Vision

Charles G. Koch comments on the importance of a vision

❝ Where there is no vision, the people perish - Proverbs 29:18

Value

The development of an effective vision begins by recognizing the way in which an organization can create superior value for society. A vision statement is the organization's view of how it plans to create that value. It should be based on a realistic assessment of its capabilities (as well as improvements it needs to make and the ones it needs to add) and on a detailed analysis to determine the opportunities for which these capabilities can create the most value. This vision should guide everything the organization does.

A company's vision should take into consideration the fact that, over time, competition erodes the profitability of every product or innovation. Competitors are constantly seeking less costly methods of production and superior new products that destroy the profitability of established products. This is Schumpeter's process of creative destruction.

To maximize profit over the life of a product, a business must slow down the inevitable erosion in the profitability of its products and continually renew or replace them. The wide range of strategies to slow this decline include: developing good customer relationships; maintaining a strong brand with the quality and consistency to back it up; developing hard-to-duplicate distribution channels; establishing advantage longterm sales or supply contracts developing new applications; protecting intellectual property by using patents, secrecy and contracts; and improving the quality/cost relationship more rapidly than competitors.

❝ An effective business vision begins and ends with value creation, which is the only reason any business should exist.

How do we create a vision?

The development of an effective vision required recognizing how an organization can create superior value for society and most fully benefit by it. The process starts with a realistic assessment of the business's core capabilities (existing, improved or new) and a preliminary determination of the opportunities for which these capabilities can create the most value.

At Koch Industries overall, we have six core capabilities that have brought about significant, sustainable, competitive advantages: Market-Based Management, Innovation, Operations Excellence, Trading, Transaction Excellence and Public Sector.

We constantly improve and add to list of capabilities, building them through theory, observation, practice and measurement.

We enhace the application of these capabilities in our businesses through teams in each business, reinforced and supported by a team at the corporate level.

Point of View Development (POVD)

POVD involves intensive, systematic, global study.

We study the industry's history, technology, competition, customers, applicable laws and barriers to entry, and how all these factors are changing. We then analyze its value chain and cost structure, future demand for its products, competitive positions of participants and other relevant factors. We seek to understand the future drivers and level of profitability for various segments of the industry.

Based on our point of view, we modify our thinking on the best opportunities and how to capture them. From this analysis, we develop a vision that explicitly states how we plan to create superior value. The vision must be specific enough to guide action and consistent enough with the original vision of the company.

Setting Priorities

Based on its vision, a business needs to develop and implement strategies that will enable it to maximize its long-term value. This requires setting priorities. Deciding the order in which to do things can be just as important as deciding what things to do.

At least two sets of criteria are needed to determine priorities.

1. Actions that are required to stay in business, such as meeting a deadline for complying with a government regulation or a major customer's quality or volume requirements.

2. Actions determined by gap analyses that estimate the risk-adjusted present value of the opportunities relative to the resources consumed (such as scarce talent or capital).

An opportunity with a risk-adjusted present value of $100M will take precedence over one of $20M, assuming similar resources are required.

Priorities must be set first for the business as a whole (based on the company's vision) and then for:

• Marketing

• Operations (down to the plant level)

• Supply

• R&D and support groups

Each must assign responsibility for executing this priorities. These can be executed under an OKR scheme. Also, opportunity cost must be considered in deciding what to do and in what order.

❝ The vision must guide all actions. An effective vision is the genesis of long-term success