Management's Key Responsibility

Bartley Madden, a leading management consultant and author, follows up after Edmund Phelps' leading article on innovation and mass flourishing with specific recommendations for business managers. Madden identifies a firm's knowledgebuilding proficiency as its most important capability in order to survive and prosper over the long term. Even a firm's competitive advantage and intangible assets are best understood as the result of its ability to build knowledge. Along with a firm's organizational structure, knowledge‐building proficiency coordinates and improves work, innovation, and resource allocation. Madden is very critical of much of the current academic finance research that, while ostensibly focused what creates “excess shareholder returns” (i.e., economic profit or economic value‐added), is actually irrelevant to a fundamental understanding of what creates long‐term value. Academic studies are usually just statistical factor analyses. Even when economists study individual firms, they usually do so by modeling them simply as production functions: management is assumed to coordinate factors of production to make and sell products until marginal costs equal marginal revenue and profits are maximized. Such a firm is assumed to have clear boundaries and its management tightly controls the work of employees and the accumulation and allocation of its physical assets. Instead, Madden proposes a new and more sophisticated concept of the firm to position human capital, in general, and knowledge‐building proficiency, in particular, at the center of value creation. In this connection he offers two business exemplars: the American retailer Walmart and the Chinese Haier Group that makes consumer electronics and home appliances.