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:
These ideas have taken shape as a natural outgrowth of 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 xi
Acknowledgments xvii
CHAPTER 1 A Systems Mindset 1
How We Know What We Think We Know 2
The PAK (Perceiving-Acting-Knowing) Loop 3
Purposes 3
Perceptions 4
Cause and Effect 6
Actions and Consequences 7
Feedback 8
Knowledge Base 9
Examples of Systems Thinking and Problem Solving 10
High-Reliability Organizations 10
Eli Goldratt, Business Theorist 12
Colonel John Boyd, Military Theorist 14
Correlation, Causality, and Control Systems 15
Summary of Key Ideas 17
CHAPTER 2 The Wealth-Creation System 19
The Perception of Free-Market Capitalism 20
The Housing and Credit Crisis of 2008–2009 21
Government Regulation and Unknown Risks 25
The Standard of Living 28
Summary of Key Ideas 33
CHAPTER 3 The Ideal Free-Market System 35
Components of a Free-Market System 36
Consumer Wealth, Producer Wealth, and Competition 39
Efficiently Providing What Consumers Want 41
Summary of Key Ideas 43
CHAPTER 4 The Competitive Life-Cycle View of the Firm 45
Competitive Life-Cycle Framework 45
Firms’ Competitive Life Cycles and Dynamism 47
Company Examples 51
Eastman Kodak 53
IBM 55
Digital Equipment 58
Apple 59
Bethlehem Steel 62
Nucor 63
Kmart 67
Medtronic 69
Walgreen Company 71
Donaldson Company 73
Life-Cycle Observations 75
Summary of Key Ideas 76
CHAPTER 5 The Life-Cycle Valuation Model as a Total System 79
Efficient Markets versus Behavioral Finance 80
Valuation Model Principles 81
Measurement Units 86
Forward-Looking, Market-Derived Discount Rates 89
Problems with CAPM Cost of Capital 91
Improving the Valuation Process 93
Investor Expectations: The Wal-Mart Example 96
Critical Accounting Issues 99
Reply to Critics 102
Summary of Key Ideas 104
CHAPTER 6 Business Firms as Lean, Value-Added Systems 107
Lean Thinking and PAK Loop Components 108
Knowledge Base 108
Purposes 111
Perceptions 113
Cause and Effect 114
Actions and Consequences 115
Feedback 116
A Lean Transformation Example: Danaher 118
Summary of Key Ideas 121
CHAPTER 7 Corporate Governance 123
A Systems View for Corporate Governance 123
Corporate Governance Needs Repair 124
A Standard of Performance for Boards 127
A Successful Cultural Transformation Example: Eisai Co., Ltd. 128
Shareholder Value Review 130
Valuation Model Selection 133
Value-Relevant Track Records 135
Business Unit Analyses 137
Reply to SVR Objections 138
SVR as an Evolutionary Process 140
Summary of Key Ideas 141
CHAPTER 8 Concluding Thoughts 143
Benefits for Public Policy Makers 144
Benefits for Business Managers 146
Benefits for Investors 148
Notes 153
References 159
About the Author 167
Index 169
About the Author :
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.
