scientific revolutions
  •  Nonprofit Capabilities 12/29/2010: Describes the difficulty of selecting opportunities in the nonprofit sector.
  • The Goal of Business 11/24/2010: Identifies recruitment and retention of customers as the goal of business, with profit as an important measurement of success in doing so (but not the goal). Compare to Gary North, who describes “firing” some of his most troublesome customers. For more perspective, consider Pareto’s Law, which applies here as well: 80% of your profits come from 20% of your customers.
  • MBM Readings 8/3/2010: Recommended reading within the MBM framework.
  • Hey, Let’s Create a New Language! 6/29/2010: Points out the role of spontaneous order in the development of language and compares it to French attempts at top-down authority.
  • Which manager are you? 9/15/2007: Funny anecdote about changing supervisors
  • The Five Percent Solution 7/31/2007: Describes Scott Adams resistance to negative feedback regarding Dilbert, and his success when he finally listened. Classic quote by the author: “If someone calls you a donkey, laugh at them… but if everyone is calling you a donkey, buy a saddle and start selling rides.” Another good idea: “A colleague once told me that when listening to feedback he assumes 5% of it is true.  This allows him to avoid getting defensive and to start getting curious about which 5% – so he has to consider all of the feedback.  It is good advice that might lead to some rather spectacular breakthroughs in your performance. “
  • Vision 11/9/2005: Describes guided imagery. I’ve seen this concept in many places now.
  • Exploration Place needs your (a) attendance, or (b) tax dollars 8/18/2005: Pokes fun at an arts museum in Wichita that can not support itself and needs “permanent” help from the government. Connection to “Vision” unknown.
  • Leading Change 7/27/2005: Compares the writing of CEO Corrado Passera, who lead two successful corporate transformations, to MBM and finds many similarities.
  • Debt forgiveness: The African Panacea? 6/14/2005: Proposes that debt forgiveness for undeveloped nations doesn’t help. Possible, but ignores the deliberate exploitation of these nations described by Confessions of an Economic Hitman. Also does not mention that western values are not universal and that tinpot dictators will not create value with the loans, but build palaces and posture as mighty leaders, and the future payments be damned.

Common Symptoms and Mental Models Related to Vision

From a paper on problems and potential related MBM mental models:

If you observe these SYMPTOMS The root cause may be in this MBM DIMENSION These MBM MODELS may help create the solution
  • Looking at every deal that comes by
  • Lack of shared direction
  • No clear sense of priorities – activities not focused
  • Fire fighting – reactionary
  • People working on wrong things
  • Status quo thinking
  • Analysis paralysis
  • No forward thinking/growth
  • Unprofitable business decisions
  • Turf-wars
VISION
  • As Simple as Possible, but no Simpler
  • Change
  • Competitive Advantage
  • Competitive Analysis
  • Core Capabilities
  • Creative Destruction
  • Customer Focus
  • Decision Making Framework
  • Economic vs. Political Profit
  • Experimental Discovery
  • Fatal Conceit
  • Form vs. Substance
  • Human Action
  • Innovation
  • Integration of Theory and Practice
  • Mental Models
  • Operations Excellence
  • Origination
  • Price Seekers vs. Price Takers
  • Prioritization
  • Public Sector
  • Science of Liberty
  • Spontaneous Order
  • Structure of Production
  • Trading
  • Time Preference
  • Value Chain Analysis
  • Value Creation
  • Vision Development Process
  • Waste Elimination
  • Whole vs. the Parts

Establishing the Right Climate

Another clip demonstrating that the absence of Vision and the presence of all other MBM elements causes confusion among employees (click for full size image):

Establishing the Right Climate: Vision Deficiency

Vision within the MBM Framework

MBM Results Tools
Vision Opportunities that leverage our capabilities are identified and captured to generate superior earnings. Assets valued more by others are sold. Waste is eliminated.
  • Vision statement
  • Competitive analysis & strategy
  • Value chain analysis
  • Decision making framework

Applying MBM as a Supervisor: Vision

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?

“Determining where and how the organization can create the greatest long-term value.”

You understand the value chain and the greatest opportunities to create value now and in the future. Your direct reports understand how they create value and appropriately prioritize their work.
  • What do your customers value? What alternatives are available to them?
  • How are the market and your relative position changing?
  • How do your strategies and actions link to the greatest opportunities
  • to create value?
  • How is your team doing compared to competitors?
  • What capability gaps exist in your team?
  • What are you doing to ensure that your direct reports can articulate
  • how they create value?
  • What experiments are currently underway in your group?
  • How are you eliminating waste?

Additional Thoughts on “Change” and Change Agency

recent HBR blog elaborates on the failure of Time, Inc.’s CEO and offers the following lessons on how to drive change, some of it counterintuitive. The main points are here for the purpose of challenge and to stimulate discussion:

  1. Avoid the term “change agent.” … As one Time Inc. veteran complained to me, “it’s not as though all of us had just been sitting on our thumbs.” That is a classic, and predictable, response.
  2. Gauge the internal hunger for change. … It’s not impossible to take a comfortable organization and get it excited about a quest, but it definitely affects how you should frame the mission.
  3. Arrive without a vision. … “Yes, leaders must ask, “What’s new? What’s next? What’s better?” — but they can’t present answers that are only theirs. Constituents want visions of the future that reflect their own aspirations.”
  4. Go directly to “us”. … Ask yourself honestly whose side you are on — and if it’s not your organization’s, don’t blame them for hating you.
  5. Act as catalyst not cattle prod.
  6. Surround yourself with new friends. … But nothing — nothing — is more alienating to your inherited team than to suddenly be on the outside of the inner circle looking in.

Notes on Coercion vs. Consent

This Reason Magazine article was referenced in the self-interest section by a comment on cooperation and aggression as the two ways of dealing with strangers. Richard Epstein was the keynote speaker, and Reason published 3 responses along with final comments by Epstein.

  • Self-Interest and Scarce Resources. ”[No] individual could survive in a world of scarce resources without a strong measure of self-interest, one that includes at the very least his own family and close associates. That self-interest can manifest itself in one of two ways when dealing with strangers; through either aggression or cooperation.” (The second sentence was quoted by Koch.)
  • Win-Win. ”The overall social consequences of these two approaches are massively different. With force, one person wins while the other person loses. With cooperation, both persons win.” Caveat: cooperation requires that both parties agree to cooperate. If one party fails to act in good faith, the win-win of cooperation is lost. So, as Epstein later acknowledges, the decision to cooperate or aggress is not so simple as cooperate=good: “The libertarian prohibition against force does not take into account the possibility that successful cooperation in key situations can be thwarted by individual holdouts.”
  • Controlled Coercion. ”In sum, the central challenge to any political theory is to devise a set of institutions that first allows and then controls the use of coercion against individual citizens for their own benefit.” Seriously??? This guy is considered a libertarian? Who decides when and where to coerce individuals for their own benefit? Who watches the watchmen? George Washington said that government is not reason or eloquence, it IS force.
  • State Role in Condemnation and Taxation. ”We arrive at the same results even after we recognize the legitimate state role in condemnation and taxation. Unregulated labor and product markets present no coordination and no monopoly problem. The basic libertarian position in favor of competitive markets is thus strengthened by allowing in principle a broader range of state justifications…” Sure, we must take away freedom in order to let people keep it. /sarcasm
  • 1984 All Over Again, Compliments of Epstein. ”Our limited use of coercion is done with the paradoxical intention of expanding the scope of individual freedom.” This is ridiculous double-talk and sophistry. War is peace. Freedom is slavery. Ignorance is strength. Doubleplusungood.

Conclusion: The statement that one can deal with others through cooperation or aggression is fine, but the rest of this article is garbage and my opinion of Reason Magazine has declined for having had Epstein as a keynote speaker. History has yet to identify a control mechanism for having but limiting coercion. As Epstein is a law professor, he must know better. He is being circuitous and deceptive in his arguments and deserves to be ignored as the court philosopher he is. The reviews of his remarks that follow certainly point this out as well as I could.

More Sophistry. Epstein writes, “Of the two basic points I made in my initial remarks, one has escaped serious criticism: that the traditional natural law justifications for freedom are not sufficient to sustain the case for individual liberty or for limited government.” There is no reference to natural law anywhere in his original comments. This is make-believe. He also becomes insulting toward his critics and insinuates that they use illegal drugs. Typical hysteric.

Notes on Constructivist and Ecological Rationality in Economics

This Nobel acceptance speech was referenced in the section on self-interest attributing beneficial rules of exchange to “the right of possession, its transference by consent, and the performance of promises.” Other notes from the speech reprint:

  • Caring Intervention applied to Wider Society is as much of an error as Competitive Market applied to Family or Intimate Group.
  • Constructivist Rationality refers to rationalism (i.e. Descartes), scientific truths (i.e. Sowell), or analytic truths (Peikoff).
  • Ecological Rationality refers to empiricism (i.e. Locke), consensual truths (i.e. Sowell), or synthetic truths (Peikoff).
  • Complexity can come from recursive application of simple rules, for example, medieval cities that appear intricately planned, but had no central plan dictating their layout (see also: Stephen Wolfram’s work on cellular automata)
  • “A recurrent theme in economics is that the values to which people respond are not confined to those one would expect based on the narrowly defined canons of rationality.”
  • “[To] do good for others does not require deliberate action to further the perceived interest of others.”
  • Cognitive Costs. Attention is scarce, like any resource in existence. Therefore, “no one can consistently apply rational logical principles to everything they do; if there are cognitive costs in every application then the effort cost will often exceed the benefits.” Unconscious, autonomic systems are an economizing function of the brain. Without them, “no one could get through the day under the burden of the self-conscious monitoring and planning of every trivial action in detail.” Also, according to Hayek, “If we stopped doing everything for which we do not know the reason, or for which we cannot provide a justification… we would probably soon be dead.” Reason: “Such mental processes are enormously opportunity-costly and implicitly our brain knows, if our conscious mind does not know, tht we must avoid incurring opportunity costs that are not worth the benefit.”
  • The Fatal Conceit. ”The idea that the ability to acquire skills stems from reason.” (Hayek)
  • “Most of our operating knowledge we do not remember learning.”
  • “People follow rules without being able to articulate them, but they can be discovered.”
  • “Within economics there is essentially only one model to be adapted to every application: optimization subject to constraints due to resource limitations, institutional rules, and/or the behavior of others, as in Cournot-Nash equilibria.”
  • “Events of small probability happen at about the expected frequency, and since there are many such events the unexpected it not that unlikely.”
  • Regulatory Thought Process. ”The regulatory thought process is as follows: the function of price is to provide revenue, and the function of revenue is to cover cost. But this is the antithesis of the market function of price.”
  • Weakness of Exclusive Constructivism (Rationalism/Analysis). ”Constructivism alone, without competitive trial-and-error ecological experimentation with retail delivery technologies and consumer preferences, cannot design mechanisms that process all the distributed knowledge that individuals either possess or will discover.” In other words, deductive reasoning struggles with the mass complexity and constant change of the marketplace.
  • “Experiments have established that constructivist inefficiency is often alleviated by one of several ecologically rational response mechanisms: competition among sellers for reputations, quality (brand) signaling, product warranties, and the aggregation of private asymmetric information into public price patterns that self-correct the alleged problems.”
  • People Usually Can’t Say What They Want. ”Sometimes what people actually do completely contradicts what they say, and sometimes you cannot find out by asking because the agents themselves do not know what they will do or are doing.” Example: women say they want a gentleman to respect them (i.e. a beta male), but especially in a prosperous society reward the behavior of alpha male cads and bad boys. To really figure out “what women want” is to look at their actual behavior rather than what, for reasons of social acceptability or self-delusion, they say they want.
  • Fairness. ”The descriptor ‘fairness’ has so many meanings in different contexts that I believe it is best to avoid the term entirely in experimental science except where it is explicitly modeled and the model tested in environments where subjects make decisions on the basis of the defining parameters of the model; then the descriptor ‘fair’ and its ambiguity can be avoided altogether… Of course it is appropriate to use the descriptor if the purpose is to see how its instructional use might have an emotive affect on behavior.” The July 1st Economist also had a good article on the fuzziness and ambiguity of fairness.
  • Perception and Memory. ”There is a constant dynamic interaction between perception and memory… [In] the internal order of the mind, perception is self-organized: abstract function combines with experience to determine network connectivity and expansion.” Meaning, based on memory and experience, the mind chooses which details to emphasize or de-emphasize in perceptions of current situations. “Block or distort sensory input, and function is impaired; impair function by brain lesions or inherited deficiency, and development is compromised.”
  • Biology and Culture. ”In this view, mind is the unconscious product of coevolution between the biological and cultural development of our brains that distinguished us from other primates. It is what made reason possible. Our folk predilection for believing in the ‘blank slate’ concept of mind makes plain that this interpretation of mind is just as consonant with our direct experience as was once the idea that the earth is flat, or that witches had to be destroyed. In each case, to escape from the folk perception requires the falsifying indirect evidence, based on reason, to become part of our ‘felt’ experience. Constructivist rationality then becomes ecologically rational.”

The paper concludes with a series of working hypotheses for continued examination, among them:

  1. Spontaneous Order. ”Rules emerge as a spontaneous order—they are found—not deliberately designed by one calculating mind.” This is an important clarification: rules exist within both spontaneous order and central planning, but the rules of spontaneous order evolve from social feedback loops while the rules of authority are decreed based on the calculations of the rule-maker. Enforcement methods would also differ: dictated rules (laws) are enforced by the courts, police, and/or military. Under spontaneous order, reputation, ostracization, and lost opportunity for trade become key. While this may sound minor in today’s anonymous society, within a small city or tribe, the results of such sanctions could be severe, and unless one is completely self-sufficient, just as deadly as a stoning or firing squad.
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