Amoco Corp. is negotiating to sell a wholly-owned subsidiary, MW Petroleum, to Apache Corp. MW owns large reserves of oil and gas comprising many properties at different stages of engineering, development, and production. The proposed acquisition is a large one for Apache and poses several important financing and valuation problems. This case focuses primarily on valuation.

Explores the strategy, financing, and governance of a new type of organizational form, dubbed the Leveraged Build-Up by its inventor, Kohlberg, Kravis, Roberts & Co. The company makes leveraged acquisitions of small publishing companies, managing them in a very decentralized way. It has grown dramatically between 1989 and 1993. K-III's organization and governance structure combines many of the characteristics of leveraged buyouts with those of venture-backed companies. Each individual operating company is highly leveraged, achieving the discipline of debt and avoidance of free cash flow problems that otherwise plague pubishing companies. At the same time, the top management mandate is to acquire companies, requiring continual infusions of cash. Explores the tension between the debt repayment obligations and the demand for additional financing.

1994 was a turnaround year for pulp prices and the Aracruz company. How does the company respond to environmental pressures and to new types of competition in the industry? Teaching Purpose: Indicates how to position oneself in the value-added timber/pulp industry in an environment-friendly manner.

TV Guide is the largest magazine in the United States and is attaining record profitability. This case details the economics of TV Guide's success by studying its advertiser and reader relationships. Presents a detailed look at how a large magazine manages all aspects of its business in the face of emerging competition.

Provides an overview of patent and trade secret protection. Also discusses the legal processes through which intellectual property is protected and litigated.

Focuses on developing a promising idea into a viable product design by considering customer needs early in the design process. Following an Alaskan fishing trip, Sandy Platter, a computer peripherals engineer, has a new idea for a portable water-filter device for use by outdoor recreationalists.

Structure follows strategy; and systems support structure. In the high-growth environment of post-World War II, a management doctrine rose up around these two aphorisms. But today the business environment has changed. A change in management doctrine is needed to match this new landscape. After 5 years researching 20 leading European, U.S., and Japanese companies, the authors concluded that senior managers must change their own priorities and way of thinking. Beyond designing corporate strategy, they must shape a shared institutional purpose. They must expand their focus from devising formal structures to developing organizational processes. And more than just managing systems, they must develop people. Top management's role in the companies researched already reflects the changes the authors prescribe. Consequently, 3M has managed to retain an entrepreneurial spirit despite its $14 billion bulk. ABB transformed two "also-ran" companies into the leading competitors in the global power-equipment industry. And companies like AT&T, Royal Dutch/Shell, Intel, Andersen Consulting, Kao, and Corning are doing well despite what some predicted as the inevitable decline of large corporations.

The United States has the best stock markets in the world, many people believe. And the SEC works hard to keep them that way. The U.S. markets are the broadest and fairest anywhere. The average American can trade with little fear of rigged markets or insider dealings. But there is a dark side to this environment of perfectly liquid markets. Unwittingly, the U.S. system nurtures market liquidity at the expense of good governance. The system prevents shareholders from engaging managers in candid dialogues and providing informed oversight and counsel. It encourages capable executives to neglect their fiduciary duties, thus injuring the long-term interests of companies and shareholders. Clever tinkering with insider-trading and disclosure laws cannot get around the basic conflict between market liquidity--which requires transient, arm's length shareholding--and close, honest shareholder-manager relationships.

U.S. managers know that the formidable success of Japanese automakers stems to a great extent from their close relationships with suppliers. Toyota, Nissan, and others, working closely with their respective lean-production networks of parts suppliers, produce high-quality vehicle models quickly and inexpensively; competitors rooted in traditional mass-production operations, which have typically compelled manufacturers to keep suppliers at arm's length, are left struggling to catch up. Most competitors know that a key factor in the success of Japanese network relationships is the practice of dedicating supplier assets to the customer. Nevertheless, many U.S. managers still do not fully appreciate just how profitable the practice of using dedicated assets can be. A two-year study that Jeffrey Dyer conducted of production networks in the auto industry strongly reinforces the contention that dedicated assets provide Japanese manufacturers with substantial competitive advantages. U.S. managers who face closing plants, building plants, or changing suppliers have much to learn from their Japanese competitors.

In recent years, managers have become aware of how their companies can be buffeted by risks beyond their control. To insulate themselves from such risks, many companies are turning to the derivatives markets, taking advantage of instruments like forwards, futures, options, and swaps. Although heavily involved in risk management, most companies do not have clear goals underlying their hedging programs. Without such goals, using derivatives can be dangerous. The authors present a framework to guide top-level managers in developing a coherent risk-management strategy. That strategy cannot be delegated to the corporate treasurer--let alone to a hotshot financial engineer. Ultimately, a company's risk-management strategy needs to be integrated with its overall corporate strategy. A risk-management program should have one overarching goal: to ensure that a company has the cash available to make value-enhancing investments.

Many companies throughout the world, seeking ways to develop products more efficiently, are recasting their relationships with suppliers--often modeling their efforts on approaches used by world-class Japanese manufacturers like Toyota and Nissan. The favored Japanese practices include using fewer suppliers and forging longer-term relationships with them, prodding suppliers to improve continually, and involving suppliers in design and development. But many managers who adopt Japanese-style practices have an incomplete understanding of them and, as a result, may be unable to gain all the benefits Japanese manufacturers enjoy. Successful partnerships depend on the balance among a supplier's technological capabilities, a customer's willingness to share information, and both companies' strategic requirements. Using the Japanese approach as a model, the authors describe four roles that suppliers can play in a long-term cooperative relationship. Each role carries different responsibilities during product development, and the relationships between supplier and customer vary considerably in closeness and intensity.

Merck's acquisition of Medco Containment Services in November 1993 set off a wave of controversial mergers between pharmaceutical companies and prescription-benefits-management companies. Drug-company executives argue that PBMs can provide valuable information about the way drugs are prescribed and used. But critics of the mergers question the PBMs' practice of offering incentives to retail pharmacists who persuade physicians to prescribe certain drugs. Critics also speculate that aggressive growth of acquired PBMs contributes to price competition, which may decrease profits and incentives for new-drug research. The PBM acquisitions are attempts to confront profound changes in the industry, but does ownership of PBMs create competitive advantage? Proponents of the mergers argue that a PBM can provide a pharmaceutical company with superior information, better access to customers, and the opportunity to introduce new products, such as capitation and disease management. But before drug companies can fully exploit the potential of alliances with PBMs, they face enormous challenges, including an environment that may favor less investment in R&D and important ethical and legal questions.

In the last ten years, products have proliferated in every category of consumer goods and services, and the deluge shows few signs of letting up. Most companies are pursuing product expansion strategies--in particular, line extensions--full steam ahead. But as John Quelch and David Kenny argue in "Extend Profits, Not Product Lines" (September-October 1994), evidence indicates that such aggressive tactics can be hazardous. Quelch and Kenny offer several guidelines for avoiding the pitfalls of wanton line extensions and sharpening product line strategies: improve cost accounting, allocate resources to popular products, research consumer behavior, coordinate marketing efforts, work with channel partners, and foster a climate in which product-line deletions are encouraged. In this issue's Perspectives section, nine experts offer their views on product-line management and the logic of line extensions.

One of the profound consequences of the ongoing information revolution is its influence on how economic value is created and extracted. Specifically, when buyer-seller transactions occur in an information-defined arena, that information is more easily accessed and absorbed, and arranged and priced in different ways. Most important, the information about a product or service can be separated from the product or service itself. In some cases, the information can become as critical as the actual product or service in terms of its effect on a company's profits. As a result, information-defined transactions--or value creation and extraction in the marketspace--create new ways of thinking about making money and thus a new value proposition. Today both marketplace and marketspace transactions are occurring. The authors have researched how companies work marketplace and marketspace to their best advantage. These companies' experiences provide a useful backdrop for thinking about the marketspace and suggest a strategic model for maximizing opportunities in this emerging area.

The industralized world has been undergoing a crisis during the last three years--its worst since 1945. Even now, as the long-awaited recovery finally begins to gather momentum, it is failing to make itself felt in the most critical domain: employment. In Europe, unemployment is expected to continue increasing, probably until the end of 1995. The authors argue that the failure of the current recovery to translate into a significant improvement in employment is evidence that what the world has been going through is not merely a crisis but also an economic revolution. Perhaps the most spectacular component of this revolution is the shift in the world economy's center of gravity to Asia. These changes are creating new rules and necessitating a new modus operandi for the key players in the world economy. If they play by those rules, the authors argue, there is no reason to think they cannot bring about a period of widespread prosperity similar to the one following World War II.

How do we build organizations that are skilled enough, smart enough, and, most of all, enduring enough to maneuver through a treacherous competitive environment--without choking on the systems and procedures that create that strength? How do we ensure crisp execution and flawless performance--without suffocating the democratic spirit and individual creativity that are the heart of innovation? These are the questions that will occupy companies and managers through the end of the century, for they strike at the heart of business and life in the New Economy. They are also the central questions in the three books discussed in this issue's Books in Review section: Out of Control: The Rise of Neo-Biological Civilization by Kevin Kelly, Built to Last: Successful Habits of Visionary Companies by James C. Collins and Jerry I. Porras, and Show-Stopper! The Breakneck Race to Create Windows NT and the Next Generation of Microsoft by G. Pascal Zachary.

On November 1, 1994, P. Roy Vagelos retired after nearly 20 years at Merck. As head of the research labs from 1975 to 1985 and then as CEO, Vagelos turned Merck into a pharmaceutical powerhouse through a series of breakthrough drugs. More recently, Vagelos shocked this once conservative corner of the medical industry with Merck's acquisition of the prescription-benefits-management company (PBM) Medco Containment Services, which provides prescription drugs to HMOs and employees of large corporations. Merck's acquisition of Medco represents a $6.6 billion bet on where the future of the pharmaceutical industry lies. In today's managed-care environment, Vagelos argues, the company that best controls the information flow from doctor to patient to pharmacist to plan sponsor has the greatest chance of succeeding. Medco has information on 38 million patients, which allows Merck to learn a lot more about how its drugs are prescribed and used and, ultimately, how effective they are in fighting disease.

Eric Holt had one responsibility as FireArt's director of strategy: to put together a team of people from each division and create and implement a comprehensive plan for the company's strategic realignment within six months. It seemed like an exciting, rewarding challenge. Unfortunately, the team got off on the wrong foot from its first meeting. Randy Louderback, FireArt's charismatic and extremely talented director of sales and marketing, seemed intent on sabotaging the group's efforts. Anxiously awaiting the start of the team's fourth meeting, Eric was determined to address Randy's behavior openly in the group. But before he could, Randy provoked a confrontation, and the meeting ended abruptly. What should Eric do now? Is Randy the team's only problem? In 94612 AND 94612Z, Jon R. Katzenbach, J. Richard Hackman, Genevieve Segol, Paul P. Baard, Ed Musselwhite, Kathleen Hurson, and Michael Garber offer advice in this fictional study.

Eric Holt had one responsibility as FireArt's director of strategy: to put together a team of people from each division and create and implement a comprehensive plan for the company's strategic realignment within six months. It seemed like an exciting, rewarding challenge. Unfortunately, the team got off on the wrong foot from its first meeting. Randy Louderback, FireArt's charismatic and extremely talented director of sales and marketing, seemed intent on sabotaging the group's efforts. Anxiously awaiting the start of the team's fourth meeting, Eric was determined to address Randy's behavior openly in the group. But before he could, Randy provoked a confrontation, and the meeting ended abruptly. What should Eric do now? Is Randy the team's only problem? In 94612 and 94612Z, Jon R. Katzenbach, J. Richard Hackman, Genevieve Segol, Paul P. Baard, Ed Musselwhite, Kathleen Hurson, and Michael Garber offer advice on this fictional case study.

Eric Holt had one responsibility as FireArt's director of strategy: to put together a team of people from each division and create and implement a comprehensive plan for the company's strategic realignment within six months. It seemed like an exciting, rewarding challenge. Unfortunately, the team got off on the wrong foot from its first meeting. Randy Louderback, FireArt's charismatic and extremely talented director of sales and marketing, seemed intent on sabotaging the group's efforts. Anxiously awaiting the start of the team's fourth meeting, Eric was determined to address Randy's behavior openly in the group. But before he could, Randy provoked a confrontation, and the meeting ended abruptly. What should Eric do now? Is Randy the team's only problem? In 94612 and 94612Z, Jon R. Katzenbach, J. Richard Hackman, Genevieve Segol, Paul P. Baard, Ed Musselwhite, Kathleen Hurson, and Michael Garber offer advice on this fictional case study.