A study indicates that on-line shoppers would rather customize Web site information themselves than have personalization software do it for them. But the best customer-retention strategy may be a combination of both approaches.

Sustainability has become a strategic imperative for all businesses in the 21st century. It has become a fundamental market force affecting long-term financial viability and success. Over the past two decades, Hewlett-Packard (HP) has moved along a continuum toward environmental sustainability. During the 1980s, HP was a leader in pollution prevention and control. During the 1990s, HP established a leading product stewardship function. Today, HP is taking big steps to move beyond baseline market expectations and integrate environmental sustainability into its fundamental business strategy. This article explores the processes currently underway at HP as well as the challenges ahead.

In the 1990s, Environmental Voluntary Agreements (VAs) involving regulatory agencies and industry have emerged as the promise of the future in environmental policy circles. The collaborative mechanisms of VAs can be conducive to the development of innovative solutions, which regulators or firms would have been unlikely to develop alone. From a business perspective, participation in VAs can reduce the burden of regulation, facilitate the communication of environmental improvements, and allow firms to be ahead of competition for environmental products. However, the benefits of participating in VAs can be outweighed by high transaction and administration costs if VAs are not properly designed. This article discusses when participation in a VA offers strategic opportunities and when joining a VA might turn into a costly enterprise.

Environmental Management Systems (EMSs) are relatively new and rather innovative management practices that provide firms with additional sources of information and leverage over their environmental and business processes and performance. This article reports the results of a survey of manufacturing plants that have adopted EMSs. It finds that EMSs are associated with factories that are larger, more committed to total quality management, and more innovative in general. EMSs are also a useful tool for managing community relationships and dealing with key stakeholder groups with respect to potentially controversial environmental issues. Furthermore, EMS plants appear to pose less environmental risk for communities and report that their adoption and use of an EMS is an important factor in achieving this result. In the end, EMSs are an effective tool for managing environmental costs and risks inside and outside the factory in ways that add to, rather than detract from, the bottom-line.

The toy industry faces relentless change and an unpredictable buying public, which creates immense challenges in anticipating best sellers and predicting volume. Like the high-technology industry, toys also suffer from many supply chain ailments, including short product life, rapid product turnover, and seasonal demand. Coupled with long supply lines and ongoing political and economic turmoil in Asia, toy makers face an unusually complex set of risks. Managers in many businesses can learn valuable lessons in managing uncertainty from toy makers. This article describes supply chain lessons focused on reducing risk by actively managing both demand and supply variability. These lessons include product variety strategies based on product extensions, rolling mix strategies, leveraged licensing agreements, coordinated outsourcing strategies, and hedging against political and currency risk by producing in many different countries.

This articles presents four standardization techniques--product, part, procurement, and process--that help mitigate the negative impact of product variety on a firm's operations. The ability of a firm to use these standardization approaches depends on the following: degree to which it can modularize its products and processes, what it is trying to achieve for its customers, and the costs associated with standardization. Presents a framework for thinking about these options and choosing among them.

In spite of making substantial investments in information technology planning systems, retailers are struggling with two execution problems--inventory record inaccuracy and misplaced stock keeping units (SKUs)--that are hurting their performance and ability to satisfy customers. At one leading retailer, 65% of inventory records were inaccurate (i.e., recorded inventory levels did not reflect actual inventory levels). Misplaced SKUs at another leading retailer prevented one in six customers who requested help from a sales associate from finding the products that were available in a store. These execution problems reduce profits by more than 10%. Moreover, performance along these two dimensions of execution varies substantially among stores within the same chain that use identical information technology. By examining the systematic differences that exist among stores, this article identifies the drivers of inventory record inaccuracy and misplaced SKUs and recommends steps retailers can take to improve operational execution in their chains.

This is an MIT Sloan Management Review article. The cost of information technology outsourcing involves more than vendor fees, but how much of that additional cost is really necessary? A survey of 50 outsourcing efforts shows that companies are largely unaware of costs associated with such activities as transitioning to a new vendor and, so, tend not to take measures to reduce them. Jerome Barthelemy of Audencia Nantes graduate school of management in France looks at four kinds of hidden costs that can erode the benefits a company anticipates from outsourcing. Drawing on lessons from company interviews, he provides anecdotes that show how a company's choices can lead to high hidden costs. When searching for a vendor, for example, companies often try to spend as little as possible. However, spending more at the search stage reduces hidden costs throughout the outsourcing effort and saves considerable expense later. Companies should include certain clauses in the contract, select a trustworthy vendor, and be certain about the vendor's role. Another hidden cost is the expense of transitioning activities to the vendor. This cost is elusive, because it is incurred as long as the vendor has not completely taken over from the internal IT department. The nature of the outsourced activities determines much of this cost. The cost to manage the outsourcing effort can be considerable, but companies tend to overlook it. Even spending money to hire consultants with IT outsourcing experience can be cheaper than enduring the high cost of contract renegotiation and dogging the vendor to get the desired performance. The last hidden cost category is the expense to switch vendors or reintegrate the outsourced activities. Many managers view the end of an outsourcing agreement that involves strategic activities as a failure and are uncomfortable preparing for that cost. Simple precautions, such as including a reversibility clause in the contract, can help reduce problems.

This is an MIT Sloan Management Review article. Is mass customization really the best way to deliver variety to consumers? Today, mass-customized products seem to be everywhere. Levi-Strauss sells custom-fitted jeans. Andersen Windows can build a window to fit any house. Consumers can get their names printed, sewn, or embossed on nearly anything. But managers beware: Do not be seduced by the gaudy banner of mass customization. There are several ways to deliver variety, and mass customization may not always be the best. So argues Paul Zipkin, professor of business at Duke University's Fuqua School of Business. Mass customization actually requires unique operational capabilities. Several elements have to work well--individually and together--to ensure that mass customization is a plausible business strategy. Those key capabilities are elicitation (a mechanism to interact with the customer and obtain specific information); process flexibility (production technology that fabricates the product according to the information); and logistics (subsequent processing stages and distribution that are able to maintain the identity of each item and deliver the right one to the right customer). Not all companies--or industries--will be able to master these capabilities. Moreover, demand for customization is limited and likely to remain so. Current technology can support large-scale customization only for a few attributes of a few products. For mass customization to deliver real value, people must have sharply differing preferences for certain attributes. This signals opportunities for industries such as apparel, sports equipment, and building accessories. But it also means that mass customization is not for every company. Managers should seek opportunities to add value through variety, Zipkin advises. But before committing their companies to a mass-customization strategy, they need to analyze carefully the technology, demand, costs, and benefits.

This is an MIT Sloan Management Review article. Renowned management thinker Henry Mintzberg and business professor Frances Westley zero in on three ways the best managers make decisions. To hone their decision-making skills, business leaders can start by admitting that real-world decisions are not always made through logical steps--and that often they shouldn't be. Most managers believe they make decisions by using analysis. Define the problem, they say, diagnose its causes, design possible solutions, choose and, finally, implement the choice. But they may make their best decisions in some other way--for example, after a flash of intuition or by trying out several things and keeping what works. The authors show that a focus on "thinking first" before choosing may interfere with a deep understanding of the issues dividing people and prevent a good decision. A decision-making approach the authors call "seeing first"--literally creating a picture with others to see everyone's concerns--can surface differences better than analysis and can force a genuine consensus. "Doing first"--going ahead with an action to learn--is the third approach. Each route is best under particular circumstances. Thinking first works best when the issue is clear, data are reliable, the context is structured, thoughts can be pinned down, and discipline can be applied--for example, in an established production process. Seeing first works best when many elements must be combined into creative solutions, commitment to those solutions is key, and communication across boundaries is essential--for example, in new-product development. Doing first works best when the situation is novel and confusing, when complicated specifications might get in the way, and a few simple relationship rules could help people move forward--for example, when companies face a disruptive technology.

This is an MIT Sloan Management Review article. How can company leaders identify and exploit the opportunities that take the fullest advantage of their companies' capabilities and potential to pursue new strategies? In their attempts to meet the stock market's imperative, multibusiness companies in the past have pursued operational efficiencies by integrating business activities and have extended their existing strategies by combining resources from various business units. But that is not enough, say Robert A. Burgelman, professor of management at Stanford University, and Yves L. Doz, professor of global technology and innovation at INSEAD. Multibusiness corporations need to develop a capability for what the authors call complex strategic integration (CSI), which involves the discovery and creation of new business opportunities by combining resources from multiple units within the firm--each with its own perspective and vested interests--to extend the corporate strategy in new directions. Only a few multibusiness companies are currently trying to develop a CSI capability. But the challenges and imperatives for all companies are the same. Company leaders need to manage the evolving tension between reinforcing the company's core business and redirecting strategy in new directions, as well as the sharing and transferring of resources. They also must ensure that senior executives develop the political and entrepreneurial skills necessary to pursue CSI initiatives effectively, along with the ability to conceive of these new strategies. Above all, company leaders have to create a corporate context that facilitates CSI as an ongoing institutionalized process rather than as an infrequent occurrence that depends on the ad hoc championing efforts of some highly dedicated senior managers. That includes developing the appropriate organizational structures, control systems, and incentives.

This is an MIT Sloan Management Review article. Although the concept is not new, profitability modeling, to date, has been limited to individual departments or business functions. Although firms develop models that are more comprehensive and cross-functional, these efforts are sporadic, relatively expensive, and time consuming. More companies might attempt this kind of modeling if they had an explicit framework and procedure for establishing links to guide them. Marc Epstein and Robert Westbrook, professors at Rice University's Jones Graduate School of Management, have studied companies' efforts to develop models that link action to profit and have devised a general model that managers can use to link any departmental action to overall corporate profitability. By customizing their general model, firms can more quickly arrive at specific links between an action and its impact on profitability. The action-profit linkage model helps managers identify and measure key drivers of business success and profit, develop causal links among them, and estimate the impact of actions to bring them about. This process forces managers to narrow their strategies to the areas with the highest payoff. Attention shifts from a preoccupation with individual performance metrics to an awareness of how those metrics work as a system and how they lead to increased profit and more shareholder value. The process of getting to the final model is valuable because managers gain tremendous insight into how their organizations' various metrics interrelate. The model also fosters a common management focus on the variables that matter most in achieving success. More importantly, it helps develop disciplined thinking about profit drivers by tracing them through the customer, the product offering and, ultimately, the company's actions.

There have been many changes in professional services since Egon Zehnder founded his executive search firm nearly four decades ago--not the least of which has been a shift in the way professionals pay themselves. When he started, compensation everywhere was strongly tied to seniority. Today, partners at most professional services firms are paid according to the size of their client billings and their ability to bring in new clients. But Egon Zehnder International, which now has 57 offices worldwide, has stuck with the old-fashioned way to pay. In addition to giving partners base salaries and equal shares in a percentage of the profit, the firm apportions another fraction of the profit based only on length of tenure as partner. Yet the firm attracts outstanding consultants, and its turnover rate is low. The reasons, the author says, are simple: the firm's approach to compensation forces it to hire team players--consultants who get more pleasure from the group's success than from their own advancement. And the seniority-based system requires the firm to find people who want to stay for the long haul. Call the system a relic, says Zehnder, but don't call it nonsense. It works. In this article, the author describes the extremely intensive interview process used to hire the right kind of people. By the time the interviews are over, he says, potential hires know that people in the firm's Boston office think and act the same way as people in its Brazil offices--and that they themselves must think and act that way if they are to succeed at the firm.

Many companies now run boot camps--comprehensive orientation programs designed to help new hires hit the ground running. They're intense and intimidating, and new employees emerge from them with strong bonds to other recruits and to the organization. But at Trilogy, organizational consultant Noel Tichy discovered one program that's a breed apart. In this article, Tichy gives us a detailed tour of Trilogy's boot camp, Trilogy University, to demonstrate why it's so different--and so effective. Like the best boot camps, it serves as an immersion in both the technical skills new recruits will need for their jobs and Trilogy's corporate culture, which emphasizes risk-taking, teamwork, humility, and a strong customer focus. But this is a new-employee orientation session that's so fundamental to the company as a whole that it's presided over by the CEO and top corporate executives for fully six months of the year. Why? In two three-month sessions, these top executives hone their own strategic thinking about the company as they decide what to teach the new recruits each session. They also find the company's next generation of new products as they judge the innovative ideas the recruits are tasked with developing--making the program Trilogy's main R&D engine. And they pull the company's rising technical stars into mentoring roles for the new recruits, helping to build the next generation of top leadership. After spending months on-site studying Trilogy University, Tichy came away highly impressed by the power of the virtuous teaching cycle the program has set in motion. Leaders of the organization are learning from recruits at the same time that the recruits are learning from the leaders. It's a model, he argues, that other companies would do well to emulate.

Most executives know the basics of negotiation; some are spectacularly adept. Yet even experienced negotiators routinely leave money on the table, end up in deadlock, damage relationships, or allow conflicts to spiral. They fall prey to common mistakes that keep them from solving the right negotiation problem. In any negotiation, each side ultimately chooses between two options: accepting a deal or taking its best no-deal option - that is, the course of action if a deal were not possible. As a negotiator, you seek to advance your interests by persuading the other side to say yes to a proposal that meets your interests better than your best no-deal option. Because the other side will say yes only to a proposal that meets its own interests better than its best no-deal option, you must understand and shape your counterpart's decision so that it chooses in its own interest what you want. Far from being exercises in manipulation, understanding your counterpart's interests and shaping the decision so that the other side agrees to a proposal for its own reasons are the keys to jointly creating and claiming sustainable value from a negotiation. In this article, James Sebenius compares good negotiating practice with bad, providing examples from the business world and insights from 50 years of research and analysis on negotiation. The author describes six common mistakes that result in merely effective negotiation: neglecting your counterpart's problem, letting price bulldoze other interests, letting positions drive out interests, searching too hard for common ground, neglecting no-deal alternatives, and failing to correct for skewed vision.

Diversity has become a top priority in corporate America. Despite corporations' best intentions, however, many have failed to achieve a racial mix at the top levels of management. Some have revolving doors for talented minorities, recruiting the best and brightest, only to see them leave, frustrated by their experiences. Others are able to retain high-potential professionals of color but find them mired in middle management. To understand the different career trajectories of whites and minorities, David Thomas studied the progression of racial minorities at three large U.S. corporations. Here, he explains the three career stages that all professionals advance through, and he discusses why promising white professionals tend to enter fast tracks early in their careers, whereas high-potential minorities typically take off after they have reached middle management. Thomas's research shows that minorities who advance the furthest share one characteristic: a strong network of mentors and corporate sponsors. He found that minorities who plateaued in middle management received mentoring that was basically instructional; it helped them to develop skills. By contrast, minorities who became executives enjoyed fuller developmental relationships with their mentors. Thomas explains the types of support mentors provide for their proteges and outlines the challenges of mentoring across racial lines.

Speeches and presentations offer an interesting catch-22: executives don't want to spend long hours creating them, and people don't want to sit for long hours listening to them. Ultimately, though, executives can't live without them. That's because a good speech or presentation has the power to inspire people to act on the speaker's behalf and create change. Author Nick Morgan, a longtime speechwriter and speaking coach, says what's most often lacking in today's speeches and presentations is what he calls the "kinesthetic connection." Many good speakers connect aurally with their audiences, telling dramatic stories and effectively pacing their speeches to hold people's attention. Others connect visually, with a vivid film clip or a killer slide. Some people do both, but not many also connect kinesthetically. Morgan says the kinesthetic speaker feeds an audience's primal hunger to experience a presentation on a physical, as well as an intellectual, level. Through awareness of their own physical presence--gestures, posture, movements--and through the effective use of the space in which they present, kinesthetic speakers can create potent nonverbal messages that reinforce their verbal ones. In this article, Morgan describes techniques for harnessing kinesthetic power and creating a sense of intimacy with an audience--a closeness that is more widely expected from speakers since the advent of television. For instance, kinesthetic speakers should make use of audience proxies--individuals in the crowd who serve as representatives for the others. Ultimately, the author says, a speech or presentation offers something of great value to business executives: it's the best vehicle for winning trust from large groups of people--be they employees, colleagues, or shareholders.

Business is shaped by ideas. But how do you separate enduring ideas from passing fancies? In this, the first edition of the annual HBR List, our editors spotlight five breakthrough ideas that are truly shaping the future of business. Even a great business model is not enough. The rise and fall of dot-coms left markets reeling and CEOs scratching their heads. The most important lesson of the debacle: squishy thinking about "business models" is no substitute for a distinctive strategy. Change is changing. In recent years, pundits have urged executives to incite revolutions within their companies. But a growing group of experts now suggests that the best companies actually evolve through incremental change--change that builds on rather than subverts their heritage. Ego makes the leader. By looking deeply into executives' psyches, we are beginning to unlock the enigma of leadership. While there will never be a single recipe for successful corporate stewardship, an understanding of the human ego can shed light on leadership's most fundamental components. Only connect. In business organizations, what's really important about people is not their individual skills but the relationships they form with one another. By investing in "social capital," companies can often push their performance to a whole new level. The biology century dawns. In the twentieth century, product innovations tended to spring from physics. But in the new century, biology may be the central source of innovation. From genomics to biomimicry, the study of life promises to change what companies sell and even how they operate.

Despite the harsh realities of retailing, the illusion persists that magical tools can help companies overcome the problems of fickle consumers, price-slashing competitors, and mood swings in the economy. Such wishful thinking holds that retailers will thrive if only they communicate better with customers through e-mail, employ hidden cameras to learn how customers make purchase decisions, and analyze scanner data to tailor special offers and manage inventory. But the truth is, there are no quick fixes. In the course of his extensive research on dozens of retailers, Leonard Berry found that the best companies create value for their customers in five interlocking ways. Whether you're running a physical store, a catalog business, an e-commerce site, or a combination of the three, you have to offer your customers superior solutions to their needs, treat them with respect, and connect with them on an emotional level. You also have to set prices fairly and make it easy for people to find what they need, pay for it quickly, and then move on. None of these pillars is new, and each sounds exceedingly simple, but don't be fooled--implementing these axioms in the real world is surprisingly difficult. The author illustrates how some retailers have built successful operations by attending to these commonsense ways of dealing with their customers and how others have failed to do so.

Contrary to popular wisdom, buybacks don't create value by raising earnings per share. But they do indeed create value, and in two very different ways. First, a buyback sends signals about the company's prospects to the market--hopefully, that prospects are so good that the best investment managers can make right now is in their own company. But investors won't see it that way if other, negative, signals are coming from the company, and it's rarely a good idea for companies in high-growth industries, where investors expect that money to be spent pursuing new opportunities. Second, when financed as a debt issue, a buyback is essentially an exchange of equity for debt, conferring the traditional benefits of leverage--a tax shield and a discipline for managers. For such a buyback to make sense, a company would need to have taxable profits in need of shielding, of course, and be able to predict its future cash flows fairly accurately. Justin Pettit has found that managers routinely underestimate how many shares they need to buy to send a credible signal to the markets, and he offers a way to calculate that number. He also goes through the iterative steps involved in working out how many shares must be purchased to reach a target level of debt. Then he takes a look at the advantages and disadvantages of the three most common ways that companies make the actual purchases--open-market purchases, fixed-price tender offers, and auction-based tender offers. When a company's performance is lagging, a share buyback can look attractive. Unfortunately, a buyback can backfire--unless executives understand why, when, and how to use this powerful and risky tool.