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Prudential Insurance Co. attempted to diversify into financial services by building an investment banking franchise. Prudential's initial foray into the industry was its acquisition of The Bache Group in 1982. In 2000, the company decided to exit investment banking. The firm adopted various strategic positions and human resource management strategies during the 18 years it struggled to compete successfully against prestigious incumbents. Although Prudential's efforts to establish a top-tier investment bank ultimately failed, other firms did succeed in this endeavor.

Slingshot Technology Inc. (STI) is a privately held software start-up founded in 1995 focused on identifying emerging spaces in the IT services industry and partnering with vendors selling promising but unproven technologies in those spaces. The vendors used STI to extend their system development and integration capabilities to deliver on aggressive deadlines, STI gained a steady stream of consulting and engineering work plus opportunities to identify and meet follow-on needs of the vendors' Fortune 1000 customers. Four years after the company was founded with $1,000, revenue had exploded to $1.9 million on the basis of partnerships with enterprise applications development and enterprise application integration vendors. In late 1998, the founder was pondering how to set up an innovative "software factory" to complement the consulting side of the business while ensuring that STI's knowledge assets and intellectual property were protected.

Slingshot Technology Inc. (STI) is a privately held software start-up founded in 1995 focused on identifying emerging spaces in the IT services industry and partnering with vendors selling promising but unproven technologies in those spaces. The vendors used STI to extend their system development and integration capabilities to deliver on aggressive deadlines, STI gained a steady stream of consulting and engineering work plus opportunities to identify and meet follow-on needs of the vendors' Fortune 1000 customers. Four years after the company was founded with $1,000, revenue had exploded to $1.9 million on the basis of partnerships with enterprise applications development and enterprise application integration vendors. In late 1998, the founder was pondering how to set up an innovative "software factory" to complement the consulting side of the business while ensuring that STI's knowledge assets and intellectual property were protected.

Supplements the (A) case.

The cofounder and CEO of AsiaInfo, a Chinese system integrator that built 70% of China's Internet backbone, must decide whether to list equity in the United States to fund future growth. Describes the company and the decision. A rewritten version of a previous case.

Breeden Electronics USA is a start-up division of a German company. It plans to produce two products, both electronic signaling devices. Herman Klein, the division president, has asked his controller, Marlene Baer, to compute several breakeven sales figures as they assess the sales level that is necessary to meet the profit target established by the parent company. Baer must conduct several breakeven analyses and consider the impact on profit if production exceeds sales. This is the first in a series of three cases that can be used to explore the evolution of cost systems. The main issues of the three cases are as follows: in the A case, the company uses a traditional costing system. The main questions relate to breakeven analysis and the effect of inventory buildup on profit. The B case (UV1732) introduces the definition of activities, costing those activities, and computing product cost based on their use of the activities. The revised product costs are not dramatically different, but analyzing what causes the differences is important to discovering where ABC can provide valuable information. The C case (UV1734) takes place after the end of the year, when profits have been reduced by the need to take care of a growing and increasingly complex packing and shipping activity. The controller defines a new activity (order handling), computes the cost per order, and begins to revise the data on product profitability and to develop new data on customer profitability. Having discovered the high cost of handling each order, the controller now has good reason to work on activity-based management: making that process more efficient, and perhaps more customer friendly. The three cases can be used in three classes, or the A and B cases together in one class and the C case in a second class.

It was supposed to be an amicable "merger of equals," an example of European togetherness, a synergistic deal that would create the world's second-largest consumer foods company out of two former competitors. But the marriage of entrepreneurial powerhouse Royal Biscuit and the conservative, family-owned Edeling GmbH is beginning to look overly ambitious. Integration planning is way behind schedule. Investors seem wary. But for Royal Biscuit HR head Michael Brighton, the most immediate problem is that he can't get his German counterpart, Dieter Wallach, to collaborate on a workable leadership development plan for the merged company's executives. And stockholders have been promised details of the new organizational structure, including a precise timetable, in less than a month. The CEO of the British company--and of the postmerger Royal Edeling--is furious. It's partly a culture clash, but the problems may run deeper than that. Commenting on the fictional case study in R0405A and R0405Z are Robert F. Bruner, the executive director of the Batten Institute at the University of Virginia's Darden Graduate School of Business Administration in Charlottesville; Leda Cosmides and John Tooby, the codirectors of the Center for Evolutionary Psychology at UC Santa Barbara; Michael Pragnell, the CEO and director of the board for the agribusiness firm Syngenta, based in Basel, Switzerland; and David Schweiger, the president of the Columbia, South Carolina-based management consulting firm Schweiger and Associates.

What wisdom could a horse trainer have to offer a corporate manager? Let's start with the fact that the word "manage" has an equine origin. It comes from Latin, by way of the Italian "maneggiare"--to handle, to train horses. To find out whether the connection goes any further than etymology, senior editor Julia Kirby interviewed the man who is perhaps the most famous thoroughbred trainer of all time: D. Wayne Lukas. Over the course of his 40-year career, Lukas has broken virtually every record in the history of the sport. He's had a horse in every Kentucky Derby for the past 23 years. In 14 different years, he has made more money than any other trainer in the United States; his lifetime earnings mark is now approaching an incredible $250 million. Although his accomplishments are undeniable, Lukas remains a controversial figure in his industry. Early on, he bucked long-standing traditions and came up with a training program unlike anyone else's. His willingness to ship horses across the country to compete in fields where they had better chances of prevailing meant more victories, happier clients, and a reputation for success that brought Lukas even better horses. One of the biggest assets a trainer can have is a good eye for selecting not just talented horses but also talented assistants. Horse training is a trial-and-error, learn-by-experience profession, and a lot of it is handed down. There aren't any books that demonstrate how to train a horse to win the Kentucky Derby. Lukas may be famous for holding almost every record in racing, but his ability to develop a whole new generation of great trainers may be his most important legacy.

Highly intelligent, confident, and successful, alpha males represent about 70% of all senior executives. Natural leaders, they willingly take on levels of responsibility most rational people would find overwhelming. But many of their quintessential strengths can also make alphas difficult to work with. Their self-confidence can appear domineering. Their high expectations can make them excessively critical. Their unemotional style can keep them from inspiring their teams. That's why alphas need coaching to broaden their interpersonal tool kits while preserving their strengths. Drawing from their experience coaching more than 1,000 senior executives, the authors outline an approach tailored specifically for the alpha. Coaches get the alpha's attention by inundating him with data from 360-degree feedback presented in ways he will find compelling. Such an assessment is a wake-up call for most alphas, providing undeniable proof that their behavior doesn't work nearly as well as they think it does. That paves the way for a genuine commitment to change. To change, the alpha must admit vulnerability, accept accountability not just for his own work but for others', connect with his underlying emotions, learn to motivate through a balance of criticism and validation, and become aware of unproductive behavior patterns. The goal of executive coaching is not simply to treat the alpha as an individual problem, but to improve the entire team dynamic.

Eliot Spitzer's investigations into the mutual fund and investment banking industries have made the New York State attorney general the de facto flag bearer of corporate reform. His exposure of conflicts of interest between investment bankers and research analysts in Wall Street firms led to the $1.4 billion global settlement between regulators and banking houses in 2003. In this interview, Spitzer describes the challenge of protecting public markets from conflicts of interest, paying particular attention to how such conflicts get institutionalized in an industry. "The cases that have gotten me and my fellow regulators most upset are the ones where we've seen senior management being tolerant of rank abuses," he says. "Because then you know that the entire structure is rotten." He also points the finger squarely at boards, maintaining that board members are drawn from pools of company and industry insiders. He cites "a void in values in a lot of boardrooms," holding up executive compensation as a powerful example. "Board compensation committees...are self-selected and interwoven--it's a rigged marketplace." He continues, "It would be interesting to see what the world would look like if CEO pay packages had to be submitted to shareholder votes." Spitzer suggests that what's really needed is for all business leaders to reinstill throughout their organizations the critical notion of a fiduciary duty--whether it is to the shareholder or to the customer. Using the mutual fund industry as an example, he also contrasts the value of enforcement with that of regulation and articulates an important--and surprisingly limited--role for government in protecting free markets.

Many companies have tried to copy Toyota's famous production system--but without success. Part of the reason why, says the author, is that imitators fail to recognize the underlying principles of the Toyota Production System (TPS), focusing instead on specific tools and practices. This article tells the other part of the story. Building on a previous HBR article, "Decoding the DNA of the Toyota Production System," Spear explains how Toyota inculcates managers with TPS principles. He describes the training of a star recruit--a talented young American destined for a high-level position at one of Toyota's U.S. plants. Rich in detail, the story offers four basic lessons for any company wishing to train its managers to apply Toyota's system--rather than go through the cursory walk-throughs, orientations, and introductions of most companies. First, there's no substitute for direct observation. Toyota employees are encouraged to observe failures as they occur--for example, by sitting next to a machine on the assembly line and waiting and watching for any problems. Second, proposed changes should always be structured as experiments. Employees embed explicit and testable assumptions in the analysis of their work. That allows them to examine the gaps between predicted and actual results. Third, workers and managers should experiment as frequently as possible. The company teaches employees at all levels to achieve continuous improvement through quick, simple experiments rather than through lengthy, complex ones. Finally, managers should coach, not fix. Toyota managers act as enablers, directing employees but not telling them where to find opportunities for improvements.

With the battle for the best and brightest people heating up again, you're most likely out there looking for first-rate talent in the ranks of your competitors. Chances are, you're sold on the idea of recruiting from outside your organization--developing people within the firm takes time and money. But the authors, who have tracked the careers of high-flying CEOs, researchers, software developers, and leading professionals, argue that top performers quickly fade after leaving one company for another. To study this phenomenon in greater detail, the authors analyzed the ups and downs of more than 1,000 star stock analysts, a well-defined group for which there are abundant data. The results were striking. After a star moves, not only does his performance plunge, but so does the effectiveness of the group he joins--and the market value of his new company. Moreover, transplanted stars don't stay with their new organizations for long, despite the astronomical salaries firms pay to lure them from rivals. Most companies that hire stars overlook the fact that an executive's performance is not entirely transferable because his personal competencies inevitably include company-specific skills. When the star leaves the old company for the new, he also leaves behind many of the resources that contributed to his achievements. As a result, he is unable to repeat his performance in another company--at least not until he learns to work the new system, which could take years. The authors conclude that companies should focus on cultivating talent from within and do everything possible to retain the stars they create.

Companies facing new requirements for governance are scrambling to buttress financial reporting systems, overhaul board structures--whatever it takes to comply. But there are limits to how much the outside can impose good governance. Boards know what they ought to be: seats of challenge and inquiry that add value without meddling and make CEOs more effective but not all-powerful. A board can reach that goal only by functioning as a high-performance team, one that is competent, coordinated, collegial, and focused on an unambiguous goal. Such entities don't just evolve; they must be constructed to an exacting blueprint--what the author calls "board building." In this article, Nadler offers an agenda and a set of tools for boards to define and achieve their objectives. It's important for a board to conduct regular self-assessments and to pay attention to the results of those analyses. As a first step, the directors and the CEO should agree on which of the following common 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 take inventory of 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 make sure 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.

A carefully chosen story can help the leader of an organization translate an abstract concept into a meaningful mandate for employees. The key is to know which narrative strategies are right for what circumstances. Knowledge management expert Stephen Denning explains that, for optimal effect, form should follow function. Challenging one professional storyteller's view that more is better, Denning points out that it's not always desirable (or practical) to launch into an epic that's jam-packed with complex characters, cleverly placed plot points, an intricate rising action, and a neatly resolved denouement. If the aim is to motivate people to act when they might not be inclined to do so, it's best to take an approach that's light on detail--particulars can bog down listeners and prevent them from focusing on the message. Drawing on his experiences at the World Bank and observations made elsewhere, the author provides several dos and don'ts for organizational storytellers, along with examples of narratives that get results. Denning also presents seven distinct types of stories, the situations in which they should be told, and tips on how to tell them. Leaders with the strength to push past some initial skepticism about the enterprise of storytelling will find that the creative effort pays off.

Some projects have such diverse requirements that they need a variety of specialists to work on them. But often the best-qualified specialists are scattered around the globe, perhaps at several companies. Remarkably, an extensive benchmarking study reveals, it isn't necessary to bring team members together to get their best work. In fact, they can be even more productive if they stay separated and do all their collaborating virtually. The scores of successful virtual teams the authors examined didn't have many of the psychological and practical obstacles that plagued their more traditional, face-to-face counterparts. Team members felt freer to contribute--especially outside their established areas of expertise. The fact that such groups could not assemble easily actually made their projects go faster, as people did not wait for meetings to make decisions, and individuals, in the comfort of their own offices, had full access to their files and the complementary knowledge of their local colleagues. Reaping those advantages, though, demanded shrewd management of a virtual team's work processes and social dynamics. Rather than depend on videoconferencing or e-mail, which could be unwieldy or exclusionary, successful virtual teams made extensive use of sophisticated online team rooms, where everyone could easily see the state of the work in progress, talk about the work in ongoing threaded discussions, and be reminded of decisions, rationales, and commitments. Differences were most effectively hashed out in teleconferences, which team leaders also used to foster group identity and solidarity.

It was supposed to be an amicable "merger of equals," an example of European togetherness, a synergistic deal that would create the world's second-largest consumer foods company out of two former competitors. But the marriage of entrepreneurial powerhouse Royal Biscuit and the conservative, family-owned Edeling GmbH is beginning to look overly ambitious. Integration planning is way behind schedule. Investors seem wary. But for Royal Biscuit HR head Michael Brighton, the most immediate problem is that he can't get his German counterpart, Dieter Wallach, to collaborate on a workable leadership development plan for the merged company's executives. And stockholders have been promised details of the new organizational structure, including a precise timetable, in less than a month. The CEO of the British company--and of the postmerger Royal Edeling--is furious. It's partly a culture clash, but the problems may run deeper than that. Commenting on the fictional case study in R0405A and R0405Z are Robert F. Bruner, the executive director of the Batten Institute at the University of Virginia's Darden Graduate School of Business Administration in Charlottesville; Leda Cosmides and John Tooby, the codirectors of the Center for Evolutionary Psychology at UC Santa Barbara; Michael Pragnell, the CEO and director of the board for the agribusiness firm Syngenta, based in Basel, Switzerland; and David Schweiger, the president of the Columbia, South Carolina-based management consulting firm Schweiger and Associates.

It was supposed to be an amicable "merger of equals," an example of European togetherness, a synergistic deal that would create the world's second-largest consumer foods company out of two former competitors. But the marriage of entrepreneurial powerhouse Royal Biscuit and the conservative, family-owned Edeling GmbH is beginning to look overly ambitious. Integration planning is way behind schedule. Investors seem wary. But for Royal Biscuit HR head Michael Brighton, the most immediate problem is that he can't get his German counterpart, Dieter Wallach, to collaborate on a workable leadership development plan for the merged company's executives. And stockholders have been promised details of the new organizational structure, including a precise timetable, in less than a month. The CEO of the British company--and of the postmerger Royal Edeling--is furious. It's partly a culture clash, but the problems may run deeper than that. Commenting on the fictional case study are Robert F. Bruner, the executive director of the Batten Institute at the University of Virginia's Darden Graduate School of Business Administration in Charlottesville; Leda Cosmides and John Tooby, the codirectors of the Center for Evolutionary Psychology at the University of California, Santa Barbara; Michael Pragnell, the CEO and director of the board for the agribusiness firm Syngenta, based in Basel, Switzerland; and David Schweiger, the president of the Columbia, South Carolina-based management consulting firm Schweiger and Associates.

NASA's fabled Faster, Better, Cheaper initiative sped up the agency's spacecraft development. But when missions began to fail, it was faulty organizational learning--not hardware--that was to blame.

Companies struggling to rejuvenate tired brands may want to look east. SoBe beverages, Nissan, and others are exploiting Westerners' fascination with products that are--or merely seem--Asian.

If they know the unwritten rules about how people in their companies whine, to whom, and about what, managers can determine where not to put their problem-solving energies.