Value Creation Principles

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Bartley J. Madden's Value Creation Principles specifies that a firm's knowledge-building proficiency is the fundamental cause of a firm's survival and prosperity as well as a pathway to significant improvements across a firm's typically siloed activities. This theory is about connectedness among the firm's purpose, its major activities, and its long-term overall performance, with attention to long-term financial performance. Madden argues that employees improve their knowledge-building proficiency with experience in traversing the knowledge-building loop, whether alone or preferably with a mentor. Success in understanding cause and effect, using that virtuous cycle of learning, reveals faulty or obsolete assumptions and leads to new assumptions whose reliability is then verified. Language matters and employees' knowledge-building proficiency improves with a habitual concern for questioning assumptions underpinning words describing the firm's activities. Attention to language can help guide experiments (similar to Intuit's experimentation culture) having the potential to negate "knowledge" which is now obsolete possibly due to a changed environment. A firm's knowledge-building proficiency depends upon top management developing and sustaining an organizational culture that accomplishes two objectives. First, employees are rewarded for productive work enabled by their continual learning and related proficiency in knowledge building, which results in process improvements and occasional breakthrough ideas. Second, the culture promotes collaboration both inside and outside the firm and sharing local knowledge across the firm's business units so that firm-wide knowledge becomes a significant, value-creating intangible asset. A pragmatic theory of the firm offers a more insightful thinking template compared to existing theories of the firm. It reflects the following tenets about knowledge building and firm performance: * The fundamental cause of a firm's long-term performance is its knowledge-building proficiency versus competitors. * Although competitive advantage is typically ascribed to a firm's capabilities, intangible assets, and the like, the source of these advantages is the firm's knowledge-building proficiency. * A firm's performance--distilled into long-term, life-cycle track records of economic returns and reinvestment rates--offers insights about firm performance helpful to investors and other stakeholders and can improve management's resource allocation decisions. * Job satisfaction and retention of key employees improves as knowledge-building is made an integral part of employees' jobs. * Innovation, whether in products, processes, or strategy, improves as more employees (including management) are engaged in knowledge-building experiences with the potential to discover faulty assumptions and generate insights. * Enterprise risk is best conceptualized as impediments to achieving a firm's purpose. * Sustained shortfalls in profitability are typically assigned to changes in the external environment. But the real cause is a combination of inferior knowledge building (feedback and questioning of core business assumptions) and lack of managerial skill and determination to effectively restructure the firm.