Wealth Creation: A Systems Mindset for Building and Investing

Wealth Creation: A Systems Mindset for Building and Investing

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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.

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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 wealth
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Economic 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 America

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.
From the Inside Flap
The competitive life-cycle framework-and its relation to stock valuation-is based on the premise that competition and capital flows operate over the longer term to force a firm's economic returns toward the cost of capital. In short, the pattern of a firm's economic returns and reinvestment rates reflects an unending struggle between managerial skill and competition over time. The life-cycle framework, as explained in this book, provides an insightful and intuitive way to understand levels and changes in stock prices over time. It is widely used by institutional money managers in order to make better investment decisions.

Throughout the book, the common thread is a systems mindset for understanding societal attitudes and institutions that hinder or promote wealth creation and the complex activities of business firms in efficiently meeting customer needs. Such a mindset focuses attention on the underlying processes and related incentives that drive the overall system results, and especially on the importance of continual firm-wide learning to improve those processes.

The life-cycle framework provides a unique lens for seeing through a firm's short-term financial results to better gauge likely long-term wealth creation or destruction. Company examples showcase the analytical usefulness of life-cycle track records and present a bottom-up view of how-in a free-market economy-customers, employees, and shareholders have mutual, long-term interests.

Madden details opportunities for higher, sustainable economic growth through voluntary, private sector initiatives. As to improved management, he analyzes both the difficulty in duplicating lean principles pioneered by Toyota and the related potential for sustained competitive advantage. As to improved corporate governance, he describes a novel approach for boards of directors to ensure that management follows a wealth creation path.
From the Back Cover
Praise for Wealth Creation

"Bart effectively illustrates that neither unprincipled opportunism nor endless regulation can lead to business success and societal well-being. Instead, such universal benefits can only derive from a relentless focus on creating real, long-term value."
-Charles G. Koch, Chairman of the Board and CEO, Koch Industries, Inc.

"This book is for investors, but public policymakers take note. Its message for both is that wealth is created from within, not top down or outside in. For investors there are practical guidelines to identify firms early in their life cycle that demonstrate a high capacity for innovation and integrity, and that listen to and serve their customers. Policymakers must nurture this business environment for all to prosper."
-Vernon L. Smith, Economic Science Institute, Chapman University, Nobel Laureate in Economics, 2002

"We use the life-cycle framework explained in Bart Madden's book as the linchpin for analyzing companies and diversifying clients' portfolios. Before voting for leaders in Washington, we should quiz them on how well they understand the principles laid out in Wealth Creation."
-Christopher C. Faber, founder, IronBridge Capital Management, LP

"An imaginative [book] that integrates a dynamic approach to business systems with the fundamentals of wealth creation."
-Douglass C. North, Nobel Laureate in Economics, 1993

"This enlightening book helps the reader understand what is needed to get a free market economy to function ideally, and identifies significant shortcomings in current arrangements. Particularly illuminating is the emphasis on an absence of incentives for management to focus on long-term performance of the firm, and the failure of directors to provide effective oversight."
-William J. Baumol, author of The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism


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