Lightning Bolt Inspiration vs. Persistent Practice & Preparation

Does innovation have to be a lightning bolt of inspiration or can it, like any other skill, be fashioned from practice, preparation, and a consistent process? Arguments can be found leaning both ways. You can read about the belief that there are those with a born "entrepreneurial spirit" or study those who claim you can condition your "ability to innovate" almost like a muscle. CNN in the Executive Education section of their website recently posted an article on this very argument. You can read the full transcript here. The article claims that researchers have discovered "the five secrets of innovation."

Coming up with brilliant, game-changing ideas is what makes the likes of Apple's Steve Jobs so successful, and now researchers say they have identified the five secrets to being a great innovator.

Professors from Harvard Business School, Insead and Brigham Young University have just completed a six-year study of more than 3,000 executives and 500 innovative entrepreneurs, that included interviews with high-profile entrepreneurs including Amazon founder Jeff Bezos and Michael Dell, founder of Dell computers.

In an article published in December's Harvard Business Review the researchers identified five skills that separate the blue-sky innovators from the rest -- skills they labeled associating, questioning, observing, experimenting and discovering.

FIVE KEYS TO INNOVATION
Researchers say they have identified five skills that drive innovation:

Associating: The ability to connect seemingly unrelated questions, problems or ideas from different fields.

Questioning: Innovators constantly ask questions that challenge the common wisdom. They ask "why?", "why not?" and "what if?"

Observing: Discovery-driven executives scrutinize common phenomena, particularly the behavior of potential customers.

Experimenting: Innovative entrepreneurs actively try out new ideas by creating prototypes and launching pilots.

Obviously these researchers side more towards the ability to innovate being a learned trait. I would have to agree that the ability to innovate like any other skill can be learned through hard work, practice, and dedication. However, I also acknowledge the fact some people hit the genetic lottery while others are well....not so fortunate. I think that like most things even an absent disposition can be overcome if the desire is there. I think more and more business minds are starting to lean in the direction of this line of thinking. I am currently reading Innovation and Entrepreneurship by business hall of famer Peter Drucker in which the entire premise of the book is calculated implementation of innovation and entrepreneurship. I will go into more detail of my thoughts on the book after its completion, but the one thing that really stands out is Drucker's ability to use actual stories and examples to illustrate his views and principles. Badskiblog readers are also familiar with another book I read recently by Twyla Tharp called the Creative Habit, which held a very similar view on creativity although presented in a very different manner than Drucker.

One of the men behind the study, Insead's Hal Gregersen, told CNN, "What the innovators have in common is that they can put together ideas and information in unique combinations that nobody else has quite put together before."

The researchers describe this ability to connect ideas as "associating," and say it's key to innovators' ability to think outside the box. But they add that the secret to how the great innovators think is the way they act.

"The way they act is to observe actively, like an anthropologist, and they talk to incredibly diverse people with different world views, who can challenge their assumptions," Gregersen told CNN.

Because the ability to think differently comes from acting differently, Gregersen says anyone can become a better innovator, just by acting like one.

"Studies have shown that creativity is close to 80 percent learned and acquired," he told CNN. "We found that it's like exercising your muscles -- if you engage in the actions you build the skills."

I love the way they describe what true innovators do...they recognize unique patterns that others don't see. I like that describe them as anthropologist-esque. Entrepreneurs seek to satisfy wants or create wants that consumers didn't know they had. Innovators ability to satisfy wants typically rests firmly upon their ability to recognize patterns amongst the most complex study known to man; the study of man. It is a very insightful and great way to look at what entrepreneurs actually do. What are you doing to hone your innovation acumen?

War Tax, Our National Debt, And The Illusive Terrorist

This is one of the few times I actually want more taxes! Read the full article on a proposed war tax here. The average American doesn’t recognize the immense cost of maintaining an expeditionary force overseas. I would rather have to fork out the extra money in taxes than continue to grow our astronomical national debt, the majority of which lies in the hands of the Chinese.

"There ain't going to be no money for nothing if we pour it all into Afghanistan," House Appropriations Chairman David Obey told ABC News in an exclusive interview. "If they ask for an increased troop commitment in Afghanistan, I am going to ask them to pay for it."

Obey, a Democrat from Wisconsin, made it clear that he is absolutely opposed to sending any more U.S. troops to Afghanistan and says if Obama decides to do that, he'll demand a new tax -- what he calls a "war surtax" -- to pay for it.

"On the merits, I think it is a mistake to deepen our involvement," Obey said. "But if we are going to do that, then at least we ought to pay for it. Because if we don't, if we don't pay for it, the cost of the Afghan war will wipe out every initiative we have to rebuild our own economy."

There was another article on MSN regarding the immense costs of borrowing that we as Americans are dealing with. Not only is it an immense cost now but it may get much worse in the near future.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

I am always amazed at the propensity for government officials and political pundits to try and defy the laws of finance based on the premise that government spending is different than personal finance. I disagree. There are some obvious differences, however basic principles like the cost of capital, the power of compounding interest, and spending more than you make aren’t moot just because a sovereign government is doing the spending. That is why I think developing a clear “end state” or perhaps more accurately an “exit state” for Afghanistan is so important. Right now we are likely going to bolster troops in a war that to my knowledge has no clear goal other than to prevent the harboring of terrorists. That argument might be enough if the majority of the terrorists in the 9-11 attacks hadn’t masterminded in Europe. A more recent example is the Ft Hood tragedy. It is a new world out there with bolstering interconnectivity of those worldwide. And if we continue to treat these terrorists as if they are actors of a nation state we will continue to be behind the eight ball when it comes to combating them. Terrorist activity, as has been proven time and again, can arise from anywhere. It can cross any border into any nation and is more of a mental disposition than a national association. If we are going to continue financing a war without an end state in mind we may as well do it from our own pockets vice the interest bearing dollars of other nations.

Obama, Veterans Benefits, and Combat Related PTSD

Veterans have served and sacrificed in defense of our Nation. When they complete their service, we must do everything in our power to assist them in re-entering civilian life and finding employment. Government as well as private employers should play a prominent role in helping veterans who may be struggling to find jobs. As one of the Nation's leading employers, the Federal Government is in need of highly skilled individuals to meet agency staffing needs and to support mission objectives. Our veterans, who have benefited from training and development during their military service, possess a wide variety of skills and experiences, as well as the motivation for public service, that will help fulfill Federal agencies' staffing needs. It is therefore the policy of my Administration to enhance recruitment of and promote employment opportunities for veterans within the executive branch, consistent with merit system principles and veterans' preferences prescribed by law. The Federal Government will thereby help lead by example in promoting veterans' employment.

Not sure how enforceable any of these policies are as I am not well versed in reading through government legislature, but I am happy to see the president making strides in this direction. Not just because I am currently serving. It is just the right thing to do. Trust me there are many in our Armed Forces that have sacrificed much more than I ever will and I think it is a shame if those who have put forth tremendous sacrifice defending the country aren’t able to reap the rewards upon their return. I am still a firm believer in the meritocracy, however I think often times people both in and outside the service fail to recognize the parallels between military service and many other seemingly unrelated careers. There are many lessons learned that transcend job experience that are valuable in any life situation, job, or team scenario. Here is the full executive order.

Employment is one thing, but I would love to see greater strides made towards mental health and wellness of soldiers returning from combat. One of the most rewarding acquisitions I ever made in the military was purchasing Combat Related Post Traumatic Stress Disorder training for medical practitioners treating returning veterans. Given the expeditionary nature of our services, the decreased size of our force, and the extended and intensified operations tempo there are a lot of our defenders returning with combat related PTSD. Not only are many of these veterans not being treated when they return home, many are being sent back over again.

More than 600,000 Americans have served multiple tours in Iraq and Afghanistan.

"Psychological trauma is cumulative," explained Dr. Paul Ragan, a former Navy psychiatrist who is an associate professor of psychiatry at Vanderbilt University. More deployments can mean more mental stress, and for some, more mental illnesses, he said.

Army surveys show that for those soldiers deployed once, the rate of anxiety, depression and post-traumatic stress disorder is 12 percent. For those deployed three or more times, the rate is 27 percent.

"People who have psychiatric symptoms, actively symptomatic with PTSD or depression, are being sent back to the very situation that caused their PTSD and depression," Ragan said.

The Army's chief psychiatrist, Dr. Elspeth Ritchie, agrees with the Rand Corp.'s estimate that 300,000 service members have demonstrated post-traumatic stress disorder symptoms. Some are returning to the battlefront, although the Army is not keeping track of how many.

The Afghanistan Mafia State

Consistent readers of BadskiBlog have likely picked up on my general skepticism of our elected officials and the claims that they make. However, do not mistake me for an anarchist. I love the country we live in and I believe government serves a very important role in maintaining its greatness. Although I am hesitant towards any government encroachment of the freedoms we enjoy as American’s I strongly believe that the good ol’ US of A does a pretty damn good job of protecting it’s citizens freedoms from the dangers of lawlessness, crime, and corruption. I found this article on Afghanistan’s President Hamid Karzai and his vow to clean his country of corruption.

It was no secret what the world wanted to hear from Hamid Karzai when Afghanistan’s president was sworn in for a second term on Thursday November 19th: a commitment to get tough on corruption. Visiting Kabul for the inauguration, Hillary Clinton, America’s secretary of state, said Mr Karzai had a “window of opportunity” to show tangible results. American officials say he has just six months to tackle what one calls “Afghanistan’s mafia state”.

In his inauguration speech, he said ministers in his administration must be “competent and just”. But heeding Western concerns about their behaviour does not come naturally to Mr Karzai. He has been in a combative mood since the West’s much-resented demand that he accept that his re-election was marred by massive vote-rigging. In a recent American television interview he batted back questions about corruption in his government with his oft-repeated line that foreign donors must clean their own act up and stop development funds from being wasted. Such wastage, however, is at least lawful, unlike the Afghan government’s practice of selling jobs to officials who then repay themselves through extortion. Nor is it akin to the impunity the well-connected enjoy.

We focus so much on the war fighter in our conflict in Afghanistan. We focus on our battle against the Taliban. I would argue that they are not our greatest challenge. If you watched the documentaries I recommended on a previous BadskiBlog post you would see that the Taliban are merely players in a much more complicated problem. In fact our, and I use the term loosely, “strategy” in Afghanistan is now engaging the people of Afghanistan in an effort to rebuild their nation and align them with US interests. We are tasking our war fighters to protect the local population, to get the local population to trust us, to get the locals to continue their daily life, and in theory to reject Islamic extremists that hide amongst them. However, this article illustrates a fundamental problem with this strategy. How are we supposed to empower a 19 year old army private to win over the local population when we are supporting a corrupt government that is seen by the people as completely inadequate in representing and protecting their rights? Karzai’s own half brother is said to be one of the main beneficiaries of the now flourishing drug trade and Karzai's own reelection was internationally exposed as a farce.

For some Americans, the crucial test of Mr Karzai’s seriousness in tackling corruption is his willingness to sack Ahmed Wali Karzai, his half-brother, who lords it over the south as head of Kandahar’s provincial council. Both he and his brother deny longstanding allegations that Ahmed Wali is involved in the drug trade. And parts of the foreign effort in Afghanistan also rely on Ahmed Wali, including allegedly the CIA (though he denies reports he is on the agency’s payroll). As one NATO official in Kabul put it, Ahmed Wali’s “ruthless use of patronage” has annoyed many people and possibly increased support for the insurgents. But it has also kept many other people on side. “Ahmed Wali is the only thing holding Kandahar together right now,” says the official, speaking of a city second only to Kabul in importance, and suggesting that in tackling this important symbol of perceived corruption it is not just Mr Karzai who has a conflict of interest.

Not to mention that the current US strategy does little to address Pakistan as a player in the Afghanistan scenario. I have been happy to see that Pakistan has become more involved by sending actual troops into areas inhabited by the Taliban, but only time will tell how serious they are in their efforts. I will be much happier if Pakistan acknowledges that a stable Afghanistan is good for Pakistan and carries out the actions to prove it.

Lesson Learned From 5 Nights In Vegas

My posts have been light the last week with good reason. I was in Las Vegas with some of my best buddies competing in the 2009 Armed Forces Hockey Tournament. Besides winning the tournament and having an unbelievable time with the guys who shared the experience with me, I tried to take some form of learning away from a trip that most only see as a release of pent up adolescent debauchery.

I am not a big gambler. I am not morally opposed to it or anything like that, I just hate to lose. However, both times I have been to Vegas I have really enjoyed it. There is so much going on and there is always action to be seen, heard, felt, smelt, etc. Which leads me to my first Vegas takeaway.

Think In Senses – Vegas is often described as sensory overload. It may be true, but who knows. Regardless, what Casinos and other establishments in Vegas have figured out is that the sensory overload principle is memorable. I think that is why Vegas is so polarizing. People either love it or hate it and the increased stimuli is likely intensify that love or hate position. One day when I was in our casino with some of the boys I couldn’t help but notice that I was tuning into more of my senses. The slots were flashing, Eddie Money was belting out 80’s tunes in the background, I could smell the faint smell of cigarettes coupled with bad perfume and hotdogs, I could feel the cool oxygen enhanced air conditioning against my brow, and I was savoring an ice cold beer. Part of the increased consciousness of all my senses was the heightened stimuli, part was probably that it was a unique extraordinary vacation that had me taking in more of my surroundings than a standard day at the office. Regardless, I started thinking about how much more enjoyable and present one can be living like you are in a casino in Vegas. I am hesitant to make the comparison, but it is a similar parallel to people who have had a second chance at life. Their new found appreciation for life causes them to take increased notice of things that were once mundane and ordinary. Obviously having an external circumstance such as recovering from a disease or illness makes appreciating daily living almost automatic, but a conscious effort to “think in senses” I suspect will likely do the same to some degree. As Immanuel Kant once said “All our knowledge begins with the senses, proceeds then to the understanding, and ends with reason. There is nothing higher than reason.”

Customer Service Is More Important Than Ever – Another experience that is generally synonymous with Vegas is great customer service. Between the most luxurious casinos and hotels, the constant drink service and plentiful restaurants, and the battle to entice you, the customer, into one establishment versus the one next door it is easy for almost anyone in Las Vegas to feel as though they have achieved “high roller” status. Our team got a suite at the Bellagio for the last night. Wow. That is customer service! So if the Bellagio is the furthest point north what is the polar opposite? In this case it was my experience on my return flight home with a company we will call "ABC Airlines". Now in defense of ABC Airlines they have a lot of things going against them being in the industry they are in. Southwest is probably the shining star of an industry that is extremely price sensitive and generally unwilling to pay a premium for enhanced customer service. However, the experience a friend and I had with an “ABC Customer Service Representative” is a perfect example of the power and extreme importance of good customer service in an ever-increasingly connected world. Here is a copy of the formal complaint I submitted to ABC Airlines with the names changed to protect the not so innocent:

While checking in at the ABC ticket counter in the Las Vegas airport I experienced one of the most appalling displays of customer service I have ever had. Eanna the customer service representative who serves as the face of your brand and the customer experience began by greeting the entire line of early morning fliers with a scolding that the customer service agents weren't open yet even though her coworker opened the kiosks for check in. She then proceeded to challenge my friend and I on our active duty military permissive TDY orders. Instead of trying to politely clarify the miscommunication she inferred that two Air Force officers were liars in front of a crowd of fellow travellers and that we were really on leave status and not the permissive TDY status we told her we were on. When asked if she could read the status on both our orders she threatened to not help us if we "got attitude." Her display was not only embarrassing and offputting, it seared into my memory and undoubtedly into the minds of others that this is what the ABC flying experience is about. There is no need to reply for the damage from her display is most certainly done. In the future I would recommend screening more carefully the mouthpiece of the ABC experience.

Now before you start boxing me in as the complainer guy you must know that I am the opposite of that guy. My wife tells stories of the two of us at dinner where I get the wrong meal and don’t speak up to send it back because I feel bad for the waitress. I rarely complain. I am typically part of the majority, sadly, that doesn’t complain and merely chooses to never entertain a business with my business ever again. There are more dangerous people than me however that not only never go back but tell 10 of their friends to never go back either. I see myself as more of the Ghandi of customer service feedback. However, times are changing. I didn’t write this letter and mail it to ABC headquarters via certified mail. I typed it out on my phone minutes after a friend and I experienced the scenario described above. I didn’t have to wait in line at the gate or ask to speak to a manager. I just went to ABC’s website and submitted a complaint. It is easier now than ever for those who, in the past would have gotten home later that night and gotten over the urge to complain, to shoot a quick complaint via their phone to management. Not only that, but now I don’t even have to tell 10 friends about my shoddy experience. I can tweet about it, post it on Facebook, or blog about it. The post is the equivalent to telling the story once, but having it reach a theoretically endless audience. My intent is not to destroy the ABC name by trashing them online, although there are sites that do partake in such activity. You see in today’s world I don’t need to go on a crusade to destroy a business with poor customer service, for with the enhanced connectivity in today's world it is only a matter of time until companies without a customer focused business model destroy their business on their own.

Learning is a Journey Not a Destination

“Experience is the best teacher, but a fool will learn from no other.” - Benjamin Franklin (American Statesman, Scientist, Philosopher, Printer, Writer and Inventor. 1706-1790)

Here is an awesome post from a new blog I have been reading lately called Six Pixels of Separation. The post is on the importance of learning from everything! I think it ties in nicely with the BadskiBlog theme of a fairly average cranium looking to expand. I know that my blogs I follow list is getting fairly ridiculous but there is a lot of good stuff out there and I have to show the love. Here are some excerpts of the quality advice from the post above.

Last week, there was a Blog post here titled, 10 New Business Books Worth Checking Out. As I was sorting through which books to list, it was interesting to read the reviews surrounding these titles (both on the book retail websites and on Blogs, Twitter feeds, etc...). You could tell which reviewers were regular people (the silent majority, the mass population, etc...) and which were the ones who were neck-deep into New Media (those with their own Blogs, thousands of followers on Twitter, etc...). It should come as no shock, that when it comes to Bloggers we like to eat our own. We're quick to judge, comment and attack, but in seeing countless semi-nice reviews with lines like, "there is nothing new in this book" or "I didn't really learn anything I didn't already know," it wound up becoming somewhat comical.

The real experts, the ones who really are superstars don't do this.

After spending countless years in the music industry, it was plain as day who would be a successful artist/musician and who would disappear quickly into obscurity. The real geniuses, the real experts and the real artists were the ones who knew this one golden rule: you can learn something new from anyone at any time. The trick is in leaving yourself open to this experience. The trick is in always being a student.

Taking Good From The Bad: The Emergence of Entrepreneur MBA's

During the recession of the last year or so all the chicken little's have been screaming that the sky is falling. It was supposedly the end of the world that the market took a dive. I must admit that things get a little scary when banks start failing, and even scarier when we as taxpayers are left to foot the bill while the government cherry picks which companies are "too big to fail" and which aren't. However I have written before that not only are economic downturns a perpetual reality but that they are a necessity. Not only did the recession present one of the greatest buying opportunities of our time, but it also has changed behaviors on a grand scale that would not have changed without of little push from market forces (hint: consumer debt, lending practices, etc.). However, not all the fallout from the downturn is arm twisting change. I found this article in BusinessWeek regarding the increase in start up companies coming out of MBA programs.

Business schools have quietly become the back door to starting your own business. Once considered merely the hallway to a high-salaried career with an investment banking or consulting firm, business schools are now drawing attention from those
tinkering in their garages and hoping to find the next big thing. Through virtual and traditional business incubators, business schools are helping students launch startups with everything from fund-raising and networking to finding office space and interns.

Innovation and entrepreneurship have always been the driving force behind the small business fueled American growth. It is great to see that a positive outcome can come from such a seemingly negative financial period. These incubators and business plan competitions that are springing up at campuses nationwide are really cool. When I was taking an innovations class
at the United States Air Force Academy (yes, even they are teaching innovation) we had the CEO of an incubator in Boulder come and talk about what they do and it was really impressive. They also talked about the business plan competitions and a few groups even went and participated. I tend not to regret too many things in life but I really wish I would have sucked it up and participated in one of those competitions. I did get the chance to do a mock competition where prominent startup figures in the area came to our department and served as judges alongside faculty as guest judges which served as our final grade in the class. Great experience that I am sure it magnified tremendously with the opportunity to actually carry out your business plan and even be given money to make it happen.

"Rather than creating the next generation of employees, we want to create the next generation of employers," says Ted Zoller, associate professor and executive director of the Center for Entrepreneurship at the UNC Kenan-Flagler Business School.

As bonuses disappear and pink slips fly in increasing numbers, entrepreneurship-the nitty-gritty kind where men and women with dreams roll up their sleeves, get their hands dirty, and work hard to make something of nothing-is becoming the new MBA lifestyle. Business schools are impressing upon students that taking on this new ideology behooves all MBAs, even those
in traditional industries. "Entrepreneur is not just a job title," says Arthur A. Boni, director of the Donald H. Jones Center for Entrepreneurship at Tepper. "It's a way of thinking and acting. All people are required to innovate, whether in a startup or a big company. Especially in a recession, everybody needs to be more innovative."

Well said. In the new era of business where the possibilities for exploiting and creating new markets are seemingly endless, there is so much more to getting a first class business education than accounting and organizational culture. It is great to see that although the last year has been painful for many, it is in fact bettering the future of the way we do business.

Personal MBA Update - How To Read A Financial Report

How to Read A Financial Report by John A. Tracy – Accounting sounds about as fun as watching infomercials, but I must say that I didn’t struggle getting through this book. In fact I spent most of the book thinking that I could have learned more from this book than my college accounting courses. Instead of focusing on computing missing data from a balance sheet the book focused on the most valuable thing regarding being able to read statements; being able to see how they are interconnected. Much like a foreign language, I am sure that I will forget many of the lessons of this book if I do not use them on a daily basis. However I think that I will be much more adept at intuitively following data from the income statement all the way through to the statement of cash flows, and in doing so will be able to draw conclusions about the financial condition of a business. The book wasn’t very long which helped make it an easy read. But it was the fact that it had a great number of simple example statements that always focused on how the statements work together that made it a very useful book. Another book down on my Personal MBA journey that I would definitely recommend to anyone seeking a life in the business world. One thing I learned in sports is to always focus on the fundamentals no matter how far along you go, and there is nothing more fundamental in business than understanding the basic language of business known as financial accounting.

Lurking somewhere amidst all the figures in a financial report is vitally important information about where a company has been and where it is headed. But without a guide to isolate and interpret those numbers, the dizzying array of columns and rows doesn't add up to a hill of beans. That's why thousands of professionals and savvy individuals have referred to this bestselling resource that shows anyone how to make sense of all those numbers. If you're someone who works with financial reports or needs to understand them-but have neither the time nor the need for an in-depth knowledge of accounting-this book will help you cut through the maze of accounting information to find out what those numbers really mean. It steers you quickly and painlessly through the basic accounting concepts and line-by-line explanations of the basic financial statement. Complete with a visual guide that leads you through the intricacies of financial reporting, How to Read a Financial Report shows you how the three essential parts of every financial report-the balance sheet, the income statement, and the cash flow statement-fit together and what it all means to you and your company. Updated throughout, this new edition addresses the many changes in the financial world in the past few years, including new pronouncements of the Financial Accounting Standards Board, new income tax laws, and emerging financial reporting problems. Also, all exhibits have been made easier to
follow.

Here are my notes from the book. As I stated before they would be a lot more beneficial if they had the actual example statements and illustrations included but I guess you will just have to go read the book!

Starting with Cash Flows:
- Cash inflows and outflows are the heartbeat of every business
- 2 groups of cash flows: 1. Cash flows of making profit (inflows from sales and outflows from expenses) 2. Cash flows of the business (raising capital, investing capital, distributing profits)
- 2 most important things a cash flow summary won’t tell you: 1. The profit earned for the period 2. The financial condition of the business
- Accrual based accounting recognizes receivables from sales on credit and liabilities for unpaid expenses to determine profit measure for that period

Introducing the Balance Sheet and Income Statement:
- The financial condition of a company is communicated in an accounting report called the balance sheet and profit performance is presented in the income statement
- Income statement summarizes revenue and expenses for a period of time
- The balance sheets liabilities have first claim on assets that’s why they are listed above owners equity
- Balance sheet is prepared on the last day of the income statement period

Profit Isn’t Everything:
- Prevent cash shortages that cause default on liabilities
- Threefold: 1. Earning profit 2. Controlling assets and liabilities 3. Preventing cash outs
- The balance sheet, income statement, and statement of cash flows are all interconnected and in order to effectively manage the business you must understand how they work together

Sales Revenue and Accounts Receivable:
- Extending credit to customers creates a cash inflow lag. The accounts receivable balance is the amount of this lag
- You have fast slow and average payoff times with credit. The average sales credit period determines the size of accounts receivable
- Exhibit page 26
- Accounts turnover ratio page 30 is most meaningful when used to determine how long it takes to turn receivables into cash
- If you turnover into cash faster it is less you have to borrow at 8% or the owners could have invested less. Capital has a COST!

Cost of Goods Sold and Inventory:
- Gross margin is the starting point for earning adequate bottom line profit
- Sell products for enough gross margin so all other business expenses can be covered and still have a remainder for profit
- Inventory holding period determines the size of inventory relative to annual costs of goods sold

Inventory and Accounts Payable:
- none

Operating Expenses and Accounts Payable:
- Some operating expenses have to be recorded before they are paid
- Examples on page 44

Operating Expenses and Prepaid Expenses:
- Example of prepaid expense is insurance premium
- Used to show prepaid expense but delay recording it in expenses

Long Term Operating Assets: Depreciation and Amortization Expense:
- Financial accounting doesn’t just keep track of expenses it is concerned with correct timing of expenses
- Matching expenses with sales revenue
- Matching expenses with the correct period
- Depreciation in financial accounting means cost allocation
- Leased assets are not reported
- Accounting for fixed assets does not attempt to record changes in current replacement costs. It is a cost recovery based method not mark to market
- There are many reasons to pay more for a company than the sum of its identifiable assets. The excess is called goodwill.
- Writing off intangible assets is called Amortization

Accruing Unpaid Operating Expenses and Interest Expense:
- Notes payable pay interest where accounts payable do not

Income Tax and Income Tax Payable:
- Tax not paid from prior year goes on balance sheet as a payable liability

Net Income and Retained Earnings: Earnings Per Share:
- Retained earnings is the cumulative result of all the years it has been in business minus dividends
- Many people think it is an asset or even cash. This is not true cash is also reported in the balance sheet
- Only public companies must report EPS

Cash Flow From Profit and Loss:
- Why doesn’t profit equal cash flow?
- Business managers have double duty: earn a profit and convert profit into cash as soon as possible
- 8 changes in operating assets and liabilities that determine cash flow from profit for year: 1. Accounts receivable 2. Inventory 3. Prepaid expenses 4. Depreciation 5. Amortization 6. Accounts payable 7. Accrued expense 8. Income tax payable
- Cash flow adjustments to net income: Increase in operating assets cause decrease in cash flow from profit and decreases in operating assets cause increases in cash flow from profit. Increases in operating liabilities help cash flow from profit. Decreases in operating liabilities decrease cash flow from profit
- Profit generates cash flow, cash flow doesn’t generate profit

Cash flows from Investing and Financing Activities:
- Capital expenditures area a bet on the future

Growth, Decline, and Cash Flow:
- 3 major pieces to cash flow: Depreciation and amortization, operating assets, operating liabilities
- Growth doesn’t instantly boost cash flow

Footnotes, The Fine Print in Financial Reports:
- Footnotes are an essential supplement to financial statements
- Managers have to decide how much to disclose in footnotes above minimum standards

CPA’s Audits and Audit Failures:
- Financial Statements can be misleading for two major reasons: 1. Honest mistakes 2. Deliberate dishonesty
- Audits done by independent CPAs are supposed to prevent this
- Audits add credibility but it is an opinion so be careful!
- You want a clean unqualified audit
- qualified is good except for…..
- Adverse opinion is that the statement is misleading
- CPA may also withdraw

Choosing Accounting Methods and Quality of Earnings:
- 6 basic steps in the accounting process of a business:
1. Identify and analyze all transactions and operations during the period
2. Determine the correct accounting according to GAAP
3. Record the transactions, operations, and development
4. At the end of the period assemble the accounts for sales, revenue, expenses, assets, liabilities, and owners equity making sure they’re up to date and accurate
5. Prepare financial statements for period with footnotes
6. Distribute to those entitled a copy
- Once a business chooses an accounting method it cannot flip-flop
- Managers can massage the numbers by timing things like expenditures
- Cooking the books means sales revenue is recorded when no sales were made
- Quality of earnings refers to the quality of accounting methods to record profit
- Look to cash flows because it is the hardest to manipulate

Making and Changing Accounting Standards:
- Financial statement users are interested in 3 main things: 1. Profit or loss performance 2. Financial condition particularly the solvency 3. Capitalization structure or ownership structure
- Recording stock options can cause many problems. It is a big debate whether or not to record them

Cost of Goods Sold Conundrum:
- 3 methods: 1. Average cost method 2. LIFO method 3. FIFO method
- The 3 methods affect inventory and most importantly gross margins

Depreciation Dilemmas:
- Accelerated deductions have higher depreciation and therefore lower taxes in the early years
- Accelerated depreciation coupled with shorter depreciation schedules than actual useful life encourages capital investment
- Accelerated or straight line method
- Chart comparisons on page 165
- Only straight line is used for Amortization

Ratios for Creditors and Investors:
- Current ratio is used to test short term liability paying ability of a business
- Current ratio = total current assets/total current liabilities
- Should be 2 to 1 or higher
- The acid test ratio or quick ratio only includes cash and liquid assets
- Quick ratio = cash +accounts receivable/total current liabilities
- Should be 1 to 1 or higher
- Debt to equity ratio measures how prudently they are using their debt
- Debt to equity = liabilities/stockholder equity
- Most below a 1 to 1 ratio
- Times interest earned ratio is the ability to pay interest from earnings
- Times interest earned ratio = operating earnings/interest expense
- Should be higher than a 1 to 1
- Return on sales ratio = net income/sales revenue
- Profit divided by capital invested is ROI
- Net income by owners equity is ROE
- Operating earnings by assets is ROA
- Net income for common stockholders/Total number of outstanding shares = EPS
- Earnings yield and market cap
- Earnings yield is reciprocal of P/E ratio is a E/P = EPS/Price
- Market value X outstanding shares = market capitalization

A Look Inside Management Accounting:
- Internal accounting or managerial accounting is wide open without many rules
- Helps to determine variables and ways to reach goals

A Few Parting Comments:
- Are financial statements reliable and trustworthy? Yes most are.
- Are some misleading and fraudulent? Yes unfortunately.
- Is it worth your time to read statements and compute ratios? Doubtful. Market prices reflect all publicly available information.
- Why read them then? To know what you are getting into.
- Is there any quick litmus test? Yes. Percent increase/decrease in sales revenue and test that vs. bottom line profit.
- Do conservative accounting methods cause conservative market values? No not necessarily
- Do financial statements report the truth the whole truth and nothing but the truth? With regards to profit yes. Disclosure…..no.
- Does a financial report explain the basic profit making strategy? Not really.
- Do financial statements report the value of the business? No it doesn’t report what it should be on the auction block.
- Should financial statements be taken at face value when buying a business? No a lot more goes into it.

Obama's War and The Fixer

Obama’s War. The title I imagine is very controversial to some, I know it piqued my interest since we have been at war for 8 years, the majority of which he was not Commander in Chief. Although I think that the title is more a realization that no matter what happened in the past the war is now in the hands of our Commander in Chief and therefore he is ultimately responsible to devise a strategy that ends the conflict. I must say I was pleasantly surprised that despite what many would consider a controversial title the documentary was objective, insightful, and very daring both in the footage obtained in harm’s way and daring via the questions asked of the true key players in Operation Enduring Freedom. Fellow classmate and blogger Cameron Schaefer provides some very well written and intelligent discussion on his blog, and recently I have adopted him as a pseudo information funnel regarding our nation’s war strategy (or lack thereof depending on your view). He highly recommended Obama’s War and I must thank him for doing so. The documentary coupled with my watching Charlie Wilson’s War last week have, sadly I must admit, greatly expanded my awareness of not only how we got into the crisis at hand, but the immense difficulties we face strategically moving forward. Below is the summary of the 55 minute masterpiece concocted by PBS. I like my adopted Afghanistan Guru friend highly recommend watching this show, especially if you are currently serving and will likely be headed over there.

In Obama's War, veteran correspondent Martin Smith travels across Afghanistan and Pakistan to see first-hand how the president's new strategy is taking shape, delivering vivid, on-the-ground reporting from this eight-year-old war's many fronts. Through interviews with top generals, diplomats and government officials, Smith also reports the internal debates over President Obama's grand attempt to combat terrorism at its roots.

"What we found on the ground was a huge exercise in nation building," says Smith. "The concept's become a bit of a dirty word, but that's what this is. We started with the goal of eliminating Al Qaeda, and now we've wound up with the immense task of re-engineering two nations."

The brunt of the work is falling on rank-and-file soldiers, and nowhere is it more difficult than in the dusty, unforgiving landscape of Helmand province, the Taliban stronghold in southern Afghanistan, where FRONTLINE embedded with Echo Company, 2nd Battalion, 8th Marine Regiment. Since the Marines' arrival in July, Helmand has become the most lethal battlefield in Afghanistan. But FRONTLINE found the Marines trying to act as armed diplomats, attempting to build the necessary trust for badly needed economic development.

"It's trying to change the culture of the organization," Gen. Stanley McChrystal, the top commander in Afghanistan, tells FRONTLINE of the administration's plan. "At the end of the day, our best counterinsurgents are going to be young sergeants who just have an ability to deal with people. We've got to give them the flexibility to make decisions."

Even as American soldiers struggle to make progress in Afghanistan village by village, equally vexing challenges remain across the border in Pakistan. "In Afghanistan we know what to do; we just don't know if we have the resources or the time available to do it," David Kilcullen, a leading counterinsurgency expert, tells FRONTLINE. "The problem in Pakistan is we're not really sure what to do."

When FRONTLINE confronts the Pakistani army about its reluctance to take out key Taliban leaders, the military's chief spokesman, Gen. Athar Abbas, argues that the accusations are misplaced. There is no truth, he claims, that insurgents stage attacks on American forces from the Pakistani side of the border. "They operate from Afghanistan. If somebody claims that everything is happening from this side of the border, I am sorry, this is misplaced, and we refute it."

Barred from sending troops across the border, the United States is left with few good options. No quick fix will solve Pakistan. "If we have a strategy in Pakistan," says George Packer, a staff writer at The New Yorker, "it's to build up the civilian government to the point where it can be a kind of counterbalance to the military and begin to reorient their own sense of their destiny. Is that even thinkable for a foreign power to do? Even as I say it, I think, why do we think we could even begin to accomplish that?"

CLICK HERE TO WATCH "OBAMA'S WAR"

Update: After I originally drafted this post I watch and HBO on demand documentary entitled "Fixer." A fixer is an individual who facilitates interaction between journalists and those they are out to capture on film. In this case the fixer was a twenty four year old Afghan named Ajmal. The documentary shows Ajmal and his American journalist counterpart interviewing Taliban members, corrupt Afghan elected officials, and terrified commoners. Between the candid glimpses of daily Afghan life and the candid real discussion of the fixer and journalist it is an incredibly powerful documentary for those interested in what is going on overseas. The documentary eventually shifts to tell how Ajmal along with an Italian journalist were captured by the Taliban. The Taliban (alleged by many including the makers of this documentary to be puppets of Pakistan) eventually negotiate a release with Karzai. While the Italian is celebrating his return Ajmal is never actually released and is eventually murdered by decapitation. The film shows Ajmal's father and his disgust for his government. He is appalled that Karzai would negotiate with terrorists to release a foreigner while they sit idly by while his son whose rights the government has sworn to protect are violated. The true value of the film, like Obama's War above, is the illustration of the difficult political interactions of all the players besides the Taliban. Ajmal in a very powerful scene in the film is lecturing his elder American journalist, who is supposed to be an expert on the conflict, that this is not a war against the Taliban. Ajmal states that it is an "international war." Pakistan, the US, and Afghanistan are deeply intertwined in every consequence of this conflict and to see it unfold with Ajmal's tale as a backdrop is truly incredible. I have included a trailer below.

The Dollar And The Gun

You are in a conversation with an acquaintance. The conversation turns to politics. You make it clear you are for capitalism, laissez-faire capitalism. Eloquently, you explain the case for capitalism in terms of man’s rights, the banning of physical force and the limitation of government to the function of protecting individual freedom. It seems clear, simple, unanswerable.

But instead of seeing the “light-bulb look” on the face of your acquaintance, you see shock, bewilderment, antagonism. At the first opportunity, he rushes to object:

"But government has to protect helpless consumers from the power wielded by huge multinational corporations.”

Or: “Freedom is impossible under strict capitalism: people must have jobs in order to live, and they are therefore forced to accept the employer’s terms.”

Or: “In a complex industrial society such as ours, government planning must replace the anarchy of the marketplace.”

Does any of this sound familiar? It is a battle that is all but new. In fact it represents the fictional battle that ensues throughout one of the greatest pieces of literature ever written (my opinion). The literature I am speaking of is Atlas Shrugged by Ayn Rand. The book is controversial, however in my opinion I think that if you put your philosophical beliefs aside you will appreciate the mastery with which Rand has interwoven politics, business, philosophy, love, religion, etc all within an amazingly entertaining fictional tale.

I recently began following The Ayn Rand Center on Twitter which posts publications in line with Rand's philosophy. One that I read the other day was entitled "The Dollar and the Gun." It was written by Harry Binswanger as published in Why Businessmen Need Philosophy back in 1983. The work centers on many of the central premises of Atlas Shrugged, specifically the distinction between economic and political power.

"Political power” refers to the power of government. The special nature of that power is what differentiates government from all other social institutions. That which makes government government, its essential attribute, is its monopoly on the use of physical force. Only a government can make laws—i.e., rules of social conduct backed up by physical force. A “government” lacking the power to use force is not a government at all, but some sort of ugly pretense, like the United Nations.

A non-governmental organization can make rules, pass resolutions, etc., but these are not laws precisely because they cannot be enforced on those who choose not to deal with that organization. The penalty for breaking the rules of e.g., a fraternal organization is expulsion from the association. The penalty for breaking the law is fines, imprisonment, and ultimately, death. The symbol of political power is a gun.

A proper government points that gun only at those who violate individual rights, to answer the physical force they have initiated, but it is a gun nonetheless.

Economic power, on the other hand, is the ability to produce material values and offer them for sale. E.g., the power of Big Oil is the power to discover, drill and bring to market a large amount of oil. Economic power lies in assets—i.e., the factors of production, the inventory and the cash possessed by businesses. The symbol of economic power is the dollar.

A business can only make you an offer, thereby expanding the possibilities open to you. The alternative a business presents you with in a free market is: “Increase your well-being by trading with us, or go your own way.” The alternative a government, or any force-user, presents you with is: “Do as we order, or forfeit your liberty, property or life.”

As Ayn Rand wrote, “economic power is exercised by means of a positive, by offering men a reward, an incentive, a payment, a value; political power is exercised by means of a negative, by the threat of punishment, injury, imprisonment, destruction. The businessman’s tool is values; the bureaucrat’s tool is fear.” (Capitalism: The Unknown Ideal, p. 48)

Whether you agree wholeheartedly or are completely opposed to the above line of thinking, the argument should be had. As I was reading through a second time I came across the excerpt below.

In today’s depressed economy where “obscene profits” have turned into (lovely?) losses, the anti-business theme is being played in a new key: the target has shifted to foreign businesses. The equation of the dollar and the gun remains, however. To wit: “Senator Paul Tsongas (D-Massachusetts) believes that the hightechnology challenge from Japan is as serious to the United States’ long-term security as the defense threat posed by the Soviet Union.” (Infoworld, May 30, 1983)

The Soviet Union threatens us with nuclear annihilation. The Japanese “threaten” us with the opportunity to buy cheap, reliable computer parts.

One could point out that the law of comparative advantage, a cornerstone of economic science, dictates that one country’s superior productive ability can only benefit all those with whom it trades; that if Japanese firms can produce computer parts at lower cost than U.S. firms can, then our firms will necessarily have a comparative advantage in some other area of production; that any government intervention to protect some U.S. firms from foreign competition sacrifices other U.S. firms and the public at large to inefficiency, lowering our standard of living. But all this would be lost on the kind of mentality that equates imports with bombs.

Does that sound familiar? It should. Because we aren't far off from the same situation today. Just replace Japan's cheap products with China and add in cheap labor from India and it is one and the same. I really enjoyed the way in which the author employed a Socratic method-esque approach to debating common accusations against capitalism.

It is true that laws protecting rights are a precondition for the production of wealth, but a precondition of production is not production. In enforcing proper laws, the government does not produce anything—it merely protects the productive activities performed by private individuals. Guns cannot create wealth. When a policeman prevents a mugger from stealing your wallet, no value is created; you are left intact, but no better off.

The absence of a loss is not a gain. Ignoring that simple fact is involved in the attempt to portray the government’s gun as a positive, creative factor. For instance, tax relief is viewed as if it were government encouragement. In reality, tax breaks for schools, churches, homeowners, etc., are reduced penalties, not support. But socialist Michael Harrington writes:

The Internal Revenue Code is a perverse welfare system that hands out $77 billion a year, primarily to the rich. The special treatment accorded to capital gains results in an annual government benefit of $14 billion for high rollers on the stock exchange. (Saturday Review, November 1972)

Harrington equates being forced to surrender to the IRS one quarter of your earnings (the tax rate for capital gains), with being given a positive benefit by the government. After all, the IRS could have taken it all.

Just as the absence of a loss is not a gain, so the absence of a gain is not a loss. When government handouts are reduced, that is not “balancing the budget on the backs of the poor”—it is a reduction in the extent to which the poor are balanced on the backs of the rest of us.

And:

I will conclude with another scenario. Imagine that you survive a shipwreck and have to steer your lifeboat to one of two desert islands where you will have to remain for several years. On each island there is one inhabitant. The western island is the property of a retired multi-millionaire, who lives there in high luxury, with a mansion, two swimming pools and all the accoutrements of great wealth. The eastern island is inhabited by a propertyless beachcomber who lives in rags and eats whatever fruit and fish he can scrounge up. Let’s add that the millionaire is an egoist and strict capitalist, while the beachcomber is a saint of altruism who will gladly share his mud hut with you. Would you, or anyone, head east to escape being “exploited” by the millionaire’s economic power?

As I said earlier, you may not agree with the premise of the writing but I definitely recommend reading the article in its entirety here. I would love to hear comments as this is a polarizing topic amongst many.

Personal MBA Update - Ready, Fire, Aim

The Personal MBA Update - Ready, Fire, Aim by Michael Masterson: This book was awesome. Plain and simple. It was one of the best books I have read on the topic of entrepreneurship. It wasn't just a touchy feely go out and do it type book. The book had great lessons and practical advice on how to best achieve entrepreneurial success, not just as a start up but as you mature your business. I particularly like the books focus on selling, marketing, and strategies for increasing profits. I found myself testing my own random business ideas against the criteria and recipes for success of this book to see if I truly have good ideas and more importantly if the ideas have the potential to make money. For me I felt as though I took more out of the first stage entrepreneur advice, but that is probably because that is the stage I am trying to reach. I think that the book could prove valuable to business owners and executives alike as it also offers practical advice for those seeking to grow their business and move it into the next stage of business maturity. This is one of those books that I may not remember all the great lessons packed inside, but when I go to start a business the book will be one of the first resources I grab to ensure that I am focusing my efforts for success.

Whether you're thinking about starting a new business or growing an existing one, Ready, Fire, Aim has what you need to succeed in your entrepreneurial endeavors. In it, Masterson shares the knowledge he has gained from creating and expanding numerous businesses and outlines a focused strategy for guiding a small business through the four stages of entrepreneurial growth. Along the way, Masterson teaches you the different skills needed in order to excel in this dynamic environment.

While some of the concepts covered may seem novel, all of them have been proven to work time and again. Among other things, you'll discover:

Why selling is your first business priority and the one thing you should never stop doing

The handful of numbers that are critical to every business

When to cut your losses short and when to let your winners run

The front-end/back-end method of doubling profits easily

Why having a Plan B is as important as Plan A, and when and how to create it

The difference between pushers, thinkers, organizers, and sellers, and how to attract the ones you need for your business

Over the course of his remarkably successful career, Michael Masterson has helped start and develop dozens of multimillion-dollar businesses, including one whose revenues exceeded $135 million and another still growing at $300 million. Now, with Ready, Fire, Aim, he'll show you how to make your way to the top by designing powerful marketing campaigns that will regularly outsell your competitors; implementing innovative operational procedures that will reduce costs and hassles; and using the revolutionary power of the Internet to reduce customer complaints and increase profits.

To start and grow multimillion-dollar businesses over and over again you have to master certain skills. Ready, Fire, Aim reveals what those skills are and shows you how to quickly master them. Filled with in-depth insights and expert advice, this remarkable guide for entrepreneurs gives you a blueprint for business and financial success that will allow you to enjoy life to its fullest.

Here are my notes from the book:

Part I: Being all that you can be
Introduction: The very best job in the world:
- Three most important decisions in life are 1. what you do 2. where you do it 3. with whom you do it Plus #4 when you work and when you don't
- no consideration is more important that who you work with

Getting to the next level:
- The four stages of business development: 1. Starting out zero to $1M 2. Fast growth 1 to $10M 3. Adolescent stage 10 to $50M 4. Maturing state 50 to $300M
- Stage I:
main problem - you don't really know what you are doing
main challenge - making the first profitable sale
main opportunity - achieving a minimum critical mass of customers
- Stage 2:
main problem - you are only breaking even or losing money
main challenge - creating many additional profitable products quickly
main opportunity - increasing cash flow and becoming profitable
- Stage 3:
main problem - your systems are strained and customers are noticing
main challenge - turning the chaos into order
main opportunity - learning how to establish useful protocols and manage processes and procedures
- Stage 4:
main problem - sales slow down or stall
main challenge - becoming entrepreneurial again
main opportunity - getting the business to run itself

Why Employee Size Matters:
- 4 Stages: 1-7-49-344 Employees

Becoming a five star business genius:
- For a business to grow to $100M-$300M it must be good if not great in these areas: 1. coming up with new and useful product ideas 2. selling those products profitably 3. managing processes and procedures efficiently 4. finding great employees to do the work 5. getting people, procedures, products, and promotions going
- To successfully start a business all you need is to 1. know how to make a sale 2. be able to put that sales process into action
- Natural inclinations of an entrepreneur: 1. They are attracted to challenges 2. they enjoy being in leadership roles 3. they are passionate about their ideas
- Natural skill of entrepreneurs: 1. well organized 2. good analytical thinkers 3. they are good at sales 4. good at taking initiative
1. coming up with ideas
2. selling products
3. managing systems
4. developing superstars
5. taking action

Part II: Stage One: Infancy
The supremacy of selling:
- without sales it is very hard to sustain an ongoing business
- Jim Koch and the Sam Adams story
- 4 aspects of entrepreneurial success: 1. A seller: someone to market the product 2. An improver: someone to improve the product 3. An organizer: someone to make sure things flow smoothly 4. A pusher: someone to get people to do what they are supposed to do
- Priorities should be:
1. selling 2. pushing 3. improving 4. organizing
- There is a direct relationship between the success of a business at any given time and the percentage of its capital, temporal, and intellectual resources that are devoted to selling
- Stage I business priorities: 1. get the product ready enough to sell it but don't worry about perfecting it 2. sell it 3. then if it sells make it better
- Making the first sale is critical for two reasons: 1. you need to create cash flow to keep your business going 2. you will never know whether your unique selling proposition (USP) is good until you test it in the marketplace
- The sooner you learn the answer the better and less costly!

Your optimum selling strategy and the 4 fundamental secrets of selling your first product:
- Your optimum selling strategy (OSS): 1. Where are you going to find your customers? 2. What product will you sell them first? 3. How much will you charge for it? 4. How will you convince them to buy it?
- Best advice: Do what everyone else is doing! In the beginning at least.
- How to pick a start up product: 1. What products are hot? 2. Determine if your product fits that trend 3. If yes you are set to go if not go to 4 & 5. 4. Come up with me too product versions of several hot products 5. Improve them in some way by adding features or benefits the originals lack.

Mastering the copy side of selling:
- 4 marketing concepts: 1. The difference between needs and wants 2. Difference between features and benefits 3. How to establish a unique selling proposition (USP) 4. How to sell the USP
- USP: 1. Make it some way better 2. Make it seem better
- quote page 100
- 3 aspects of a solid USP: 1. The appearance of uniqueness 2. The big promise 3. Specific claims 4. Proof of those claims
- advertising cheat sheet on page 107

Secondary yet important priorities for stage one businesses:
- Mentoring and being mentored
- Teaching your team
- Setting business targets
- Page 117 last paragraph

A quick review of the problems, challenges, and opportunities faced by the stage one entrepreneur:
- Don’t waste your time on corporate marketing, sell your product not your company
- Don’t waste your money on invisible (to your customers) business extras like office space, furnishing, equipment and the like
- Don’t be misled by phony business experts
- Be proud of your business acumen not arrogant about your business ideas
- Ask advice from smart people
- Don’t ever believe you know more than the market
- Make sales your company’s top priority
- Learn everything you can about sales and marketing
- Discover the optimum selling strategy
- Understand how pricing and other aspects affect sales
- Give you marketing team one and a critical mass of qualified customers
- If possible use direct mail or email to discover OSS
- In testing price to determine OSS favor the down side
- Don’t invest a lot of inventory before you have figured out OSS

Stage II Childhood:
From $1M to $10M and beyond:
- “Innovation distinguishes between a leader and a follower,” – Steve Jobs
- If you get caught in stage I you have a self employment company vs. equity business
- Every time your business changes so must its leader – YOU
- Most companies that go from 1M to 10M do so within 5 years. Why so quickly? Because they made the fundamental change from 1 product to marketing many products.
- Aggressive proliferation of new products
- The primary factor in stage II growth is the development and marketing of new products. The faster you can develop and sell those new products the fast your business will grow
- Front end sales come from those people who have never bought anything before
- Back end sales come from existing customers
- The purpose of front end is to get a new customer the back end is to produce a profit
- Axiom page 144

Innovation is the key to second stage growth:
- Innovation is rarely new its noticing trends and getting ahead of them to create the tipping point
1. The secret to breaking into new markets or reviving a flagging business is to create tipping point products
2. The secret to creating them is to find hot products in rising markets and come up with some way to make them new and different
3. You can make lots of money on the back end with ordinary products as long as you sell them to existing customers
- quote pg 154 at bottom
- New product ideas: work as a member of a team. Don’t fly solo
- Formula of creative brainstorming:
1. A quorum of three: 2 is better than one 3 is better than 2
2. A maximum of 8: there is a limit to the number of people who can effectively operate
3. A limit of time: Parkinson’s law
4. Established goals: what is your specific objective
5. High standards: keep asking how can we improve upon that?
6. A code of equality
7. Strict rules: a. specific suggestions b. no specific criticism c. be positive d. encourage the weak and cut the windbags short
8. A culture of creativity
- Magic Product cube: cubes have 3 dimensions 1. Price – inexpensive, moderate, expensive 2. Product type – golf clubs, golf paraphernalia, golf balls 3. USP – you have 3 golf pros who will endorse you Tiger etc. This means you have 3X3 or 27 possible products
- The 24 hr rule for preserving the inspiration of genius 1. The entire brainstorming session must be tape recorded 2. When a tipping point idea is suggested a short advertising piece must be written in 24 hrs.

Speed:
- When innovation and speed are combined the results can be astonishing
- 80% of G=IV2 where G= second stage growth I= innovation V= velocity
- Axiom page 168
- Innovators should be passionate about: love good ideas, hate sluggishness, enjoy the process
- “money loves speed”
- Accelerated failure and ready fire aim
- By accelerating failure we can accelerate success. Over time increase success vs. failure
- 8 guidelines to speed up implementation of good ideas: 1. Explain the key concepts 2. Support management 3. Walk the walk 4. Establish parameters 5. Get agreement 6. Accelerate gradually 7. Provide support as you go 8. Follow the program

Getting Ready:
- Ready questions: 1. Do I have a good idea 2. Does it feel like it will work? 3. Are my sales targets real? 4. Can I afford to test the idea? 5. Do I know the basic tasks that need to be done? 6. Do I have the people who can do them? 7. Do I have plan B an exit plan in case my good idea is a bad one?
- quote 183
- gut instincts are really subconscious suggestions that arise from all the patterns we’ve observed. They will tell us more than we can logically know because they represent more information that our brains can logically process.
1. Ask yourself how much it will logically cost to make the product come to life. Take that and double it
2. Figure out how many units it will sell and cut it in half
- Ready Aim Fire business proposal pg 193

What are you waiting for? Get started already:
- 2 reasons most good ideas never get implemented: 1. A desire for perfection 2. Little chores

Aiming the product:
- Ready aim fire ultimately results in higher quality products because there is less money and time wasted on features, mechanisms, and details that customers don’t really care about
- Fewer resources at the ready stage means more available at the aim stage
- A tale of incremental degradation – the candy example page 210
- Business people fall into two categories. Those who believe the universe is limited and disconnected and those who believe its unlimited and interconnected. One hoards and one expands.
- The golden rule or the rule of gold
- Remember that most of your profits will come from back end products which means the easiest way to grow your company is to develop long term relationships with customers and good products
- If it ain't broke….fix it. By broke I mean sales. Trash ones that don’t sell and fix the ones that do sell.

Aiming the Marketing Part I:
- Step I: Exercising the righteous demons
- Myth 1: it is good to sell things that people need, like grain and milk, but it is bad to sell things that people don’t need like TIVOs and gambling vacations
- Reality: More than 90% of what people buy is based on wants not needs
- Myth 2: It is good to sell things as long as you don’t charge much more than they are worth
- Reality: What does value really mean?
- Myth 3: It is good to make good things better but it is bad to sell them
- Reality: Give me a break
- “Don’t be ashamed of doing to thy neighbor which you secretly want done to you.” Golden rule of Marketing Genius is treat your customer as you want to be treated.
- Step 2: Shooting revenues through the roof with 3 basic approaches:
1. You can sell the product to more people
2. You can get your customers to buy more products
3. You can charge more for the products you sell
- Customer service made easy and profitable:
1. Knowing what customers really want
2. Finding out how you can do that for them
3. Talking to them about what you are happy to do
- Step 3: A crash course in sales and marketing
1. Your customers don’t care about you or your business. They are about themselves
2. A small portion of your customer base is giving you the lion’s share of profits
3. Understand why your customers buy from you
a. to feel good about themselves
b. to solve a problem
4. Almost every sales transaction begins with the process of generating leads
5. Learn multichannel marketing
6. Follow the golden rule of marketing genius: treat your customers as you want to be treated
7. Understand the secret of the four legged stool:
a. the big idea b. the big benefit c. the big promise d. proof
8. Understand that customer complaints and objections are the key to selling better
9. Maintain a “no dead end” policy regarding your products. Every sale is a link in a system of links that go on forever
10. Take advantage of customer inertia. Establish a bill til forbid relationship
11. Understand the 80/20 rule
12. Understand the USP of each product
13. Every product line needs its own branding
14. Never lose your marketing edge
15. understand the secret of the core complex. Think of your customers personality as an onion
16. Practice reciprocity with your customers
17. Understand that intimacy is the key to a customer’s lifetime value to your business
18. Be confident and enthusiastic when you sell
19. Don’t push or bribe your customers
20. Develop and mature a marketing culture that emphasizes 3 sentiments: providing benefits to the customer is the heart of product development, providing value is the heart of sales transactions, sincerity is the heart of all communications.

Aiming the Marketing Part 2:
- Understand the buying frenzy
- Increase your profits by stimulating your customers natural wants and turning them into a buying frenzy
- If you convince a customer to buy when they need it you have a loyal customer but if you can persuade him to buy every time that he wants it then you have a human ATM.
- The Law: The likelihood of a customer buying a product is inversely related to his need for it.
- The Corollary: The less a customer needs a product the more likely they are going to buy it.
- 3 factors that stimulate buying frenzies: 1. Feeling like I have more money than I need 2. Being exposed to psychologically effective selling signals 3. Good feeling from buying.

Ready Fire Aim in action:
- various stories

A quick review of the problems, challenges and opportunities faced by the stage 2 entrepreneur:
- Pages 272-277

Making the Stage III Transformation:
- In stage II new employees are added by subordinates creating a communication gap for the first time.
- Corporate execs are different than you but you need them because you can’t change your company without them
- The rule of 3! Each manager should be required to give you only 3 numbers month
- 1. Change yourself. 2. Change or hire great people to run your business

Change into a Corporate Leader:
- Six skills for a Stage 3 business: 1. Controlling operations 2. Managing your managers 3. Communicating your vision 4. Networking for joint ventures 5. Negotiating deals 6. Being good at hiring

Filling your Stage III business with stars and superstars:
- Myths and realities:
- Myth: Employees need job descriptions to know the scope of their responsibilities
- Reality: Job descriptions are not necessary
- Myth: Employees are always motivated by money
- Reality: Money isn’t even the second most important motivating force
- Myth: To win loyalty you must make them owners
- Reality: Most don’t want to be business owners
- Myth: Flat organizations create happier and more effective employees
- Reality: Employees like hierarchy
- Myth: Make work fun by filling it with amusements
- Reality: Fun comes from good work not from distractions
- Myth: A good boss is a sensitive boss willing to respond to personal problems
- Reality: Mixing business with friendship is always a bad idea
- Myth: A good boss listens to employee complaints and responds to them
- Reality: Some complaints are better ignored

Bottlenecks, Bureaucracy, and Politics:
- Terms page 322
- Ostensibly politics and business have the same purpose: go make the world a better place. But their methodology is different. Politicians don’t start doing good until they get their power. Business people can’t get their profits until they do their good.
- Quote pg 332

A quick review of the problems, challenges, and opportunities faced by the Stage III entrepreneur:
- Pages 334-337

Part Five: Stage IIII Adulthood
The last big change:
- Opportunities: 1. Selling your business privately 2. Bringing it public 3. Stepping back and becoming chairman of the board
- Role I: The employer role
- Role 2: The manager
- Role 3: The business builder
- Role 4: The wealth builder

Acting as your company’s main investor:
- Bottom line page 356