For much of the past five decades, financial capital was considered a scarce resource. Today, however, capital is abundant and cheap, and the authors expect that to be the case for another 20 years or more. They point out that global financial assets have been growing faster than global GDP, and they explain why that trend is likely to continue. They note, too, that as the supply of capital has increased, the cost has plunged, making it possible for many large firms to borrow funds for next to nothing. What all this means is that companies can no longer sustain competitive advantage simply by allocating capital skillfully. In this new climate, the authors argue, business leaders need to lower hurdle rates and change their investment strategy, moving away from a few big bets and instead pursuing numerous small, varied growth opportunities. Not all will pan out, but embracing the risk of failure is necessary for success. Executives must also recognize that human capital is the truly scarce resource today. Organizations need to manage their workforces as carefully and rigorously as they manage their financial assets, unleashing and supporting the talent within their organizations.

Most corporations are not as skilled at selling off assets as they are at buying them, often divesting at the wrong time or in the wrong way. Either is a very expensive mistake. A Bain & Company study has found that over the last 20 years, corporations that took a disciplined approach to divestiture created nearly twice as much value for shareholders as the average firm. In this article, Bain partners Mankins, Harding, and Weddigen set out the four straightforward rules those effective divestors follow. First: Just as they have acquisition teams, smart divestors have full-time divestiture groups, which continually screen their companies' portfolios for likely businesses to sell off and think through the timing and implementation steps needed to maximize value in each particular case. Second: They choose their divestiture candidates objectively. Too many firms rush to sell in economic downturns, when prices are low. Thoughtful divestors will sell only those businesses that do not fit with the corporation's core and are not worth more to themselves than they are to any other company. Third: Successful divestors consider how to structure a deal and to whom they will sell as carefully as they consider what units to sell and when. And they are as meticulous about planning the implementation of a deal as savvy acquirers are about postmerger integration. Fourth: They make a compelling case for how, and how quickly, the deal will benefit the buyer, and they make sure the selling unit's employees will be motivated to stay on and realize that value. Using these four rules, companies as diverse as Textron, Weyerhaeuser, Ford, Groupe Danone, and Roche have become "divestiture ready": consistently able to sell at the right time and in the right way to create the most value for their shareholders.

Most companies do a thorough job of financial due diligence when they acquire other companies. But all too often, deal makers simply ignore or underestimate the significance of people issues in mergers and acquisitions. The consequences are severe. Most obviously, there's a high degree of talent loss after a deal's announcement. To make matters worse, differences in decision-making styles lead to infighting; integration stalls; and productivity declines. The good news is that human due diligence can help companies avoid these problems. Done early enough, it helps acquirers decide whether to embrace or kill a deal and determine the price they are willing to pay. It also lays the groundwork for smooth integration. When acquirers have done their homework, they can uncover capability gaps, points of friction, and differences in decision making. Even more important, they can make the critical "people" decisions--who stays, who goes, who runs the combined business, what to do with the rank and file--at the time the deal is announced or shortly thereafter. Making such decisions within the first 30 days is critical to the success of a deal. Hostile situations clearly make things more difficult, but companies can and must still do a certain amount of human due diligence to reduce the inevitable fallout from the acquisition process and smooth the integration. This article details the steps involved in conducting human due diligence. The approach is structured around answering five basic questions: Who is the cultural acquirer? What kind of organization do you want? Will the two cultures mesh? Who are the people you most want to retain? And how will rank-and-file employees react to the deal? Unless an acquiring company has answered these questions to its satisfaction, the acquisition it is making will be very likely to end badly.

Reprint: R0409J The headlines are filled with the sorry tales of companies like Vivendi and AOL Time Warner that tried to use mergers and acquisitions to grow big fast or transform fundamentally weak business models. But, drawing on extensive data and experience, the authors conclude that major deals make sense in only two circumstances: when they reinforce a company's existing basis of competition or when they help a company make the shift, as the industry's competitive base changes. In most stable industries, the authors contend, only one basis-superior cost position, brand power, consumer loyalty, real-asset advantage, or government protection-leads to industry leadership, and companies should do only those deals that bolster a strategy to capitalize on that competitive base. That's what Kellogg did when it acquired Keebler. Rather than bow to price pressures from lesser players, Kellogg sought to strengthen its existing basis of competition-its brand-through Keebler's innovative distribution system. A company coping with a changing industry should embark on a series of acquisitions (most likely coupled with divestitures) aimed at moving the firm to the new competitive basis. That's what Comcast did when changes in government regulations fundamentally altered the broadcast industry. In such cases, speed is essential, the investments required are huge, and half-measures can be worse than nothing at all. Still, the research shows, successful acquirers are not those that try to swallow a single, large, supposedly transformative deal but those that go to the M&A table often and take small bites. Deals can fuel growth-as long as they're anchored in the fundamental way money is made in your industry. Fail to understand that and no amount of integration planning will keep you and your shareholders from bearing the high cost of your mistakes.

Mergers that instantly boost earnings per share may gain favorable attention from Wall Street, but dilutive deals can outperform accretive deals in the long term because executives are pressed to rigorously analyze and execute on the promise of their acquisitions.

Many consumer goods manufacturers believe that superstore retailers are bad for their business and a scourge on their brands. But some manufacturers have turned relationships with megaretailers into a competitive advantage.

When Starbucks made coffee hip, its success set off a chain reaction of innovation that boosted the whole category's profits. New research shows the same phenomenon at work in other markets, but the effect can work in reverse as well.

How real is the private-label threat to branded products? What should national-brand manufacturers do about it? On the one hand, manufacturers have reason to be concerned. There are more private labels on the market than ever before; collectively, unit share of store-brand goods place first, second, or third in 177 of 250 supermarket product categories in the United States. But many manufacturers have not fully recognized two important points in considering this threat. First, private-label market share generally goes up when the economy is suffering and down in stronger economic periods. Second, manufacturers of brand-name products can have significant influence on the seriousness of the challenge posed by private-label goods. It is difficult for managers to look at a competitive threat objectively and in a long-term context when day-to-day performance is suffering. But the authors strongly advocate keeping the private-label challenge in perspective.