When the World Bank signed an agreement with the government of Peru in December, 1997 to provide a $22.5 million loan to help reform the country's antiquated and corrupt judicial system, the Bank knew it faced risks. Peru's President Alberto Fujimori was under fire and observers considered it possible that, rather than exhibiting real commitment to reform, the government may have been seeking the loan chiefly to lend a veneer of legitimacy to measures that in reality reduced judicial independence and concentrated more power in the executive. On balance, however, Bank officials who had to make the decision on whether to proceed with the agreement believed it offered a rare opportunity to address a variety of longstanding ills-including limited access to the justice system, a crumbling infrastructure, and inadequate training of judges and prosecutors. But just three months after the agreement had been signed, Peru's Congress-dominated by members loyal to the President-passed a measure which led Bank officials to question the good faith of the government. The new law limited the powers of one of the pillars of the loan agreement-the National Council of Magistrates, an independent entity mandated to , ratify and remove judges and prosecutors. The Council's members resigned en masse and, in response, the Bank postponed the effective date of the judicial reform loan by six months-halting any disbursement of funds. But in the days following the announcement, Peru's government put increasing pressure on the Bank to change its mind-and finally summoned the Bank's country director for Peru to a personal meeting with President Fujimori. The country director would have to decide whether to stick with the loan postponement-and, more broadly, take stock of what was really going on in Peru. Would the loan help a government sincerely embarked on reform? Or might it simply abet a government bent on subverting the judiciary to further its own political goals? HKS Case Number 1779.0
This is an MIT Sloan Management Review article. Executives began outsourcing substantial portions of their operations more than a decade ago to offload activities they declared to be noncore to cut costs and improve strategic focus. Today, however, companies are looking outside for help for more fundamental reasons--to facilitate rapid organizational change, to launch new strategies, and to reshape company boundaries. In doing so, they are engaging in transformational outsourcing: partnering with another company to achieve a rapid, substantial, and sustainable improvement in enterprise-level performance. On the basis of research on 20 companies that have attempted the practice, the author identifies four broad organizational categories that can benefit from transformational outsourcing. Start-ups such as TiVo, for example, need partners to scale up rapidly. "Crouching tigers" such as Family Christian Stores are being stymied by a deficiency in some key capability from meeting their strategic aspirations. "Fallen angels"--such as BP in the mid-1990s--settle into the wrong performance trajectory and need strong action to change their tack. And organizations on the edge of survival--as Britain's National Savings and Investments was several years ago--need transformational outsourcing to become "born again."
This is an MIT Sloan Management Review article. Many corporate boards adopt a one-size-fits-all approach to governance. Instead, they should consider that their primary role must shift depending on various conditions, both internal and external. Boards have four main functions--auditing, supervising, coaching, and steering--each with a different perspective and behavior. The roles reflect two main differences in board culture. The first type of board concerns itself mainly with shareholder interests or shareholder plus other stakeholder interests. The focus is on externalities. The second type of board either monitors executives' activities or gets actively involved in the conduct of the organization. Here the focus is on handling ineffective management. The basic role types are not mutually exclusive; instead they reflect different board cultures that result from different emphases on decision making and resource allocation. During any time period, a board must determine what its dominant role should be, given the current conditions.
This is an MIT Sloan Management Review article. The conventional planning process does not work for strategic experiments that are truly bleeding edge. Nevertheless, many companies cling to what they know--planning that holds managers responsible for numbers. But that is not practical for entering completely new territory, when numbers are essentially pulled out of a hat and their underlying assumptions rarely revisited. A better approach to planning comes from researchers at Dartmouth College's Tuck School of Business. It emphasizes learning instead of numbers, and it draws on in-depth studies of such companies as New York Times Digital, Thomson Corp., Corning, and Analog Devices. Their approach, theory-focused planning, diverges from conventional planning in six critical ways. Companies that use it concentrate on a few critical unknowns instead of the usual horde of details in conventional plans; they focus on the theory underlining the predictions rather than the predictions themselves; they look for trends rather than numerical benchmarks; they review the plan often, in response to important new data, instead of annually; in that review, they consider the experiment over time instead of just for the current period; and they emphasize leading indicators rather than financials. Companies still hold managers of strategic experiments responsible for performance, but performance is gauged according to how quickly managers learn from new data. To be successful in uncharted waters, the ability to learn from experience is paramount.
This is an MIT Sloan Management Review article. For decades, companies relied on push marketing to sell their products and services. Then, in the 1990s, the emphasis shifted to relationship marketing, as slogans such as "delight your customers" became the mantra of many marketers. But those tactics have been losing their effectiveness, particularly as the power of customers continues to grow. Thanks to digital technologies like the Internet, today's increasingly educated consumers expect companies to do more than just delight them. In response, innovative companies are now trying a different approach: They are providing customers with open, honest, and complete information, and then finding the best products for them--even if those offerings are from competitors. In short, they are truly representing their customers' best interests, essentially becoming advocates for them. The strategy is this: If a company advocates for its customers, they will reciprocate with their trust, loyalty, and purchases--either now or in the future. The firm might then command higher prices for its products and services, as many customers will be willing to pay for the extra value. And when people trust a company, they will often tell others about it, helping to reduce the organization's costs for acquiring new customers.
This is an MIT Sloan Management Review article. Most management advice today--whether it's from books or articles, prescribed in courses or by consultants--says that change is good and more change is better. Advice on how to change varies quite a bit, but it has three features in common: "Creative destruction" is its motto. "Change or perish" is its justification. And "no pain, no change" is its rationale for overcoming a purportedly innate human resistance to change. The author admits that creative destruction may be necessary, and even preferable, in certain situations. Companies that have enjoyed captive markets, docile suppliers, and government support may need the rude awakening it provides. In such instances, organizational stability is so ingrained that creative destruction may even be the best way to achieve change with the least amount of pain. But for every change avoider today, he says, there are many more "change-aholics"--companies that have changed more aggressively, quickly, and repeatedly than any organization could hope to do successfully. In the process, they have often suffered from "more pain, less change." The author urges executives at such companies to monitor their organizations continually for symptoms of repetitive change syndrome: initiative overload, change-related chaos, employee cynicism, and burnout.
Tracking technologies--in products and services like TiVo and electronic toll collection--make people's lives a lot more convenient. But the public is understandably concerned about the privacy issues such technologies raise. No one is more aware of those issues than Dante Sorella, CEO of Raydar Electronics, which develops and sells radio frequency identification (RFID) tags and readers. So Dante is troubled when executives from one of his client companies approach him about integrating RFID technology into retail operations. KK Inc., a manufacturer and retailer of teen clothing, wants to embed flat RFID tags into the bills of its caps and visors. The tags would be activated at the registers with customers' purchasing data. When a customer wearing a hat next visited a KK store, the tag would be scanned by readers mounted at the entrance, and a video screen would greet the shopper. Armed with data about the individual's preferences, store personnel could steer her toward her favorite styles or appropriate sale items. Dante appreciates the technology behind the idea--and, of course, its business potential for Raydar--yet he can't help thinking that this particular application smacks of Big Brother. How should Dante respond to KK's interest in tagging the caps and visors? Commenting on this fictional case study in R0412A and R0412Z are Glen Allmendinger, president of the technology consulting firm Harbor Research; Lee Tien, senior staff attorney at the Electronic Frontier Foundation, a nonprofit organization that works to protect individuals' digital rights; Nick Dew, an assistant professor of management at the Naval Postgraduate School in Monterey, California; and R. Bhaskar, an associate of the Division of Engineering and Applied Sciences at Harvard University.
Most companies serve customers through a broad array of interfaces, from retail sales clerks to Web sites to voice-response telephone systems. But although the typical company has an impressive interface collection, it doesn't have an interface system. That is, the whole set does not add up to the sum of its parts in its ability to provide service and build customer relationships. Too many people and too many machines operating with insufficient coordination (and often at cross-purposes) mean rising complexity, costs, and customer dissatisfaction. In a world where companies compete not on what they sell but on how they sell it, turning that liability into an asset is what separates winners from losers. In this adaptation of their forthcoming book by the same title, Jeffrey Rayport and Bernard Jaworski explain how companies must reengineer their customer interface systems for optimal efficiency and effectiveness. Part of that transformation, they observe, will involve a steady encroachment by machine interfaces into areas that have long been the sacred province of humans. Managers now have opportunities unprecedented in the history of business to use machines, not just people, to manage their interactions with customers credibly. Because people and machines each have their strengths and weaknesses, company executives must identify what people do best, what machines do best, and how to deploy them separately and together. Front-office reengineering subjects every current and potential service interface to an analysis of opportunities for substitution (using machines instead of people), complementarity (using a mix of machines and people), and displacement (using networks to shift physical locations of people and machines), with the twin objectives of compressing costs and driving top-line growth through increased customer value.
Lou Gerstner's was a hard act to follow. As CEO in what were arguably IBM's darkest hours, Gerstner brought the company back from the brink. After nearly 10 wrenching years, in which the big-machine manufacturer remade itself into a comprehensive software, hardware, and services provider, business was looking good. So the challenge for Sam Palmisano, when he took over as CEO in 2002, was to come up with a mandate for a second act in the company's transformation. His primary aim was to get different parts of the company working together so IBM could offer customers "integrated solutions"--hardware, software, services, and financing--at a single price. As part of this effort, he asked all of IBM's 320,000 employees, in 170 countries, to weigh in on a new set of shared corporate values. Over a 72-hour period, thousands of IBMers throughout the world gave Palmisano and his executive team an earful in an intranet discussion dubbed "ValuesJam," an often-heated debate about the company's heart and soul. Twenty-four hours into the exercise, at least one senior exec wanted to pull the plug. The jam had clearly struck a chord with employees, but it was a dissonant one, full of rancor and discontent. Palmisano let the discussion continue, and the next day, the mood began to shift. The criticism became more constructive. Out of the million words generated by the jam grew a set of values that, as Palmisano explains in this interview, are meant to guide the operational decisions made by IBM's employees--and, more important, to serve as Palmisano's mandate to continue the reinvention of the company.
Intellectual property comprises an ever-increasing fraction of corporate wealth, but what's the good of that if an ever-increasing fraction of the property is copied or stolen? Faced with developing countries' limited and inadequately enforced patent and copyright laws, some companies are resorting to market-based strategies to protect their intellectual property. These include preempting or threatening competitors, embedding intellectual property in environments that can be protected, bundling insecure intellectual property with its more secure cousins, and actually entering the businesses that pose a threat. The authors urge companies coping with weak property rights to follow a decision tree when choosing which strategies to use and when: Start by thinking of the strategies that will protect your business' core. If, for example, a first-mover advantage is within reach, making yourself more committed to intellectual property could be the answer. If you and your rivals are equally matched, ask yourself, "Can those that threaten me with copying be copied in turn?" The knowledge that each of you can hurt the other may dampen the competitive intensity or even lead to voluntary sharing of property. If these solutions fail or don't apply, try forging a connection with a product or business closely related to your own. Doing so may prevent a valued asset from falling into a rival's hands or make the asset harder to misappropriate. This approach can even help you expand your piece of the market pie or reduce the cost of making the threatened product, perhaps to the point where you can compete against pirated goods. Finally, if there still doesn't seem to be a way of making money from your threatened product, you may choose to move into the very business that has hurt your own. Such strategies are behind the economics of successful companies like Intel and NBC, say the authors.
In the past few years, companies have become aware that they can slash costs by offshoring: moving jobs to lower wage locations. But this practice is just the tip of the iceberg in terms of how globalization can transform industries, according to research by the McKinsey Global Institute (MGI). The institute's yearlong study suggests that by streamlining their production processes and supply chains globally, rather than just nationally or regionally, companies can lower their costs--as we've seen in the consumer electronics and PC industries. Companies can save as much as 70% of their total costs through globalization--50% from offshoring, 5% from training and business-task redesign, and 15% from process improvements. But they don't have to stop there. The cost reductions make it possible to lower prices and expand into new markets, attracting whole new classes of customers. To date, however, few businesses have recognized the full scope of performance improvements that globalization makes possible, much less developed sound strategies for capturing those opportunities. In this article, Diana Farrell, director of MGI, offers a step-by-step approach to doing both things. Among her suggestions: Assess where your industry falls along the globalization spectrum, because not all sectors of the economy face the same challenges and opportunities at the same time. Also, pay attention to production, regulatory, and organizational barriers to globalization. If any of these can be changed, size up the cost-saving (and revenue-generating) opportunities that will emerge for your company as a result of those changes. Farrell also defines the five stages of globalization--market entry, product specialization, value chain disaggregation, value chain reengineering, and the creation of new markets--and notes the different levers for cutting costs and creating value that companies can use in each phase.
Few leaders excel at both the unit and enterprise levels. More than ever, though, it's up to organizations to develop leaders who can manage the inherent tensions between unit and enterprise priorities. Take the example of RBC Financial Group, one of the largest, most profitable companies in Canada. In the mid-1990s, RBC revamped its competitive strategy in a couple of ways. After the government announced that the Big Six banks in Canada could neither merge with nor acquire one another, RBC decided to grow through cross-border acquisitions. Additionally, because customers were starting to seek bundled products and services, RBC reached across its traditional stand-alone businesses to offer integrated solutions. These changes in strategy didn't elicit immediate companywide support. Instinctively, employees reacted against what would amount to a delicate balancing act: They would have to lift their focus out of their silos while continuing to meet unit goals. However, by communicating extensively with staff members, cross-fertilizing talent across unit boundaries, and targeting rewards to shape performance, RBC was able to cultivate rising leaders with the unit expertise and the enterprise vision to help the company fulfill its new aims. Growing such well-rounded leaders takes sustained effort because unit-enterprise tensions are quite real. Three common conditions reinforce these tensions. First, most organizational structures foster silo thinking and unimaginative career paths. Second, most companies lack venues for airing and resolving conflicts that arise when there are competing priorities. Third, many have misguided reward systems that pit unit performance against enterprise considerations. Such long-established patterns of organizational behavior are tough to break. Fortunately, as RBC discovered, people can be trained to think and work differently.
More and more, businesses are counting on their suppliers to lower costs, improve quality, and develop innovations faster than their competitors' suppliers can. To this end, many experts agree that American firms, like their Japanese rivals, should build supplier keiretsu: networks of vendors that learn, improve, and prosper in sync with their parent companies. As history has shown, however, that's easier said than done. Some U.S. corporations created supply chains that superficially resembled those of their Japanese competitors, but they didn't alter the nature of their relationships with suppliers. As a result, relations between U.S. manufacturers and their suppliers have sunk to the lowest levels in decades. But reports of keiretsu's demise are overblown. The Japanese supplier-partnering model is alive and well--in North America as well as Japan. During the past 10 years, automakers Toyota and Honda have struck successful partnerships with some of the same suppliers that are at odds with the Big Three and created effective keiretsu across Canada, the United States, and Mexico. So how do Toyota and Honda do it? The authors, who have studied the American and Japanese automobile industries for more than 20 years, found that Toyota and Honda have built great supplier relationships by consistently following six steps: they understand how their suppliers work, turn supplier rivalry into opportunity, monitor vendors closely, develop those vendors' capabilities, share information intensively but selectively, and help their vendors continually improve their processes.
When managers from Wendy's International and Tyson Foods got together in 2003 to craft a supply chain partnership, each side had misgivings. There were those in the Wendy's camp who remembered past disagreements with Tyson and those on the Tyson side who were wary of Wendy's. But the companies had a tool, called the "partnership model," to help get things started on the right foot. Drawing on the experiences of member companies of the Global Supply Chain Forum at Ohio State University, the model offers a process for aligning expectations and determining the most productive level of partnering. It rapidly establishes the mutual understanding and commitment required for success and provides a structure for measuring outcomes. This article puts the tool in the reader's hands. Partnerships are justified only if they stand to yield substantially better results than the firms could achieve on their own. And even if they are warranted, they can fail if the partners enter them with mismatched expectations. Over the course of a day and a half, the partnership model elucidates the drivers behind each company's desire for partnership, allows managers to examine the conditions that facilitate or hamper cooperation, and specifies which activities managers must perform to implement the relationship. This tool has proved effective at Wendy's and elsewhere in determining what type of partnership is most appropriate. Colgate-Palmolive, for example, used it to help achieve stretch financial goals with suppliers of innovative products. But the model is just as effective in revealing that some companies' visions of partnership are not justified. In matters of the heart, it may be better to have loved and lost, but in business relationships, it's better to have headed off the resource sink and lingering resentments a failed partnership can cause.
Nike's tagline, "Just do it," is an inspirational call to action for the millions who wear the company's athletic gear. But in terms of corporate responsibility, Nike didn't always follow its own advice. In the 1990s, protesters railed against sweatshop conditions at some of its overseas suppliers and made Nike the global poster child for corporate ethical fecklessness. The intense pressure that activists exerted on the athletic apparel giant forced it to take a long, hard look at corporate responsibility--sooner than it might have otherwise. In this article, Simon Zadek, CEO of the U.K.-based institute AccountAbility, describes the bumpy route Nike has traveled to get to a better ethical place, one that cultivates and champions responsible business practices. Organizations learn in unique ways, Zadek contends, but they inevitably pass through five stages of corporate responsibility, from defensive ("It's not our fault") to compliant ("We'll do only what we have to") to managerial ("It's the business") to strategic ("It gives us a competitive edge") and, finally, to civil ("We need to make sure everybody does it"). He details Nike's arduous trek through these stages. As he outlines this evolution, Zadek offers valuable insights to executives grappling with the challenge of managing responsible business practices. Beyond just getting their own houses in order, the author argues, companies need to stay abreast of the public's evolving ideas about corporate roles and responsibilities. Organizations that do both will engage in what he calls "civil learning."
As a way to value growth opportunities, real options have had a difficult time catching on with managers. Many CFOs believe the method ensures the overvaluation of risky projects. This concern is legitimate, but abandoning real options as a valuation model isn't the solution. Companies that rely solely on discounted cash flow (DCF) analysis underestimate the value of their projects and may fail to invest enough in uncertain but highly promising opportunities. CFOs need not--and should not--choose one approach over the other. Far from being a replacement for DCF analysis, real options are an essential complement, and a project's total value should encompass both. DCF captures a base estimate of value; real options take into account the potential for big gains. This is not to say that there aren't problems with real options. As currently applied, they focus almost exclusively on the risks associated with revenues, ignoring the risks associated with a project's costs. It's also true that option valuations almost always ignore assets that an initial investment in a subsequently abandoned project will often leave the company. In this article, the authors present a simple formula for combining DCF and option valuations that addresses these two problems. Using an integrated approach, managers will, in the long run, select better projects than their more timid competitors while keeping risk under control. Thus, they will outperform their rivals in both the product and the capital markets.
Tracking technologies--in products and services like TiVo and electronic toll collection--make people's lives a lot more convenient. But the public is understandably concerned about the privacy issues such technologies raise. No one is more aware of those issues than Dante Sorella, CEO of Raydar Electronics, which develops and sells radio frequency identification (RFID) tags and readers. So Dante is troubled when executives from one of his client companies approach him about integrating RFID technology into retail operations. KK Inc., a manufacturer and retailer of teen clothing, wants to embed flat RFID tags into the bills of its caps and visors. The tags would be activated at the registers with customers' purchasing data. When a customer wearing a hat next visited a KK store, the tag would be scanned by readers mounted at the entrance, and a video screen would greet the shopper. Armed with data about the individual's preferences, store personnel could steer her toward her favorite styles or appropriate sale items. Dante appreciates the technology behind the idea--and, of course, its business potential for Raydar--yet he can't help thinking that this particular application smacks of Big Brother. How should Dante respond to KK's interest in tagging the caps and visors? Commenting on this fictional case study in R0412A and R0412Z are Glen Allmendinger, president of the technology consulting firm Harbor Research; Lee Tien, senior staff attorney at the Electronic Frontier Foundation, a nonprofit organization that works to protect individuals' digital rights; Nick Dew, an assistant professor of management at the Naval Postgraduate School in Monterey, California; and R. Bhaskar, an associate of the Division of Engineering and Applied Sciences at Harvard University.
Tracking technologies--in products and services like TiVo and electronic toll collection--make people's lives a lot more convenient. But the public is understandably concerned about the privacy issues such technologies raise. No one is more aware of those issues than Dante Sorella, CEO of Raydar Electronics, which develops and sells radio frequency identification (RFID) tags and readers. So Dante is troubled when executives from one of his client companies approach him about integrating RFID technology into retail operations. KK Inc., a manufacturer and retailer of teen clothing, wants to embed flat RFID tags into the bills of its caps and visors. The tags would be activated at the registers with customers' purchasing data. When a customer wearing a hat next visited a KK store, the tag would be scanned by readers mounted at the entrance, and a video screen would greet the shopper. Armed with data about the individual's preferences, store personnel could steer her toward her favorite styles or appropriate sale items. Dante appreciates the technology behind the idea--and, of course, its business potential for Raydar--yet he can't help thinking that this particular application smacks of Big Brother. How should Dante respond to KK's interest in tagging the caps and visors? Commenting on this fictional case study in R0412A and R0412Z are Glen Allmendinger, president of the technology consulting firm Harbor Research; Lee Tien, senior staff attorney at the Electronic Frontier Foundation, a nonprofit organization that works to protect individuals' digital rights; Nick Dew, an assistant professor of management at the Naval Postgraduate School in Monterey, California; and R. Bhaskar, an associate of the Division of Engineering and Applied Sciences at Harvard University.