Description
On behalf of the American Quarter Horse Foundation, we would like to thank you for giving us the opportunity to enjoy the Legends of the American Quarter Horse Trail Ride at the Matador Ranch.
Discovery
October 2013
THE QUARTERLY NEWSLETTER OF KOCH INDUSTRIES
Growth and innovation at Georgia-Pacific
All across Koch Industries, two words
are often repeated these days: growth
and innovation.
Charles Koch made a point of mentioning them in his Founder’s Day video and
Groundbreaking speech, and both are
emphasized in Koch Industries’ updated
Vision (see page 3).
Three recent acquisitions by GeorgiaPacific reflect the importance of growth
and innovation in GP’s plans for the future.
million tons of recycled fiber to custom- lose mill and the largest airlaid nonwovens machine.
ers last year — most of which ended
up in tissues, towels, napkins and boxes. The three Buckeye facilities that produce specialty fibers have become part
As of July 26, the company is now
involved in plastics recycling processing, of GP Cellulose.
thanks to the acquisition of a Tennessee The two specialty nonwovens facilities,
facility from The Highlands Group, Inc. as well as the nonwovens sales, busiMarc Forman, president of GP Harmon ness and R&D teams from Buckeye,
are combining with GP’s existing airlaid
Recycling, says this acquisition will
group to create a new nonwovens busidramatically expand the company’s
ness as part of
involvement in nonConsumer
fiber recyclables.
“Buckeye Technologies will GP’s
Temple-Inland
Products
Group.
“Now we can take
strengthen
our
innovation
On July 19, GP completed its muchCharles Koch frethe various polymers
anticipated acquisition of Temple-Inland used in milk jugs,
quently mentions
efforts.” — Charles Koch
assets from International Paper, which
innovation as an
detergent bottles or
had purchased the company in 2012.
bottle caps and separate them efficiently important reason for this acquisition.
The transaction included 15 sites in
so they can be converted into high-grade “Companies like Buckeye will strengtheight states and involved more than
raw materials.”
en our innovation efforts. That’s terrific,
1,800 employees — working mostly
because that’s the future. We can’t sucBuckeye Technologies
in the southeastern United States.
ceed for long if we don’t innovate.”
GP’s
latest
acquisition,
in
August,
was
Temple-Inland is known for making
Putting it all together
Buckeye Technologies, based in Memhigh-quality building materials, such
phis,
Tenn.
It
produces
specialty
fibers
Jim Hannan, GP’s president and CEO,
as particleboard, gypsum products
and
nonwoven
materials.
sees these businesses as important parts
and lumber.
of a much bigger picture.
Buckeye is the only company in the
“This is a long-term investment that
world capable of making specialty cellu- “It’s a wonderful thing to grow and
fits in very well with our existing operalose products (such as the fibers used in succeed,” Hannan said, “and these three
tions,” said Mark Luetters, GP’s execuLCD screens and oil filters) from both
acquisitions — made in a span of just
tive vice president – building products.
wood and cotton cellulose.
six weeks — will help us do both.
“It’s also a strong indicator of our longThe company’s nonwoven materials are “But the real challenge is to make sure
term confidence that the building products
used in a variety of hygiene and personal we keep innovating and creating even
market will rebound from the recessionary
care products, cleaning supplies, baby
more value for our customers.
lows we have seen in recent years.”
wipes, towels and tissues.
“If we’re not helping people improve
The Highlands Group
their lives and making the world a
Five manufacturing facilities — four in
better place,” Hannan said, “we’re
the U.S. and one in Germany — were
GP Harmon Recycling is one of the
largest recyclable commodities traders in part of the transaction. Buckeye’s assets not doing our job.”
include the world’s largest cotton celluwww.gp.com
the world. It supplied more than seven
this issue…
Thank you, Koch
Nylon’s 75th anniversary
pg 2
pg 9
Koch Industries’ new Vision statement
Perspective: Affordable Care Act
pg 3
pg 10
Postal Pipeline
Thank you so much for your offer to
allow me to bring our Youth Leadership
Conference group to the INVISTA Victoria Wetlands. You have made a lasting
impression on these students.
The Wetlands are blessed to have such a
great leader as Jon Snyder. He not only
has such an interest in our environment,
but in teaching our young people about
the environment in which they live.
Oct. 4 – David H. Koch attended the dedication of
a 14,000-square-foot childcare center at MIT named
in his honor. He was lead donor for the project,
contributing $20 million.
Thank you for supporting the History
Buffs of Southeast High School.
Thank you for including me on the mailing list for Discovery, which I am happy
to receive.
The news of Koch’s new building
brought back memories of when I was
interviewed in December 1948 for a
position in the administrative offices of
Wood River Oil & Refining Co., Inc.
There were about 50 employees at
that time in the corporate offices —
a far cry from the 3,000 employees
in Wichita today.
It was also a great honor to have your
plant manager, Paul Hughes, visit with
our students. Having managers tell stories I am privileged and proud to have parof how they got started in their profesticipated in the growth of this phenomsion is always interesting to the students. enal corporation for 36 years, retiring
Lanell Mantey in 1985.
Executive director
Victoria Business and Education Coalition
Victoria, Texas
Kenneth D. Rupe
Wichita, Kan.
The field trip to the Eisenhower Presidential Library in Abilene was a true highlight
of the year for many students. Our guest
speakers were outstanding.
We hope you continue to support history
clubs around the area.
Kathy Saar
U.S. history teacher
Wichita Southeast High School
Wichita, Kan.
On behalf of the American Quarter
Horse Foundation, we would like to
thank you for giving us the opportunity
to enjoy the Legends of the American
Quarter Horse Trail Ride at the Matador Ranch.
Our time at the ranch couldn’t have
been more perfect, but none of it would
have been as enjoyable (or even possible) without the incredible staff of
the Matador.
We realize it was a big step to open the
ranch to this event as it required a lot
of planning and evaluation to coordi-
nate our activities and select the proper
horses for our guests.
We could not be more pleased with
how everyone was matched with their
mounts and received many compliments from our guests on the quality
of the horses provided.
Your team illustrated exactly why the
Matador Ranch was selected as the 2013
Best of the Remuda Award recipient.
Chris Sitz
Senior director
American Quarter Horse Foundation
Amarillo, Texas
This hand-drawn card from several youngsters
thanked Koch Industries for its support of the 2013
Water Wise program (a series of water safety
classes at Wichita’s Downtown YMCA).
To “like” and follow Koch companies and leaders –
including Georgia-Pacific, INVISTA, Flint Hills Resources,
Matador Ranch, Koch Pipeline and Charles and David
Koch – visit Koch Industries’ Facebook and Twitter pages.
Letters and other submissions become the property of Koch
Industries, Inc., and may be reproduced in whole or in part,
including your name, for any purpose and in any manner.
Letters may be edited for length or clarity.
Discovery
Editorial board
Melissa Cohlmia
Philip Ellender
Rich Fink
Jeff Gentry
Dale Gibbens
Greg Guest
Charles Koch
Jim Mahoney
Dave Robertson
2
October 2013 | Volume 19 | Number 4
Questions? Comments?
Contact: Rod Learned
316.828.6136
[email protected]
Publication design
Caleb Swank
Amber Vogts
Koch Creative Group
www.kochind.com
© 2013 Koch Industries, Inc. Koch is an EOE. M/F/D/V
UNDERSTANDING AND APPLYING
Koch Industries’
Vision
Included in this issue of Discovery is
your copy of our new Vision statement.
We have revised KII’s Vision to more
accurately reflect our actual practice and
what is needed to continue our success
and growth in the future.
Our Vision serves a dual role: as a
North Star and as a guide to keep us
effectively moving in that direction.
In its role as a North Star, the Vision is
a compass to keep us going in the right
direction, rather than a destination we
plan to reach. As such it is constant —
it never changes.
It embodies fundamental principles,
such as the role of business in society
and our Guiding Principles. This part
of our articulation of the Vision only
by Charles Koch
changes as we improve our understanding of these principles.
In its role as a guide, the Vision should
continually change as the business
environment and our capabilities
change, and as we learn what we need
to do to more effectively make progress
on the journey.
It is always difficult to develop an effective Vision for KII because, given the
breadth and diversity of its businesses,
its Vision must, of necessity, be very
broad. At the same time, it must be
specific enough to guide our actions and
the respective visions of our businesses
and capabilities.
To help accomplish these twin objectives, the Koch Industries Vision now
consists of four parts: our view of the
role of business, what we need to do to
fulfill that role and succeed, the specific
capabilities we need to develop and
apply, and the further benefits to society
when we execute our Vision.
I will try to explain each of these
parts in enough detail to make them
useful to each business and capability
as they create their own visions, and
to every employee, since it is important that we all understand our
philosophy and direction.
“It is important that we all
understand our philosophy
and direction.”
Charles Koch is chairman and CEO of Koch Industries, Inc.
He has served in these roles for 46 years.
I realize that our new Vision is
much longer and more complex than what we have had
in the past; however, the
same is also true of Koch
Industries. It is bigger and
more complex.
Studying this Vision so that
you understand it and can
help advance it will be well
worth your time. If you have questions
or concerns, be sure to discuss them
with one of your leaders.
3
The role of business
This gale is created by competitors con- MBM®, ensure we have sufficient talent
to capture all attractive opportunities,
stantly innovating and improving in
The first paragraph describes what we
every way imaginable, forcing less effective remain private so we can focus on the
believe the role of business to be and,
products, methods and companies out of long term, generate the opportunities
therefore, what a business needs to do
the market. To succeed long term, a busi- to enable us to reinvest 90 percent
to be successful. That role starts with
of our earnings at
ness must innovate
creating products and services that
“We should be able to continue superior returns and,
and improve at least
provide superior value for customers.
last, but certainly
as fast as its most
doubling our earnings, on
For a given value provided
not least, ensure that
effective competitor.
average, every six years.”
to customers, the amount of reeveryone, everywhere
sources used needs to be minimized,
fully applies MBM
Doubling our earnings
including capital, raw materials,
Guiding Principles 1 and 2 – Integrity
labor and other inputs.
As mentioned in the second paragraph
and Compliance.
of the Vision, if we can continually
In doing so, the business is making the
Achieving these goals as we continue
greatest contribution to society by maxi- satisfy these requirements, we should be to grow necessitates continued imable to maintain our historical growth
mizing the difference between value
provement of our return on capital
rate of at least 12 percent, which, when
delivered and value of resources conconsumed and an increased ability
sumed. Thus, a business’s profits, created compounded, allows us to double our
to generate and capture sufficiently
by the economic means, are a measure of earnings, on average, every six years.
profitable investment opportunities.
The “on average” modifier is critically
the value it is creating in society.
The latter requires that our horizons
important, because if we began to
increase with our size. We will need
This accomplishment, while necessary, is
attempt to smooth out earnings (as
innovations that move the needle,
not sufficient for long-term business sucsome public companies feel compelled
investments that make a bigger contricess. Each business must take to heart
to do to defend their stock price) our
bution and new platforms for growth.
what Joseph Schumpeter called “the
future will not be as bright.
Achieving these objectives requires that
essential fact about capitalism,” which is
we more fully develop and apply our six
Maintaining this growth rate requires
“its role in the perennial gale
core MBM-based capabilities.
that we more fully and broadly apply
of creative destruction.”
“Achieving these objectives requires that
we more fully develop and apply our six
core MBM-based capabilities.”
2007
4
2008
Commercial excellence
Innovation
Operations excellence
Trading mentality
Talent
Public sector
To the extent we can make our Vision a reality, it would dramatically improve lives across all segments of society — especially for the disadvantaged.
Commercial excellence
Vision Development: Assess the business’s core capabilities and determine
the opportunities for which they can
create the most value in an environment of creative destruction. Improve
existing capabilities and add new ones
to enhance the company’s ability to
create value.
Principled Entrepreneurship™: Maximize long-term profitability by creating superior value for customers while
consuming fewer resources and always
acting lawfully and with integrity.
Customer Focus: Become the preferred
supplier by doing a superior job of understanding our customers and anticipating and satisfying what they value.
Doing so means we must be responsive
and the terms of our transactions must
be considered reasonable.
Marketing: Profitably orchestrate
communication and engagements
with customers along the path to purchase, with a focus on positioning,
product, price, placement and
the purchase experience.
Brand Building: Provide a unique
and difficult-to-imitate position in the
hearts and minds of customers by using
insights, analytics, marketing, packag-
ing, design, relationships and public
relations to anticipate and satisfy what
they value.
Origination and Knowledge Networks:
Build formal and informal global relationships to learn relevant information
before competitors and get a preferred
look at opportunities for which we can
create superior value.
Opportunity Generation, Evaluation and
Capture: Create an organization that
will do a superior job of internally and
externally generating, evaluating and
commercializing or acquiring the most
profitable opportunities.
Decision Making Framework: A process
for improving opportunity capture by
using the best knowledge, exploring
the full range of outcomes, identifying
ways to mitigate risk and discovering
the best alternative. The process should
be made as simple as possible considering the size and complexity of the decision, given that the goal is directional
accuracy, not precision.
Logistics: Connect our assets to
markets and ensure reliable service to
customers by delivering transportation
solutions to supply goods and services
in a timely and cost-effective manner
while providing a competitive advantage to our businesses.
Optimization: Optimize the use of
all Koch resources, including assets and
talent, across and within businesses,
plants and groups, using tools such
as marginal analysis, opportunity cost
and supply chain management.
Prioritization: Prioritize to maximize
Koch Industries’ long-term value by
first doing what is required to stay in
business, then proceeding in order
of the risk-adjusted present value of
the alternatives.
Operations excellence
EHS Excellence: In addition to complying with the applicable laws and regulations, achieve a level of safety and environmental performance that provides
superior protection and value, placing
the highest priority on risks that could
cause the most serious harm to people,
the environment or the business.
Permitting: By understanding the
objectives of the relevant regulators and
potential opponents and supporters,
develop permit application processes
that will provide the greatest chance of
success in the least time at the least cost.
Cost, Energy and Capital Effectiveness:
Eliminate costs that don’t create sufficient value, reduce energy usage wherever economical and apply innovative
5
approaches to capital expenditures to
maximize value creation.
Reliability: Build, operate and maintain our assets and processes so they
can consistently and predictably maximize long-term value.
Benchmarking: Identify, understand
and adopt relevant best practices,
including the best in Koch, in the
industry and in the world.
Ownership-Based Work Systems:
Build ownership for value creation at
the operating level and all other areas
by clarifying
responsibilities and accountabilities,
enabling team
members to
expand their
contributions
to match their
individual
capabilities.
Build Talent Acquisition Networks:
Build formal and informal relationships
globally with organizations and individuals that prove effective at identifying
and recruiting the diverse talent needed.
Trade Skills Recruiting: Overcome
the shortage of certain skilled trades by
partnering with educators, proactively
recruiting globally, and attracting and
training less-experienced people with
the appropriate aptitude.
Select First on Values: Hire, advance,
reward and retain people with the
employee’s comparative advantages. To
the extent a role requires an employee to
apply a disadvantaged aptitude, the role
should be modified.
Accelerating Employees’ Learning and
Practice of MBM: Ensure employees
understand and are applying MBM
to get results.
ABC Process: Apply the ABC process
to improve commitment to the Guiding
Principles and the level of talent. This
includes ensuring that the role of each
employee fits that employee’s comparative advantages.
BusinessDetermine the talent of all types that will be required long term to maintain our current operations and rapid growth.
Focused
Prioritization and Improvement:
talent necessary to produce results,
Develop a prioritized approach to
Innovation
but only those who embrace our
sustainable improvement by tying
MBM Guiding Principles. Ensure
Leader Commitment: Effective innoopportunities to the business vision
that
our
policies,
practices,
communivation requires leaders to define the
while reducing complexity in order to
cations and compensation reinforce
vision, set priorities on the highestrecognize and capture opportunities
these Principles.
value opportunities, apply the right
faster than the competition.
mix of talent and resources, optimize
Talent Development and Optimization
Quality Management: Provide
risk and establish a culture that creates
for KII: Leaders at every level must
the planning, control, assurance
transformative value.
ensure that
and improvement in quality necesemploysary to deliver products or services
“Given Koch’s growth and
Identifying Unmet Needs: The
ees
are
that consistently meet or exceed
size, our emphasis should be successful development of new
developed
customers’ expectations.
products, services and business
on disruptive innovations.”
and given
models is facilitated by identifyopportuniing unmet needs of customers.
Talent
ties (not hoarded) throughout Koch in
Since customers are not yet aware of
which they could create the most value.
Anticipate Talent Needs: Determine the
undiscovered alternatives, this is best
talent of all types that will be required
accomplished indirectly by observation
Roles and Development by Comparalong term to maintain our current opand research to understand their subjective Advantage: Roles and developerations and rapid growth.
tive values and dissatisfactions.
ment plans should fit and enhance an
6
Disruptive Advances: Given Koch’s
growth and size, appropriate emphasis
should be on innovations that disrupt
the status quo. This requires an expansion of our Vision regarding talent,
external networks, capability development, resource commitment, risk taking
and time horizon.
Republic of Science: Innovation is
enhanced by adapting how the best
scientific communities share knowledge
and focus on real value creation. This
includes the freedom to determine how
to create that value, taking into account
what is already known.
Experimental Discovery: Innovation
is derived from numerous welldesigned experiments to determine which hypotheses will
(and which won’t) be successful.
The investment in each experiment should reflect the risk, the
potential return and the value of
the knowledge gained.
Internal Knowledge Sharing:
Recognize that discoveries best
occur in a system of shared
knowledge and mutually adjusting individual initiatives. Thus,
we need to proactively share
knowledge throughout Koch
through spontaneous order.
Commercialization: Since the value of
an innovation is, in large part, determined by the cost and time to get it
implemented and commercialized, we
must not only have world-class idea generation, but be world-class in execution,
integration and commercialization.
Intellectual Property Strategy: In order
to maximize the NPV generated over
the lifetime of an innovation, we must
vide significant gains and reduce losses.
Since the future is always unknown,
evaluate a range of outcomes.
Knowledge Systems: Build superior
knowledge sources globally for relevant developments through trading,
knowledge of customers, suppliers
and their operations, understanding
logistics and political factors, and
having knowledge networks.
Strategy Development: Understand
key drivers of price movements, such as
supply/demand, money flow, the economics and subjective values of market
participants, demographic, policy and
regulatory trends, and logistic economics and constraints. Only make bets
Innovation is derived from numerous well-designed experiments to determine which hypotheses will be successful.
External Knowledge Networks:
Build formal and informal networks
to be aware of relevant developments taking place everywhere in the
world. Our networks should include
customers, suppliers, specialists,
universities, technology companies,
entrepreneurs, investment groups and
business advisors.
Joint Programs – Internal and External:
Apply the division of labor by comparative advantage to innovation by jointly
working on opportunities with groups
that have the best complementary capabilities. These groups may be within or
independent of Koch.
7
Technology Adoption: Be an early
experimenter and timely adopter of
superior new technology that increases
value for customers, reduces costs, reconfigures the value chain or improves
knowledge. This requires that we have
good knowledge networks.
not only optimize the revenue, we must
optimize our intellectual property position through patents, copyright, secrecy,
licensing and contracts.
where we have (at a minimum) competitive knowledge systems and other
capabilities. Ensure rapid and nimble
response to events and information.
Appropriate Risk Taking and
Incentives: Ensure the level of innovation risk is optimized for the magnitude
of each opportunity by providing the
right measures, decision rights, culture
and incentives.
Risk-taking Optimization: Absorb risk
when we have the capability to manage
it while eliminating unprofitable risk
mitigation and structuring deals to
optimize returns and avoid catastrophic
risks. Employees need to adopt the risk
profile of the company, not their own.
Trading mentality
Optionality: Since the future is unknown, always attempt to get profitable
options built into contracts and facilities. Be aware, though, of all the costs
of getting options, such as trade-offs for
Point of View: See and act on relevant
long- and short-term trends before competitors, which, if correct, will both pro-
other terms, the relationship with the
counterparty or in the capital or operating cost of the facility. Be careful not to
undervalue the cost of giving options.
Asset Ownership Optimization: We
should only own assets or businesses
that are worth more to us than somebody else, considering our point of
view, the capabilities they provide and
whether they are a platform for growth.
Frequently update hold values.
Industry Opportunity Perspective: For
any service, trade or technique we perform
today or discover that creates value internally at Koch, explore whether the potential, considering opportunity cost, is large
enough to justify offering it externally.
integrity. Protect the company, its
employees and shareholders by ensuring 10,000 percent compliance and
providing effective legal representation.
Help further the goals of our businesses in a manner that builds trust and
confidence — both with those we deal
with in adversarial settings and those in
commercial transactions, making us the
preferred counterparty.
Communications: Provide internal
and external communications that
accurately depict our performance
and record, and build an environment
that welcomes the ideas and values
we advocate, while effectively countering misrepresentations.
Community and Government
Relations: Establish productive relationships with relevant
officials at all levels of government who have jurisdiction
over our facilities and businesses.
Understand and be responsive
to the concerns of our neighbors
and leaders in our communities,
which will build trust.
Branding: Clearly and accurately define who we are, what
we stand for and why we do
what we do. Ensure that our
We need to proactively share knowledge throughout Koch.
brand and messages accurately
represent our philosophy and resonate
Waste Elimination: Every activity
with relevant audiences.
should be constantly analyzed (using
benchmarking and other measures)
Network Building: Build networks
to identify and eliminate waste, which
with like-minded people and organiis always increasing as businesses and
zations with whom we can work in a
methods change. Examples include
mutually supportive manner to encourobsolete or unprofitable plants, units,
age market-based policies that improve
products and practices, unprofitable
people’s lives.
information gathering, needless studies and decision-making processes, or
Advocating Policies that Enhance
value-adding activities with a higher
Principled Entrepreneurship™:
opportunity cost.
Educate the public, organizations and
policymakers as to the philosophies and
policies that we believe best contribute
Public sector
to societal well-being. Advocate these
Legal: Ensure that the company’s afpolicies while opposing those we befairs are conducted lawfully and with
lieve to be detrimental.
Making this Vision a reality should provide significant benefits
for our employees, communities and society as a whole.
Results
To the extent we are successful in
making this Vision a reality, it should
provide significant benefits, not only
to Koch Industries, but to our employees and communities, and society as a
whole. If we can demonstrate that our
approach to business and life benefits
those who apply it and those they touch,
it would become much more universally
accepted and applied.
The more companies focus on profiting
only by the economic means, the more
effective they will become at satisfying consumer needs. This, in turn, will
make them more productive and able
to provide more and better jobs, all
while improving workplace safety and
the environment.
Through ours and other efforts to
encourage market-based policies that
improve human well-being, we hope to
enable more companies to more fully
practice Principled Entrepreneurship.
This would not only make businesses
more productive, but, by removing the
roadblocks of destructive regulations
and taxes, open opportunities for business start-ups and more and better jobs.
These changes would dramatically
improve lives across all segments of society, especially for the disadvantaged.
As opportunities open for people to
develop and improve, depressed communities would move from a culture of
poverty, dependency, hopelessness and
corruption to one of prosperity, opportunity, self-help and self-worth.
This, in turn, would move us toward
what Tocqueville described as the best
in America: civility, voluntary cooperation, self-help and mutual aid.
8
Looking Back
Noteworthy
Too True
Charles Koch credits the transformative
power of Market-Based Management®
for the remarkable success and growth
of Koch Industries.
“But past performance does not guarantee
future success,” says Koch. “To continue
to achieve superior results, we must continually improve our understanding and
application of MBM®.”
To help achieve that goal, the MBM
team has produced a series of videos that
provide detailed case studies involving
several Koch businesses.
The first video in the series tells how
applying MBM enabled Georgia-Pacific’s
Green Bay Broadway Mill in Wisconsin
to improve safety, productivity, product
quality and leadership.
MBM also helped transform the future
of GP’s North American Consumer
Products business, which had been
losing market share. A second video
documents that turnaround.
The newest case study in this series details
how a team from INVISTA’s Victoria site
studied MBM in action at FHR’s Pine
Bend Refinery and used shared knowledge to improve its utilities operations
back in Texas.
All three are available on DVD, or athttp://mbm-prod.khc.local/default.aspx.
“In order to be successful it is
necessary that you want to be.
You must have the will to win.”
– Fred C. Koch
On Sept. 20, 1938, U.S. Patent number
2,130,948 was issued for one of the
great innovations of the 20th century:
nylon fiber.
Six months later in Seaford, Del., construction began on the first commercial
nylon plant. When it opened in December 1939, that plant established Seaford
as the “Nylon Capital of the World.”
The first commercial use of nylon was
for bristles in toothbrushes, but it
didn’t become a household word until
it replaced silk as the fiber of choice for
women’s hosiery.
When nylon stockings were introduced
to the commercial market in 1940, they
were so popular that mob scenes sometimes developed at retail stores.
Nylon soon became the standard for
fishing line, surgical thread and tire
cord. By the time the U.S. entered
World War II, nylon 6,6 was also used
in parachutes, tent canvas and ropes.
The development of nylon resin, which
could be molded into solid parts, led to
its use in thousands of products, from
automobiles to adding machines.
INVISTA, which became a Koch
company in 2004, has spent hundreds
of millions of dollars to continually develop and manufacture new and better
nylon products.
INVISTA is now the world’s largest
producer of nylon 6,6 polymer (the
original form of nylon) as well as ADN
and HMD — key chemical components
for making nylon.
The greatest growth area for nylon is in
engineering polymers and resins. These
tough but lightweight products are destined to play a greater role in automotive manufacturing as car makers try to
design more fuel-efficient vehicles.
Constant innovation
INVISTA has introduced more than 80 new styles of STAINMASTER®
carpet fiber this year — more styles than any other competitor.
Although the original patent for nylon
expired in 1955, further innovations
have been ongoing for decades.
CORDURA® and SUPPLEX® fabrics,
TACTEL® fiber and TORZEN® engineering polymers are just a few examples of further breakthroughs.
In his book (and recent Founder’s Day
message), Charles Koch points to INVISTA
as an example of constant innovation.
But odds are, INVISTA already has a
presence in your vehicle. Approximately
one billion air bags have been made using INVISTA nylon fiber.
And then there are the tire cords, carpets,
seat belts, wheel covers, oil pans and electrical connectors made with nylon.
Nylon may be 75 years old, but its story
at INVISTA is far from over.
9
Dale Gibbens Perspective
Vice president – KII Human Resources
During my 31 years in Human Resource
roles at Koch, nothing has prompted
more concerns or questions than the
Affordable Care Act (ACA), often
called “Obamacare.”
Under this law, nearly all U.S. citizens
and legal residents will be required to
buy health insurance next year. Anyone
who doesn’t, faces a fine (the Supreme
Court called it a tax) ranging from $95
to more than $2,000 per year. Over
time, the fines/taxes will increase to
more than $12,500 per year.
Tax increases are a big part of the ACA.
The Medicare withholding tax rate
for millions of taxpayers has already
jumped by 50 percent. A 3.8 percent
surcharge and new taxes on medical
devices and some insurance plans are
also being implemented.
My biggest concern is that these costs
and changes are only the tip of the iceberg.
What worries me most is not what happens January 1, when the individual
mandate kicks in. I’m much more concerned about the long-term effects
of this law.
More than likely, the federal government,
with its huge purchasing power, large
subsidies and pricing controls would
force private car dealers out of business.
Meanwhile, auto manufacturers, forced
to sell at artificially low prices, would
have little incentive to innovate or
invest. The final result would be less
choice and lower quality.
This, I fear, will be the unfortunate
outcome of the Affordable Care Act:
moving us from an admittedly flawed
health insurance model to a single-payer, government-run system that severely
damages the quality, accessibility and innovation of the entire health care system.
The set-up
If this seems far-fetched to you, consider
the Health Insurance Marketplace that
just opened.
The government says it’s “a new way to
get affordable coverage” and encourages
people to “learn if you qualify for lower
costs.” Sound familiar?
Of course, the promise of lower costs and
better coverage has been made before.
In 1967, shortly after Medicare was
Kick the tires
launched, the government said it would
Imagine if the government decided
cost just $12 billion by 1990. In reality,
everyone had to buy a car. It wouldn’t
Medicare cost over $98 billion that year
matter if you needed or wanted one —
and $551 billion last year.
you would have to buy a car or face
Ironically, the governa costly fine.
ment is telling us the
“What worries me is not what ACA will actually
For the millions
who couldn’t
happens January 1. I’m much result in less spendafford a car, a
even though it
more concerned about the long- ing,
federal dealerallows millions more
term effects of this law.”
ship would offer
to enroll in Medicare
taxpayer-subsiwithout paying for
dized financing by the government and
that coverage. I find that prediction
artificially low prices (mandated to auto beyond belief.
manufacturers). Younger buyers would Whenever the U.S. government has
be forced to subsidize older buyers so all wanted to cut Medicare spending, it has
prices could be “normalized.”
often done so by reducing payments to
States would be free to sell, too, giving
doctors and health care providers.
citizens the choice of private, state-run
As a result, many doctors actually
or federal dealerships.
lose money seeing Medicare patients.
Given that scenario, what would you
Consequently, more than 10,000 U.S.
doctors no longer accept Medicare.
expect to happen?
10
Then what?
At Koch we often talk about secondand third-order effects — the unintended
consequences of a policy or action.
With the ACA, companies are already
experiencing higher costs because
of new taxes
and fees.
Many employers are
also reducing
employee
work hours
to avoid the
requirement
to provide
health care for
those working 30+ hours
per week.
Another
consequence
will be lack of
innovation. If researchers and entrepreneurs cannot cover their costs —
let alone be rewarded — for developing better treatments, why bother?
And then there is the issue of fairness.
As with so many government programs, the ACA does not provide a
level playing field.
President Obama recently granted waivers to large companies, allowing them
to postpone compliance until after the
next election. Government employees
may not have to comply at all. Yet individuals, families and small businesses
have to comply immediately.
For years, Koch Industries has worked
to provide reasonably priced health care
benefits. Unfortunately, this new law
makes it harder for us to maintain good
benefits at an affordable cost.
The ACA has done nothing to help us
or other employers improve quality,
reduce cost or increase the number of
providers. That is deeply concerning
for me and, in my opinion, should be
for all Americans.
Koch Industries, Inc.
Vision
The role of
business
in society is to help people improve their lives by
providing products and services they value more highly than their alternatives,
and to do so while consuming fewer resources. To the extent a business does
this by the economic means, its profits are a measure of the value it creates
in society. Creative destruction is inherent in a market system, so a business
must not only continually improve the value it creates for customers and
MBM is the overarching capability vital to achieving these
objectives, from which specific core capabilities have been
and are being developed:
®
Commercial Excellence
Vision development; Principled Entrepreneurship™; customer focus (become
preferred); marketing; branding; origination and knowledge networks; opportunity
generation, evaluation and capture; DMF; logistics; optimization; prioritization.
Operations Excellence
EHS excellence (prioritized by seriousness); permitting; cost, energy and capital
effectiveness; reliability; benchmarking; ownership-based work systems; businessfocused prioritization and improvement; quality management.
To the extent this Vision is realized,
we will not only fulfill our role as a
business, but further benefit society by:
? Motivating other companies to
practice Principled Entrepreneurship™
such that they profit only by the
society, but do so significantly faster than its competitors.
Talent
Thus, to continue to succeed, our Vision is to improve the value we create
Anticipate talent needs; build talent acquisition networks; college recruiting, including
for our customers more efficiently and faster than our competitors. This should
internships; trade skills recruiting; select first on values; talent development and
enable us to generate the return on capital and investment opportunities
optimization for KII (rather than a business); roles and development by comparative
constituencies to advocate market-
needed to achieve a long-term growth rate that doubles earnings, on average,
advantage; accelerating employees’ learning and practice of MBM; ABC process.
based policies that improve human
every six years. This necessitates significantly accelerating the application
of MBM®, becoming much more forward-looking in talent acquisition and
development, remaining private and continuing to reinvest 90% of earnings,
while conducting all affairs lawfully and with integrity.
To achieve these goals we must improve our return on capital consumed and
Innovation (in every aspect of our businesses and capabilities)
Leader commitment; identifying unmet needs; disruptive advances; Republic
economic means,
? Educating and mobilizing key
well-being, and
? Helping people improve their lives
of Science; experimental discovery; internal knowledge sharing; external
through new business opportunities,
knowledge networks; joint programs – internal and external; technology adoption;
new and better jobs, and safer
commercialization; IP strategy; appropriate risk taking and incentives.
communities in which people are
mutually supportive.
substantially increase the origination and capture of investment opportunities.
Our investment focus will be on those opportunities that — by utilizing existing
Trading mentality
or adding new capabilities — provide the greatest value creation, the highest
Point of view (e.g., seeing trends early); knowledge systems; strategy development;
returns and contribution, and new growth platforms.
risk-taking optimization; optionality; asset ownership optimization; industry opportunity
perspective; waste elimination.
Public Sector
Legal; communications; community and government relations; branding; network
building; advocating policies that enhance Principled Entrepreneurship™.
13_KII_1863_KII_Vision_FA.indd 4-6
10/25/13 4:04 PM
doc_796783615.pdf
On behalf of the American Quarter Horse Foundation, we would like to thank you for giving us the opportunity to enjoy the Legends of the American Quarter Horse Trail Ride at the Matador Ranch.
Discovery
October 2013
THE QUARTERLY NEWSLETTER OF KOCH INDUSTRIES
Growth and innovation at Georgia-Pacific
All across Koch Industries, two words
are often repeated these days: growth
and innovation.
Charles Koch made a point of mentioning them in his Founder’s Day video and
Groundbreaking speech, and both are
emphasized in Koch Industries’ updated
Vision (see page 3).
Three recent acquisitions by GeorgiaPacific reflect the importance of growth
and innovation in GP’s plans for the future.
million tons of recycled fiber to custom- lose mill and the largest airlaid nonwovens machine.
ers last year — most of which ended
up in tissues, towels, napkins and boxes. The three Buckeye facilities that produce specialty fibers have become part
As of July 26, the company is now
involved in plastics recycling processing, of GP Cellulose.
thanks to the acquisition of a Tennessee The two specialty nonwovens facilities,
facility from The Highlands Group, Inc. as well as the nonwovens sales, busiMarc Forman, president of GP Harmon ness and R&D teams from Buckeye,
are combining with GP’s existing airlaid
Recycling, says this acquisition will
group to create a new nonwovens busidramatically expand the company’s
ness as part of
involvement in nonConsumer
fiber recyclables.
“Buckeye Technologies will GP’s
Temple-Inland
Products
Group.
“Now we can take
strengthen
our
innovation
On July 19, GP completed its muchCharles Koch frethe various polymers
anticipated acquisition of Temple-Inland used in milk jugs,
quently mentions
efforts.” — Charles Koch
assets from International Paper, which
innovation as an
detergent bottles or
had purchased the company in 2012.
bottle caps and separate them efficiently important reason for this acquisition.
The transaction included 15 sites in
so they can be converted into high-grade “Companies like Buckeye will strengtheight states and involved more than
raw materials.”
en our innovation efforts. That’s terrific,
1,800 employees — working mostly
because that’s the future. We can’t sucBuckeye Technologies
in the southeastern United States.
ceed for long if we don’t innovate.”
GP’s
latest
acquisition,
in
August,
was
Temple-Inland is known for making
Putting it all together
Buckeye Technologies, based in Memhigh-quality building materials, such
phis,
Tenn.
It
produces
specialty
fibers
Jim Hannan, GP’s president and CEO,
as particleboard, gypsum products
and
nonwoven
materials.
sees these businesses as important parts
and lumber.
of a much bigger picture.
Buckeye is the only company in the
“This is a long-term investment that
world capable of making specialty cellu- “It’s a wonderful thing to grow and
fits in very well with our existing operalose products (such as the fibers used in succeed,” Hannan said, “and these three
tions,” said Mark Luetters, GP’s execuLCD screens and oil filters) from both
acquisitions — made in a span of just
tive vice president – building products.
wood and cotton cellulose.
six weeks — will help us do both.
“It’s also a strong indicator of our longThe company’s nonwoven materials are “But the real challenge is to make sure
term confidence that the building products
used in a variety of hygiene and personal we keep innovating and creating even
market will rebound from the recessionary
care products, cleaning supplies, baby
more value for our customers.
lows we have seen in recent years.”
wipes, towels and tissues.
“If we’re not helping people improve
The Highlands Group
their lives and making the world a
Five manufacturing facilities — four in
better place,” Hannan said, “we’re
the U.S. and one in Germany — were
GP Harmon Recycling is one of the
largest recyclable commodities traders in part of the transaction. Buckeye’s assets not doing our job.”
include the world’s largest cotton celluwww.gp.com
the world. It supplied more than seven
this issue…
Thank you, Koch
Nylon’s 75th anniversary
pg 2
pg 9
Koch Industries’ new Vision statement
Perspective: Affordable Care Act
pg 3
pg 10
Postal Pipeline
Thank you so much for your offer to
allow me to bring our Youth Leadership
Conference group to the INVISTA Victoria Wetlands. You have made a lasting
impression on these students.
The Wetlands are blessed to have such a
great leader as Jon Snyder. He not only
has such an interest in our environment,
but in teaching our young people about
the environment in which they live.
Oct. 4 – David H. Koch attended the dedication of
a 14,000-square-foot childcare center at MIT named
in his honor. He was lead donor for the project,
contributing $20 million.
Thank you for supporting the History
Buffs of Southeast High School.
Thank you for including me on the mailing list for Discovery, which I am happy
to receive.
The news of Koch’s new building
brought back memories of when I was
interviewed in December 1948 for a
position in the administrative offices of
Wood River Oil & Refining Co., Inc.
There were about 50 employees at
that time in the corporate offices —
a far cry from the 3,000 employees
in Wichita today.
It was also a great honor to have your
plant manager, Paul Hughes, visit with
our students. Having managers tell stories I am privileged and proud to have parof how they got started in their profesticipated in the growth of this phenomsion is always interesting to the students. enal corporation for 36 years, retiring
Lanell Mantey in 1985.
Executive director
Victoria Business and Education Coalition
Victoria, Texas
Kenneth D. Rupe
Wichita, Kan.
The field trip to the Eisenhower Presidential Library in Abilene was a true highlight
of the year for many students. Our guest
speakers were outstanding.
We hope you continue to support history
clubs around the area.
Kathy Saar
U.S. history teacher
Wichita Southeast High School
Wichita, Kan.
On behalf of the American Quarter
Horse Foundation, we would like to
thank you for giving us the opportunity
to enjoy the Legends of the American
Quarter Horse Trail Ride at the Matador Ranch.
Our time at the ranch couldn’t have
been more perfect, but none of it would
have been as enjoyable (or even possible) without the incredible staff of
the Matador.
We realize it was a big step to open the
ranch to this event as it required a lot
of planning and evaluation to coordi-
nate our activities and select the proper
horses for our guests.
We could not be more pleased with
how everyone was matched with their
mounts and received many compliments from our guests on the quality
of the horses provided.
Your team illustrated exactly why the
Matador Ranch was selected as the 2013
Best of the Remuda Award recipient.
Chris Sitz
Senior director
American Quarter Horse Foundation
Amarillo, Texas
This hand-drawn card from several youngsters
thanked Koch Industries for its support of the 2013
Water Wise program (a series of water safety
classes at Wichita’s Downtown YMCA).
To “like” and follow Koch companies and leaders –
including Georgia-Pacific, INVISTA, Flint Hills Resources,
Matador Ranch, Koch Pipeline and Charles and David
Koch – visit Koch Industries’ Facebook and Twitter pages.
Letters and other submissions become the property of Koch
Industries, Inc., and may be reproduced in whole or in part,
including your name, for any purpose and in any manner.
Letters may be edited for length or clarity.
Discovery
Editorial board
Melissa Cohlmia
Philip Ellender
Rich Fink
Jeff Gentry
Dale Gibbens
Greg Guest
Charles Koch
Jim Mahoney
Dave Robertson
2
October 2013 | Volume 19 | Number 4
Questions? Comments?
Contact: Rod Learned
316.828.6136
[email protected]
Publication design
Caleb Swank
Amber Vogts
Koch Creative Group
www.kochind.com
© 2013 Koch Industries, Inc. Koch is an EOE. M/F/D/V
UNDERSTANDING AND APPLYING
Koch Industries’
Vision
Included in this issue of Discovery is
your copy of our new Vision statement.
We have revised KII’s Vision to more
accurately reflect our actual practice and
what is needed to continue our success
and growth in the future.
Our Vision serves a dual role: as a
North Star and as a guide to keep us
effectively moving in that direction.
In its role as a North Star, the Vision is
a compass to keep us going in the right
direction, rather than a destination we
plan to reach. As such it is constant —
it never changes.
It embodies fundamental principles,
such as the role of business in society
and our Guiding Principles. This part
of our articulation of the Vision only
by Charles Koch
changes as we improve our understanding of these principles.
In its role as a guide, the Vision should
continually change as the business
environment and our capabilities
change, and as we learn what we need
to do to more effectively make progress
on the journey.
It is always difficult to develop an effective Vision for KII because, given the
breadth and diversity of its businesses,
its Vision must, of necessity, be very
broad. At the same time, it must be
specific enough to guide our actions and
the respective visions of our businesses
and capabilities.
To help accomplish these twin objectives, the Koch Industries Vision now
consists of four parts: our view of the
role of business, what we need to do to
fulfill that role and succeed, the specific
capabilities we need to develop and
apply, and the further benefits to society
when we execute our Vision.
I will try to explain each of these
parts in enough detail to make them
useful to each business and capability
as they create their own visions, and
to every employee, since it is important that we all understand our
philosophy and direction.
“It is important that we all
understand our philosophy
and direction.”
Charles Koch is chairman and CEO of Koch Industries, Inc.
He has served in these roles for 46 years.
I realize that our new Vision is
much longer and more complex than what we have had
in the past; however, the
same is also true of Koch
Industries. It is bigger and
more complex.
Studying this Vision so that
you understand it and can
help advance it will be well
worth your time. If you have questions
or concerns, be sure to discuss them
with one of your leaders.
3
The role of business
This gale is created by competitors con- MBM®, ensure we have sufficient talent
to capture all attractive opportunities,
stantly innovating and improving in
The first paragraph describes what we
every way imaginable, forcing less effective remain private so we can focus on the
believe the role of business to be and,
products, methods and companies out of long term, generate the opportunities
therefore, what a business needs to do
the market. To succeed long term, a busi- to enable us to reinvest 90 percent
to be successful. That role starts with
of our earnings at
ness must innovate
creating products and services that
“We should be able to continue superior returns and,
and improve at least
provide superior value for customers.
last, but certainly
as fast as its most
doubling our earnings, on
For a given value provided
not least, ensure that
effective competitor.
average, every six years.”
to customers, the amount of reeveryone, everywhere
sources used needs to be minimized,
fully applies MBM
Doubling our earnings
including capital, raw materials,
Guiding Principles 1 and 2 – Integrity
labor and other inputs.
As mentioned in the second paragraph
and Compliance.
of the Vision, if we can continually
In doing so, the business is making the
Achieving these goals as we continue
greatest contribution to society by maxi- satisfy these requirements, we should be to grow necessitates continued imable to maintain our historical growth
mizing the difference between value
provement of our return on capital
rate of at least 12 percent, which, when
delivered and value of resources conconsumed and an increased ability
sumed. Thus, a business’s profits, created compounded, allows us to double our
to generate and capture sufficiently
by the economic means, are a measure of earnings, on average, every six years.
profitable investment opportunities.
The “on average” modifier is critically
the value it is creating in society.
The latter requires that our horizons
important, because if we began to
increase with our size. We will need
This accomplishment, while necessary, is
attempt to smooth out earnings (as
innovations that move the needle,
not sufficient for long-term business sucsome public companies feel compelled
investments that make a bigger contricess. Each business must take to heart
to do to defend their stock price) our
bution and new platforms for growth.
what Joseph Schumpeter called “the
future will not be as bright.
Achieving these objectives requires that
essential fact about capitalism,” which is
we more fully develop and apply our six
Maintaining this growth rate requires
“its role in the perennial gale
core MBM-based capabilities.
that we more fully and broadly apply
of creative destruction.”
“Achieving these objectives requires that
we more fully develop and apply our six
core MBM-based capabilities.”
2007
4
2008
Commercial excellence
Innovation
Operations excellence
Trading mentality
Talent
Public sector
To the extent we can make our Vision a reality, it would dramatically improve lives across all segments of society — especially for the disadvantaged.
Commercial excellence
Vision Development: Assess the business’s core capabilities and determine
the opportunities for which they can
create the most value in an environment of creative destruction. Improve
existing capabilities and add new ones
to enhance the company’s ability to
create value.
Principled Entrepreneurship™: Maximize long-term profitability by creating superior value for customers while
consuming fewer resources and always
acting lawfully and with integrity.
Customer Focus: Become the preferred
supplier by doing a superior job of understanding our customers and anticipating and satisfying what they value.
Doing so means we must be responsive
and the terms of our transactions must
be considered reasonable.
Marketing: Profitably orchestrate
communication and engagements
with customers along the path to purchase, with a focus on positioning,
product, price, placement and
the purchase experience.
Brand Building: Provide a unique
and difficult-to-imitate position in the
hearts and minds of customers by using
insights, analytics, marketing, packag-
ing, design, relationships and public
relations to anticipate and satisfy what
they value.
Origination and Knowledge Networks:
Build formal and informal global relationships to learn relevant information
before competitors and get a preferred
look at opportunities for which we can
create superior value.
Opportunity Generation, Evaluation and
Capture: Create an organization that
will do a superior job of internally and
externally generating, evaluating and
commercializing or acquiring the most
profitable opportunities.
Decision Making Framework: A process
for improving opportunity capture by
using the best knowledge, exploring
the full range of outcomes, identifying
ways to mitigate risk and discovering
the best alternative. The process should
be made as simple as possible considering the size and complexity of the decision, given that the goal is directional
accuracy, not precision.
Logistics: Connect our assets to
markets and ensure reliable service to
customers by delivering transportation
solutions to supply goods and services
in a timely and cost-effective manner
while providing a competitive advantage to our businesses.
Optimization: Optimize the use of
all Koch resources, including assets and
talent, across and within businesses,
plants and groups, using tools such
as marginal analysis, opportunity cost
and supply chain management.
Prioritization: Prioritize to maximize
Koch Industries’ long-term value by
first doing what is required to stay in
business, then proceeding in order
of the risk-adjusted present value of
the alternatives.
Operations excellence
EHS Excellence: In addition to complying with the applicable laws and regulations, achieve a level of safety and environmental performance that provides
superior protection and value, placing
the highest priority on risks that could
cause the most serious harm to people,
the environment or the business.
Permitting: By understanding the
objectives of the relevant regulators and
potential opponents and supporters,
develop permit application processes
that will provide the greatest chance of
success in the least time at the least cost.
Cost, Energy and Capital Effectiveness:
Eliminate costs that don’t create sufficient value, reduce energy usage wherever economical and apply innovative
5
approaches to capital expenditures to
maximize value creation.
Reliability: Build, operate and maintain our assets and processes so they
can consistently and predictably maximize long-term value.
Benchmarking: Identify, understand
and adopt relevant best practices,
including the best in Koch, in the
industry and in the world.
Ownership-Based Work Systems:
Build ownership for value creation at
the operating level and all other areas
by clarifying
responsibilities and accountabilities,
enabling team
members to
expand their
contributions
to match their
individual
capabilities.
Build Talent Acquisition Networks:
Build formal and informal relationships
globally with organizations and individuals that prove effective at identifying
and recruiting the diverse talent needed.
Trade Skills Recruiting: Overcome
the shortage of certain skilled trades by
partnering with educators, proactively
recruiting globally, and attracting and
training less-experienced people with
the appropriate aptitude.
Select First on Values: Hire, advance,
reward and retain people with the
employee’s comparative advantages. To
the extent a role requires an employee to
apply a disadvantaged aptitude, the role
should be modified.
Accelerating Employees’ Learning and
Practice of MBM: Ensure employees
understand and are applying MBM
to get results.
ABC Process: Apply the ABC process
to improve commitment to the Guiding
Principles and the level of talent. This
includes ensuring that the role of each
employee fits that employee’s comparative advantages.
BusinessDetermine the talent of all types that will be required long term to maintain our current operations and rapid growth.
Focused
Prioritization and Improvement:
talent necessary to produce results,
Develop a prioritized approach to
Innovation
but only those who embrace our
sustainable improvement by tying
MBM Guiding Principles. Ensure
Leader Commitment: Effective innoopportunities to the business vision
that
our
policies,
practices,
communivation requires leaders to define the
while reducing complexity in order to
cations and compensation reinforce
vision, set priorities on the highestrecognize and capture opportunities
these Principles.
value opportunities, apply the right
faster than the competition.
mix of talent and resources, optimize
Talent Development and Optimization
Quality Management: Provide
risk and establish a culture that creates
for KII: Leaders at every level must
the planning, control, assurance
transformative value.
ensure that
and improvement in quality necesemploysary to deliver products or services
“Given Koch’s growth and
Identifying Unmet Needs: The
ees
are
that consistently meet or exceed
size, our emphasis should be successful development of new
developed
customers’ expectations.
products, services and business
on disruptive innovations.”
and given
models is facilitated by identifyopportuniing unmet needs of customers.
Talent
ties (not hoarded) throughout Koch in
Since customers are not yet aware of
which they could create the most value.
Anticipate Talent Needs: Determine the
undiscovered alternatives, this is best
talent of all types that will be required
accomplished indirectly by observation
Roles and Development by Comparalong term to maintain our current opand research to understand their subjective Advantage: Roles and developerations and rapid growth.
tive values and dissatisfactions.
ment plans should fit and enhance an
6
Disruptive Advances: Given Koch’s
growth and size, appropriate emphasis
should be on innovations that disrupt
the status quo. This requires an expansion of our Vision regarding talent,
external networks, capability development, resource commitment, risk taking
and time horizon.
Republic of Science: Innovation is
enhanced by adapting how the best
scientific communities share knowledge
and focus on real value creation. This
includes the freedom to determine how
to create that value, taking into account
what is already known.
Experimental Discovery: Innovation
is derived from numerous welldesigned experiments to determine which hypotheses will
(and which won’t) be successful.
The investment in each experiment should reflect the risk, the
potential return and the value of
the knowledge gained.
Internal Knowledge Sharing:
Recognize that discoveries best
occur in a system of shared
knowledge and mutually adjusting individual initiatives. Thus,
we need to proactively share
knowledge throughout Koch
through spontaneous order.
Commercialization: Since the value of
an innovation is, in large part, determined by the cost and time to get it
implemented and commercialized, we
must not only have world-class idea generation, but be world-class in execution,
integration and commercialization.
Intellectual Property Strategy: In order
to maximize the NPV generated over
the lifetime of an innovation, we must
vide significant gains and reduce losses.
Since the future is always unknown,
evaluate a range of outcomes.
Knowledge Systems: Build superior
knowledge sources globally for relevant developments through trading,
knowledge of customers, suppliers
and their operations, understanding
logistics and political factors, and
having knowledge networks.
Strategy Development: Understand
key drivers of price movements, such as
supply/demand, money flow, the economics and subjective values of market
participants, demographic, policy and
regulatory trends, and logistic economics and constraints. Only make bets
Innovation is derived from numerous well-designed experiments to determine which hypotheses will be successful.
External Knowledge Networks:
Build formal and informal networks
to be aware of relevant developments taking place everywhere in the
world. Our networks should include
customers, suppliers, specialists,
universities, technology companies,
entrepreneurs, investment groups and
business advisors.
Joint Programs – Internal and External:
Apply the division of labor by comparative advantage to innovation by jointly
working on opportunities with groups
that have the best complementary capabilities. These groups may be within or
independent of Koch.
7
Technology Adoption: Be an early
experimenter and timely adopter of
superior new technology that increases
value for customers, reduces costs, reconfigures the value chain or improves
knowledge. This requires that we have
good knowledge networks.
not only optimize the revenue, we must
optimize our intellectual property position through patents, copyright, secrecy,
licensing and contracts.
where we have (at a minimum) competitive knowledge systems and other
capabilities. Ensure rapid and nimble
response to events and information.
Appropriate Risk Taking and
Incentives: Ensure the level of innovation risk is optimized for the magnitude
of each opportunity by providing the
right measures, decision rights, culture
and incentives.
Risk-taking Optimization: Absorb risk
when we have the capability to manage
it while eliminating unprofitable risk
mitigation and structuring deals to
optimize returns and avoid catastrophic
risks. Employees need to adopt the risk
profile of the company, not their own.
Trading mentality
Optionality: Since the future is unknown, always attempt to get profitable
options built into contracts and facilities. Be aware, though, of all the costs
of getting options, such as trade-offs for
Point of View: See and act on relevant
long- and short-term trends before competitors, which, if correct, will both pro-
other terms, the relationship with the
counterparty or in the capital or operating cost of the facility. Be careful not to
undervalue the cost of giving options.
Asset Ownership Optimization: We
should only own assets or businesses
that are worth more to us than somebody else, considering our point of
view, the capabilities they provide and
whether they are a platform for growth.
Frequently update hold values.
Industry Opportunity Perspective: For
any service, trade or technique we perform
today or discover that creates value internally at Koch, explore whether the potential, considering opportunity cost, is large
enough to justify offering it externally.
integrity. Protect the company, its
employees and shareholders by ensuring 10,000 percent compliance and
providing effective legal representation.
Help further the goals of our businesses in a manner that builds trust and
confidence — both with those we deal
with in adversarial settings and those in
commercial transactions, making us the
preferred counterparty.
Communications: Provide internal
and external communications that
accurately depict our performance
and record, and build an environment
that welcomes the ideas and values
we advocate, while effectively countering misrepresentations.
Community and Government
Relations: Establish productive relationships with relevant
officials at all levels of government who have jurisdiction
over our facilities and businesses.
Understand and be responsive
to the concerns of our neighbors
and leaders in our communities,
which will build trust.
Branding: Clearly and accurately define who we are, what
we stand for and why we do
what we do. Ensure that our
We need to proactively share knowledge throughout Koch.
brand and messages accurately
represent our philosophy and resonate
Waste Elimination: Every activity
with relevant audiences.
should be constantly analyzed (using
benchmarking and other measures)
Network Building: Build networks
to identify and eliminate waste, which
with like-minded people and organiis always increasing as businesses and
zations with whom we can work in a
methods change. Examples include
mutually supportive manner to encourobsolete or unprofitable plants, units,
age market-based policies that improve
products and practices, unprofitable
people’s lives.
information gathering, needless studies and decision-making processes, or
Advocating Policies that Enhance
value-adding activities with a higher
Principled Entrepreneurship™:
opportunity cost.
Educate the public, organizations and
policymakers as to the philosophies and
policies that we believe best contribute
Public sector
to societal well-being. Advocate these
Legal: Ensure that the company’s afpolicies while opposing those we befairs are conducted lawfully and with
lieve to be detrimental.
Making this Vision a reality should provide significant benefits
for our employees, communities and society as a whole.
Results
To the extent we are successful in
making this Vision a reality, it should
provide significant benefits, not only
to Koch Industries, but to our employees and communities, and society as a
whole. If we can demonstrate that our
approach to business and life benefits
those who apply it and those they touch,
it would become much more universally
accepted and applied.
The more companies focus on profiting
only by the economic means, the more
effective they will become at satisfying consumer needs. This, in turn, will
make them more productive and able
to provide more and better jobs, all
while improving workplace safety and
the environment.
Through ours and other efforts to
encourage market-based policies that
improve human well-being, we hope to
enable more companies to more fully
practice Principled Entrepreneurship.
This would not only make businesses
more productive, but, by removing the
roadblocks of destructive regulations
and taxes, open opportunities for business start-ups and more and better jobs.
These changes would dramatically
improve lives across all segments of society, especially for the disadvantaged.
As opportunities open for people to
develop and improve, depressed communities would move from a culture of
poverty, dependency, hopelessness and
corruption to one of prosperity, opportunity, self-help and self-worth.
This, in turn, would move us toward
what Tocqueville described as the best
in America: civility, voluntary cooperation, self-help and mutual aid.
8
Looking Back
Noteworthy
Too True
Charles Koch credits the transformative
power of Market-Based Management®
for the remarkable success and growth
of Koch Industries.
“But past performance does not guarantee
future success,” says Koch. “To continue
to achieve superior results, we must continually improve our understanding and
application of MBM®.”
To help achieve that goal, the MBM
team has produced a series of videos that
provide detailed case studies involving
several Koch businesses.
The first video in the series tells how
applying MBM enabled Georgia-Pacific’s
Green Bay Broadway Mill in Wisconsin
to improve safety, productivity, product
quality and leadership.
MBM also helped transform the future
of GP’s North American Consumer
Products business, which had been
losing market share. A second video
documents that turnaround.
The newest case study in this series details
how a team from INVISTA’s Victoria site
studied MBM in action at FHR’s Pine
Bend Refinery and used shared knowledge to improve its utilities operations
back in Texas.
All three are available on DVD, or athttp://mbm-prod.khc.local/default.aspx.
“In order to be successful it is
necessary that you want to be.
You must have the will to win.”
– Fred C. Koch
On Sept. 20, 1938, U.S. Patent number
2,130,948 was issued for one of the
great innovations of the 20th century:
nylon fiber.
Six months later in Seaford, Del., construction began on the first commercial
nylon plant. When it opened in December 1939, that plant established Seaford
as the “Nylon Capital of the World.”
The first commercial use of nylon was
for bristles in toothbrushes, but it
didn’t become a household word until
it replaced silk as the fiber of choice for
women’s hosiery.
When nylon stockings were introduced
to the commercial market in 1940, they
were so popular that mob scenes sometimes developed at retail stores.
Nylon soon became the standard for
fishing line, surgical thread and tire
cord. By the time the U.S. entered
World War II, nylon 6,6 was also used
in parachutes, tent canvas and ropes.
The development of nylon resin, which
could be molded into solid parts, led to
its use in thousands of products, from
automobiles to adding machines.
INVISTA, which became a Koch
company in 2004, has spent hundreds
of millions of dollars to continually develop and manufacture new and better
nylon products.
INVISTA is now the world’s largest
producer of nylon 6,6 polymer (the
original form of nylon) as well as ADN
and HMD — key chemical components
for making nylon.
The greatest growth area for nylon is in
engineering polymers and resins. These
tough but lightweight products are destined to play a greater role in automotive manufacturing as car makers try to
design more fuel-efficient vehicles.
Constant innovation
INVISTA has introduced more than 80 new styles of STAINMASTER®
carpet fiber this year — more styles than any other competitor.
Although the original patent for nylon
expired in 1955, further innovations
have been ongoing for decades.
CORDURA® and SUPPLEX® fabrics,
TACTEL® fiber and TORZEN® engineering polymers are just a few examples of further breakthroughs.
In his book (and recent Founder’s Day
message), Charles Koch points to INVISTA
as an example of constant innovation.
But odds are, INVISTA already has a
presence in your vehicle. Approximately
one billion air bags have been made using INVISTA nylon fiber.
And then there are the tire cords, carpets,
seat belts, wheel covers, oil pans and electrical connectors made with nylon.
Nylon may be 75 years old, but its story
at INVISTA is far from over.
9
Dale Gibbens Perspective
Vice president – KII Human Resources
During my 31 years in Human Resource
roles at Koch, nothing has prompted
more concerns or questions than the
Affordable Care Act (ACA), often
called “Obamacare.”
Under this law, nearly all U.S. citizens
and legal residents will be required to
buy health insurance next year. Anyone
who doesn’t, faces a fine (the Supreme
Court called it a tax) ranging from $95
to more than $2,000 per year. Over
time, the fines/taxes will increase to
more than $12,500 per year.
Tax increases are a big part of the ACA.
The Medicare withholding tax rate
for millions of taxpayers has already
jumped by 50 percent. A 3.8 percent
surcharge and new taxes on medical
devices and some insurance plans are
also being implemented.
My biggest concern is that these costs
and changes are only the tip of the iceberg.
What worries me most is not what happens January 1, when the individual
mandate kicks in. I’m much more concerned about the long-term effects
of this law.
More than likely, the federal government,
with its huge purchasing power, large
subsidies and pricing controls would
force private car dealers out of business.
Meanwhile, auto manufacturers, forced
to sell at artificially low prices, would
have little incentive to innovate or
invest. The final result would be less
choice and lower quality.
This, I fear, will be the unfortunate
outcome of the Affordable Care Act:
moving us from an admittedly flawed
health insurance model to a single-payer, government-run system that severely
damages the quality, accessibility and innovation of the entire health care system.
The set-up
If this seems far-fetched to you, consider
the Health Insurance Marketplace that
just opened.
The government says it’s “a new way to
get affordable coverage” and encourages
people to “learn if you qualify for lower
costs.” Sound familiar?
Of course, the promise of lower costs and
better coverage has been made before.
In 1967, shortly after Medicare was
Kick the tires
launched, the government said it would
Imagine if the government decided
cost just $12 billion by 1990. In reality,
everyone had to buy a car. It wouldn’t
Medicare cost over $98 billion that year
matter if you needed or wanted one —
and $551 billion last year.
you would have to buy a car or face
Ironically, the governa costly fine.
ment is telling us the
“What worries me is not what ACA will actually
For the millions
who couldn’t
happens January 1. I’m much result in less spendafford a car, a
even though it
more concerned about the long- ing,
federal dealerallows millions more
term effects of this law.”
ship would offer
to enroll in Medicare
taxpayer-subsiwithout paying for
dized financing by the government and
that coverage. I find that prediction
artificially low prices (mandated to auto beyond belief.
manufacturers). Younger buyers would Whenever the U.S. government has
be forced to subsidize older buyers so all wanted to cut Medicare spending, it has
prices could be “normalized.”
often done so by reducing payments to
States would be free to sell, too, giving
doctors and health care providers.
citizens the choice of private, state-run
As a result, many doctors actually
or federal dealerships.
lose money seeing Medicare patients.
Given that scenario, what would you
Consequently, more than 10,000 U.S.
doctors no longer accept Medicare.
expect to happen?
10
Then what?
At Koch we often talk about secondand third-order effects — the unintended
consequences of a policy or action.
With the ACA, companies are already
experiencing higher costs because
of new taxes
and fees.
Many employers are
also reducing
employee
work hours
to avoid the
requirement
to provide
health care for
those working 30+ hours
per week.
Another
consequence
will be lack of
innovation. If researchers and entrepreneurs cannot cover their costs —
let alone be rewarded — for developing better treatments, why bother?
And then there is the issue of fairness.
As with so many government programs, the ACA does not provide a
level playing field.
President Obama recently granted waivers to large companies, allowing them
to postpone compliance until after the
next election. Government employees
may not have to comply at all. Yet individuals, families and small businesses
have to comply immediately.
For years, Koch Industries has worked
to provide reasonably priced health care
benefits. Unfortunately, this new law
makes it harder for us to maintain good
benefits at an affordable cost.
The ACA has done nothing to help us
or other employers improve quality,
reduce cost or increase the number of
providers. That is deeply concerning
for me and, in my opinion, should be
for all Americans.
Koch Industries, Inc.
Vision
The role of
business
in society is to help people improve their lives by
providing products and services they value more highly than their alternatives,
and to do so while consuming fewer resources. To the extent a business does
this by the economic means, its profits are a measure of the value it creates
in society. Creative destruction is inherent in a market system, so a business
must not only continually improve the value it creates for customers and
MBM is the overarching capability vital to achieving these
objectives, from which specific core capabilities have been
and are being developed:
®
Commercial Excellence
Vision development; Principled Entrepreneurship™; customer focus (become
preferred); marketing; branding; origination and knowledge networks; opportunity
generation, evaluation and capture; DMF; logistics; optimization; prioritization.
Operations Excellence
EHS excellence (prioritized by seriousness); permitting; cost, energy and capital
effectiveness; reliability; benchmarking; ownership-based work systems; businessfocused prioritization and improvement; quality management.
To the extent this Vision is realized,
we will not only fulfill our role as a
business, but further benefit society by:
? Motivating other companies to
practice Principled Entrepreneurship™
such that they profit only by the
society, but do so significantly faster than its competitors.
Talent
Thus, to continue to succeed, our Vision is to improve the value we create
Anticipate talent needs; build talent acquisition networks; college recruiting, including
for our customers more efficiently and faster than our competitors. This should
internships; trade skills recruiting; select first on values; talent development and
enable us to generate the return on capital and investment opportunities
optimization for KII (rather than a business); roles and development by comparative
constituencies to advocate market-
needed to achieve a long-term growth rate that doubles earnings, on average,
advantage; accelerating employees’ learning and practice of MBM; ABC process.
based policies that improve human
every six years. This necessitates significantly accelerating the application
of MBM®, becoming much more forward-looking in talent acquisition and
development, remaining private and continuing to reinvest 90% of earnings,
while conducting all affairs lawfully and with integrity.
To achieve these goals we must improve our return on capital consumed and
Innovation (in every aspect of our businesses and capabilities)
Leader commitment; identifying unmet needs; disruptive advances; Republic
economic means,
? Educating and mobilizing key
well-being, and
? Helping people improve their lives
of Science; experimental discovery; internal knowledge sharing; external
through new business opportunities,
knowledge networks; joint programs – internal and external; technology adoption;
new and better jobs, and safer
commercialization; IP strategy; appropriate risk taking and incentives.
communities in which people are
mutually supportive.
substantially increase the origination and capture of investment opportunities.
Our investment focus will be on those opportunities that — by utilizing existing
Trading mentality
or adding new capabilities — provide the greatest value creation, the highest
Point of view (e.g., seeing trends early); knowledge systems; strategy development;
returns and contribution, and new growth platforms.
risk-taking optimization; optionality; asset ownership optimization; industry opportunity
perspective; waste elimination.
Public Sector
Legal; communications; community and government relations; branding; network
building; advocating policies that enhance Principled Entrepreneurship™.
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