Recommended Readings

This is one of the areas for which Paul Krugman won this year’s Nobel prize. What explains the emergence of large regional concentrations of economic activity? The concentration of production seems to be self-reinforcing. Firms choose to produce in regions with good access to markets but access to markets tends to be good in regions in which many firms choose to produce. Both the size of the export base and the share of income spent locally are likely to be increasing functions of the size of the regional economy. So if a regional economy for whatever reason reaches a sufficiently large scale, it could take off in a cumulative process of growth. For example, the large market might make it profitable to produce locally goods that had previously been imported from other regions. This would increase the multiplier on the region's export base, leading to a further expansion of income, which would lead to still more local production, and so on. The key assumption is that there are important economies of scale enforcing the geographic concentration of some activities. The new interest in space may be regarded as the fourth wave of the increasing returns/imperfect competition revolution that has swept through economics over the past two decades. First came the New Industrial Organization, which created models of imperfect competition. Then the New Trade Theory used that toolbox to build models of international trade in the presence of increasing returns. The New Growth Theory, which followed, did much the same for economic growth. After 1990 we saw the emergence of the New Economic Geography, which tries to explain the spatial structure of the economy using models in which there are increasing returns and imperfect competition.

In this article, noted historian, Peter Temin points out that ancient Rome enjoyed high standards of living. The early Roman Empire, followed the Roman Republic in 27 BCE with the development under Augustus of a monarchy known as the Principate. The early Roman Empire was followed in turn by the late Roman Empire that began around 200 CE, following political and economic instability. There is evidence from the late Republic and early Empire of widespread economic prosperity and possibly economic growth. The standard of living in ancient Rome was similar to that of early modern period of seventeenth- and eighteenth century Europe, an extraordinary achievement for any economy in the ancient world. Ancient Rome managed to achieve this high standard of living thanks to moderately stable political conditions and well functioning markets for goods, labor and capital, which allowed specialization and efficiency.

There are several misconceptions about slavery in ancient Rome. Chemin provides deep insights here. Since this part of the paper is the most interesting, a more detailed account is in order. Frequent manumission—that is, freeing of slaves—was a distinguishing feature of Roman slavery. Slaves in the early Roman Empire could anticipate freedom if they worked hard and demonstrated skill or accumulated a peculium, money “owned” by slaves, with which to purchase freedom. About 10 percent of slaves in the early Roman Empire were freed every five years starting at age 25. Anthropologists distinguish between “open” slavery, in which slaves can be freed and accepted fully into general society, and “closed” slavery, in which slaves are a separate group, not accepted into general society and not allowed to marry among the general population when freed. Roman slavery conformed to the open model. Freed men were granted Roman citizenship; their children could be town councilors, and their grandchildren could be knights. Freed slaves retained the names of their former owners and could be identified as members of their owners’ family, providing former slaves with a reputation that helped them to operate in the economy. A productive freed man also increased the reputation and income of his former owner and his family. Freed men could marry other Roman citizens. Children and grandchildren of freedmen were accepted fully into Roman society. The combination of frequent manumission and open slavery created incentives for slaves to work hard and hasten the day when they would be free workers. Slavery in fact was the most common formal, legally enforceable long-term labor contract in the early Roman Empire. Roman slaves worked in all kinds of activities. A slave might even hold a managerial job. Ancient slave owners often encouraged slaves to be educated to perform responsible economic roles, since education increased the value of slave labor to the owner. Some ambitious poor people in the early Roman Empire even sold themselves into slavery as a long-term employment contract that offered a greater chance of advancement than the life of the free poor. Ex-slaves were better placed to make a success of themselves in the urban economy than the free born poor: Upon manumission, many of the ex-slaves started with skills and a business. Roman slavery in some ways resembled the processes of apprenticeship and indenture in early modern Europe, which reveals the integration of Roman slavery into the overall labor market.

Well functioning markets promoted a modest rate of economic growth that resulted in the prosperity of the early Roman Empire, which was not to be equaled in the West for almost two millennia thereafter.

In this paper, nobel prize winner George Ackerlof, well known for his Theory of lemons and Rachel Kranton present a principal-agent model that incorporates the notion of identity. Employees may have identities that lead them to behave more or less in concert with the goals of their organizations. With such an identity, workers are willing to put in high effort . Identity is an important supplement to monetary compensation. Monetary incentives remain a blunt instrument. First, compensation schemes can be based only on variables (such as output or profits) that are observable to management. But such variables are most often imperfect indicators of individual effort, as when—for example—output derives from workers' collective efforts in a team . Moreover, many monetary incentive schemes create opportunities for workers to game the system. For example, most jobs involve multiple tasks. In this case, workers will have incentive to overperform on the tasks that are well rewarded and to underperform on the tasks that are poorly rewarded. Tournaments, where pay depends upon relative performance, reduce the need for information, but create another problem because workers may try to sabotage one another. So to function well, an organization should not rely solely on monetary compensation schemes. The ability of organizations to place workers into jobs with which they identify and the creation of such identities are central to what makes organizations work.

This is a phenomenal article that helps us to understand how private equity actually works as a corporate governance mechanism. Traditionally private equity has been viewed as “expensive” capital and public equity as a relatively “cheap” source of funds.. But this logic misses the point. For both private companies considering whether to go public and public companies considering whether to go private there is much more to making sound equity-raising decisions than simply comparing investor returns. Who provides equity capital to a company is as important as how much equity is raised. Moon argues that private equity and public ownership represent very different packages of costs and benefits. Public equity may not turn out to be as cheap as it seems. And, in some cases, the benefits of private equity may prevail. Only by recognizing the costs and benefits of each can companies make the value-maximizing choice.

Venture capital has emerged as an important source of funding for small firms that would otherwise have problems in accessing capital markets. These firms are subject to various uncertainties and typically operate in fast changing markets with few tangible assets. There are large information gaps between the entrepreneurs involved and the investors. Venture capital as opposed to public equity comes in handy in such situations. This article by two of the leading researchers in the field provides deep insights about the art and science of venture capital.

In this article, a well known scholar examines the tradeoffs underlying the use of debt and equity. Contrary to what Miller and Modigliani mentioned, capital structure does matter because of taxes, differences in information and agency costs. Accordingly, Myers examines three theories in detail. The trade off theory tries to balance the tax advantages of debt and the possibility of distress. The pecking order (differences in information ) theory states that firms will first borrow rather than raise equity when they are short of funds. The free cash flow (agency costs) theory argues that cash flows belong to equity holders. Even dangerously high levels of debt can create value for shareholders if the free cash flows are more than the investment opportunities.

Thanks to modern financial markets, managers can ensure that virtually the only risks its shareholders, debt holders, trade creditors, pensioners, and other liability holders must bear are value-adding risks. Those are the risks associated with positive-net-present-value activities in which the company has a comparative advantage. All other risks can be hedged or insured against through the financial markets. In most large companies, equity capital is used to cushion against a great many risks where the firm does not have a comparative advantage. If it can remove these non-value-adding risks, a company will be able to use its existing equity capital to finance a lot more value-adding assets and activities than competitors. The Nobel prize winner argues that the potential for creating shareholder value through financial engineering is enormous.

Companies can manage risks in piece meal fashion or they can bring in an integrated approach. Such an approach which takes a view of the risks facing the organization as a whole and comes up with the most effective way of managing risk is called Enterprise Risk Management. ERM creates value at both a “macro” or company-wide level and a “micro” or business- unit level. At the macro level, ERM creates value by enabling senior management to quantify and manage the risk-return trade off that faces the entire firm. This way, ERM helps the firm maintain access to the capital markets and other resources necessary to implement its strategy and business plan. At the micro level, ERM becomes a way of life for managers and employees at all levels of the company. It makes them think of various projects using a risk- return framework.

This article examines some strategic issues pertaining to Basle 2. The new Basle accord is expected to enhance banks’ safety and soundness, strengthen the stability of the financial system as a whole, and improve the financial sector’s ability to serve as a source for sustainable growth for the broader economy. But the record of success of past changes to the regulatory system in reducing bank failures suggests that this may be a somewhat rosy assessment. While an increase in capital requirements may reduce the incidence of bank failure, its efficacy depends on the accuracy and frequency with which bank assets are valued. Brealey argues that the right way is to move toward an explicit system for regulatory purposes of market-value accounting for bank assets.

Various financial innovations developed over the past several decades failed in the summer of 2007, as the sub prime crisis got under way. The $9 trillion of US securitizations that spawned various instruments including asset-backed securities, mortgage-backed securities, collateralised debt obligations, asset-backed commercial paper, structured investment vehicles, and credit default swaps had grown into a monster of an unregulated and conflicted market. The author argues that financial innovations invariably create conditions of asymmetric information that can lead to financial crises and panics. Also, financial innovations that are not fundamentally diversifying, market completing, or capital deepening will not survive to become mature financial market products. He concludes that finance academics should spend more time focusing on financial efficiencies and less time focusing on Wall Street hype in order to better understand which financial arrangements are beneficial to savers and borrowers, therefore promoting economic growth.

Bank regulation must minimise the adverse consequences of banks taking excessive risks. The author proposes three reforms: requiring banks to retain a proportion of any loan that they originate, so as to reduce the risks of moral hazard; insisting that the risks involved in the financial products in which banks trade are transparent; and reforming Basel II so that the amounts of regulatory capital that banks are required to hold are less procyclical than is currently the case.

Inc Financial engineering - the use of derivatives to manage risk and create customized financial instruments - can advance a company's strategic goals. It is true that when traders speculate and their bets backfire, companies lose millions and executives lose their jobs. Managers who seek to avoid disasters certainly must be cautious. But that does not imply that financial engineering should not be used by nonfinancial companies to advance core business goals. Many leading organizations have used financial engineering to solve classic and vexing business problems. These are not narrow finance problems but rather broad strategic problems in marketing, production, human resources, investor relations, and strategic restructuring - for which advanced financial techniques have offered new solutions. This article presents five case studies that illustrate innovative applications of financial engineering and offers managers guidance for determining when such techniques are appropriate.

In this article, the authors review the economics of M&A decisions and some findings from the merger wave of the late 1990s. They offer some simple analytical tools and raise some straightforward questions for which boards should demand answers before committing shareholder capital. Boards should be vigilant as mergers have major implications for shareholder value. Indeed, as the authors mention, few decisions carry as much immediate and ongoing risk to shareholders as a major acquisition. Since the early 1980s, the buyer’s stock price has fallen immediately after the deal was announced in more than half the major deals. So there remains a need for effective oversight of these crucial decisions.

In this article, a leading expert on mergers examines whether mergers add value for shareholders. Contrary to the negative coverage in the popular media, Bruner finds that the scenario is not that alarming. Target shareholders seem to generate sizable returns but the acquiring shareholders receive zero return. So on the whole, shareholders benefit. But companies should proceed with caution before finalising a merger deal.

Mergers seem to occur in waves and within a wave, mergers seem to cluster by industry. This seems to imply that mergers might happen as a response to industry shocks. The merger wave of the 1990s was caused largely by one kind of industry shock, deregulation. But all the gains from mergers on an average seem to accrue to target company shareholders. There is little for the acquiring company shareholders. This indicates that many acquisitions are driven by sentiment and ego and not by any serious economic rationale.

In this article, the authors investigate the economic role of mergers. They find strong evidence that merger activity clusters through time by industry, whereas internal investment does not. The authors classify industry forces broadly as either ‘‘expansionary,’’ in which case mergers are similar in spirit to internal investment, adding to the capital stock of a firm or industry; or ‘‘contractionary,’’ whereby mergers facilitate consolidation and reduction of the asset base. Mergers play both an ‘expansionary’’ and ‘contractionary’’ role in industry restructuring. During the 1970s and 1980s, excess capacity drove industry consolidation through mergers, while peak capacity utilization triggered industry expansion through non-merger investments. In the 1990s, this phenomenon was reversed, as industries with strong growth prospects, high profitability, and near capacity experienced the most intense merger activity.

"The fastest way to succeed" IBM's Thomas Watson, Sr., once said, "is to double your failure rate." People are afraid to fail, and corporate culture reinforces that fear. The presence of failure-tolerant leaders can help employees overcome their anxieties about making mistakes. In the process, they create a culture of intelligent risk-taking that leads to sustained innovation. Such leaders don't just accept productive failure, they promote it.

Failure-tolerant leaders break down the social and bureaucratic barriers that separate them from their followers. They engage at a personal level with the people they lead. They avoid praising or criticising, preferring to take a non judgmental, analytical posture as they interact with staff. They openly admit their own mistakes, instead of trying to cover them up or shifting the blame. And they try to root out the destructive competitiveness built into most organizations.

Above all, failure-tolerant leaders push people to see beyond the traditional definitions of success and failure. They know that as long as a person views failure as the opposite of success, rather than its complement, he or she will never be able to take the risks necessary for innovation.

Motivation is the desire to do something. Volition is the absolute commitment to achieving something. Motivating managers with carrot and stick is overly simplistic. People commit to action for more subtle reasons.

Volition, implies deep personal attachment to an intention. Volitional managers have a powerful need to produce results and are not driven by rewards or even enjoyment. Willpower lets managers execute disciplined action even when they lack desire, expect not to enjoy the work, or feel tempted by alternative opportunities.

Volitional managers do not wait for further information or external stimuli to get started. They focus attention and energy on information supporting their goals and block out contradictory information. They are not tempted by other opportunities or distracted by disruptions.

Motivation often crumbles at negative feedback, resistance from colleagues or lack of executive interest. Volition, however, is inspired by obstacles.

Three phases define the process of creating and leveraging volition: intention formation, the resolution to cross over to willpower, and intention protection.

When there's no choice -- in reality or in perception -- there can be no free will, no volition. Also essential is acceptance of personal responsibility. The decision to commit comes with the resolve to bear full responsibility.

Companies are full of distractions that take attention and energy away from purposive action. Willful managers modify their environment so as to be impervious to these distractions. For example, deliberately creating social pressures (public commitments, challenging deadlines or having relevant stakeholders monitor a manager's activities) can increase the cost of abandoning the goal.

When goals are simple, the necessary actions relatively routine and unexpected difficulties rare, motivation can lead to action. Managerial jobs, however, are rarely routine. Managers have multiple and often conflicting goals, many of which require persistent, long-term action. Their work context is fragmented, with high levels of uncertainty and opposition. Engaging willpower is a personal, almost intimate, process that cannot be triggered merely through rewards.

People need a vivid picture of the goal in order to activate their emotions and protect their intention through the action-taking phase. Vivid pictures help simplify long-term goals and make them tangible. Later, if doubts arise, the pictures stimulate perseverance. Senior executives can help managers create such pictures.

Instead of encouraging questions like "What's in it for me? Is it reasonable?" executives seeking true commitment must push people to ask, "What's the downside? Does it feel right? Do I really want it?" That way, managers engage their emotions, lead to deeper commitment.

When enlisting people for assignments, most executives paint rosy pictures, downplaying obstacles and highlighting benefits. Those who foster deep commitment often do the opposite. They point out the difficulties involved. This prevents superficial commitment.

The best way to build effective organizational commitment is to build it bottom-up, on the foundation of personal ownership of and commitment to specific initiatives and goals. In the world of mobile employees, frontline entrepreneurship and constant, unavoidable organizational restructuring, it is that kind of commitment that corporate leaders must develop if they want to build a bias for action in their companies.

A story can be a powerful way to inspire and encourage people into action. Unlike data and analysis which appeal to the mind, narratives appeal to the heart. Stories are particularly effective motivational tools while operating in unfamiliar territory. A good story must have characters, a plot, turning points and a lesson learned. Some of the situations where stories can be used with great effect are : Sparking action, Introducing yourself , Transmitting values, Fostering collaboration, Taming the grapevine, Sharing knowledge and Leading people into the future. Different stories are appropriate in different situations. For example, if the objective is to spark action, we could use a story that describes how a successful change was implemented in the past. But we should allow listeners to imagine how it might work in their situation. We must avoid excessive detail that will take the audience's mind off its own challenge. If we are using a story to introduce ourselves, we must use a story that provides an engaging drama. We must reveal some strength or vulnerability from our past. We must include meaningful details but make sure the audience has the time and inclination to hear the story. The response from the audience should be: "I didn't know that about him!“

Effectiveness is a discipline. And, like every discipline, it can and must be earned.

Effective effectives follow eight practices: They ask, "What needs to be done?" They also ask, "What is right for the enterprise?" They develop action plans. They take responsibility for decisions. They take responsibility for communicating. They are focused on opportunities rather than problems. They run productive meetings. And they think and say "we" rather than "I." The first two practices provide them with the knowledge they need. The next four help them convert this knowledge into effective action. Drucker also suggests a ninth practice that's so important. In fact, he elevates it to the level of a rule: Listen first, speak last.

Effective executives know that they have authority only because they have the trust of the organization. They think of the needs and opportunities of the organization before they think of their own needs and opportunities.

For a more detailed account of the subject, one must read Drucker’s book “The Effective Executive.”

Nearly all areas of business call for interpersonal savvy. Some people can "talk a dog off a meat truck," as the saying goes. Others are great at resolving interpersonal conflicts. Some have a knack for translating high-level concepts for the masses. And others thrive when they are managing a team. Since people are most effective when the work most closely matches their interests, managers can increase productivity by taking into account employees' relational interests and skills when making personnel choices and project assignments.

The authors have identified four dimensions of relational work: influence, interpersonal facilitation, relational creativity, and team leadership. Understanding these four dimensions will help us get optimal performance from employees, appropriately reward their work, and assist them in setting career goals. It will also help us make better choices when it comes to our own career development.

People who abuse time can be disruptive to a company’s morale and operating efficiency. Real time abuse results from psychological conflict. The time abuser typically has a brittle self-esteem and an unconscious fear of being evaluated and found wanting. This article describes four types of time abusers typically encountered in the workplace:

Perfectionists are afraid of receiving negative feedback. Their work has to be "perfect," so they can increase their likelihood of earning a positive evaluation or at least avoid getting a negative one. Preemptives try to be in control by completing work far earlier than they need to, making themselves unpopular and unavailable in the process. People pleasers commit to far too much work because they find it impossible to say no. Procrastinators make constant excuses to cover the fear of being found inadequate in their jobs.

Managing these four types of people can be challenging. Time abusers respond differently from most other employees to criticism and approval. Praising a procrastinator when he is on time, for instance, will only exacerbate the problem, because he will fear that our expectations are even higher than before. In fact, some time abusers, like the perfectionist, may need professional treatment.

In this landmark article, Theodore Levitt argues that "the history of every dead and dying 'growth' industry shows a self-deceiving cycle of bountiful expansion and undetected decay." Railroads failed not because the need for passenger transportation declined or because that need was filled by cars, airplanes, and other modes of transport. Rather, the industry failed because those behind it assumed they were in the railroad business rather than the transportation business. They were railroad-oriented instead of transportation-oriented, product-oriented instead of customer-oriented. For companies to ensure continued evolution, they must define their industries broadly to take advantage of growth opportunities. They must ascertain and act on their customers' needs and desires, not take demand for granted. An organization must learn to think of itself not as producing goods or services but as doing the things that will make people want to do business with it.

In the past decade, marketing gurus have emphasised customer care, customer focus, and customer centricity. But according to Stephen Brown, the customer craze has gone too far. In this article, he makes the case for "retromarketing"- a return to the days when marketing succeeded by tormenting customers rather than pandering to them. Brown argues that many recent consumer marketing coups have decidedly not been customer-driven. They've relied instead on five basic retromarketing principles:

Exclusivity. Retromarketing holds back supplies and delays gratification.

Secrecy. Whereas modern marketing is up-front and transparent, retromarketing revels in mystery, intrigue, and covert operation.

Amplification. In a world of incessant commercial chatter, amplification is vital, and it can be induced in many ways, from mystery to affront to surprise.

Entertainment. Marketing must divert, engage, and amuse. The lack of entertainment is modern marketing's greatest failure.

Tricksterism. Customers love to be teased. The tricks don't have to be elaborate to be effective; they can come cheap. But the rewards can be great if the brand is embraced, even briefly, by the crowd.

Geographic management allows global companies to sense, analyze, and respond to the needs of different national markets. Business management capabilities with global product respon­sibilities help MNCs achieve global efficiency and integration. These managers can facilitate manufacturing rationalization, product standardi­zation, and low-cost global sourcing. Functional management capabilities are needed to builds and transfers core competencies across a global organization.

Three simplifying assumptions block organizational development. There is a widespread, often implicit assump­tion that roles of different organizational units are uniform and symmetrical. Internal interunit relationships are assumed to be clear and unambiguous. One of cor­porate management's principal tasks is to institu­tionalize clearly understood mechanisms for deci­sion making and to implement simple means of exercising control.

Successful global companies do not treat different businesses, functions, and subsidiaries similarly. They systematically differentiate tasks and responsibilities. Instead of seeking organizational clarity by basing relation­ships on dependence or independence, they build and manage interdependence among the different units of the companies. And instead of consider­ing control their key task, they search for complex mechanisms to coordinate and co-opt the differentiated and interdependent organiza­tional units into sharing a vision of the company's strategic tasks.

Independent units risk being attacked one-by-one by competitors whose coordinated global approach gives them two important strategic advantages – the ability to integrate research, manufacturing, and other scale efficient operations, and the opportunity to cross subsidize the losses from battles in one market with profits generated in other markets. On the other hand, foreign operations totally dependent on a central unit must deal with problems reaching beyond the loss of local market responsiveness.

It is not easy to change relationships of dependence or independence that have been built up over a long time. But some companies have done this by changing the basis of the relationships among product, functional, and geographic management groups. From relations based on dependence or independence, they have moved to relations based on formidable levels of explicit, genuine interdependence. In essence, they have made integration and collaboration self-enforcing by making it necessary for each group to cooperate in order to achieve its own interests.

A unit with strategic leadership responsibility must be given freedom to work in an entrepreneurial fashion. But it must also be strongly supported by headquarters. For this unit, operating controls may be light and quite routine, but coordination of information and resource flows to and from the unit may still require intensive involvement from senior management. In contrast, units with implementation responsibility might be managed through tight operating controls, with standardized systems used to handle much of the coordination. Because the tasks are more routine, the use of scarce coordinating resources can be minimized.

Developing multidimensional perspectives and capabilities does not mean that product, functional and geographic management must have the same level of influence on all key decisions. Different groups have different roles for different activities and these roles are likely to change from time to time. The ability to manage these multidimensional aspects in a flexible manner is the hallmark of a transnational company.

Until recently, most worldwide industries presented relatively unidimensional strategic re­quirements. In each industry, a particular set of forces dominated the environment and led to the success of firms that possessed a particular set of corresponding competencies.

Take the consumer electronics industry. In an environment characterized by incrementally changing technologies, falling transportation and communication costs, relatively low tariffs and other protectionist barriers, and increasing homogenization of national markets, huge scale econ­omies progressively increased the importance of global efficiency. The industry gradually assumed the attributes of a classic global industry. Important characteristics like consumer needs, minimum efficient a scale, and context of competitive strategy were defined not by individual national environments, but by the global economy.

Firms like Matsushita were ideally placed to ex­ploit the emerging global-industry demands. Hav­ing expanded internationally much later than their American and European counterparts, they were able to capitalize on highly centralized scale intensive manufacturing and R&D operations, and leverage them through worldwide exports of stan­dardized global products. Such global strategies fit the emerging industry characteristics far better than the more tailored country-by-country approach that companies like Philips and GE had been forced to adopt in an earlier era of high trade barriers, differences in consumer preferences, and pretransistor technological and economic characteristics.

Today, it is more difficult for a firm to succeed with a relatively unidimensional strategic capability that emphasizes only efficiency, or responsiveness, or learning. To win, it must now achieve all three goals at one time, i.e., global efficiency, national responsiveness, and worldwide learning. These are the characteristics of what the authors call a transnational company.

A company's organizational capability develops over many years and is tied to a number of attributes: a configuration of organizational as­sets and capabilities that are built up over decades; a distribution of managerial responsibilities and influence that cannot be shifted quickly; and an ongoing set of relationships that endure long after any structural change has been made. Collectively, these factors constitute a company's administrative heritage. It can be, at the same time, one of the company's greatest assets-the underlying source of its key competencies-and also one of its most significant liabilities, since it resists change and thereby prevents realignment or broadening of strategic capabilities.

A company's administrative heritage is shaped by many factors. Strong leaders often leave indeli­ble impressions on their organizations. Home country culture and social systems also have significant influences on a company's adminis­trative heritage. For example, the more important roles that owners and bankers play in corporate level decision making in many European compa­nies have led to an internal culture quite different from that of their American counterparts. These com­panies tend to emphasize personal relationships rather than formal structures, and financial con­trols rather than coordination of technical or operational detail. Finally, the internationalization history of a firm also influences its administrative heritage.

The companies that were slow to adapt to the new environment never seemed to recognize the importance of their administrative heritage.

The ability of a company to survive and succeed in today’s turbulent international environment depends on two factors: The fit between its strategic posture and the dominant industry characteristics, and its ability to adapt that posture to the multidimensional task demands shaping the current competitive environment.

Many companies have tried to copy the Toyota Production System (TPS) – but without success. Part of the reason is that imitators fail to recognize the underlying principles of TPS. This article explains how Toyota makes new managers familiar with TPS principles. Spear describes the training of a talented young American selected for a high-level position at one of Toyota’s US plants. There are four basic lessons for any company wishing to train its managers to apply Toyota’s system.

• There's no substitute for direct observation.

• Proposed changes should always be structured as experiments.

• Workers and managers should experiment as frequently as possible.

• Managers should coach, not fix the problem.

Instead of going through cursory walk-throughs, orientations, and introductions as incoming fast-track executives at most companies might, the executive in this story learned TPS the long, hard way--by practicing it. This is how Toyota trains any new employee, regardless of rank or function. This article is a sequel to the author’s 1999 article on the Toyota Production System.

Boards must be able to add value without meddling and make CEOs more effective but not all-powerful. A board can do that if it functions as a high-performance team, one that is competent, coordinated, collegial, and focused on an unambiguous goal. There are limits to how much good governance can be imposed from the outside.

The board must conduct regular self-assessments. As a first step, the directors and the CEO should agree on which of the board models best fits the company: passive, certifying, engaged, intervening, or operating. The directors and the CEO should then analyze which business tasks are most important and allot sufficient time and resources to them. Next, the board should assess each director's strengths to ensure that the group as a whole possesses the skills necessary to do its work. Directors must exert more influence over meeting agendas and ensure they have the right information at the right time and in the right format to perform their duties. Finally, the board needs to foster an engaged culture characterized by candor and a willingness to challenge.

Imitation exerts enormous influence over contemporary society. The influence of imitation has grown as the avenues by which people imitate have multiplied. In consumer purchases, financial markets, and corporate strategy, what others do matters more to us than the facts. When there's too much information, imitation becomes a convenient heuristic.

Imitation has its virtues, but it also promotes instability and unpredictability. That's because, it can swell a single opinion into a mass movement or catapult the smallest player to the forefront of a market.

Businesses that understand how imitation works can be better prepared by accounting for it in their forecasts and risk-management plans, by becoming more sensitive to unexpectedly changing circumstances, and by avoiding mindless imitation of other companies' moves. In some instances, they may even be able to use the tools of imitation to capture new business.

Today, intangible assets generate most of a company's growth and shareholder value. Yet extensive research indicates that investors systematically misprice the shares of intangibles-intensive enterprises. While, overpricing wastes capital, underpricing raises the cost of capital. So companies must generate better information about investments in intangibles, and disclose at least some of that data to the capital markets.

Getting at that information is easier said than done, however. There are no markets generating visible prices for intellectual capital, brands, or human capital to assist investors in correctly valuing intangibles-intensive companies. And current accounting practices lump funds spent on intangibles with general expenses, so that investors and executives don't even know how much is being invested in them, let alone what a return on those investments might be.

At the very least, companies should separate the amounts spent on intangibles and disclose them to the markets. Executives should also start thinking of intangibles not as costs but as assets, so that they are recognized as investments whose returns are identified and monitored.

By making the most of organizational capabilities we can dramatically improve the company's market value. The authors identify 11 intangible assets that well-managed companies tend to have: talent, speed, shared mind-set and coherent brand identity, accountability, collaboration, learning, leadership, customer connectivity, strategic unity, innovation, and efficiency. Such companies typically excel in only three of these capabilities while maintaining acceptable performance by industry standards in the other areas. Organizations that fall below the norm in any of the 11 are likely candidates for dysfunction and competitive disadvantage.

Creativity is often touted as a miraculous road to organizational growth and affluence. But new ideas can hinder rather than help a company if they are put forward irresponsibly.

Too often, the creative types who generate a proliferation of ideas confuse creativity with practical innovation. They usually pepper their managers with intriguing but short memoranda that lack details about what is at stake or how the new ideas should be implemented. They pass off onto others the responsibility for getting down to brass tacks.

In this classic HBR article from 1963, Levitt emphasizes that the person with a great new idea must recognize that managers are already bombarded with problems. He must act responsibly by including in the proposal at least a minimal indication of the costs, risks, manpower, and time the idea may involve.

Conformity and rigidity are necessary for corporations to function. Indeed, the purpose of an organization is to achieve the order and conformity necessary to do a particular job. Otherwise there would be chaos and decay. But even then, large companies do have important attributes that actually facilitate innovation. For one thing, big businesses distribute risk, making it safer for individuals to break new ground. For another, bigness and group decision making function as stabilizers. Stability encourages people to risk presenting ideas that might rock the boat.

Many dot-coms have violated nearly every precept of good strategy. Instead of focusing on profits, they have chased customers indiscriminately through discounting, channel incentives, and advertising. Instead of delivering value that earns an attractive price from customers, they have pursued indirect revenues such as advertising and click-through fees. Instead of making trade-offs, they have rushed to offer every conceivable product or service.

Porter argues that the Internet rarely nullifies traditional sources of competitive advantage in an industry; it often makes them even more valuable. And as all companies embrace Internet technology, the Internet itself will be neutralized as a source of advantage. Competitive advantages will continue to result from traditional strengths such a unique products, proprietary content, and distinctive physical activities. Internet technology may be able to fortify those advantages, but it is unlikely to supplant them.

The traditional approach to strategy assumes that by applying a set of powerful analytic tools, executives can predict the future of any business accurately enough to allow them to choose a clear strategic direction. But what happens when the environment is very uncertain? The authors argue that uncertainty requires a new way of thinking about strategy. All too often, executives take a binary view: either they underestimate uncertainty and come up with very accurate forecasts or they overestimate it, abandon all analysis, and go with their gut instinct.

The authors draw a crucial distinction among four discrete levels of uncertainty that any company might face. They then explain how a set of generic strategies-shaping the market, adapting to it, or reserving the right to play at a later time-can be used in each of the four levels. And they illustrate how these strategies can be implemented through a combination of three basic types of actions: big bets, options, and no-regrets moves.

We are in the midst of a fundamental shift in the economics of information, a shift that will precipitate changes in the structure of entire industries and in the ways companies compete. This shift is made possible by the widespread adoption of Internet technologies, but it is less about technology and more about a new behavior reaching critical mass. Millions of people are communicating at home and at work in an explosion of connectivity that threatens to undermine the established value chains for businesses in many sectors of the economy.

The authors present a conceptual framework for understanding the relationship of information to the physical components of the value chain and how the Internet's ability to separate the two will lead to the reconfiguration of the value proposition in many industries. In any business where the physical value chain has been compromised for the sake of delivering information, there will be an opportunity to create a separate information business and a need to streamline the physical one. Executives must keep examining the potential to deconstruct their businesses to see the real value of what they have. If they do not, someone else will.

In our personal life, experience is often the best teacher. Not so in corporate life. After a major event- a product failure, a downsizing crisis, or a merger, many companies stumble along, oblivious to the lessons of the past. Mistakes get repeated.

A useful tool in this context is the learning history, a written narrative of a company's recent critical event, nearly all of it presented in two columns. In one column, relevant episodes are described by the people who took part in them, were affected by them, or observed them. In the other, learning historians - trained outsiders and knowledgeable insiders- identify recurrent themes in the narrative, pose questions, and raise "undiscussable" issues. The learning history forms the basis for group discussions, both for those involved in the event and for others who also might learn from it. This tool based on the ancient practice of community story telling can build trust, raise important issues and transfer knowledge from one part of a company to another.

Core competencies and focus are popular mantras in the west. Managers in the West have dismantled many conglomerates assembled in the 1960s and 1970s. But large, diversified business groups continue to dominate many emerging markets. Consultants and foreign investors are increasingly pressuring groups to conform to Western practice by reducing the scope of their business activities. But the authors argue that this advice may be wrong. Companies must adapt their strategies to fit their institutional context: a country's product, capital, and labor markets; its regulatory system; and its mechanisms for enforcing contracts. Unlike advanced economies, emerging markets suffer from weak institutions in all or most of these areas. Conglomerates can add value by imitating the functions of several institutions that are present only in advanced economies.

Many companies do not tap the full potential of their foreign factories. They try to derive benefits only from tariff and trade concessions, cheap labor, capital subsidies, and reduced logistics costs. As a result foreign factories are given a limited range of work, responsibilities, and resources. But there are companies that expect much more from their foreign factories and, as a result, get much more. They use them to get closer to their customers and suppliers, to attract skilled and talented employees, and to create centers of expertise for the entire company. The author points out that managers must consider manufacturing as a major source of competitive advantage, not just a way of cutting costs or getting around regulatory barriers.

In the past, companies kept most of their R&D activities in their home country. They thought it important to have R&D close to where strategic decisions were being made. But today many companies choose to establish R&D networks in foreign countries in order to tap the knowledge there or to customise products for those markets rapidly.

Adopting a global approach means linking R&D strategy to a company's overall business strategy. Companies must determine whether an R&D site's primary objective is to augment the expertise that the home base has to offer or to exploit that knowledge for use in the foreign country. That determination affects the choice of location and staff. For example, to augment the home base laboratory, a company would want to be near a foreign university. To exploit the home base laboratory, it would need to be near large markets and manufacturing facilities. Leaders of these R&D set ups must combine the qualities of good scientist and good manager, know how to integrate the new site with existing sites, understand technology trends, and be good at gaining access to foreign scientific communities.

Today's dynamic markets and technologies have called into question the sustainability of competitive advantage. Under pressure to improve productivity, quality, and speed, managers have embraced tools such as TQM, benchmarking, and reengineering. Dramatic operational improvements have resulted, but rarely have these gains translated into sustainable profitability.

Porter explains how efforts to improve operational efficiency have led to the rise of mutually destructive competitive battles that erode profitability. Operational effectiveness, although necessary for superior performance, is not sufficient, because its techniques are easy to imitate. In contrast, the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.

Porter traces the economic basis of competitive advantage down to the level of the specific activities a company performs. He shows how making trade-offs among activities is critical to the sustainability of a strategy.

Whereas managers often focus on individual components of success such as core competencies or critical resources, Porter shows how managing fit across all of a company's activities enhances both competitive advantage and sustainability.

The prevailing view is that there is an inherent and fixed trade-off: ecology versus the economy. On one side are the social benefits that arise from environmental standards. On the other side are the private costs to industry of prevention and cleanup that lead to higher prices and reduced industrial competitiveness. The authors argue that this is a static view. Companies are constantly finding innovative solutions in response to pressures of all sorts-from competitors, from customers, from regulators. The authors emphasise that tougher environmental standards can actually enhance competitiveness by pushing companies to use resources more productively.

Today managers and regulators focus on the actual costs of eliminating or treating pollution. To end the stalemate, they should focus instead on the enormous opportunity costs of pollution- wasted resources, wasted effort, and diminished product value to the customer. Managers must start to recognize environmental improvement as an economic and competitive opportunity, not as an irritant or a compliance issue.

Discovery-driven planning is a practical tool that is useful in planning for new ventures, which are often undertaken with several assumptions. But assumptions about the unknown are often wrong. New ventures inevitably experience deviations, often huge ones from their original targets. Indeed, new ventures frequently require fundamental redirection from time to time. The authors offer managers a tool that highlights potentially dangerous implicit assumptions. Discovery-driven planning converts assumptions into knowledge as a new venture unfolds, forces managers to articulate what they don't know, provides a discipline to help them address the make-or-break unknowns before making major resource commitments.

In the post war years, planning and control systems enabled companies to grow and helped managers deal with sprawling enterprises. But this strategy-structure-systems doctrine is increasingly losing relevance.

Systems can control employees but they also inhibit creativity and initiative. Today the challenge for top-level managers is to engage the knowledge and skills of each person in the organization in order to create what the authors call an individualized corporation.

Senior executives must spend much of their time coaching their management teams. The direct personal contact that top-level managers maintain with others not only keeps those at the top apprised of the real issues and challenges their businesses face but also gives them the opportunity to shape frontline managers' responses to those issues.

Top-level managers must not direct and correct middle and frontline managers. Instead they must create an environment in which individuals monitor themselves. The assumption is that given the same information, incentives, and authority to act, frontline managers will reach the same decisions that top-level managers would have reached.

Systems, no matter how sophisticated, can never replace the richness of close personal communication and contact between top-level and frontline managers.

The hierarchical organization based on the strategy-structure-systems doctrine of management no longer delivers competitive results. A top-down structure gives managers tight control and allows companies to grow. But it also fragments resources and creates a vertical organization that prevents small units from sharing their strengths with one another. Structural fixes, such as skunk works, alliances, and acquisitions, have also not solved the problem.

The authors emphasize that management must promote three core organizational processes: frontline entrepreneurship, competence building, and renewal. Companies should encourage bottom-up initiatives from operating units, which are closest to customers. Managers must balance discipline and support to create a self disciplined organization. Similarly, managers must trust operating units with creating competencies and limit their own role to seeing that those strengths are shared throughout the company.

In addition to providing direction, managers must sometimes disrupt organizational equilibrium-for example, by stretching the company with increasingly challenging goals. They must create an environment that asks employees to challenge conventional wisdom.

Many leading companies lose their market leadership when technologies or markets change. Why is it that established companies invest aggressively- and successfully- in the technologies necessary to retain their current customers but then fail to make the technological investments that customers of the future will demand?

Most established companies are consistently ahead of their industries in developing and commercializing new technologies as long as those technologies address the next-generation-performance needs of their customers. However, an industry's leaders are rarely in the forefront of commercializing new technologies that do not initially meet the functional demands of mainstream customers and appeal only to small or emerging markets.

To remain at the top of their industries, managers must first be able to spot the technologies that fall into this category. Managers must protect them from the processes and incentives that are geared to serving mainstream customers. And the only way to do that is to create organizations that are completely independent of the mainstream business.

To compete around the world, a company needs three strategic capabilities: global-scale efficiency, local responsiveness, and the ability to leverage learning worldwide. No single "global" manager can build these capabilities. Rather, groups of specialized managers must integrate assets, resources, and people in diverse operating units.

Bartlett and Ghoshal identify three types of global managers. They also illustrate the responsibilities each position involves through a close look at the careers of successful executives.

The first type is the global business or product-division manager who must build worldwide efficiency and competitiveness. These managers recognize cross-border opportunities and risks as well as link activities and capabilities around the world.

The second is the country manager who is responsible for understanding and interpreting local markets, building local resources and capabilities, and contributing inputs to the development of global strategy.

Finally, there are worldwide functional specialists. To transfer expertise from one unit to another and leverage learning, these managers must scan the company for good ideas and best practices, transfer them across units, and champion innovations with worldwide applications.

Unilever, the Anglo-Dutch multinational with operations in some 75 countries, is one of the world’s leading transnationals. In this article, Unliver co-chairman, Floris A Maljers provides an inside look at Unilever's evolution. Through all the changes, many based on trial and error, the company has maintained two consistent practices: developing high-quality managers and linking decentralized units through the "Unileverization" of those managers.

Many consider Unilever's managerial recruitment and training policies to be the best in the world. The company has a strong tradition of developing local talent in its subsidiaries. At the same time, the head office also expects managers to gain experience in more than one country or product line. According to Maljers, a matrix is only as good as the people in it. It can only work if everyone in the organization accepts and supports its flexibility.

Traditional performance measurement systems are inadequate. A balanced presentation of measures that allow managers to view the company from several perspectives simultaneously is needed.

The balanced scorecard includes financial measures that tell the results of actions already taken and three sets of operational measures - customer satisfaction, internal processes, and the organization's ability to learn and improve.

Managers can create a balanced scorecard by translating their company's strategy and mission statements into specific goals and measures. To create the part of the scorecard that focuses on the customer perspective, for example, executives can establish general goals for customer performance. These might be to get standard products to market sooner, to improve customers' time-to-market, to become customers' supplier of choice through partnerships, and to develop innovative products tailored to customer needs. Managers can translate these elements of strategy into four specific goals and identify a measure for each.

Leadership is not just about making people happy in the hope that happy people will do the right things. Leadership must ensure that the company's vision and strategy capture people's emotional excitement, engage their intellectual capacities, and produce a sense of urgency for taking action. Companies can be in one of four zones.

Companies in the comfort zone have low animation and a relatively high level of satisfaction. With weak but positive emotions such as calm and contentedness, they lack the vitality, alertness and emotional tension necessary for initiating bold new strategic thrusts or significant change.

Companies in the resignation zone demonstrate weak, negative emotions -- frustration, disappointment, sorrow. People suffer from lethargy and feel emotionally distant from company goals. They lack excitement or hope.

Companies in the aggression zone experience internal tension founded on strong, negative emotions. Tension drives their intensely competitive spirit, which manifests itself in high levels of activity and alertness -- and focused efforts to achieve company goals.

In the passion zone, companies thrive on strong, positive emotions -- joy and pride in the work. Employees' enthusiasm and excitement mean that attention is directed toward shared organizational priorities.

Companies in the comfort zone or the resignation zone operate at low levels of attention, emotion and activity. Companies in the aggression zone or the passion zone display higher levels of focused emotional tension, collective excitement and action taking.

High-energy companies display an urgency that makes them more productive. Being constantly alert allows them to process information and mobilize resources quickly. They strive for larger-than-life goals. Low-energy companies prefer standardization and institutionalization. They try to avoid the surprises, exceptions and risks on which high-energy companies thrive.

Energy is not an unmixed blessing, however, and unless managed wisely, it can degenerate into one of three main pathologies or energy traps. In the Acceleration Trap, CEOs drive an organization beyond its capabilities. Relentless efforts to accelerate can lead to organizational burnout. Companies that keep adopting major change initiatives without making time for regeneration are susceptible to the acceleration trap. Inertia Trap results when a company's ability to leverage resources is weakened. This trap ensnares victims after too long a stretch of either success or poor performance. When a company faces external threats (or opportunities) at the same time as it confronts internal discord, it may fall into the corrosion trap. Instead of working together to meet external challenges, people channel their energy into internal fights.

Companies that succeed at radical change generally adopt one of two approaches for unleashing and channeling organizational energy. In the "slaying the dragon" strategy they move into the aggression zone by focusing people's attention, emotions and effort on a threat. In the "winning the princess" strategy, they move into the passion zone by building enthusiasm for an exciting vision. On the rare occasions when a company can combine the strong positive and negative emotions of both zones, the results are spectacular. Companies with neither strategy fall victim to an energy trap and decline to mediocrity or to crisis.

Slaying the Dragon involves a clear articulation of an imminent threat, the release of strong, negative emotions and the channeling of those emotions toward overcoming the threat. Threats such as bankruptcy, a dangerous competitor or a disruptive technology require moving employees from the comfort or resignation zone to the aggression zone.

Because anger, fear, hate or shame are such powerful emotions, slaying the dragon can effectively shock people into action. However, the strategy has its downside. Sometimes, it leads to organizational myopia, with people overly focused on one well-defined threat. Also, the slay-the-dragon strategy rarely leads to major innovations or new growth trajectories. And once the dragon is slain, there may be a rush for the comfort zone.

Winning the Princess relies on strong, positive emotions like excitement and enthusiasm to move people into the passion zone. To engage people's dreams and openness to heroic effort, leaders have to create an object of desire and invoke passion so strong that people will overcome passivity and satisfaction with the status quo.

Slaying the dragon requires high-energy, brave and commanding leadership. Winning the princess needs calm, gentle, inspiring and empathic leaders. Because the former strategy channels aggressive energy into disciplined execution, it requires top-down instructions and meticulous plans. A strategy that unleashes passion, however, needs leaders who create an environment of curiosity, excitement and ownership.

Making people see, believe in and commit to an opportunity is inherently more difficult than getting them to acknowledge a threat. The first and most difficult task in pursuing the winning-the-princess strategy is to define, describe and substantiate the intangible. Leaders fail when the vision remains too abstract. It must be simple, clear, convincing and moving. Second, leaders must embody that vision. Their personal credibility and actions hold the key to attracting and retaining people's commitment. Third, leaders have to balance the often playful activities involved in seeking an intangible future with the comparatively unexciting protection of the ongoing business.