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

by Bartley J. Madden

• ISBN13: 9780470593974
• ISBN10: 0470593970
• Format: eBook
• Copyright: 2010-02-01
• Publisher: Wiley

Summary

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.

Table of Contents

Preface

Acknowledgments

A Systems Mindset

How We Know What We Think We Know

The PAK (Perceiving-Acting-Knowing) Loop

Purposes

Perceptions

Cause and Effect

Actions and Consequences

Feedback

Knowledge Base

Examples of Systems Thinking and Problem Solving

High-Reliability Organizations

Eli Goldratt, Business Theorist

Colonel John Boyd, Military Theorist

Correlation, Causality, and Control Systems

Summary of Key Ideas

The Wealth-Creation System

The Perception of Free-Market Capitalism

The Housing and Credit Crisis of 2008-2009

Government Regulation and Unknown Risks

The Standard of Living

Summary of Key Ideas

The Ideal Free-Market System

Components of a Free-Market System

Consumer Wealth, Producer Wealth, and Competition

Efficiently Providing What Consumers Want

Summary of Key Ideas

The Competitive Life-Cycle View of the Firm

Competitive Life-Cycle Framework

Firms' Competitive Life Cycles and Dynamism

Company Examples

Eastman Kodak

IBM

Digital Equipment

Apple

Bethlehem Steel

Nucor

Kmart

Medtronic

Walgreen Company

Donaldson Company

Life-Cycle Observations

Summary of Key Ideas

The Life-Cycle Valuation Model as a Total System

Efficient Markets versus Behavioral Finance

Valuation Model Principles

Measurement Units

Forward-Looking, Market-Derived Discount Rates

Problems with CAPM Cost of Capital

Improving the Valuation Process

Investor Expectations: The Wal-Mart Example

Critical Accounting Issues

Reply to Critics

Summary of Key Ideas

Business Firms as Lean, Value-Added Systems

Lean Thinking and PAK Loop Components

Knowledge Base

Purposes

Perceptions

Cause and Effect

Actions and Consequences

Feedback

A Lean Transformation Example: Danaher

Summary of Key Ideas

Corporate Governance

A Systems View for Corporate Governance

Corporate Governance Needs Repair

A Standard of Performance for Boards

A Successful Cultural Transformation Example: Eisai Co., Ltd

Shareholder Value Review

Valuation Model Selection

Value-Relevant Track Records

Business Unit Analyses

Reply to SVR Objections

SVR as an Evolutionary Process

Summary of Key Ideas

Concluding Thoughts

Benefits for Public Policy Makers

Benefits for Business Managers

Benefits for Investors

Notes

References

About the Author

Index

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