Wealth Creation : A Systems Mindset for Building and Investing in Businesses for the Long Term

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 3/8/2010
  • Publisher: Wiley
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Wealth creation insights by the creator of the company life-cycle framework known as the CFROI valuation model.Investors searching for companies whose future profitability will far exceed that implied in current stock prices, those in business making decisions to improve company performance, and politicians crafting legislation-all use some form of a wealth creation framework.In this book, author Bartley Madden addresses how to think about the complex dynamics in generating wealth and the practical benefits to be gained from upgrading one's wealth creation framework. Throughout these pages, Madden shares six critical insights: A systems mindset focuses not so much on the individual pieces of a system, but on how all the pieces work together to achieve the goal envisioned for the system. The systems way of thinking described in Wealth Creation helps to avoid unintended, bad consequences, and to generate insights for leveraging change that produces big gains in wealthEconomic systems -- the rules and relationships that exist to create wealth by delivering value to customers -- are devilishly complex and therefore solving economic problems requires extensive knowledge. Seen in this light, knowledge growth and wealth creation are two sides of the same coin. A prerequisite to making better buy/hold/sell investment decisions and business judgments is an improved understanding of how wealth is created. An especially useful approach described in this book is to connect business firms' financial performance to stock prices via the firms' competitive life-cycle framework A deeper understanding of business firms makes it plain that customers, employees, and shareholders have mutual, long-term interests. In other words, a free-market system geared to serving customers through competition is a system in which participants share the wealth that is jointly created There is a huge opportunity for sustained, higher economic growth through voluntary initiatives by the private sector. One initiative involves an accelerated implementation of lean management, which was pioneered by Toyota. This is a systems approach that continually purges waste and optimizes the use of resources in delivering value to customers The other initiative concerns improved corporate governance. The wealth creation principles discussed in this book offer a blueprint for boards of directors to vastly improve how they fulfill their responsibility to shareholders, and in so doing, improve the performance of corporate AmericaThese ideas have taken shape as a natural outgrowth of the two areas that occupied Madden's independent research career. First, a commercial research program that began in 1969 at Callard, Madden & Associates focused on how to value business firms. It produced the CFROI (cash-flow-return-on-investment) metric and its related life-cycle valuation model. This work was further advanced at HOLT Value Associates, which was later acquired by Credit Suisse in 2002. Credit Suisse HOLT continues the research to improve the valuation tools and related global database that analyzes 20,000 companies in over 60 countries. This system is used by a large number of institutional money management firms worldwide in order to make better investment decisions.

Author Biography

Bartley J. Madden is an independent researcher whose current focus is on market-based solutions to public policy issues, including FDA reform and corporate governance. In 1969, Madden cofounded Callard, Madden & Associates, where his research was instrumental in developing the CFROI (cash-flow-return-on-investment) valuation model that has become an integral part of the investment process for many large money management firms. He later managed portfolios for Harbor Capital Advisors. In the early 1990s, Madden joined HOLT Value Associates, a firm created to commercialize the CFROI valuation model worldwide. Madden retired in 2003 as a managing director of Credit Suisse, which acquired HOLT. He is the author of CFROI Valuation: A Total System Approach to Valuing the Firm.

Table of Contents

Prefacep. xi
Acknowledgmentsp. xvii
A Systems Mindsetp. 1
How We Know What We Think We Knowp. 2
The PAK (Perceiving-Acting-Knowing) Loopp. 3
Purposesp. 3
Perceptionsp. 4
Cause and Effectp. 6
Actions and Consequencesp. 7
Feedbackp. 8
Knowledge Basep. 9
Examples of Systems Thinking and Problem Solvingp. 10
High-Reliability Organizationsp. 10
Eli Goldratt, Business Theoristp. 12
Colonel John Boyd, Military Theoristp. 14
Correlation, Causality, and Control Systemsp. 15
Summary of Key Ideasp. 17
The Wealth-Creation Systemp. 19
The Perception of Free-Market Capitalismp. 20
The Housing and Credit Crisis of 2008-2009p. 21
Government Regulation and Unknown Risksp. 25
The Standard of Livingp. 28
Summary of Key Ideasp. 33
The Ideal Free-Market Systemp. 35
Components of a Free-Market Systemp. 36
Consumer Wealth, Producer Wealth, and Competitionp. 39
Efficiently Providing What Consumers Wantp. 41
Summary of Key Ideasp. 43
The Competitive Life-Cycle View of the Firmp. 45
Competitive Life-Cycle Frameworkp. 45
Firms' Competitive Life Cycles and Dynamismp. 47
Company Examplesp. 51
Eastman Kodakp. 53
IBMp. 55
Digital Equipmentp. 58
Applep. 59
Bethlehem Steelp. 62
Nucorp. 63
Kmartp. 67
Medtronicp. 69
Walgreen Companyp. 71
Donaldson Companyp. 73
Life-Cycle Observationsp. 75
Summary of Key Ideasp. 76
The Life-Cycle Valuation Model as a Total Systemp. 79
Efficient Markets versus Behavioral Financep. 80
Valuation Model Principlesp. 81
Measurement Unitsp. 86
Forward-Looking, Market-Derived Discount Ratesp. 89
Problems with CAPM Cost of Capitalp. 91
Improving the Valuation Processp. 93
Investor Expectations: The Wal-Mart Examplep. 96
Critical Accounting Issuesp. 99
Reply to Criticsp. 102
Summary of Key Ideasp. 104
Business Firms as Lean, Value-Added Systemsp. 107
Lean Thinking and PAK Loop Componentsp. 108
Knowledge Basep. 108
Purposesp. 111
Perceptionsp. 113
Cause and Effectp. 114
Actions and Consequencesp. 115
Feedbackp. 116
A Lean Transformation Example: Danaherp. 118
Summary of Key Ideasp. 121
Corporate Governancep. 123
A Systems View for Corporate Governancep. 123
Corporate Governance Needs Repairp. 124
A Standard of Performance for Boardsp. 127
A Successful Cultural Transformation Example: Eisai Co., Ltd.p. 128
Shareholder Value Reviewp. 130
Valuation Model Selectionp. 133
Value-Relevant Track Recordsp. 135
Business Unit Analysesp. 137
Reply to SVR Objectionsp. 138
SVR as an Evolutionary Processp. 140
Summary of Key Ideasp. 141
Concluding Thoughtsp. 143
Benefits for Public Policy Makersp. 144
Benefits for Business Managersp. 146
Benefits for Investorsp. 148
Notesp. 153
Referencesp. 159
About the Authorp. 167
Indexp. 169
Table of Contents provided by Ingram. All Rights Reserved.

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