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BACK TO THE FUTURE:

LESSONS OF VISION, PASSION, AND RESULTS

APRIL 17, 2003

INTRODUCTION unprecedented business expansion, and new,


national markets. In our current revolution,
Earning consumers’ trust through the PC and the Internet have changed our
demonstrating your company’s real integrity reality yet again, enabling national markets,
is more important then ever in times of great immediate connectivity, and even larger-
social and economic turmoil, according to scale business expansion.
Nancy Koehn, Ph.D. Koehn, Professor of
Business Administration at Harvard For Koehn, studying the past enables her to
Business School, has studied entrepreneurial see “rhymes” with the present, rhymes that
companies from the 18th century to the echo past events. She noted that our
present. Her recent book, Brand New: How “irrational exuberance” in the 1990s has
Entrepreneurs Earned Consumers’ Trust been supplanted by equally “irrational
from Wedgwood to Dell, takes advantage of pessimism.” She believes that we would be
her training as a historian to uncover lessons less indulgent in extreme viewpoints if we
learned by visionary start-ups that succeeded could frame the present moment in terms
in business during “key inflection points” in that recollect similarly critical, past
history. moments of change.

Key Historical Junctures “The big question is how do you connect


The three turning points she considers are with your customers—your employees
the first industrial revolution in England in inside the organization and your external
the mid-eighteenth century, the customers.”
transportation and communication
revolution in America at the end of the Today in Context
nineteenth century, and our current In terms of your business, Koehn pointed
technological revolution. In the first, out, “The big question is how do you
transformative changes included the steam connect with your customers—your
engine, the textile industry, an emergent employees inside the organization and your
middle class, and new occupations, such as external customers—how do you connect
merchants and lawyers. In the second, the
telegraph and the railroad enabled new Continued on Page 2
connectivity, larger-scale manufacturing,

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pursued his craft, becoming an “intern” in an
Continued from Page 1 established potter’s business.

with them in meaningful, profitable, In the 1750s and 60s when he was beginning
strategically effective ways with integrity his career, society in England was
when the social and economic context is undergoing massive change, moving from
accelerating into turbo-charged change?” an agrarian economy to an industrial one. In
this new economy, nations were fighting for
Noting the current absence of a social leader resources, manufacturers were suddenly
(such as Winston Churchill or Teddy employing an unprecedented 200 or more
Roosevelt) who can define our moment for employees simultaneously to mass-produce
us, Koehn warned against learning about the goods that had heretofore been produced
world exclusively from the media. She sees individually by the consumer. Income
today’s media as fluctuating between differentiation and income inequality
extreme perspectives at a frenetic pace, became realities.
simply following whatever “story” arises.
“A brand is a promise based on an
Reframing our current “moment,” Koehn acknowledged set of things people of a
said, “The information age is at least a 10- company deliver to a customer.”
chapter novel, and we’re just finishing
Chapter 3. How do I know that? Because I Wedgwood’s Wares
spent the last 20 years studying two Wedgwood created fashionware for a new
moments just like this. And those moments class of consumer, the city-dweller. His first
were as capricious—in terms of the stock unique line was “pineappleware.” As
market and socially—they were as scary and Koehn’s pictorial slide demonstrated, these
exhilarating. There are so many rhymes. pieces resembled pineapples, both in color
And the computer revolution was just a and in texture. Pineappleware was a far cry
prologue.” from the wood and pewter food containers
people had been using, and it was readily
Having contextualized the discussion embraced by those with disposable income.
historically, the rest of Koehn’s talk focused Next, came cauliflowerware. Though
on the stories of three highly successful considered unattractive by some in today’s
entrepreneurs: Josiah Wedgwood, Esteé audience, it too was popular in the mid-
Lauder, and Howard Schultz, whose eighteenth century.
collective careers spanned from the 18th
century to the present. In 1759, Wedgwood decided to venture out
on his own with borrowed equipment to
The Making of Josiah Wedgwood establish the Josiah Wedgwood Company.
Josiah Wedgwood was born in 1730 to a He began to sell his wares in three cities.
lower working class family. He surpassed all Through customer word-of-mouth, his china
odds by living beyond the average life span became popular. In the history of capitalism,
of 36, by moving into the top of the middle Wedgwood was the first one to mark his
classes, and by creating an entirely new product with his name, signing the bottom of
niche of high-end pottery. At 12, he was each piece to establish his china’s identity.
crippled by small pox and so was no longer
able to work on a potter’s wheel in his Continued on Page 3
father’s pottery shop. He nonetheless

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Continued from Page 2 recession or depression. For instance, after
9/11, Koehn reported that more alcohol was
He was also the first one to offer a money- bought, more babies born nine months later,
back guarantee, thus increasing customer and more videos watched in the subsequent
trust and loyalty. Wedgwood was also the eight months than in any other eight-month
first to offer free shipping. period in the US. Additionally, more
diamonds were bought in those eight months
He created a new market with new business than in the preceding 45 years in the US!
practices, and he courted early adopters. He These trends reflect people’s grasping new
consciously sought to build a reputation with priorities. Koehn explained the diamond
a clear identity attached to his products. In surge as testament to the fact that jewelry is
other words, Wedgwood established a an emotional purchase and ties in with
brand. According to Koehn, “a brand is a consumer’s sense of enduring values.
promise based on an acknowledged set of
things people of a company deliver to a Creative Marketing
customer.” And Wedgwood delivered on his Wedgwood was ahead of his time in many
promise. ways. Understanding that women were—
and are—the primary decision makers on
Attracting the Aristocracy household decisions (71% of household
In 1762, Wedgwood set up a partnership decisions today), he marketed toward
with an aristocrat, Thomas Bentley. At that women. He also employed women as
point, seeking an even more affluent craftspeople; indeed, 10% of his
consumer base, he put out a line of pottery craftspeople were female, which was
called Queensware. His beautifully wrought unheard of at that time.
saffron yellow china was durable, and
clearly identified as targeted toward the By 1768, he was the most successful potter
upper-level market. Wedgwood remained in the world, selling all over North America.
uninterested in appealing to the lower He continued to take chances. Spending ¾
classes. In fact, he never discounted a piece of his annual revenue, he sent out
of pottery, but rather priced his china at a unsolicited pieces to the 700 top aristocrats.
premium and continued to differentiate it The risk paid off—all but two of them
from all others. subsequently bought from him. He began to
leverage his brand across products, creating
Recognizing that the royalty in England set Jasperware belt buckles and broaches, for
the fashions for all other aristocrats to instance, beautiful white carvings inlaid in a
follow, he sought to make them his market. blue background.
As the social pecking order shifted during
the industrial revolution, people sought ways Wedgwood produced prestige pieces, which
to validate their new money. Owning were basically “money pits,” as Koehn put
Wedgwood china rapidly became part of it. However, they served an important
that validation. purpose, much like Nike Town and Neiman
Marcus’ impossibly extravagant items
Aspirations Drive the Market today, prestige pieces build brand
As an aside, Koehn noted that “aspirational recognition. When these prestige pieces and
branding,” such as Wedgwood practiced,
becomes even more important during Continued on Page 4
economic contraction, such as during a

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Continued from Page 3 and customers’ feel for your
company?
experiential stores complement what you do,
they become a launching pad to success, 5. In this moment of geopolitical
assured Koehn. turbulence, what do your customers
think about themselves, their
In the 1760s, Wedgwood built a possibilities, and your organization?
showroom/factory that remained viable until
1942. In it, consumers (primarily women at The Making of Esteé Lauder
that time) could browse freely, even Esteé Lauder was born in 1908 in Queens,
touching pieces (another first), in a large, New York, as Josephine Esther Mentzer.
well-lit space with friendly, knowledgeable She was a Hungarian Jewish immigrant, at a
salespeople. All aspects of this showroom time when 1 million immigrants per year
were unprecedented. Pointing out yet were entering the US. Her father owned a
another critical piece of Wedgwood’s hardware store, and her uncle was a chemist.
success puzzle, Koehn explained that In the midst of the second industrial
Wedgwood’s sales force was able to revolution, the health and beauty aids
communicate the values, benefits, and industry did not exist. (To compare, today
mission of the company. And his the prestige cosmetics industry is a $90
distribution point itself was well-aligned billion enterprise, fragrance is a $40 billion
with his brand identity in its uniqueness and industry, and hair care is a $70 billion
grandeur. industry.)

To date, Wedgwood has never operated at a As a child, Josephine Mentzer played with
deficit. Eventually, Waterford Crystal skin care products from her uncle’s
bought Wedgwood in order to gain financial laboratory. An unseemly beginning for an
stability. Wedgwood remains successful, its entrepreneur whose company yielded $5
brand connoting prestige, durability, and billion in 2002, her uncle specialized in lice
elegance, and its merchandise returning a killer, mustache remover, flea powder, and
10% profit on sales. eczema cream. A creative, savvy girl,
Mentzer sought to create a new niche, one
Application Points which provided products that would allow
1. How well is your distribution women “to enhance their own beauty by
strategy synchronized with the core themselves.” If they used her products, they
attributes of your brand? wouldn’t have go to a special salon to be
“made over.”
2. What is the experience of your
customer—internal and external— In 1929, at 21 years of age, Esther
with your service? Mentzer—one of six name changes before
she settled on her famous moniker—married
3. How empathic is your organization Joe Lauter. At this point in US history, only
toward internal and external one in 10 women used lipstick. More
customers? surprising, only one in two Americans

4. How effectively engaged are your Continued on Page 5


human resource initiatives in
supporting your brand, reputation,

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Continued from Page 4 expanded initially by word-of-mouth. From
1930-40, the emergent Esteé Lauder saw a
owned a toothbrush. However, times were in 20% expansion in her business.
flux, as the railroad and communications
technologies prompted the emergence of Shifting into High Gear
new industries and larger organizations, and When World War II began, and materials
consequently, new employee positions. With were rationed, Lauder had difficulties
women in the paid work force, ideas about getting the oils, lanolin, and packaging she
women’s appearances in public shifted. needed. Still, she persisted, through
hoarding and innate resourcefulness, having
Esther Lauter, as she was became known, moved from her kitchen stove for product
was poised to take advantage of this shift in preparation to a rented restaurant space
perceptions. She was “a curious, dramatic— between 11 p.m. and 7 a.m. Despite hard
sometimes slightly melodramatic—warm social and economic times, from 1939-44,
and charismatic child,” according to Koehn, the cosmetics industry increased more than
who was fortunate enough to have gained 25%.
entrée into the secretive beauty industry.
In a study done in England during WWII,
Establishing a Sales Strategy female factory workers were shown to be
In another identity shift, Estelle Lauter 35% more productive at work when they
began visiting beauty shops, where women were provided makeup mirrors and free
had their hair and nails done. Despite hard cosmetics. Taking notice of these results and
economic times, with unemployment at the fact that women had become
32%, and business investment having fallen “productive, economic actors,” in 1941, the
18% from 1929-32, these particular beauty US War Production Board took core
enhancements were in wide use. Using an cosmetics materials off the rationing list as
approach that her sales force adopted for the US was about to enter the war.
decades to come, Lauter took a woman’s
right hand and said, “What beautiful skin As the war came to a close, in a tenuous
you have. May I show you a lipstick that economy, Lauder decided that she could
will complement it?” Her “hands-on” build a national prestige brand; she wanted a
approach cost her very little, and she had a large margin on her sales. Consequently, she
bored, captive audience as women sat under did not want her products in drugstores, nor
hair dryers in hair salons. was she interested in company-owned
salons, like Helena Rubenstein or Elizabeth
“Try it first, then you decide if you like it.” Arden had. Instead, she was targeting Saks
Fifth Avenue, Neiman Marcus, Bergdorf’s,
Like Wedgwood, she lays claim to many and that ilk of department stores. Lauder
firsts. She was the first person to give away knew, and Koehn concurred, “the
free gifts. She gave women a dollop of distribution channel matters.”
cream or a sliver of lipstick on a piece of
wax paper. This was brilliant marketing in In the 1950s, women dressed up to go
that it said to women, “Try it first, then you shopping in department stores, and they
decide if you like it.” A gift also creates an luxuriated in their time there. If she could
obligation, and the gift’s story is more likely
to be passed on to a friend. Lauter’s beauty Continued on Page 6
business, like Wedgwood’s china business,

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Continued from Page 5 filtered, loyal to the company and its
products, and fit in with the Esteé Lauder
get her line into a prestigious department culture. Today, Esteé Lauder still boasts the
store, then her products would be granted lowest turnover in sales and manufacturing
automatic respect and validation in the right of any retail company. “They put people
circles. With the popularity of department first,” reminded Koehn.
store charge cards, much spontaneous point-
of-purchase decision-making occurred in Creating a Million Dollar Company
those stores. Lauder wanted to take If Wedgwood’s catapulting product line was
advantage of these wealthy women’s buying Queensware, Lauder’s was Youth Dew. She
power. called it “bath oil” rather than perfume, in
another brilliant marketing move. Whereas
In 1946, she aimed for the biggest 90% of women’s fragrances were bought
department store: Saks Fifth Avenue. With predominantly by men for women on special
no reputation and in competition with other occasions, bath oil— priced more
well-known brands, Lauder had to prove moderately—could be bought by the women
that customers wanted her products. In an themselves at any time of year. Women
instance of creative and audacious needn’t even think of it as an indulgence.
marketing, Lauder attended a charity Lauder had tapped into the appropriate
luncheon with 80 wealthy women. She marketing psychology. Youth Dew went
handed out exquisitely packaged lipsticks to national in hundreds of elite department
each woman. Subsequently, they all stores, and the Esteé Lauder company went
marched over to Saks a few blocks away and from a $200,000 a year company in the early
requested Esteé Lauder products. 1950s to making well over $1 million.

Having clinched Saks, she was then able to Esteé Lauder wanted to expand her
leverage her way into Neiman Marcus and distribution abroad. Encountering resistance
others. For the next five years, she traveled among foreign shopkeepers, she again
around the US at least 26 weeks each year, resorted to creativity. For example, she
representing her beauty care products. She broke a bottle of Youth Dew on the floor of
built her brand around herself. For a store she wanted to be in. For the rest of
advertisements, she used a gorgeous, female that day, customers inquired about the smell.
model, whom most consumers believed was Within days, Esteé Lauder products were
her. represented in prestigious European stores.

“They put people first.” In the 1960s, the Esteé Lauder Company
began experimenting with new lines, buying
Not only did she expand her distribution, she other brand names and product lines in order
also pioneered an extraordinary sales to compete with itself and appeal to different
training program. Her sales people, who groups of customers. In 1969, Esteé Lauder
were actually the department store’s bought Clinique. For three years, Clinique
employees, used her gentle, complimentary, did not turn a profit, but Esteé Lauder
hands-on approach. And, like other brilliant learned from customers and from mistakes.
entrepreneurial companies after her, Lauder
employees at every level, serve at a sales
counter before they work elsewhere in the Continued on Page 7
company. The sales force was carefully

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Continued from Page 6 8. How well do you hire people? (What
financial, human, and other resources
In reflection, the company chairman, do you put into hiring?)
Leonard Lauder, Esteé and Joe’s son,
remarked that had they been a public 9. How well do you compete with
company at that time they bought Clinique, yourself? How do you learn from
they could never have taken that riskier path. that?
“Clinique is the fastest selling SKU in the
beauty business today,” noted Koehn. 10. How well do you know and use your
“There is one sold every three-and-a-half company’s “circulation system” in
seconds somewhere on the globe. There is a order to know about your internal
Big Mac sold about every nine seconds and external customers?
somewhere on the globe. Clinique is the
single fastest turning product in US The Making of Starbucks
department stores of any product category.” In the 1960s and 70s, American coffee
meant Maxwell House, Folgers, and Hills
“Information flow is like a circulation Brothers. The pre-crushed beans came in 13-
system.” ounce cans, and there was very little brand
differentiation. In 1971, three male Berkeley
By 1989, women were not shopping in dropouts founded Starbucks. At the time,
department stores as frequently, so the their main products were coffee, tea, and
company began to search for new channels catnip. They were pioneers in the health
of distribution. After going public in 1995, foods movement, purists, at a time when the
Esteé Lauder began acquiring small, fashion center happened to be moving from
entrepreneurial brands. Leonard Lauder East to West—New York to Los Angeles
remarked to Koehn that the biggest and Seattle.
challenge now is to translate the company’s
organizational capabilities and philosophy Starbucks has not only exceeded these three
into the younger start-ups, and at the same men’s visions, but also that of Howard
time, to bring the younger one’s knowledge Schultz, the man who in 1985 bought out the
back to the larger company. Clearly, the remaining founders and pursued his vision
Esteé Lauder company understands the of an Italian-style American coffee bar.
value of information flow. As Koehn put it, Schultz, the only one of the three
“Information flow is like a circulation entrepreneurs discussed by Koehn in her talk
system. It’s has arteries, veins, and a to have earned a college degree, put himself
grapevine. Information, good and bad, true through school as a sales person.
and false, oxygenates your system.”
“Sales is critical. It’s not about
manipulation, but about listening.”
Application Points
6. Who are your brand validators? The Essential Role of Sales
As a relevant aside, Koehn mentioned her
7. Where are your touch points with belief that sales is vastly underrated as a
your customers?

Continued on Page 8

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Continued from Page 7 The two remaining Starbucks founders
eventually left, one for Redhook Ale and the
necessary skill for business success. All of other for the highly esteemed (among coffee
the brilliant entrepreneurs she has studied lovers) Peets Coffee. Schultz then visited
are empathic sales people. “Sales is critical,” 247 “angels” to try to get funding for his
asserted Koehn. “It’s not about venture. Thirty-seven fortunate people
manipulation, but about listening. It is about agreed. In 1992, the stocks appreciated
figuring out a fit between what your several thousand-fold.
customers want and what you have.”
Starbucks Statistics
Enter Howard Schultz Through her studies of successful
By 28 years of age, Schultz was the vice entrepreneurial companies, Koehn has
president of marketing for a major house become an expert in corporate trivia, which
wares company. He noticed that a small she shared with the audience: Each
company in Seattle named Starbucks was Starbucks store is approximately 1,000
ordering more plastic coffee filter holders square feet and costs about $350-400,000 to
than his much larger accounts were. So, he establish. From 1987-90, during the dot-com
set off to investigate. He found out that they boom, Starbucks lost money.
were offering free, on-site, sample coffee
drinks. He was hooked. For a year, he tried In 1991, however, Starbucks “popped,” said
to get a job with Starbucks. Eventually, he Koehn, in its West Hollywood location.
began working for them and attempted to High-profile celebrities began to mention
convince the founders to build into a larger, Starbucks on television. By 1992, Starbucks
national operation. They were completely was experiencing a 40% compound annual
uninterested, preferring instead to focus on growth rate on revenues.
their small coterie of sophisticated
consumers. Today, there are 6,600 company-owned
Starbucks stores in the world—1,500 of
In 1983, Schultz traveled to Milan, Italy, and those are outside North America. Individual
experienced his first coffee bar. He felt customers visit a Starbucks an average of 18
certain that the idea could be replicated times per month, spending an average of
successfully in the US. Returning home, he $3.50 each time. Aside from the regular
broke off in 1985 to found his own coffee morning coffee buyers, those who decide to
bar serving “great coffee,” not “swill,” as he buy a Starbuck’s drink do so within six
referred to the popular coffees of the day. minutes of purchase. In sum, 25 million
people a week buy from a Starbucks.
His bar was successful in that “people Additionally, it is the second most popular
poured in,” noted Koehn. However, he made place for a non-office-based business
a lot of mistakes. For instance, as in the meeting.
Italian prototype, there were Italian language
newspapers, no chairs, opera music, and In fiscal year 2002, Starbucks’ revenue was
some other characteristics Americans found $3.3 billion, in large part reliant upon its
unpalatable. He quickly changed those. At gross margin of 80% on specialty drinks.
the same time, he built upon people’s Sixty-eight percent of those specialty drinks
positive perceptions of coffee houses—
inherently social, community experiences. Continued on Page 9

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Continued from Page 8 minimum wage. Employees working 20
hours or more receive stock options and
are no longer made with whole milk, another health insurance. As a result of its emphasis
of the changes that Schultz reluctantly made on employees, Starbucks experiences
to appease American consumers. relatively low turnover. In fast food
restaurants, turnover is approximately 250-
Starbucks Strategy 300%, whereas at Starbucks, the turnover is
The locations of Starbucks stores are around 40%. Starbuck’s turnover rate is
decided based upon a number of criteria— even lower in these harder economic times.
among them, where mail-order catalog
customers are already located, also When Schultz came to speak to Koehn’s
demographics such as income and education class at the Harvard Business School, he told
level. Starbucks aims to be America’s “new them, “My priorities are, in this, order:
front porch,” so the company looks for 1. employees (called “partners” in
mixed residential and commercial areas. Starbucks lingo)
Apparently, it finds the areas it prefers quite 2. external customers
readily, as a new Starbucks store is opened 3. shareholders
every eight hours. He explained that if he treats employees
well, the other priority people will also
Although Schultz has made a number of benefit in the long-term.
concessions to American tastes since his
original idea, he has refused to sully the Starbucks has spent less than $1 million on
brand by selling flavored beans. Starbucks advertising since 1987, and yet it is
uses only Arabica beans in pure form. considered “the world’s most powerful
Recognizing its dependence on these beans young brand.” Once again, word of mouth
and the farmers that produce them, proves to be an irrepressible marketing
Starbucks invests regularly in the strategy.
infrastructure of coffee-producing countries
around the world. They call the farmers Starbuck’s latest move has been to
“stakeholders” or “farmers of origin.” selectively buy other independent coffee
places as entry points into certain cities. The
As the average consumer has noticed, company has also branched out a bit in
Starbucks clusters its stores. This purposeful terms of new products—decaffeinated
cannibalizing of itself along with that of drinks and limited merchandise, for
spending on foreign infrastructure is instance—but for the most part, the
unpopular on Wall Street; nevertheless, company is careful not to leverage the brand
Starbucks remains committed to its vision. on diverse offerings.
With multiple Starbucks in a single area, no
other coffee shops have a chance. As was true with Esteé Lauder during
Additionally, they become even more visible WWII, Starbucks has not suffered from
as the gatekeepers of fashion. recent difficult economic and political times.
In fact, Starbuck’s bottom line went up 25%
Another aspect of Starbuck’s success that after 9/11.
defies Wall Street expectations is its
investment in managerial infrastructure.
Every employee gets 24 hours of training Continued on Page 10
per year and makes at least $1 more than

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Continued from Page 9 (e.g., Internet chat rooms, television
shows).
Koehn concludes, “These are stories not • Business values and practices.
just of vision and passion, but also of “There is a huge opportunity for competitive
extraordinary operational results.” advantage,” said Koehn, “by investing long-
term in service.” Koehn believes that
The Context for Your Business “people vote with their dollars” on your
It is important for you to understand what business values and methods. If you have
your customers and employees face. For strong corporate integrity, then she
most of us, it is very similar to what we all recommends that you make it known to your
face in our lives. constituents. They will value you for your
• Time constraints. good practices. This consumer response has
People are working 170 hours more per year been borne out for the last four centuries.
than they did 20 years ago.
• Information overload. “There is a huge opportunity for
The average American sees 58,000 TV competitive advantage by investing long-
commercials each year. “We are desperately term in service.”
trying to cut the chaff from the wheat, and
figure out what matters and what doesn’t.” Koehn concluded that smart companies
• Convenience. never forget the demand side of their
We live in a time-pressed, stressful society. business. Organizational empathy means
If you can provide better convenience, you understanding consumers’ needs. “A brand
can gain the competitive advantage. is a two-way relationship,” said Koehn.
• Meaningful Experiences. “You invest in it, and you get returns on it. It
Again, in the fast pace of our society, endures if you can steward it well. It is
providing a meaningful experience to people created by earning customer’s trust in big
will go a long way toward securing their and small ways, not once but many times.”
loyalty. “Think about how powerful it would
be in this environment to actually deliver on “A brand is a two-way relationship. You
what you promise.” invest in it, and you get returns on it.”
• Income inequality.
In 1979, the top 1% of the wealth Application Points
distribution in the US controlled 25% of the 11. How often are you going on missions
assets. In 2001, the top 1% controlled 49% of learning? How are they working
of the assets. And in 2003, the top 1% is for you?
slotted to get 28% of the pending tax cut.
“The tide is not pushing all boats up at the 12. How well do you run experiments in
same rate.” your organization?
• Globalization of commerce and
communication. 13. How well do you learn from your
New challenges and opportunities abound mistakes?
in the potential for customers, employees,
and business partners in other countries. 14. What is your primary offering? What
Also significant, information travels quickly are the advantages of your offering?
and often through unexpected channels
15. How clean is your shop? Who knows
that story?

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