"In a time when so many institutions of the industrial economy . . . are challenged by a connected world," the author writes, "the industry is the proper unit of analysis." By way of example, he describes how an unusual group of thinkers met in Madrid to reconceive how innovative medicines might be made available despite the "patent cliff" in pharmaceuticals.

Capitalism remains the most powerful, flexible, and robust system for driving broad-based prosperity and enhancing quality of life. But keeping capitalism on track will depend on our ability to rethink the priorities that guide everyone in the system, from entrepreneurs to regulators to investors. In particular we will need to throttle back the headlong pursuits of competition and ROE, and that process begins with recognizing them for what they are: runaways. The runaway, a concept from evolutionary biology, is explained best by the peacock's tail. That feature grew ever more flamboyant across the centuries thanks to a simple fact: Peahens showed a preference for large-tailed mates. But after many generations the tail created a problem: It required more nutrients and was heavy, slowing down its owner and making him easier prey--eventually causing the peacock population to decline. Capitalism is on a similar runaway trajectory, say Meyer and Kirby, mostly because it has taken the ideas of competition and ROE--brilliant in their time--too far. By reining in these metrics and developing new ones more suited to today's world, we can reformulate capitalism and break the runaway cycle.

Companies have long prospered by ignoring what economists call externalities - the various impacts that a business has on its broader milieu but is not obliged to pay for. (Pollution is the classic example.) Now, claim companies must adopt a very different stance, thanks to growing industrial scale, better sensors, and heightened sensibilities. Increasingly, business impacts are laid at companies' doorsteps. The best companies don't react defensively but apply their energies to mitigating the problems they contribute to. Using an externalities-based framework will help managers deal with rising - and often competing - demands for corporate responsibility in a way that is defensible to all stakeholders.

Digital advertising is growing nearly four times as fast as advertising overall; alternative channels cost less than traditional ones; and management increasingly insists on proof of ROI. These converging forces spell the end for television advertising.

Our annual survey of ideas and trends that will make an impact on business: Duncan J. Watts contends that ordinary people, not "influentials," drive social epidemics. Yoshito Hori predicts that Japan's young entrepreneurs could outshine those in China and India. Frederic Dalsace, Coralie Damay, and David Dubois propose brands that--like Harry Potter--mature with their customers. Michael Schrage reveals the hidden value in long-forgotten equations. Harry Hutson and Barbara Perry put hope back in the executive repertoire. Eric von Hippel spotlights Denmark, where "user-centered innovation" is a national priority. Linda Stone detects a backlash against cell-phone and BlackBerry addiction. Michael C. Mankins suggests where to put all that excess cash. Ap Dijksterhuis reaffirms the value of sleeping on a decision. Robert G. Eccles, Liv Watson, and Mike Willis report on a new software standard that will make business and financial information dramatically easier to generate, aggregate, and analyze. Geoffrey B. West challenges the conventional wisdom that smaller innovation functions are more inventive. Karen Fraser warns of apparently loyal customers who are poised to bolt for ethical reasons. Phillip Longman predicts the return of large patriarchal families and their effects on marketing strategy. Rashi Glazer illustrates the sociocultural and business implications of nanotechnology. Yoko Ishikura urges global firms to "think locally." Klaus Kleinfeld and Erich Reinhardt explore the convergence of imaging technology and biotech and its enormous benefits for medical care. Christopher Meyer advises focusing on what you want from your network before you build the platform. Charles R. Morris asserts that health care costs are falling; it's spending that's on the rise. Clay Shirky shows why open source projects succeed by failing. David Weinberger claims that accountability has morphed into superstitious "accountabalism."

Anyone who has signed up for cell phone service, attempted to claim a rebate, or navigated a call center has probably suffered from a company's apparent indifference to what should be its first concern: the customer experiences that culminate in either satisfaction or disappointment and defection. Customer experience is the subjective response customers have to direct or indirect contact with a company. It encompasses every aspect of an offering: customer care, advertising, packaging, features, ease of use, reliability. Customer experience is shaped by customers' expectations, which largely reflect previous experiences. Few CEOs would argue against the significance of customer experience or against measuring and analyzing it. But many don't appreciate how those activities differ from CRM or just how illuminating the data can be. For instance, the majority of the companies in a recent survey believed they have been providing "superior" experiences to customers, but most customers disagreed. The authors describe a customer experience management (CEM) process that involves three kinds of monitoring: past patterns (evaluating completed transactions), present patterns (tracking current relationships), and potential patterns (conducting inquiries in the hope of unveiling future opportunities). Data are collected at or about touch points through such methods as surveys, interviews, focus groups, and online forums. Companies need to involve every function in the effort, not just a single customer-facing group. The authors go on to illustrate how a cross-functional CEM system is created. With such a system, companies can discover which customers are prospects for growth and which require immediate intervention.

HBR's editors searched for the best new ideas related to the practice of management and came up with a collection that is as diverse as it is provocative. The 2004 HBR List includes emergent concepts from biology, network science, management theory, and more. A few highlights: Richard Florida wonders why U.S. society doesn't seem to be thinking about the flow of people as the key to America's advantage in the "creative age." Diane L. Coutu describes how the revolution in neurosciences will have a major impact on business. Clayton M. Christensen explains the law of conservation of attractive profits: When attractive profits disappear at one stage in the value chain because a product becomes commoditized, the opportunity to earn attractive profits with proprietary products usually emerges at an adjacent stage. Daniel H. Pink explains why the master of fine arts is the new MBA. Herminia Ibarra describes how companies can get the most out of managers returning from leadership-development programs. Iqbal Quadir suggests a radical fix for the third world's trade problems: Get the World Bank to lend to rich countries so that there are resources for retraining workers in dying industries.

Some companies are better at scouting out new market opportunities than others are. Those that lack the time or the talent for this work should consider outsourcing it to reconnaissance experts.

Companies should do more than reduce the amount of time their customers spend waiting; they should actually add value to such time.

What do ants and bees have to do with business? A great deal, it turns out. Individually, social insects are only minimally intelligent, and their work together is largely self-organized and unsupervised. Yet collectively they're capable of finding highly efficient solutions to difficult problems and can adapt automatically to changing environments. Over the past 20 years, the authors and other researchers have developed rigorous mathematical models to describe this phenomenon, which has been dubbed "swarm intelligence," and they are now applying them to business. Their research has already helped several companies develop more efficient ways to schedule factory equipment, divide tasks among workers, organize people, and even plot strategy. Emulating the way ants find the shortest path to a new food supply, for example, has led researchers at Hewlett-Packard to develop software programs that can find the most efficient way to route phone traffic over a telecommunications network. Southwest Airlines has used a similar model to efficiently route cargo. To allocate labor, honeybees appear to follow one simple but powerful rule--they seem to specialize in a particular activity unless they perceive an important need to perform another function. Using that model, researchers at Northwestern University have devised a system for painting trucks that can automatically adapt to changing conditions. In the future, the authors speculate, a company might structure its entire business using the principles of swarm intelligence. The result, they believe, would be the ultimate self-organizing enterprise--one that could adapt quickly and instinctively to fast-changing markets.

In the 1990s, companies improved their business performance by speeding up their operations. Now comes the second generation of speed--and this time, the focus is on accelerated strategy making.

Many managers fail to realize that traditional measures, which focus on results, may help them keep score on the performance of their businesses but do not help a multifunctional team monitor the activities or capabilities that enable it to perform a given process. Nor do such results measures tell team members what they must do to improve their performance. Senior managers play an important role in helping teams develop performance measures by dictating strategic goals, ensuring that each team understands how it fits into those goals, and training a team to devise its own measures. But managers must never make the mistake of thinking that they know what is best for the team.