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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.

Although the Internet is an essential conduit for many business activities, it isn't rendering the physical world any less important, as the failures of many Web merchants demonstrate. People need social and sensual contact. The companies that succeed will be those best able to integrate the physical and the virtual. But that requires a new kind of business architecture--a new approach to designing stores, offices, factories, and other spaces where business is conducted. The author, a faculty member at Harvard Graduate School of Design, provides practical guidelines to help managers and entrepreneurs think creatively about the structures in which their businesses operate. He outlines four challenges facing designers of such "convergent" structures, so-called because they function in both physical and virtual space: matching form to function, allowing visitors to visualize the presence of others, personalizing spaces, and choreographing connectivity. Using numerous examples, from a fashion retailer that wants to sell in stores as well as through a Web site to a radically new kind of consulate, the author shows how businesses can meet each challenge. For instance, allowing customers to visualize the presence of others means that visitors to a Web site should be given a sense of other site visitors. Personalizing physical and virtual spaces involves using databases to enable those spaces to adapt quickly to user preferences. The success of companies attempting to merge on-line and traditional operations will depend on many factors. But without a well-designed convergent architecture, no company will fully reap the synergies of physical space and Internet technology.

For as long as can be remembered, BestBaby Corp., a manufacturer of baby equipment and furniture, has enjoyed a solid reputation with retailers, a good track record with consumers, and a supportive relationship with stockholders. But then the child of a celebrity is injured when her stroller tips over because its brakes failed. The media go wild, and CEO Greg James finds himself in uncharted territory. The morning after the accident, Greg calls an emergency meeting of his executive staff. As he searches his memory to prepare for it, he thinks about Arzep Enterprises, BestBaby's main provider of parts and materials. He remembers his COO, Keith Sigismund, telling him that Arzep had switched suppliers at some point in order to cut its own costs. Nevertheless, Keith had assured Greg that the new material, although not quite as sturdy, hadn't affected the quality of Arzep's components. Then in the meeting, Keith drops a bombshell: he reads from a year-old memo sent to him by an employee in manufacturing stating that the new brake fittings delivered by Arzep don't grab the front brakes as well as the ones previously supplied. In R0104A and R014Z, John R. Hall, Ian Mitroff, Robin Cohn, and Alan H. Schoem offer advice to Greg on how BestBaby should respond to the victim's family, the media, the public, and the company's own employees during this PR crisis.

For as long as can be remembered, BestBaby Corp., a manufacturer of baby equipment and furniture, has enjoyed a solid reputation with retailers, a good track record with consumers, and a supportive relationship with stockholders. But then the child of a celebrity is injured when her stroller tips over because its brakes failed. The media go wild, and CEO Greg James finds himself in uncharted territory. The morning after the accident, Greg calls an emergency meeting of his executive staff. As he searches his memory to prepare for it, he thinks about Arzep Enterprises, BestBaby's main provider of parts and materials. He remembers his COO, Keith Sigismund, telling him that Arzep had switched suppliers at some point in order to cut its own costs. Nevertheless, Keith had assured Greg that the new material, although not quite as sturdy, hadn't affected the quality of Arzep's components. Then in the meeting, Keith drops a bombshell: he reads from a year-old memo sent to him by an employee in manufacturing stating that the new brake fittings delivered by Arzep don't grab the front brakes as well as the ones previously supplied. In R0104A and R0104Z, John R. Hall, Ian Mitroff, Robin Cohn, and Alan H. Schoem offer advice to Greg on how BestBaby should respond to the victim's family, the media, the public, and the company's own employees during this PR crisis.

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.

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.

The case describes an international agreement to phase out child labor in soccer-ball manufacturing. This high-profile agreement, which resolves major brand manufacturers, has been hailed as an example of socially responsible corporate policy.

Details the career of Katharine Graham of the Washington Post Co., a pioneer in her field and one of the first high-profile women to lead a major public company. Her story is a unique example of how power and expertise are built over time, and differs from those of other business leaders in that she was unexpectedly thrust into a leadership position. Though Graham could have been a figurehead leader of the Washington Post Co., she gradually became a powerful national player: a publisher and CEO in more than title. Graham's strong values impel many of her decisions throughout the course of her career and help her through times of uncertainty. Her values are a stark contrast to strictly data-based decision making. Explores Graham's ability to master the newspaper business and succeed in a man's world. Additionally, Graham's unique ability to adapt her influence style in different social and career networks is also explored, as the distinction between Graham's employees, mentors, and friends is often blurred.

Two-year-old start-up Color Kinetics has developed unique colored lighting technology using digitally controlled LEDs, and has developed that technology into a successful line of products for its first targeted market of "retailtainment." Now in November 1999, the management team is evaluating how to best extend this success into other markets and/or strategic initiatives and achieve the growth it has targeted internally and with investors.

Supplements the (A) case.

Describes the evolution of Amazon.com from its inception in 1996 as an online bookseller to its position in 2001 as a globally recognized e-commerce brand. Reviews the evolution of the company's business model through an interview with the founder and CEO, Jeff Bezos. At its founding, Amazon.com mostly brokered book purchases through its Web site. After five years of phenomenal growth, the company expanded into international markets and added many categories, partners, and physical infrastructure. Examines Amazon's growth, fueled by the Internet bubble, and looks at how the company coped with increased scrutiny on profitability.

A large urban medical center implements the Balanced Scorecard management tool. Elaine Brennan, senior VP of operations, has reorganized a highly functional health care organization into decentralized patient care centers and support units. Having recently endured the pain of a major downsizing, she wants the various constituents--senior managers, physicians, nurses, technicians, and the work force--to explore implementing a new strategy focused on growth and patient care. But the existing measurement and management system reports only on costs and financial results. She introduces the Balanced Scorecard as a mechanism to increase attention to and accountability for quality, service, work environment, and employee outcomes, as well as revenues and costs.

This case describes how multiple sources of uncertainty can be incorporated into a real-options-based analysis. It works through an example of a two-stage problem where a company has both an option to explore and an option to develop oil reserves.

Discounted cash flow valuation calls for using expected future prices of inputs or outputs. This case describes the relationship between spot prices, forward/future prices, and expected future prices. Knowing current forward and future prices alone is not enough to estimate expected future prices, so the forward or future prices are not in general a good estimate of the expected future price.

The flows-to-equity or equity cash flows valuation method is a discounted cash flow method used to estimate the equity portion of the capital structure. It is closely related to the venture capital/buyout valuation method, which estimates the IRR of the stream of cash flows accruing to equity holders. Both of these methods are likely to result in an estimate of equity value that is too low when the firm's debt is risky (or, equivalently, an IRR that is too high, depending on the method used to estimate terminal value). This case describes a method for estimating the size of this bias, drawing insight from option-pricing.

Details former U.S. Trade Representative Charlene Barshefsky's strategic and tactical approach to surmounting the barriers laid out in the (A) case.