If you’ve been following the US news, you’ve most likely heard of a big scandal involving American football coach Joe Paterno and his assistant coach.

There is a VITAL business lesson in all of this that I’ll share with you in a moment.

As the scandal unfolds, it seems one of Paterno’s assistant coaches had abused several 8 year old boys in the Penn State locker rooms over the span of a decade or more.

Several people witnesses these cases over the years, and to make a long story short — nobody did anything about it.

When it was brought to his attention years ago, Paterno “passed the buck”, notified University officials and then promptly looked the other way when nothing happened.

Keep in mind these previous incidents involved the assistant coach admitting he did it to on campus police (which apparently is different than the “real” police)

As the scandal unfolds, the question keeps coming up… How could this have happened?

To understand HOW something like this happened, it’s useful to explain WHAT actually happened — and to do so in a way that be extrapolated to other situations… like running a business.

(As a parent of young children, I can’t figure who I’m more mad at… the abuser… or the people who looked the other way over the span of a decade)

So what REALLY happened here?

In short, the root cause here was in a word CULTURE.

Huh?

One of my mentors, an individual who grew a 30 person company to 30,000 employees in 10 years creating a Fortune 50 company in the process once told me, there are only 3 things you need to worry about as CEO.

1) Strategy – What’s important enough to be worth doing
2) People – Who is going to do it
3) Culture – How people should behave in the absence of explicit instructions

The real problem at Penn State is a culture problem. And ALL culture problems are ALWAYS due to the person at the top. In a business, that’s the CEO/founder. In a University, that’s the University President and/or Head Football Coach.

Here’s why.

As my mentor explained to me, the ONLY person in an organization who can set the tone for the organization’s culture is the #1 person… the person in charge.

You can’t delegate culture.

It doesn’t work.

You can’t have Human Resources come up with the official culture for an organization… because if the CEO doesn’t follow it, everyone else will know it’s meaningless.

More specifically, when you pinpoint the specifics cultural issue, it’s actually quite simple.

Every organization has (or should have) it’s mission. A mission is the organization’s purpose for existence.

In the case of Penn State, the organization’s mission was:

WIN Football Games & Championships… PERIOD.

It is VERY clear this was the mission. Whether this mission was every written down as a statement is irrelevant. By examining the behavior of everyone involved from University leaders to the janitors, to Paterno.

ALL of their behavior is can be explained as being “on mission”… in alignment with their mission.

Now you can debate whether that should have been the mission… but it’s hard to argue that their behaviors were inconsistent with this mission.

BUT, all missions should be constrained by an organization’s VALUES. It’s an organization’s values that defines its culture.

Yes, here’s where we get into MBA jargon words that I normally like to make fun of… concepts like a mission statement or a values statement. (More on this in a second).

A mission might last decades, but one’s values should last for an eternity. It is a sense of what is important… things that you will do or never do despite the mission. It defines WHO you are.. before you decide WHAT to do.

The problem with the culture at Penn State is that the MISSION was clear, but it was unconstrained by any REASONABLE sense of VALUES.

When a Mission isn’t constrained by Values, what you end up with are Enron’s, Bear Sterns, the Catholic Church Scandal (the last one is quite ironic if you ask me).

I suppose you could logically argue that the values at Penn State were = Win at Any Cost. And I suppose if you look at Enron & Bear Sterns’ values…. maximize profit at any cost…. or the Catholic Church… protect your reputation at any cost…

Either the values were to weak to constrain the mission or the values were the wrong ones to begin with.

So how does this relate to you and business?

YOU need to decide both your values and your mission.

Forget the “statement” part of values statement and mission statement… which I think ultimately complicates things. But truly think about what you and your company’s values really are.

Sure thing kind of stuff seems “soft”… it feels optional… unlike focusing on EBITDA margin, or making quota. But, if you don’t define your values and mission, than it becomes surprisingly easily to have an organization drift of course as the months and years go by.

I know this from experience. I had a phase early in my business career where every metric I aimed for I achieved, but I was miserable. I was selling a product I was embarrassed by, to a customer segment that I didn’t respect, and making good margins and sales too boot.

I remember thinking to myself… “How in the world could this have happened?” (Not to dissimilar to the comments being made about Penn State right now…) Though my situation certainly doesn’t compare to Penn State, the underlying causes were the same.

I had NOT defined my values and I didn’t really have a mission. And just in case you’re wondering, X% sales growth and Y% EBITDA margin growth is NOT a mission.

Today after much soul searching, the help of a wonderful executive coach and friend, my values and mission are crystal clear.

When your values and mission are clear, decision making becomes ridiculously easy. It because extremely easy to say NO to every opportunity (of which there are countless) that conflicts with my values or mission.

Here’s my mission and it will quite likely be the one mission I’ll end up devoting my entire life to (yes, you should feel that strongly about a mission):

Helping more people live better lives through better businesses and better business skills

It’s not the most concise of statements (probably a few grammar mistakes too boot) but it very much is THE common thread between all of my decisions — short term, long term, for profit, pro-bono.

Here are a few of my values in no particular order:

1. Always be improving your self, your skills, your business
2. Be the best in the world at what you do at every price point you do it at (including the price point “free”)
3. Only participate in businesses where I have a personal competitive advantage, an exceptional talent, or asset that’s relevant to the business’s success (otherwise it’s too hard to accomplish #2 above)
4. Treat others MORE than fairly
5. Life is short, it’s too easy to drop dead suddenly, if it ain’t fun, I ain’t doing it (or at least not for very long)
6. Always be learning… Always be teaching.
7. Don’t be afraid to charge what you’re worth, but make darn sure customers get at least 10 times what they paid for (directly linked to #2 and #3 above)
8. Be proud of what you do (and if you can’t, you should stop doing it)
9. Leave the world a better place than you entered it…don’t just consume… produce something useful.
10. Maximum profit is NOT the goal. Maximum profit is the BY-PRODUCT of doing the above… a measuring stick of how useful one is to everyone else.

When your mission is clear and your values even clearer, it becomes very easy to make good decisions. I suspect Joe Paterno and Penn State lost their way somehow in the process. Don’t make the same error for yourself and your business.

What are YOUR values?

What is YOUR company’s mission?

If the answers to those two questions are not CRYSTAL CLEAR, do not be surprised if one day you find yourself asking, “How in the world could I let this happen?”

That’s my thought for the day.

There is more news today about the U.S. FAA (Federal Aviation Administration).

Today the FAA suspended yet another air traffic controller. This time for watching a movie instead of paying attention to air traffic.  This controller got fired as he/she should.

Clearly these are embarrassing times for the FAA.

This latest incident aside, the on-going controversy is about air traffic controllers falling asleep.

The head of the FAA is going around the country, visiting his staff, telling them that unprofessional behavior such as falling asleep is unacceptable.

Rather than insisting that controllers do not sleep on the job, it might be useful to understand why controllers are falling asleep in the first place.

Are they doing it intentionally (in which case they should be fired) or are they doing it unintentionally?

It is useful to isolate the “root cause” of the problem — because you solve each problem differently.

If controllers are deliberately breaking the rules, there is a personnel selection, performance monitoring or culture problem.

If falling asleep is unintentional, it is worth questioning why this is happening.  Creating stiffer penalties will not help when the behavior is not a deliberate one. (Though it does look good in the news.)

It reminds me of the old saying that “the flogging shall continue until morale improves.”

If the falling asleep behavior is not intentional, then it is useful to focus on this more specific definition of the problem.  To solve this issue, there are multiple solutions.

1) Compare air traffic controllers to other professions involving overnight shifts to see what other professions do.

When was the last time you heard of an airplane pilot falling asleep unintentionally on a flight?  What about 911 operators? Firemen? Combat soldiers?

Surely this problem has already been solved by someone else. Learn from the experience (and mistakes) of other industries, or risk re-inventing the mistake in yours.

This is not just true for the FAA, but for your own business and industry as well.

It’s a big world out there. The problems you face in your business are hardly unique to you. Someone, somewhere in a world with 6 billion people has faced and solved this problem before.

One of my secrets to providing clients with breakthrough strategies is to “borrow” what is boring standard practice in one industry, and to transplant it to another.

This is my #1 source of innovative breakthrough ideas for my clients.

2) If unintentionally falling asleep is the problem, then why not have a backup system or process in place? This is not exactly rocket science.

The idea of a backup system is not some new invention.

For example, I back up my hard drive in multiple locations.

I have one network attached storage array that is on site. The backup array contains four hard drives in it. If any one drive fails, the other three still have all the data.

That hard drive array sits on a battery backup power supply. If the power fails, the battery kicks in. If the battery runs out, it tells the storage array to shut down.

If the power is down for an extended time, I have a 7000-watt power generator on site and enough fuel for 36 hours.

Data from the hard drive is backed up to this entire system every 60 minutes.

I also have an off-site backup where data is backed up via the Internet to a third party location — which itself has a similar backup system.

This facility is located on the East Coast. I am located on the West Coast.

Now I mention all of this because my backup process is based on a simple premise.  My hard drive will fail at some point. It is a virtual mathematical certainty.

The problem with the FAA approach is they’re basing their entire operation (and I might add your life and mine) assuming that humans can be prevented from falling asleep at 3am just by commanding them to do so.

Seems unrealistic to me.

Wouldn’t it make more sense to just assume that on any given day some controller somewhere is going to fall asleep?

Wouldn’t it make more sense to design the system of people and technology such that even if one controller fell asleep somewhere, it wouldn’t actually matter?

Wouldn’t that be the more conservative, safer approach?

3) If unintentionally falling asleep is the problem, how do we get FAA controllers to be better rested in the first place?

Some researchers have indicated that unless someone is perpetually on the overnight shift, the body is just naturally tired at 3am.

They have advocated intentionally allowing controllers to nap during their breaks (where other controllers are already covering for the controller on break) as a way to re-energize overnight shift workers.

Apparently, this is already common place in other industries (emergency room medicine being one of them).

I don’t know if this is a good idea or not, but it seems to me it should at least be considered — especially if it is already working elsewhere.

But this idea has been shot down for the simple reason: “I will not pay FAA controllers to sleep on the job.”

That’s just political perception… as opposed to a fact-based analysis showing that letting controllers nap does not work.

The reason I’ve mentioned all of this is because much of what is happening with the FAA has its parallels in business — and perhaps even in your company.

Often there is a lot of debate around symptoms… and comparatively less analytical work to determine root causes.

If a root cause is isolated (and that’s a big “if”), then often there are a lot of opinions expressed and debated as to how to solve the problem.

Quite commonly, the CEO gets a favorite pet idea stuck in his or her head.. and forces the rest of the team to just follow along. This is one instance when stubborn determination is a liability.

I have seen this dynamic play out in $1M companies, $100M companies and $1 billion companies.

It is not a function of business size, sophistication or maturity. It is a function of human nature.

Don’t be this kind of CEO!

Here’s how:

* Seek a diversity of opinions in your executive team meetings.

* Encourage others to be candid by asking them to share their opinions first… keep your opinion hidden until after everyone else has spoken. I understand this is common practice in the military. If so, it’s a good idea.

* When your team is have the mother of opinion debates… force your team to bring facts to the table. What do we factually know about the situation? What do we factually know about each solution under consideration?

The idea that makes the most sense should win… not the idea that comes from the person with the most forceful personality or the most authority. (You’d be surprised how often this happens.)

* Appoint one person (a rotating role) to be devil’s advocate in every major decision meeting. It is that person’s role to point out everything that could go wrong… and to force the rest of the team to consider whether or not such risks can be managed somehow.

Accurate Thinking – for something so useful, it’s shame it’s not used more often.

Make sure you’re one of the CEOs that not only uses accurate thinking… more than that, have a mechanism in place (such as the ones mentioned above) to provide a check and balance when your own thinking is not accurate and you don’t realize it.

In the United States, one of the hot news stories is how an air traffic controller fell asleep on the job and the pilot of an inbound plane had to land without any help from the tower.

The immediate response by the Federal Aviation Administration was that individual was fired.

Here is my thought for you today.

In this situation, what is the real problem?

That’s the key question.

It is the question I always ask my clients whenever they see something undesirable happen in their business.

Phrased differently, is the fact that now a total of three air traffic controllers have fallen asleep on the job a problem… or is it that just a symptom of an underlying problem?

Here is my rule of thumb.

If you have a undesirable outcome in your business one time — it is probably just a random event.

If the same undesirable outcome happens in your business two times — I start getting suspicious that you may not have a random event, but you might have a systemic problem hiding beneath the surface.

When the same undesirable outcome happens in your business three times… then I “know” it’s a systemic problem (or at least it is the safest position to assume you have a systemic problem) and I start hunting for it.

In the case of the FAA, the question is: What is the real problem here?

Is it that workers are too tired?

Is it that workers are falling asleep?

Which one is the real problem?

The reason it is important to define the problem is because you can not solve a problem if you can’t define it!

For example, the current approach is to make it illegal for air traffic controllers to take naps during the breaks.

The premise behind this approach is that by insisting air traffic controllers are not permitted to be tired, they won’t be.

I can’t help but ask the FAA, “So…. how’s that strategy working out for ya?”

In my experience, many companies spend a lot of time attempting to solve symptoms, rather than underlying problems.

All that accomplishes is the underlying problem expresses itself in a different way…. sometimes in multiple ways.

It’s like that game “whack a mole” — where a mole pops its head up and you are supposed to whack it with a hammer.

If you don’t stop the mole (the root cause problem), then all that happens is the mole pops its head up somewhere else.

You don’t really solve the problem, all you do is get a new “hole” somewhere else.

So my challenge for you today is to make a mental list of every headache you have in your business right now.

Jot down all those “problems.”

Take a few moments and consider each “problem” carefully, and ask yourself: Is that a problem or a symptom?

You especially want to do this with any “problem” that has occurred multiple times.

Once you have your list of “real” problems, just focus on solving them.

Quite often, by solving the underlying problems, multiple symptoms of that problem go away with it.

So if you have a morale “problem,” maybe you don’t really have a morale problem and what you have is a quality control problem… where your employees are tired of getting criticized for the company making products that don’t work well.

You could throw a party to boost morale, but all you are doing is trying to put a band-aid on the symptom. Solve the underlying problem, and all those other symptoms go away automatically.

That is why it is so vital to distinguish between the symptoms in your business vs. the underlying problems that cause them.

Do yourself a big favor (trust me on this).

Today at 5pm, the iPad 2 goes on sale at Apple retail locations across the U.S.

If you are anywhere remotely located near one, go to the store at 4:30pm.

The purpose is not to buy an iPad 2, the purpose is to stand there and experience what it feels like to witness true customer demand first-hand.

You will notice the long lines.

If you go to the flagship store in your area, you will notice the camera crews filming.

(Apple chose a 5pm launch time for a reason… it precedes the 6pm news broadcast showing long lines and people pumping their fists when they finally get one… but that’s a topic for another day.)

Notice the extra security guards hired to manage the crowd overflow.

Notice the security rope to force people to wait in line.

This, my friends, is customer demand.

Experience this yourself and you will not forget what it feels like to witness demand.

In addition to my consulting, I often teach seminars, workshops or get invited to speak at business schools, such as MIT or Harvard.

When I teach, I always tell my students to do something very important.

Any time you see a very long line in front of a place of business, get in the line… work your way up to the front of the line and figure out what that company did to create the long line.

There is always a lesson at the front of a very long line… just like there will be today at 5pm local time.

Now my explanation is absolutely no substitute for going to experience the demand yourself. Here’s why.

Demand is driven both by rational need and emotions.

Now if you happen to be a business-to-business type industry, you might be tempted to think, “Well I sell to businesses and they don’t have emotions (especially those darn people in procurement)”… this is a tempting thought, but it is my perspective that it is dead wrong.

Businesses never buy anything.

It’s the people in businesses that buy things.

Even that business buyer who is supposed to be sophisticated and rational, guess what she’s doing at 5pm today?  That’s right, going to the Apple store to get that iPad 2!

In the last 40 years, there has been one Fortune 500 company that I can think of that truly grasped this concept that businesses never buy anything, only the people within those companies do.

This company built a massive advertising campaign around this in the 1980′s.

Which company was it?

It was IBM.

You might recall their tag line at the time:

Nobody Ever Got Fired by Buying IBM.

Though IBM was in the business-to-business mainframe business and PC business at the time, they realized what business they were really in.  They were not in the business of selling computers.

No, they were in the business of selling job security and computers just happened to be involved.

Now circling back to 5pm today, when you show up at the Apple store, just notice how much demand is sitting out in front of the store, and then compare that to every other retail store in the area.

Are we in a tough economy?  Sure, we definitely are.

Does customer demand still exist even in a tough economy?

Go see for yourself at 5pm today.

Do you have to do an awful lot to get that demand to flow to you? Damn straight you do.

But the point is it does exist — you just have to figure out how to get it to flow to your company instead of someone else’s.

That’s the “secret” to thriving in this kind of economy.

And do me a favor, when you’re out at the Apple store, take a photo and email it to me. I’d like to assemble a follow up photo essay to accompany today’s thought of the day.

In future articles I will explain how to channel such demand to your business, how to handle the “dealing with procurement” problem, and other related topics.

But for now, just go experience what it feels like to be in the middle of demand so you recognize it when you see it (and far more importantly, you become acutely aware of its absence… and become alarmed by it on a gut level, not just an intellectual one.)

The annual Forbes 400 list is out, and Americans continue their downhill slide.  It used to be that one out of two billionaires was an American.

It is now down to one out of three.. a drop in market share from 50% to 33%.

So which countries are gaining the most ground?

It’s the BRIC countries – Brazil, Russia, India, and China.

Those economies are growth economies – both in the short run and long run.

Here’s a summary article on this trend:

http://finance.yahoo.com/career-work/article/112310/worlds-billionaires-2011

I think American business owners are hugely disadvantaged in the global marketplace for the simple fact that the average American simply does not think globally at all.

If you pick up a copy of Newsweek on a newsstand in any city in the U.S. and do the same at any newsstand in Europe, you will notice the articles are completely different.

The U.S. Edition of Newsweek is all about U.S. news.

The version sold in Europe is about global news (not just the country the magazine is sold in, not just Europe, and not just the U.S. — but all of it).

When your focus is overly narrow, you risk missing out on opportunity.

I admit that about three years ago, I did not think globally about my own business. After all, I run a small business, not some multi-national Fortune 500 company which one more commonly associates with doing business across borders.

But, when the Great Recession hit, I anticipated that at some point in the future, given all the economic stimulus and the completely upside P&L statement for the U.S. government, there would be incredible temptations to solve all those debt problems by printing more money.

All the U.S. government has to do pay off the trillions and trillions of debt is to push one button, and it can “print” trillions of dollars.  This of course creates an entirely different problem called inflation. When (not “if”) inflation kicks in, in the U.S. economy, suddenly revenues generated from customers in more stable economies outside the U.S. become incredibly valuable.

At the time, I generated perhaps 7% of my revenues from outside of the U.S. Given the macro economic trends, I decided this was increasingly risky and started to keep an open mind about more global opportunities.

Today, my company generates about 40% of sales from outside the U.S. This rivals and even exceeds the geographic revenue mix of many U.S.-based Fortune 500 companies.

Most CEOs artificially constrain their global opportunities due to their own self-limiting beliefs about what is possible in their business.

And while it is true that some types of business will never be global in nature, often it is easier to go global with a subset of one’s business.

For example, I recently met with the CEO of a heavy industrial construction-type company. In their local market, spending was literally non-existant.

The problem was that all of the equipment, facilities, and staff were based in a city where no demand existed. It was not cost-effective to transport everything to other areas just for a single project.

Meanwhile in this exact same company, there was one revenue stream that was growing 100%+ per year.

What was it?

Consulting services.

One of the top people in the company got tired of sitting on his rear all day with nothing to do. So he picked up his phone and started calling other construction companies in other regions of the U.S., attempting to do the kind of work this firm specializes in (I forget the exact specialty).

So his pitch was:

“We’ve done 100 of these projects, know exactly what to do, but our local economy is non existent.

“I know you are bidding on five of these kinds of projects in your area, why don’t you hire us, and we’ll buddy each of your key people with one of our key people and we’ll mentor you on the whole process.

We’ll have our proposals guy show you what has worked for us. Our foreman will be the advisor to your foreman. Our CFO can walk your CFO through the cash flow cycles unique to this kind of work,” etc…

So in this case, the equipment and bodies could not be moved to other geographical areas, but the expertise of the staff could.

This is just one example of thinking differently about your business.

The key is not to think about your business defined in terms of your target customer and current product/ offerings, but rather think in terms of:

“What the heck is my company extremely good at?”

If your answer to this question is a specific product or service, you are missing my point.

A product or service is simply one way your core capabilities or competitive advantages is expressed.

If you get wedded to how your competitive advantage is currently expressed, then you miss out on all the opportunities for how your competitive advantage could be expressed.

Once you think this way, the next, more practical step is to ask how these competitive advantages could be re-packaged to provide a different type of value (and perhaps to a different kind of customer) that is in better alignment with the current economy vs. the way those advantages are currently expressed.

This is the essence of being more strategic about your business and the environment you operate in.

My wife and I were talking last night about how the now former President of Egypt Mubarak must either be the most tone deaf person on the planet or the most stubborn.

This morning I wake up to discover he resigned… finally.

Geez, how much of a message from the market does one need to get the hint.

While I have been following this story for the last three weeks, I have just been stunned at the panoramic photographs of protestors such as this one.

At first glance, I wasn’t able to figure out what I was looking at in these photos. Then I realized those hundreds of thousands of little dots on the screen are people!

Lots and lots of Egyptians protesting.

Well the “market” in Egypt got what it wanted. It always does… eventually. (That’s a point worth remembering.)

I have been admiring both the determination of the Egyptians and their restraint in avoiding the use of violence to make their point. Both proved to be successful in the end.

From the outside, it is hard to imagine how a leader could be so oblivious to what his “market” wants.

Yet, before we judge too harshly, let me explain why this happens and why it might even be happening to you right now.

There are two views of any marketplace, including your market.

There is the perspective of the customer and there is your perspective.

It goes without saying that ideally the two should match. But quite often they do not, for two key reasons.

The first reason is market drift — customer needs evolve over time. The degree of change on a day-to-day basis is imperceptible, but on a year-over-year basis quite obvious.

I see this with my kids.

My girls today look pretty much the same as they did yesterday.  As hard as I look, I just do not see any difference from one day to another.

Yet when my folks visit once every few months, my mother in particular always remarks how much the girls have grown.  She sees the change in my girls, I do not.  The difference is in our perspective.

I am living in the hour-to-hour view of raising my girls, she has a snapshot-to-snapshot view.

I imagine that when Mubarak first came to power, he was probably very much admired and respected. I understand he was a war hero (though admittedly my history of modern Egypt is a bit rusty, so don’t quote me on this).

And in his mind, not much changed from one day to the next.

Fast forward 11,000 days later and he suddenly finds out he is one of the most despised people in the middle east. I’m sure he has had a few “how did this happen” moments these last few weeks.

So market drift and the lack of “big picture” perspective is the first reason why someone can easily miss changes evolving in a marketplace.

By the way — to combat this tendency in your company, it is useful to have someone involved in your strategic planning process that has some distance and perspective — someone who is not hampered by the hour-to-hour perspective that can’t help but color the perspective of you and your team.

Somewhat self-servingly, this is a role I play for my clients.  Regardless of who plays that role, it is important that someone not immersed in the hour-to-hour work of your business is involved.

The second reason that causes one to be out of touch with one’s market is denial.

At an emotional level, it is far easier to accept and embrace a market shift that favors you.

For example, if the product you are personally most proud of starts selling like crazy, this is validation of your perspective.

Of course it would sell well, it’s your best product.  Of course it would be easy to come to the conclusion of: “Geez, customers love it, lets sell them more of it!”

This kind of change is far easier to embrace and makes perfect logical sense.

But the reverse is problematic for most people.

What if the product you are most proud of, the one that you think is the best in the industry, suddenly stops selling?  If you weren’t emotionally tied to it, if you had distance and perspective, you would logically have the exact opposite reaction you had in my previous example.  You would say, “Okay, I guess customers don’t want to buy that one, let’s sell them something else.”

If you note the logic, it is the exact same logic as: “They love the product, let’s sell them more of it.”

This same logic argues: “They hate this product, let’s stop trying to sell them something they don’t want.”

Of course this is exactly the opposite of what many people do.

The first reaction is: They are stunned.

The second reaction is: They adopt the attitude that the market is wrong and if only they would come around, sales of “your baby” will recover.  Let’s just hang in there…

Dude… the market wants what the market wants.

You can convince them that your product helps them get what they want, but you can’t convince them to fundamentally want something else instead.

If you aren’t convinced of this, just ask former President Mubarak for his take on this point.

To clarify this point, it is important to look not at what products customers are asking for, but why they are asking for it.  That reveals what they are really demanding.

So why did iTunes and iPod take off many years ago?

What did consumers really want in that market?

They were not asking for an iPod before it came out, but they were very much wanting to enjoy music more conveniently.

The big breakthrough of the iTunes/iPod combination was the ability to get rid of the 90-minute roundtrip drive to the music store to by a whole CD to just get one song.

That’s a lot of work to enjoy a single song.

It’s worth noting that what consumers in the music industry have fundamentally demanded has not changed since Sony’s invention of the Walkman (the music convenience breakthrough of the 1980s).

They want music. They want music more conveniently.

The market wants what the market wants.

So logically, this all makes sense.

Sell more of what customers want, and less of what they do not.

This seems so obvious unless of course it’s your company, your products, and frankly your ego we’re talking about here.

It’s easy to see your colleagues’ marketplace denial; it is far harder to confront one’s own.

I have on several occasions stated that hands down the single largest expense on a P&L of a company that’s struggling is the CEO’s pride.

Don’t let your own pride get in the way of:

1) noticing market shifts

2) accepting that parts of your business might not be in sync with the market in today’s new normal economy

3) noticing the new (and sometimes very different) opportunities that emerge as old ones fade away

If you’re too busy clinging to the past, you often don’t notice the opportunities that can become your future.

Don’t make this mistake.

I have been watching the protests in Egypt with some degree of fascination.

As one resident describes it, this protest is 30 years in the making.

Clearly Egyptians want President Mubarak out of office.

What I find fascinating is how the leadership of the surrounding countries and territories are responding.

Almost all of them are calling emergency meetings, immediately announcing new elections, and replacing key appointees. This includes Jordan, The Palestinian Authority, and Yemen.

Interestingly, Syria has not joined the bandwagon, and not coincidentally, prospective protestors have been organizing online about protesting.

China has shut down internet access of any search engine searches on “Egypt” for fear that any small percentage of China’s one-billion-person population might get any ideas.

Amongst Middle East leaders, the big fear is a wholesale replacement of the top leadership of many countries.

It is equally fascinating that these protests largely organized via Facebook and Twitter could even come remotely close to accomplishing an outcome that Israel has been trying to do for decades – despite spending billions and engaging in multiple wars.

So what is the practical business lesson in all of this?

It is far easier to “ride” market demand than to fight it.

In the political context, this seems quite obvious.

Give the voters what they want, and you get re-elected. Or give the citizens what they want, and they won’t overthrow your government.

It should be even more obvious that this makes sense in business. Give your customers what they want, and they will buy.

Yet, it doesn’t happen as often as it should.

Here’s why.

When an upstart company enters the market (unencumbered by historical baggage), the company focuses on what customers want and finds a unique way to give it to them.

As a company because successful, it has an enormous financial interest in preserving the status quo — because the status quo is profitable and the company has a favored position.

As new opportunities emerge, the successful company considers them — but some of those opportunities get shot down because of the risk they might “cannibalize” one’s sales or profits.

After all, why would you willingly and deliberately reduce your sales and profits if you didn’t have to?

Why should President Mubarak have yielded on certain unpopular policies in 2010 when he didn’t have to?  (To avoid the protest in 2011 about those policies.)

Having spent many years in Silicon Valley, one big takeaway I learned was if you don’t cannibalize your sales, someone else will do it for you.  In the Valley, you eat your own young before you let your competitors have a chance.

When you combine some of the most talented people in the world with gobs of venture capital money, you get an incredibly intensive competitive atmosphere.

While most markets are not nearly as competitive or rapidly changing as technology, it is an industry very much worth studying.

This is true in part because the pace of change is so fast in that industry, you’re able to see how specific competitive decisions play out and their ultimate impact – and take the lesson and apply it to your industry.

Combining what is happening in Egypt and this idea of pro-active change in Silicon Valley, the big message for today is to be relentlessly market focused.

The extreme version of this is to not let internal considerations (e.g., “X new product might cannibalize sales of the flagship product”) be a consideration at all in your decision-making process.

Yes, your CFO will just love this…

So apply this idea back to Egypt — many of the reforms you’re seeing being rushed to “market” should have been done much sooner. If that’s what the people want, you gotta give it to them.

You can only ignore “market” demand for so long before you end up paying the price.

The latest casualty of this?

Border’s Bookstores… just days away from filing Bankruptcy.

Give customers what they want… not what you wish they would want.

Anything else is just a recipe for disaster… eventually.

Times change, and with it we must change too.

The following story is about a very unusual product called the Microplane Grater.

If you spend a lot of time in the kitchen (or Williams Sonoma), you know exactly what I am talking about.

It is a little device that shreds block of parmesan cheese effortlessly. It is just amazing — serious.

I first discovered this in our kitchen and nearly shredded my skin off. The thing is sharp, sharp, sharp!

And it grates, it shreds… (okay, now I sound like an infomercial).

But here is my point, its customers are fanatical and swear it is the best grater in the world — and in my opinion, it really is.

But what is the story behind this company’s market dominance?

It has an absurdly relevant story for us all.  It is THE essence of strategic planning — know what you’re good at doing at your core, but be flexible in how that manifests itself in terms of customers and specific products.

Be loyal to your core competitive advantage; be willing to change all else as the market changes. (And now more than ever, many markets have changed.)

The company was originally a manufacturer of woodworking tools. The Microplane Grater was originally designed to grate wood – yes, the stuff that comes from trees (which explains why it is so sharp).

As the legend goes, some housewife many years ago broke her grater before a dinner party. Desperate to grate something before her guests showed up in a few minutes, she raided her husband’s toolbox and found the Microplane Grater.

“Hmm… it looks like it could grate some cheese or lemon zest… let’s give it a try.” She falls in love with it, tells all her friends, they all descend upon the local hardware store looking for this thing.

The hardware store manager can’t figure out what is going on. All he knows is he sold out of the darn thing, re-ordered it, sold out in a day, re-ordered again… sold out yet again.

Some of the customers frustrated that they couldn’t get the product in stock at the hardware store decide to try the local kitchen store.  In response to the question, “Do you guys carry the Microplane Grater?  If you do, I’d like tobuy six of them…”, the store manager says, “Ummm…. Hmm… I’m sure we can get it for you.”

The store manager didn’t quite get it, but was smart enough to just give the customers what they wanted.

And so suddenly kitchen gadget stores like Williams Sonoma started ordering the Microplane Zester by the truckload.

When the folks at Microplane noticed this one item flying off the shelves and discovered who was buying it, at first they were insulted.  Microplane tools are tough. The fact that they were being used to grate cheese was just humiliating.

But (and this is very important), they decided to fulfill the order anyway.

Today, Microplane is the leader in high-end graters.  The kitchen gadget category represents 60% of sales.  Through this process, they came to appreciate what their true competitive advantage is.

The advantage is not the ability to make graters that grate wood (that’s a specific way their underlying competitive advantage happened to be expressed in the marketplace at a particular point in time).

Instead, they came to realize their core competitive advantage is to make “really sharp stuff.”

So they started looking to other markets where the need for sharpness was important. Through this process, they came to discover that orthopedic surgeons that need to grate bones for fitting hip replacements properly had the need for sharp tools capable of pulverizing bone.

There are two underlying lessons from this story:

1) Always take the order!

2) Don’t get overly wedded to the specific customer segment you serve and the specific products you produce — those can come and go with the times. Instead, appreciate your company’s competitive advantage, and seek to find those who value it.

For the full story, see the following New York Times article, which is good read:

http://www.nytimes.com/2011/01/12/dining/12united.html

The two most common complaints I get from CEO’s are: 1) I’m in a commodity business, and 2) There aren’t anyopportunities to grow in my market.

I’ll argue that what the person really means when they say this is, 1) I can’t figure out how to differentiate my business enough to earn anything above commodity profitmargins (e.g., razor thin margins), 2) I don’t see any opportunities in my market to grow.

One of the double-edge sword liabilities in this economy is too much experience in one industry.

When you’re in an industry that’s being doing the same thing for 30 years and you’ve personally have not spent much time outside of your industry, it is very hard to notice new opportunities.

One of the values I often provide in my consulting work is to be not only the outsider, but the outsider who has worked across dozens of industries and routinely follows innovative companies across close to 100 industries.

My best ideas are really nothing more than taking an idea that is common in one industry and moving it to another where it’s considered radically innovative.

Here’s an example.

One of the industries I follow is the insurance. During my McKinsey days I worked in both auto insurance (on pricing &underwriting) and in re-insurance (the insurance company for insurance companies).

One of the challenges is the insurance business is mature, competitive, and some would argue a commodity business wherepeople just want the lowest price. (Does this sound familiar?)

I came across a very interesting company offering an entirely new kind of insurance…. for an very unusual kind of risk.

Now before I let you in on the big secret, lets think about this situation from an insurance company’s point of view.

The business of insurance is about taking a low probability, high loss event and smoothing out the cash flow. So the chances of your home burning down due to a fire is very low, but if it does happen for most people they lose their single largest asset.

The cash flow pattern on a situation like this is very volatile. No loss today, massive wipeout tomorrow.

So homeowners insurance was developed to smooth out the cash flow curve… pay a little every month, eliminate the riskof a financial wipeout.

Now from an insurance company’s point of view, every major risk has been covered already.

You have medical insurance, life insurance, long term disability insurance, unemployment insurance, long term care insurance, auto insurance, liability insurance, etc…

So if you’re in the “product development” group of an insurance company, you’re basically racking your brain trying to figure out what kind of new risk is occurring in society that doesn’t already have insurance policies available for it.

So, pop quiz:

Does any opportunity come to mind?

Think for a moment…. a situation where when the worst case scenario happens there is a huge financial cost for which currently there is no insurance available to cover that risk.

One last try…

Any ideas?

Give up?

No problem, here’s the latest innovation out of the insurance industry:

It’s DIVORCE Insurance.

At the point of being literal, a divorce is the dissolution of a marriage typically involving some party to the marriage losing 50% of their net worth.

Does this qualify as a major financial cost by most people’s definition? I’d say so.

Does competition exist for divorce insurance?  Nope.

There’s only one company that offers it currently and theyhave the entire market to themselves… yes they have dibson the ENTIRE U.S Divorce market.

Here’s more info on them in case you are curious http://bucks.blogs.nytimes.com/2010/08/06/divorce-insurance-yes-divorce-insurance/

So now let me point out a few things worth noting:

1) In hindsight, the opportunity seems SO OBVIOUS – duh,divorce = unexpected financial wipeout… on the order of magnitude of a major medical problem, a home fire, etc… People have insurance for the latter, but why not the former?  The dollar amounts are probably comparable.

2) I’m shocked more companies haven’t figured it out.  I mean common, everybody knows that half of marriages end indivorce. I mean 30 years ago, you probably didn’t know too many people who were divorced, these days I’ve personally have lost count.

So it’s not like this societal change has been a big secret.

(And in terms of underwriting, an insurance policy can becreated for ANY kind of risk as long as there is sufficient statistical data on how often the worst case scenario happens… so it’s not like insurance companies can’t figure out how to write such a policy profitably).

3) Many of the opportunities I see in today’s economy arejust like this divorce insurance example — hiding in plain site, totally obvious to customers, and yet totally hiddenfrom vendors.

4) I guarantee you that there are meetings taking place at major insurance carriers asking two questions:

a) Lets watch this company carefully to see how they do… and to see if there is demand for this, and

b) Why the heck didn’t we even notice this opportunity?

I mean its one thing for a CEO of a major insurance company to notice this opportunity, do the homework, and decide it’s not a good fit for them.

It’s an entirely different problem to not even NOTICE the opportunity at all. I’m pretty sure someone is kicking themselves over this… and probably giving their staff ahard time as well.

Will the divorce insurance category be a profitable one?  Idon’t know. I haven’t seen the actuarial data or the sales data to form an opinion.

BUT, my point is this is an example of a kind of a “problem” most companies do not have enough of today — being first to market, in a potentially huge sector of the industry, with no competitors, the chance for both huge margins, and rapid growth… but with clearly more work to figure out how to”crack the code” to growing in such a green field opportunity.

Will it work? Who knows.

But is this kind of “problem” better than focusing on a market segment where sales are on the decline, margins have gotten wiped out, and all the competitors basically copycateach other to the point where customers can’t tell them apart?

The latter is a definite dead end. With the former, at least you have a fighting chance and if you get it right, the upside is enormous.

So here’s my question for you.

In your 2011 Strategic Plan, do you have any “game changing” opportunity as part of your plan? Something you can experiment with, innovate with, or run a pilot program with?

If not, why not?

I’d argue that most company’s strategic plans are not really strategic at all.

Here’s the acid test.

It’s only a strategic plan if you’ve got SOMETHING in your plan that is DRAMATICALLY different than your competitors. Recently, I’ve been using the phrase “Extreme Differentiation” to characterize this point.

If you don’t, then you don’t really have a strategic plan. All you really got is a budget.

There’s nothing wrong with a budget, it’s necessary, but its not the same thing.

So which category do you fall in?

Is your 2011 plan a budget or a strategic plan?

That’s my thought of the day.

I have a BIG problem with how inflation in this country ismeasured.  To put it bluntly, I think it’s a total scam.

And in a moment, I will explain how this will significantlyimpact your business in the months ahead.

But first, let explain my unusual perspective in what willhopefully be plain and simple English.

Inflation is generally considered to be measured by theconsumer price index.

And these days, inflation is measured by something called”core inflation”. Core inflation is an adjusted version ofthe Consumer Price Index excluding the prices of food and energy–which are basically goods whose prices tend to inflate.

(See the problem with this?)

So “core inflation” is really just a measure of the pricesof things that tend NOT to inflate.

So if the cost of filling up your car with gas skyrockets to$120 a tank and your grocery bill doubles overnight, there is no change to “core inflation”.

But, I think the problem is even more misleading.

The Consumer Price Index only measures the change in pricesof what American’s consume. This is NOT the only type ofinflation that can exist.

There is something called “Asset” inflation. In this caseassets are the deed to your house, stock prices, and theprices of commodities such as gold.

I think “true” inflation should really capture BOTH theprice of consumables and the price of assets.

Here’s why.

It’s a much more accurate barometer to use in terms of how to manage our economy.

For example, the traditional fear of stimulating an economythrough government spending or cutting interest rates is that it will trigger inflation.

And many will argue that Greenspan’s deliberate effort tokeep interest rates low from the early 2000′s leading up to 2008, did NOT create inflation– because core inflation was so low.

BUT, if you use my definition of “true” inflation which isprice of consumables + your assets. Then you’ll see that there was massive inflation.

The price of real estate skyrocketed during this time. Asdid the price of stocks.

In fact, I’d argue (especially in real estate) we hadrunaway inflation.

Now standard operating procedure to tame runaway inflationis to raise interest rates — thereby making money more expensive to borrow, and causing people to spend less of it.

If we used “true” inflation as our barometer, we as acountry would have noticed runaway inflation by around 2004.

If we had executed the standard operating procedure ofraising interest rates in 2004, it would have cooled off the runaway inflation in housing prices, slow down demand for buying automobiles (often using home equity to pay for it),and reduce the demand for rocket scientists on Wall Street to engineer better derivatives.

Instead, home prices would have topped out much sooner andthe additional 1 million construction workers in real estate, the 500,000 mortgage brokers, and 500,000 real estate agents that the economy didn’t really need and whose jobs have beenwiped out by the Great Recession would have had a lot more time to re-train their skills and look for work where work legitimately existed.

And those rocket scientist working on Wall Street, wouldhave been laid off and would be forced to find work in clean energy, mobile telecom, biotech, health care…and wouldhave been forced to invent the technologies that wouldprovide jobs for the next 30 years, instead of inventingnewer kinds of derivatives.

And those auto workers in Detroit, would have had a 4 yearhead start to find new work in other industries, perhaps relocate out of Detroit to other parts of the country thatvalued such skills but had nobody locally available.

In other words, all the extreme behavior leading up thecrash of the Great Recession and all the unraveling of unintended consequences would have been blunted.  
The transition from the old economy to the “new normal” economy would have taken place over half a decade, instead of in October 2008.

So why am I telling you all of this now?

Because, with the Fed’s announcement of QE2 – QuantitativeEasing 2 — we are essentially REPEATING the entire process that got us into this mess in the first place.

The justification for QE2 is this:

“Core” inflation is low, so we don’t have anything to worry about.

We need to stimulate the economy.

Lets’ do it by pouring money into the economy (by basically printing new money, to buy out those investors who have lent money to the US, so they now have more cash available to invest somewhere else in the US economy) to help it grow…

(Sounds a little familiar doesn’t it?)

And where is that newly freed up cash going?

In Greenspan’s era, it flowed into housing. We all know howthat ended up.

So in the Bernanke era, where is all this “stimulus” moneygoing?

Have you seen stock prices lately?

Have you seen the price of gold lately?

All this extra money floating around is artificial (justlike it was during the Greenspan era of really low interest rates that flooded the economy with cheap money and morespending power).

And where this extra money is being spent on assets likestocks and gold, the corresponding run up in prices will be in part fueled by this artificial “stimulus” — which atsome point will end.

What happens to those artificially fueled prices then?

So where is all of this going? What will happen? And whenwill it happen?

Truly, I have no idea. (So whatever you do, don’t make personal investment decisions based on what you think I’m recommending… my only argument is for how you mightwant to run your business differently because of this)

The only thing I’m certain of is this. While the economyrecovers (ever so slightly), it is also getting increasinglybrittle and fragile.

So with a fragile economy, moderate size economic problemsin other parts of the world (or even in our own economy) suddenly have a magnified impact on the US economy.

Normally, you would think that as an economy recovers (e.g.,grows and gets bigger), it gets more stable. I think because of all these government inventions, the opposite is true.

As the economy grows (due in large part to all this intervention), it is getting increasingly LESS stable.

(Note: I’m NOT arguing politically that we should or shouldnot pursue economic stimulus… though I do have an opinion on this.

I AM pointing out that there ARE natural consequences andtradeoffs involved that are not obvious to many people and I believe all decisions should be made or at least interpreted with the benefit of COMPLETE information.

And to the extent your information wasn’t complete, my goal was to fill in any missing gaps.)

So what does all this mean for you and your business?

Fasten your seat belt, and be prepared to respond QUICKLY to potentially a very fast changing economic environment and try to anticipate how it might impact your clients (not to mention your client’s clients).

With change comes both NEW headaches and NEW opportunities.(In the months to come, I will do my best to point out examples of both.)

You really do need to be on the lookout for both, and yourbudgets and business plans for 2011 should allow for the possibility of complete revision a the mid year point.

It has been my recent recommendation (as of a week or two ago)to schedule a mid year check in point for 2011 business planning.

Note this should not be some “stamp of approval” type mid-year review.

It should be a critical examination of whether the underlying ASSUMPTIONS of your business plan have turned out to be true.

And on a very much related note, as you finish up yourbusiness plans and budgets for 2011, you should EXPLICITLYlist the ASSUMPTIONS you are making about your market.

Then at the mid year strategic plan review, you’ll want tocritically examine not just your revenues, costs, and performance metrics, but also whether your ASSUMPTIONS have turned out to be true or dead wrong.

Very few companies explicitly state their marketplaceassumptions.

Even fewer deliberate assess the whether their assumptionshave turned out to be true and make potentially dramatic adjustments in their budgets if their assumptions proved to be false.

Don’t let your company be one of the companies that makesthese mistakes.

1) List your assumptions next to your plan and budget fornext year

2) Schedule a mid year CRITICAL review in June 2011 and evaluate whether your assumptions have turned out to be true or false.

This will help keep you one step ahead of your competitorsas we ride this roller coaster called an economic recovery.