We’ve conducted 99 conversations with value-creating entrepreneurs, and we’ve conducted about 100 Q&As with business school professors who research and teach value creation. Here’s a headline summary of what we’ve learned.
Knowledge Capsule
1) A firm is defined by its purpose.
Firms with a clear purpose that aligns everyone who works there, along with all suppliers and partners and customers, perform at a high level over the long term. Lack of clarity of purpose is associated with fluctuating performance and often with “fade” — permitting competitors and market changes to erode away a firm’s advantage.
Knowledge Capsule #199: Mises.org/E4B_200_A
2) A successful firm’s purpose is always based on value for customers.
Purposeful firms identify a vision of value received by the customer, and commit themselves to it. They craft a business model to deliver the vision, including continuous increases in efficiency and continuous innovation, thus expanding the value space in which they operate. They build and maintain strong relationships in all directions. They look to the long term, including future generations.
Per Bylund and Mark Packard on Subjective Value, The New Economics Of Value and Value Creation: Mises.org/E4B_200_B
Econ4Business.com/value
3) Firms need a deep understanding of value.
We say in Austrian economics that value is subjective. It’s formed entirely in the mind of the customer, as result of a customer’s learning process: becoming aware of a firm’s offering, evaluating its attractiveness, comparing it with alternatives, putting it to use and assessing whether the usage experience met expectations. They learn from their own perspective, in their own context, and in the process of running their own system (their household, their office, their factory) and living through dynamic changes that alter their perspective. Value is a 2-way flow: the value proposition flows to the customer, and the value experience flows back to the firm as cash flow and feedback.
The value cycle is complex and understanding it is very demanding, as is understanding the customer and their system. Winning firms work hard to build a deep value knowledge.
The Value Learning Process: Mises.org/E4B_200_C
4) Purpose + Value Creation + Entrepreneurship.
In Austrian economics, entrepreneurship is the driver of the business system. The term is often misinterpreted as pertaining to start-ups and small business innovation. It actually pertains to value creation. Entrepreneurship is an approach to business that starts with the customer and their needs — a definition of what new value opportunities are currently unmet — and develops the knowledge and assembles the capability to craft a product or service to meet those needs. There is time uncertainty and resource risk in committing to this development. Any firm and any project that pursues this new knowledge with the intent of creating new customer value is entrepreneurial, irrespective of scale.
Entrepreneurship also weeds out elements that are not value drivers — bureaucracy, obsolete assets and unproductive infrastructure such as luxury office suites. Entrepreneurial firms are focused and efficient.
This is Value Entrepreneurship: Mises.org/E4B_200_D
5) Entrepreneurial firms operate unique value-centric business models.
Entrepreneurship is action, and the set of actions the firm takes to make money consistently over the long term is called the business model. Business models vary by industry — some industries are more profitable than others — and by firm — in every industry, there is something about some firms that makes them more profitable than others. That something is their business model.
The business model that emerges from 199 Economics For Business episodes is the 4V’s model:
Value understanding: building an advantaged and exclusive knowledge base on understanding your chosen customers and their value needs and value preferences.
Value facilitation: designing and assembling a system to meet those needs and preferences and taking it to market for feedback on customer acceptance and approval.
Value exchange: market implementation at scale to generate reliable recurring cash flows from customer purchases and relationships.
Value agility: systems to receive and respond to feedback in a dynamic, responsive flow.
Per Bylund introduces the Austrian Business Model: Mises.org/E4B_200_E
The Austrian Business Model Video: Mises.org/E4B_200_F
Hermann Morris’s Business Model: Educate The Industry: Mises.org/E4B_200_G
6. The entrepreneurial mindset is different.
Over 199 episodes, we observed the following characteristics of the entrepreneurial mindset:
Greater capacity for imagination: imagining great futures for customers;
Better judgment: judgment is intent (the strong emotional relationship with a desired successful outcome), plus intuitive decision-making when data are incomplete, plus confidence in action-as-experimentation, whatever the degree of uncertainty;
Learning: entrepreneurial firms are learning machines, and especially good at challenging their own assumptions.
Empathy: the skill to understand how customers feel subjective value, and to process data through the customer’s mental model;
Orchestration: entrepreneurial firms seldom have direct control over all the resources required to deliver value, and they are expert at orchestrating others’ resources, including their time and skills and knowledge.
Embrace of change: entrepreneurs don’t fear change, they welcome it as an opportunity.
Peter Klein: Opportunities Don’t “Exist”. Entrepreneurs Create Them: Mises.org/E4B_200_H
Victor Chor’s Entrepreneurial Orientation: Mises.org/E4B_200_I
7. Explore and expand.
Entrepreneurial firms not only embrace change, they make it, through a process we call explore and expand. It means always running lots of experiments to see what works unexpectedly. Experiments should be designed to refute existing assumptions. There should be a wide variation of experiments, not just a series of nuanced changes. Entrepreneurs look for a big variation in outcome and so they make big variations in inputs.
The Age Of Strategy Is Over: The Replacement Is Explore And Expand: Mises.org/E4B_200_J
8. Harnessing the highest values.
What guides customers’ behaviors are not features and attributes, like pricing and performance metrics and guarantees, but values. The firmest guidance comes from the highest values. If a customer’s highest value is family security, they’ll never buy any offering that doesn’t align with their value system. Successful entrepreneurial firms know how to climb the values ladder from features to highest value, providing strong rungs at every level, and always going all the way to the top.
Internally for business, the highest values are service to others, delivered in the form of value creation, and ethical behavior.
Value As A Basis For Business Building: Mises.org/E4B_200_K
9. Managing the loop
Business is a flow. In business-as-a-flow, there’s no start and no finish. It’s non-linear. The environment is entirely uncertain and unpredictable. A business forms its intent, and then chooses and implements actions it judges will advance that intent. There’s no way to know what the result will be, and so the business commits to receiving and reading the feedback, making appropriate adjustments, and then implementing new, adjusted actions, to gain the next round of feedback.
This is the flow of knowledge-building, and it flows as a repeated loop, with the same process but different actions, new learning and continuous adjustment.
With sound and active monitoring and management, the loop will generate some durable learning that merit repeated action. Cash flow will flow back to the company, and profitable returns will grow. The loop can be self-reinforcing.
Mark McGrath: OODA Loop: Mises.org/E4B_200_L
Bart Madden: Proficiency With The Knowledge-Building Loop Is The Key To Value Creation: Mises.org/E4B_200_M

Value for customers is the purpose of all entrepreneurial business. Firms big and small must know, follow, and adhere to the principles of value creation. This is pragmatic not theoretical — the consequence of a failure to do so is that the firm cannot survive.
Bartley J. Madden studied value creating firms as a co-founder of a successful investment research firm and then managing director of Credit Suisse HOLT. He is now an independent researcher and founder of the Madden Center For Value Creation in the College of Business at Florida Atlantic University.
He joins the Economics For Business podcast and shared a summary of a lifetime of research.
Knowledge Capsule
A systems thinking approach provides the best route to understanding value creation.
The business firm is a sub-system within a bigger system, that of society. The effectiveness of the firm is tied to organizational learning and the evolution of dynamic capabilities. Bart Madden’s pragmatic theory of the firm treats it as a holistic system with a well-defined purpose. If it is successful in achieving its purpose, it will benefit the larger societal system.
The purpose of the firm is a four-fold composition of mutually reinforcing goals.
Sometimes, the business literature is guilty of treating purpose as a PR statement, a catchphrase that can be communicated without it necessarily governing the firm’s behavior. Bart Madden’s view of purpose demonstrates much greater depth, appropriate for complex systems management. Purpose is 4-fold:
A vision of the value that can be realized by customers, and that can inspire and motivate employees to work for a firm committed to ethical behavior and making the world a better place through customer value. [[{“fid”:”137418″,”view_mode”:”image_no_caption”,”fields”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 1″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””},”type”:”media”,”field_deltas”:{“1”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 1″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””}},”attributes”:{“alt”:”Example 1″,”class”:”media-element file-image-no-caption media-wysiwyg-align-center”,”data-delta”:”1″}}]] Customers consume value by experiencing it in their interactions and relationships with the firm. The customer’s experience is dynamic within their own system of competitive offerings and alternative choices.Survive and prosper through continual gains in efficiency and sustained innovation. These are long term performance variables that depend directly on a firm’s knowledge-building proficiency. A firm must generate a return that is greater than the cost of capital, and as it matures, this return can be eroded away by competitors who offer lower prices or different features to customers. Building knowledge and translating it into new business capabilities is critical for long-term survival. [[{“fid”:”137419″,”view_mode”:”image_no_caption”,”fields”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 2″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””},”type”:”media”,”field_deltas”:{“2”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 2″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””}},”attributes”:{“alt”:”Example 2″,”class”:”media-element file-image-no-caption media-wysiwyg-align-center”,”data-delta”:”2″}}]]Work continuously to sustain win-win relationships in every direction. Relationships with customers are primary for value creation, and relationships with employees and managers must generate the understanding, motivation and commitment to delivering customer value, while relationships with suppliers, collaborating firms and other partners must result in their best support for value creation. It’s a way of living and doing business that engenders trust all around. Shareholders are also rewarded as a consequence of these relationships.Take care of future generations. The long-term view of the pragmatic theory of the firm as a system within the bigger system of society emphasizes thoughtful concern for the future, so that return on capital can be sustained. Paying attention to minimizing waste in the earliest product and service design stages can serve the future, and this includes minimizing pollution (a form of waste) and reducing harm to the environment.[[{“fid”:”137421″,”view_mode”:”image_no_caption”,”fields”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 3″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””},”type”:”media”,”field_deltas”:{“4”:{“format”:”image_no_caption”,”alignment”:”center”,”field_file_image_alt_text[und][0][value]”:”Example 3″,”field_file_image_title_text[und][0][value]”:false,”field_caption_text[und][0][value]”:””,”field_image_file_link[und][0][value]”:””}},”attributes”:{“alt”:”Example 3″,”class”:”media-element file-image-no-caption media-wysiwyg-align-center”,”data-delta”:”4″}}]]
A firm that is successful in achieving its four-part purpose benefits customers, employees, partners, suppliers and shareholders, as well as society at large.
Nurturing and sustaining a knowledge-building culture is the most critical driver of long-term performance.
Knowledge-building is a continuous loop:
Knowledge base, purposes and worldview: Every firm has a knowledge base that determines current perceptions or current worldview, which includes ideas and beliefs and assumptions about interacting with the world.
Perceptions: We see the world through our perceptions and construct our reality that way. We may be self-assured about some favorite ideas about the obvious way to proceed, but we may be proven wrong via future learning.
Purposeful actions and consequences: With its purpose in mind, the firm takes actions, and each action has consequences, which may or may not have been anticipated.
Feedback: Learning from actions and their consequences is consumed as feedback, a critical component of the knowledge-building loop. The knowledge base changes as a result of this learning. An existing assumption may be replaced. Humility is important when traversing the knowledge-building loop.
New understanding and new perceptions: As a result of feedback and learning we may be able to evaluate our assumptions differently and perceive the world in a new and more accurate way.
It’s hard to be skeptical about our own strongly held beliefs, and therefore a cultural commitment to experimentation — the kind that’s capable of revealing obsolete assumptions — is necessary.
Knowledge-building stems from firm culture.
Knowledge-building proficiency is a culture which views everyone in the firm as a value creator and a knowledge worker who can continuously improve their own problem-solving skills. This, in turn, motivates all employees since they can take great satisfaction from their jobs.
One of the errors of the traditional command-and-control management structure is that it assumes the smartest people are “higher up”, and it takes decision-making away from those closest to the customer and to the most relevant knowledge. The higher-ups set short-term targets for the employees, which is inconsistent with treating individuals as learners and value creators.
Knowledge-building occurs, and must be nurtured, at every layer of the firm.
The correct view — and the correct measurement — of firm performance is the life cycle.
All firms traverse an inevitable life cycle. Bartley J. Madden’s books and research picture it this way.
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During a period of high innovation, economic returns are high, and firms can reinvest at a high rate. This inevitably fades as competitors erode the advantage. In maturity the returns approach the cost of capital, and the business model may fade to the point where it fails to make the long-term cost of capital. That’s why firms must always be investing in long term new innovation projects for continuous refreshment and to repeat the high return stage. They must demonstrate to investors a skill in making these high return long term investments. The stock price is an appraisal of this skill.
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The life cycle components are the long-term cost of capital, the return on capital that results from knowledge-building proficiency, the fade rate and the reinvestment rate. The metrics of firm performance are those related to the life cycle.
Additional Resources
The Pragmatic Theory of The Firm and The Knowledge-Building Loop (PDF): Mises.org/E4B_199_PDF
Books by Bartley J. Madden:
Value Creation Principles: The Pragmatic Theory of the Firm Begins with Purpose and Ends with Sustainable Capitalism: Mises.org/E4B_199_Book1Value Creation Thinking: Mises.org/E4B_199_Book2CFROI Valuation: Mises.org/E4B_199_Book3Reconstructing Your Worldview: The Four Core Beliefs You Need to Solve Complex Business Problems: Mises.org/E4B_199_Book4
Paper: “Bet on innovation, not Environmental, Social and Governance metrics, to lead the Net Zero transition” by Bartley J. Madden (PDF): Mises.org/E4B_199_Paper
Good Strategy Bad Strategy: The Difference and Why It Matters by Richard Rumelt: Mises.org/E4B_199_Book5
Plain Talk: Lessons From A Business Maverick by Ken Iverson: Mises.org/E4B_199_Book6