EntreLeadership - #244: The Danger of Complacency with Charles Koch

Episode Date: January 29, 2018

Ever since taking over his family’s business at age 25, Charles Koch has been guided by one singular mantra: Success is one of the biggest enemies of success. Those powerful words have inspired the chairman and CEO of Koch Industries to keep pushing, keep experimenting, keep improving—a state he likes to call “continual transformation.” Koch’s ironclad belief that there is always a way to do it better has helped grow the company into a $100 billion enterprise—one that prides itself, first and foremost, on creating unparalleled value for its customers. And that’s something any business, regardless of size, can aspire to. Join us to hear Charles explain why complacency is never an option and what you need to do to outpace your competition. entreleadership.com/podcast Leadership Growth Assessment from EntreLeadership Marketing to Millennials Guide from Infusionsoft Want expert help with your business question? Call 844-944-1070 and leave a message for Ken with the details. You could be featured on a future podcast episode! Learn more about your ad choices. Visit megaphone.fm/adchoices

helping business leaders grow themselves, their team, and their profits. This is Andre Leadership. Now, here's your host, Ken Coleman. Coming to you from the Music City, this is the broadcast of leaders by leaders for leaders. Thank you so much for joining the conversation. Excited to bring to you as our feature conversation, Charles Koch. That's right, billionaire CEO of Coke Industries. and after that conversation, you're going to bring you two great resources to help you start 2018 off on the right foot.

Well, let's get right to it. He is the chairman and CEO of Coke Industries. Now, you hear billionaire, I don't want you to check out because some of you're going, man, I'm just trying to be a thousandaire. And I get that. But here's the fun part of this conversation. He didn't set out to be a billionaire. He didn't start out as a millionaire. He took over a family business and he applied some really cool talents.

and principles as a result of what he cares about mathematics. You're going to hear some of that really fun. So you're going to learn, I think, some of the most practical stuff we've ever aired on this show. I'm that confident. You're going to hear some new terms you haven't heard of. How do you apply them? Really, really practical stuff.

So don't get lost in how big they are. Be focused on how good they operate the business. This is my conversation with Charles Cope. Well, Charles, really thrilled to have you with us, and we got to talk a few weeks ago. go and learn more about your personal story. And I want to start there because we've got so many small business men and women that are listening in. We have people who aren't owning a business. We have people who are middle management. We have people that are starting out early on in their journey.

And I want them to connect with you and your early story of how you got into what we now know as your business and empire. How did it start out for you? Well, it's, It started out for me. I didn't think I was much good at anything. I learned I had some math and conceptual and logical ability, so I was looking for a place to go to school that that was what was emphasized rather than all the other abilities I needed in other places. So I went to MIT where the language was math and everything was concepts.

And after I finished there, I went to work for a consultant. firm in Boston, a full-line consulting firm. And it was a great experience for me in that I got to work in most of the types of consulting work they did in product development, process development, management services, strategy, innovation, and so on. And I was looking for a chance to go in business for myself or with other people I would meet. And I thought that was a good kind of hunting ground for those opportunities. After I was there about two years, my father called me and asked me to come back and join his firm here in Wichita, Kansas. And there are basically two businesses that he had. One was, the bigger one was called Rock Island Oil Company, and it had a

gathering system, a crude oil gathering system in southern Oklahoma. So that was one business. business, and then the other was Coke Engineering Company, which really didn't do engineering. It made distillation tower internals. So this company was a small company that made those internals. So, as I said, he asked me to come back and join the firm, and I turned him down because where I grew up was on a farm, and it was an experimental. farm. My father was a chemical engineer. He called himself a half-baked chemist, and he was always experimenting. So we had chickens and cattle and horses, and he was experimenting with different feeds, with genetics, and so on. And I was the one selected to do all the dirty jobs out there

from feeding the animals to shoveling out stalls, to milking the cows. and so on. And he was a pretty tough taskmaster. One of his favorite sayings being Dutch was you can tell the Dutch, but you can't tell them much. So going back to work for him wasn't exactly what I had in mind and going business for myself. I wanted to be independent and be able to call my own shots.

So I turned him down. So a month or two later, he called back and he said, son, as you know, my health is poor. His blood pressure ran 2.30 over 1.2. 120 treated, if you can imagine. He said, I don't have long to live and I can't really run the businesses we have. And either you come back to run them or I'm going to have to sell it. And he said, I'll tell you what, we have these two companies and I'll let you run Coke engineering from the start. Any way you want, there are only two things you need my approval on. One is making a major

expenditure because I'm trying to save the money to pay my death taxes because I don't have long to live. And the other is if you want to sell it, then I want to approve that. And so that sounds like as good at any other deal I would get in going business for myself because I would get to call the shots. And then he said, as soon as as you're ready, then you can run the other business, the Rock Island Gathering business as well. Wow. And so that was 1961. I was 25 years old. So that sounded like a real opportunity for me. And when I got back there, I could see what he meant is that he had placeholders in most of the key positions. And that I mean people who were there just to kind of maintain the business. And because he wasn't really up to going, running, innovation. pushing as he always had in his career. He was just trying to hold it together and have enough liquidity, so we didn't lose it all to taxes. And of course, I had different mentality. I had

become at MIT and at Arthur D. a little fascinated with science, the scientific method, the philosophy of science, and innovation. And so I won't. to bring all that to start with to Coke Engineering and get that turned around because it was just operating at a break even and for a number of reasons. I want to ask you about that. I'm glad you mentioned that because you told us earlier and you just mentioned moments ago, process development, innovation, and strategy, your mathematical mind drew yourself to those disciplines, if you will. And now here you come in. You're 25 years old. So you got fresh eyes. And it's a sense.

essentially your own sandbox. How did you start to implement new processes, innovation and strategy at the tender age of 25? What were some of the early things that you did that worked? Even as green as I was, it was pretty clear what needed to be done. In studying science and innovation, you knew you could not be stagnant and survive for long. There was this protectionist mentality there that they had developed designs for these tower internals, and so they wouldn't share them with the customers, and the major oil companies, and the major contractors who were the customers, major chemical companies said, well, we need to understand how these design works. We've got to feel good about them.

We can't just rely on you. So we were losing business. And then they had international customers who wanted not to. to supply from the U.S., supply from Europe. And we didn't have a plant there, so we had all these subcontractors, and they divided the various pieces up to protect the manufacturing know-how. And so it was very inefficient process. So, I mean, it didn't take somebody really sophisticated in business or operations

to see all that needed to change. so we have to create value for our customers, or they're not going to do business with us. So if they want to know our design, how to design them, we'll share that. And then I went to Europe and set up a plant in northern Italy to manufacture for ourselves there. And then started adding other capabilities like I heard somebody in commercial development to look for new allied products so we could start. growing. And a miracle of all miracles, that worked pretty well. And so my father was impressed, so he pretty well turned over the rest of it to me, which was this crude-all gathering system. And then

we applied the same kind of methodology, but obviously in a much different business. And then that worked, all this worked just beyond my belief. I knew these theories were sound, but I didn't know that they would work that well and that quickly, but it was, I think, really, because the business was so stagnant that it was just like, as the expression goes, like a bird's nest on the ground. Yes. When we talked a couple weeks ago, you introduced a phrase to me that I had never heard before, but I love it. And it dovetails beautifully off of what we're talking about right now, and that is the virtuous cycle. You and your leadership really figured this out. I want you to unpack that for our listeners. What does it?

that look like? What does that mean, virtuous cycle? And why is it so powerful? Yeah, the virtuous cycle was kind of the culmination of all the studying I did on the principles of scientific progress. And then when I got back there, I started studying all these other disciplines on the principles of social progress as well. And when I'd learn a principle, I would immediately try to apply it. And so putting all that together, I came up with this concept of the virtuous cycle that works this way. The starting point is to understand what abilities you have that could create capabilities that will create superior value for others.

So that's the starting point, is developing capabilities that will create superior value for others. And then to apply them for the best opportunities for that. and then continually improve and add to those capabilities, which then open new opportunities, which then point to the need for additional capabilities, which lead to still more capabilities. And this, if it all works out, leads to continual improvement and progress and growth. And so that's been, I mean, I didn't have all this formula. back then, but we were doing a lot of aspects of that. And more recent, we've been formally

applying it in that the more you can articulate and conceptualize what you're doing, then the more you will do, then the more you will learn from it. And so that's kind of been our evolution. Yeah, it really is so sound. I've heard that you have said that Coke Industries is capability-bounded, not industry-bounded. How has that given you terrific freedom to see opportunities and then weigh those opportunities? Part of that is a luxury of being a private company, because if you're a public company, like we had to accrued all-gathering business, say, well, you're in the oil business. Well, we knew how to gather oil, but what did we know about refining or running service stations or expiration. So that made no sense. So we said, okay, what capabilities do we have

given that we're good and we're very successful in building that business that we could apply to other businesses? So looking at the capabilities we had to create value for others rather than having this stereotype image that we're in the oil business. No, it never thought that way. Yeah, see, that's so powerful. You're constantly looking through the lens of what capabilities do we have that we can scale. And that's how the business has really has taken off and just multiplied. And I think that's what a lot of business owners would love to catch.

One part of that is, and I know we're talking about successes, but I want to park here for a minute because I love this virtuous cycle and this capabilities mindset, but there have been failures along the way, I'm sure. But I want you to speak to what you've learned over time and your leadership has learned when it comes to assessing opportunities. As you're looking at capabilities, what has worked for you as it relates to saying, all right, we might have the capabilities to get into this, and this does present an opportunity, but it may not be the right opportunity.

everybody has a capability to do something, but you need to be able to differentiate yourself. You need to know or not know you don't know until you get in it. It starts with an experiment, but to believe that you can create superior value for your customers. And unless you can create more value than their alternatives for them, you're not going to succeed in that business. And then you need to believe that it's sustainable, that it's not just you get in and they'll immediately copy you or somebody will come up with a better way of doing it,

and you'll be out of business. So those are some of the things we look at. Then another piece of it is to, when we're entering a new business, is to do it at an experimental level. That is a small enough level, that if it fails, it's not going to cripple us or destroy us. Another thing, even before we start the experiment,

to have an eternal challenge process, where we don't say, okay, we got this vision and we don't want to hear any naysay. No, we want to hear naysay. Not for people to prove they're smart or just stop us, but we want people to point out the flaws in our strategy and in our theory that we can create superior value. Because you're much better off to learn the flaws in your thinking

before you plunge into it than afterward. And I've never understood people who want to protect their ideas and not have them criticized. Like any decision I make, when I think we ought to make an acquisition or implement a strategy, I look for, okay, what are the key drivers in success? or failure in this venture, and who is really good at each one, each aspect, whether that's operations, marketing, distribution, whatever it is, I want challenges. I want people who are going to come in and

say, okay, tell me what's wrong with this. How can this go wrong? I want to understand all the pitfalls. And every time we go through that, we come up with a better answer than I had. to start with. How do you, or how have you, created an environment where the people you ask for feedback that they'll speak honestly with you and not tell you what you want to hear? Because I think a lot of leaders will try this, but if they don't create a culture where the people they're asking for feedback on feel the safety to be honest and shoot an idea down or shoot holes in it where they see holes. How have you done that at Coke Industries? Well, it's starting to, with who you hire. If you hire people, particularly leaders who are arrogant and think they know all

the answers, have no humility, it isn't going to work. So the first thing is you only have people in leadership positions who have that humility and the understanding. And this is the scientific method, as Carl Popper's famous essay on this science as falsification, The scientific method is you come up with a theory and then you have an obligation to try to disprove it and solicit people who will disprove it rather than say, I got the ultimate answer. This is it. I mean, as Einstein said, the best fate for any scientific theory is it becomes a limiting case for a subsequent theory. None of us are infallible and can see truth absolutely for all time. And as soon as we start

thinking that way, we're on our way to ruination. So what we do is, and I try to set the example, is if somebody has a suggestion and has a criticism, even if I don't agree with you, say, thank you. I really appreciate you're doing that. And so you don't. rather than say, that was a stupid criticism or that's the dumbest thing I ever heard. I've heard that people in other businesses say that. That business is going to fail because you are not going to be able to have the knowledge and ideas of your people if you don't celebrate them. One of the things I picked up from you in our conversation a few weeks ago,

I wrote this down and it's clear in all of your companies. It's clear in any time spent talking with you that you really do embrace change. And two of the words in talking about change that you mentioned that you and your leadership have been intentional about is embracing and driving change. And I spend some time thinking about that. And I think that a blind spot for many leaders is to drive change because it sounds good. We know it is good. But they themselves don't embrace it. or they haven't created a culture where once we say this is the change and we start driving it,

the act of embracing it is a whole other enchilada. I want you to speak to that because I was really, really moved by that. And I think that that's something you've been great at is not just driving change, but embracing it yourself and therefore creating a culture where the company embraces it. It's a reality. And once we make a decision to move forward with this change and we need to make these changes, we have to embrace it. Talk about that. Our philosophy is that however well we're doing as individuals in our roles and our jobs, or we as a business or capability are doing, it can be done better,

differently, much better. So that's the state of mind. All of us in leadership and we try to inculcate and all of our people is that you need to be constantly striving to improve and find better way. So this is what comes under here under the rubic of Planyi's concept of the Republic of Science. The Republic of Science is you gather knowledge from everywhere that might be relevant to what you're doing. and try to see if any of those concepts can be used to help you find a better way. And so every day we want all our people experimenting in smaller, large ways to find better ways to do things and be exposed to what's going on everywhere in the world that we might be able to use from different fields, from our fields, different fields, wherever.

And so this is the Republic of Science is, okay, we want to share knowledge within the company, all our different companies share knowledge, share together all the knowledge, what's going on in our industries, and outside of our industries. I give you an example. In these Tara internals, as I mentioned earlier, we have one that's made up of various metal sheets of different shapes. and those would be assembled by driving a nail through them with like a jackhammer. And that's very time-consuming and makes the operator injury prone. So we were looking for a better way to do it.

So one of our workers in Italy said, well, you know, my family used to be in the mattress business. And the company that supplied our equipment to make the mattresses happen. a device that could drive the needle all the way across the mattress and maybe there's a way you could adapt that so we approached the equipment company and they oh no we can't we we do needles and thread we can't do nails so okay let's combine your knowledge and ours so we worked on it and found a way to apply to modify their equipment to assemble these devices and it reduce the time and cost by about 80% eliminated the injuries. So you never know where an innovation is going to come from.

So you expose yourself to all different ideas and you have everyone with an inquiring mind at every level in the company. That seems to me to be such a competitive advantage. Whereas most companies just get larger, there is a just natural income. to lose that nimble spirit, that nimble mindset? No, it's a constant battle because, I mean, we all like to rest on our laurels and become complacent. And this is one of my theories that success is the, and then not just mine, but through history, success is one of the biggest enemies of success.

It happens in nations. It happens in people. and it happens in companies. And so we constantly need to remind ourselves that whatever we're doing is not going to be good enough. And if that's been true through history, or the urgencies in order or magnitude greater today with the pace of technology. That's exactly right. You also introduced another phrase to me that I absolutely loved. And you called it creative destruction.

And we've been talking about a lot of the same things. But creative destruction just, I loved it. I loved when you said it. And I made a note for you to define that and how you use it on a daily basis. Right. That was from a great Austrian economist who ended up teaching at Harvard called Joseph Schumpeter. And the way he put it, or the way he defined creative destruction as the process of industrial mutation, incessantly revolutionizing the economic structure.

from within, incessantly destroying the old one and incessantly creating the new one. And his point was, because when we're competing, we think, okay, we're competing in productivity and output and price and those things, and that's true short term. But Schumpeter's point is longer term, what you're really competing in is you're competing with the new commodity, the new technology, the new sources supply, the new type of organization. So you need to not only be improving your current cost structure and how you compete on price and service, but these more revolutionary long-term changes. And you see over time, whole industries are driven out. And that's what he means by creative.

destruction. We believe, and this is part of this, what we call this virtuous cycle, is continual transformation. And we've had, since I've been with the company since 1961, five transformations. And the one we're going through now is to introduce the best technology into all our businesses. And we are just getting remarkable improvements by doing that. combining different forms of technology, whether that's electronics, connectors, sensors, and software, whether that's predictive analytics, artificial intelligence, robotics. We are using all those forms of technology to transform all our businesses, manufacturing, customer deliveries, understanding what our customers' value, and so forth.

Yeah, it's so great to see you doing this and continually doing it, even though you could rest on the laurels, and yet that would lead to ultimate destruction there. And I want you to talk to the small business person. So they're listening in right now, and they've heard us talk through several things, the virtuous cycle, the experimental discovery, embracing, driving change, creative destruction. All this is making a lot of sense. But if you were to sit with them, no matter what their business is, and they hear that answer that you just, just gave. What area would you tell them to focus in first, no matter what their business, as it relates to maybe efficiency so that they remain nimble, they are hopefully getting an edge on the competition? What would you say to them they need to focus on first? This is, I think,

the main driver of our success is first thing is understand what your customers value. Well, first of all, do you have the right customers? And do you understand who your best customers are, which ones are most profitable and most sustainable. And that's where you need to focus and you need to really understand what they value and what they would value. And what I mean by that is you can't just go ask them. You say, well, what do you prefer? Well, I prefer your product. But what would you prefer if you had other choices. For example, IBM did a survey back in the 80s, like 10 years from now, what computing system will you want? Well, 70% said IBM mainframes. Why did they say that? Because that was the best alternative they knew. If they had known that there would be personal

computers and the internet available at a much lower cost with much greater power than any IBM mainframe, they would have said that. So it's up to you, the supplier, to figure out, to know what they really value well enough to anticipate and be working on that. In other words, you don't want to just think, okay, how do I better compete today? This is kind of Schumpeter's point. It's not just price and output that you're competing on. You're competing on what will exist in the future. And so you either drive creative destruction or you're going to be a victim of it. Yes. As we're finding with retailers as those who are using the internet to distribute. you know, what are your thoughts on artificial intelligence and its impact on the economy and jobs as we

look at maybe some of the jobs that AI can eventually replace? Well, we're going through another transformation just as 100 years ago, the great majority of the people worked on farms. So as that those started to be automated and people go, gosh, we're going to have all these unemployment. we have more employment today. Why is that? Because with technology, we develop new products and services that when people see them, they want them. You look at what percentage of the workforce is working on products that existed 100 years ago? It's minute. They're all working on new products. And that's what, I believe, artificial intelligence and the electronics and all these, this new technology, data analytics, predictive analytics, all of this will lead to new products

that will make people's lives better. And not in a hundred years, because time is being compressed, but 10 years from now, maybe the majority of people will be working on, products that don't exist today. Wow. We're just starting to see this. This is the beginning of a new frontier. And in a decade or two, our lives, well, all of us will be completely different. This is why any protectionism, whether protecting against foreign competition or trying to rig the system to keep innovations out from competing with you, all this stuff is so self-destructive. What we all need to be as lifelong learners and see what's going on. And it's like shooting a bird. You don't aim at the bird. You'll be 10 feet behind them by the time the buckshot gets there. You need to aim

ahead of them. That's right. And that's what we all need to be doing in our careers, both as employees and as companies, and think, okay, where is this going? What capabilities do I have? What do I need to learn that can create value in this new future. And so our whole education system needs to be changed, to be oriented towards that. And that state of mind rather than, okay, the professor has all the answers, just memorize them, pass the test, regurgitate them, and that's it. No, we need to be exposing these students to a whole variety of ideas and challenges and encourage them to challenge, not just regurgitate and then try to silence any different viewpoints. I mean, if we did that here in the company, we'd be bankrupt.

That's right. Well, I want to stay here for a minute because this is absolutely right. And this is something as leaders we have a say on. And that is that if we're not careful, Charles, we are literally beating the curiosity, the ability to ask a question and come up with an answer that we believe in or that we must experiment against and thus killing innovation, which is really the child of curiosity. And we're unfortunately, we're institutionalizing the way people are thinking instead of letting them think creatively. No, you're absolutely right. So how do we, how do we as business people and as leaders,

how do we put the pressure on societal change here? Well, I think we start with ourselves. and what we need to do in our businesses, which we try here, is to ingrain in our people. First of all, you should only benefit to the extent you're creating value for others. So you better understand what aptitude you have that can be turned into valued skills and not just value skills today that will be valued in the future. So you need to first start with a mindset that you can learn, contribute, and succeed. And you're going to do whatever it takes to do that. And then you need to learn the values of success, such as integrity, humility, treating others with respect, having a desire to contribute.

And then you need to experiment to find where you have aptitudes that can be turned, into values skills and you need to be open to contrary ideas and to welcome challenges and be willing to challenge. And then you need to learn to think to yourself for yourself and be creative, always be trying to find a better way and become a lifelong learner. You see how easy all this is? That's right. Nothing to it. But as our people learn this, transform themselves. And so that's what we as a company, I believe we have an obligation for employees to help them succeed in the future. And unless we instill that in them, they aren't. They're going to fail over time and we as with our companies are going to fail. And then we as a

society will fail. And we're seeing that in this two-tiered society. We have, Certain companies like us are doing well and people who are doing well. And then we have another form of the population, large portion of the population that are being left behind because they don't have these opportunities. They're not being given the education. They're being held back by regulations such as occupational licensure or the criminal justice system that make one mistake and it ruins their lives. So we need to reform all that. And those are the things we're working on to try to improve. But it starts with ourselves and our employees.

If we can get all our employees to not be protectionist in their lives, but to be lifelong learners and driven to want to create value for others and succeed by doing that, we'll have made a huge start on reducing these problems in society. Yeah, I agree with you 100%. I want to switch it a little bit personal because I love that you said lifelong learner. I had the opportunity several years ago now over a decade to spend a lot of time with Art Linkletter, the legendary TV man. And he once told me he said the key to longevity, he lived into his 90s, was that he continued to learn every day.

He was learning something every day and keeping his mind active along with his body. I'm just curious, what are you learning these days, whether it's something new you're into or something in the business, on a personal note, on a civic note, what's something that Charles Koch is learning, something new? I'm learning all these new technologies, not in depth, but I'm understanding the power of them and how to organize them. And we've acquired a number of companies in that. As a matter of fact, we've set up a new company called Coke Disruptive Technologies to build a network of all the technology entrepreneurs out there, and then to work with them under a system and mutual benefit.

For example, the technology companies we bought, we were able to buy them because we could show them that what we had here could help make them successful and they could help make us successful. For example, we bought Molex, a connector company, and we encouraged them to build, not only connectors, but electronic systems with sensors and software. They could use our companies as laboratories to experiment with these new products, for example, on doing a leak

detection system in our plants. And so they've developed that. And then many others. And we've done the same thing. We acquired half interest in Info, who's the third largest business, management software company after SAP and Oracle. And so we said, okay, we'll want you to work with our companies to improve them with this management software. And then we'll provide a laboratory so you can develop new products in by trying to apply them in our companies and working the bugs out and working with us. So this whole concept of mutual benefit.

I think is something that can be powerful for everybody. That's good. Well, before we let you go, I want you to encourage our audience, specifically those who are leading small businesses or are leaders in small businesses, maybe the entrepreneurs that have something that they're about ready to launch or they've recently launched it because we believe here at Entree leadership that small businesses are the heartbeat of this great American economy. And so I would love for you to just encourage the hearts of these men and women that are listening in today.

What would you say to them? I would say, first of all, whatever idea you have, find people who have an understanding of the drivers of success there and solicit challenges and then design an experiment. So you don't bet everything you have on that. design an experiment so you can work the bugs out before you launch and have the attitude that Thomas Edison had. I love the story of when he had tried 9,000 approaches to design a new battery and none of them worked. So he had this friend that said, gosh, Thomas, I'm so sorry you've had so many failures. He said, I haven't had any failures. I've learned 9,000. things that don't work. But he experimented at a small enough level that didn't take him under.

That was his mindset, that he was always looking for ways to create value and experimenting to find them. Well, really good stuff. And you are a friend of businessman and women everywhere. Love your example. Love that this all came out of a family business. I think that that is so exciting because we have so many family-owned businesses that are part of this tribe. And I think this has been so encouraging and so practical for us all. So on behalf of everybody at Entree Leadership on our team and our audience, Charles Koch, thank you so much for spending time with us. We are certainly better for it. Well, thank you, Ken, enjoyed it. Hope you enjoyed that conversation with Charles Koch. Hey, our Entree Leadership team is

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Again, why would you not take advantage of this very important and free resource? All right, folks, that's going to do it. I want to say big thanks to Charles Koch for being our guest. on behalf of Will Rudder, our producer and our engineer Jim Bab and the entire Entree leadership team. Thank you so much for listening. We'll talk with you again very soon.