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

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