“It got to the point where the boats were competing against each other. I was just sitting back like a big old Cheshire cat in a tree,” Dubose said. Using data to drive changes at the level of each barge, Dubose boosted profits in the marine unit overall. His profit margin reached 33 percent. The trucking division, by contrast, was lucky to see a profit margin of 8 percent or 9 percent. As he boosted profits, Dubose was given more freedom and more resources. He added more ships, buying larger barges that could ship forty thousand barrels of oil at a time.
All the while, he was in contact with managers from Wichita. They helped him prepare his run charts, and they taught him other tricks from Deming. As he talked with more managers, Dubose learned that not everyone embraced the Deming formula. A lot of managers were accustomed to making decisions based on gut instinct. They thought the charts were just a gimmick. But as many Koch Industries employees would learn over the years, Charles Koch did not consider his guidance to be a gimmick. And following his guidance was not optional.
“Some of these poor rascals just couldn’t embrace [Deming’s] thing. They couldn’t get their arms around it. . . . They’d just zigzag a line across with a bunch of numbers. The people who couldn’t support that, well, most of them were let go,” Dubose recalled.
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The Koch University seminars were just the most visible aspect of his efforts to encode his company with a very specific culture. There were other elements of the culture that were being institutionalized behind closed doors.
One of the most important elements of Charles Koch’s philosophy was the need to expand, the need to be opportunistic. Some of this was drawn from Sterling Varner, but there was also a part of it that came from Charles and from his view of the world. One of the key lessons that Charles Koch took from the Austrian economists von Mises and Hayek was that markets never stood still. The status quo never survived. Markets always build up and then tear down. It was an evolutionary process that never ended, and companies that tried to fight the process would only be devoured by the forces of change in the end. Charles Koch wanted his company to change and grow with the markets. He wanted Koch Industries to internalize the forces of change and exploit them rather than trying to fight them.
This desire was institutionalized in a small office down the hall from Charles Koch’s suite. That’s where he started the company’s first development group. To lead the new group, Charles Koch turned to one of his brightest young lieutenants, Paul W. Brooks, the employee who had suggested simply jettisoning annual budgets. While Brooks’s ideas might have seemed brash or even radical, he was no corporate swashbuckler. Brooks didn’t come across as someone trying to impress people around him by parading his shining intellect. He was low-key and analytical and very much like Charles Koch in his deliberate approach to problems. Brooks was part of a small cadre of employees who came to Koch Industries from Exxon in the mid-1980s. Exxon approached the market with a certain hierarchical rigor; it was a company that believed in protocols and an engineer’s approach to problems, disciplined and linear. During the 1980s, this approach failed to master the violent ups and downs of the oil business, and Exxon had to let a lot of its talent go, including Brooks. At Koch, Brooks found that he could still think like an engineer but inside an institution that was more flexible, adaptable, and entrepreneurial.
When he was put in charge of Koch’s development group, Brooks was given one of the most important jobs at the company. The development group would be an acquisition machine. It would work full-time to identify new companies for Koch to buy and new deals in which to invest. The group would formalize Sterling Varner’s instinct to scan the market for new opportunities. The development group was a central hub to which all Koch employees could send potential deals that they’d spotted. Senior managers in every division at Koch were taught to act like scouts in the marketplace, and when they found a deal that was large enough and promising enough, they passed it up the chain of command to the development group for approval. The development group then studied the idea from every angle before deciding how to proceed. The development group also came up with ideas of its own. Over time, executives in the group would undertake blue-sky studies that looked out ten or even twenty years on the horizon and identified new markets in which Koch might want to invest.
Koch’s development group would become one of the largest, most effective deal-making machines in the United States. The group would come to embody modern American capitalism in the early twenty-first century, an era when private equity and hedge funds scoured the landscape in search of acquisitions. Charles Koch quietly built a private equity firm inside his offices in Wichita that would rival anything created on Wall Street. In the earliest days, in the 1980s, virtually nobody outside Koch Industries headquarters knew that the development group existed.
The development group made its first major deal in 1981. It came along thanks to Bernard Paulson, the head of oil refining. He had spotted an opportunity in part because of the computer models that he had perfected to help him run the Pine Bend refinery. The data helped Paulson determine exactly which units he should run, what products he should produce, and which markets he should sell into. The computer models gave Paulson a kind of X-ray vision into oil markets. Now, Paulson turned that vision outward, toward his competitors.
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Koch Industries sold a lot of crude oil to a refinery owned by Sun Oil in Corpus Christi. But Koch didn’t just collect money when it sold crude to Sun Oil. It also collected intelligence.
Bernard Paulson’s team knew how much oil Sun was purchasing, and what kind of oil. Then he learned who Sun’s customers were, and what those customers paid for Sun’s product. Paulson began using his computer models to study the market that surrounded Sun Oil’s refinery. He studied what equipment was inside the refinery and at what volume that equipment could process oil. He learned what products Sun was making and at what volumes. He learned where Sun was selling its products and at what price.
The Sun Oil refinery in Corpus Christi processed the same kind of “light crude” that most other refineries used.I Sun Oil did not have the type of coker towers that processed the heavy, sulfur-rich crudes refined at Pine Bend. This made the Corpus Christi refinery somewhat ordinary—it was doing the same thing that many refineries were doing along the Gulf Coast. It didn’t have the same kind of competitive niche that Koch enjoyed in Pine Bend.
But Paulson saw something in Corpus Christi that even the refinery’s owner did not seem to appreciate: he saw that a market opportunity was being wasted. The Sun Oil refinery had equipment that could process oil and turn it into a petrochemical called paraxylene (pronounced pair-uh-ZIE-lene). Paraxylene was one of those products that Koch Industries excelled at making and selling: it was obscure, difficult to produce, and used in one form or another by virtually everyone. Paraxylene was the raw material for synthetic fibers and materials like dimethyl-terephthalate acid and purified terephthalic acid. These chemicals, in turn, were used to make things like polyethylene terephthalate and saturated polyester polymers. Most people have never heard of these chemicals, but they are the building blocks for plastic containers, bottles, drapes, upholstery, clothing like polyester suits, electrical insulation, and photographic film. Paraxylene was something that everybody bought without knowing it. And demand for paraxylene was growing. There were ever-more types of synthetic clothing and an ever-increasing demand for plastic containers to hold drinks or household chemicals.