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It is not uncommon to come across calls in the business literature exhorting managers to devote greater effort in pursuit of radical innovations and/or admonishing managers for devoting too much effort in pursuit of incremental innovations. Undisputedly, over the years, successful radical innovations have had a significant impact on the fortunes of a number of companies. At the same time, firms can ill afford to overlook the role of incremental innovations in enhancing and sustaining the revenue and profit streams of successful radical innovations. From the standpoint of survival, growth and profitability of firms, both home runs (radical innovations) and singles (incremental innovations) matter. The fact that home runs generally tend to be infrequent underscores the importance of frequent singles. Against this backdrop, this article explores the various competitive strategy contexts in which incremental innovations can be effectively leveraged.     

This note provides detailed instructions on finding resources for conducting industry analysis, with a special focus on resources available at Harvard Business School. It allows students to transition from doing a Five Forces analysis on the basis of a case, where all relevant facts are provided, to doing a Five Forces analysis in a work setting, without the benefit of a prepackaged case. Exhibits provide detailed information on top resources for industry analysis, instructions for accessing prominent databases, notes on using the Internet and other new media, and some publication-related tricks of the trade pertinent to each step in the industry analysis process.

PepsiCo introduced Lay's potato chips to China in 1997. As its chips business grew in China, it faced increasing difficulties in securing a reliable supply of quality potatoes. In the North American market, Pepsi relied on external suppliers for its potatoes, but in China, it ran into problems both in sourcing locally and in getting its US supplier to grow potatoes on its behalf. The matter was further complicated by the fact that the Chinese government had banned the import of potatoes. Faced with numerous obstacles in sourcing potatoes in China, how should Pepsi go about securing this critical input? Should it rely on external suppliers given China's immature agribusiness industry, or should it integrate backwards to grow its own potatoes?

Services dominate the world's established economies (such as those of the US, Germany, and Finland) and are becoming increasingly important in developing economies, including those of China and India. Yet most companies, national governments, and universities do not put much energy into service research, innovation, or education. This ironic juxtaposition of facts has led us, along with others, to promote a focus on service research and service innovation across companies and institutions. We call this the "service imperative." In this article, we present our view of the service imperative as a burning platform that is giving birth to many hopeful directions for the future of the global economy. We believe that companies and nations which embrace the service imperative will prosper and benefit, as will individuals who do the same. We also contend that widespread embracing of the service imperative can lead to improved quality of life for people worldwide.

The key to selling well-designed, well-crafted products at high margins is the aesthetic coherence of the company and its goods. Embodying that ideal isn't easy, but it's possible if you avoid three temptations.

The mantra "Every product must stand on its own bottom line" may no longer be the one to chant. Nowadays, broadening your portfolio can increase both your chances of a big win and the benefit your other products can get from a hit's popularity.

Deliberate, emergent, and analogical approaches to finding the best strategy all have their advan-tages, depending on where an industry is in its life cycle. Be open to the best option at each juncture and wise enough to make the right call.

On the watch of three generations of executives, conservative management and aggressive expansion guided Southwest Airline's legendary growth and success in an unattractive industry. Herb Kelleher, founder and industry revolutionary, introduced a business model that transformed the airline industry. After 20 years of steady growth, Kelleher passed the baton to James Parker and Colleen Barrett, the first man-and-woman team to run an airline. This team maintained Kelleher's direction and focus. However, the company soon experienced cracks in its façade in the wake of 9/11 terrorism, spiraling fuel prices, labor unrest, and credible new entrants like JetBlue. After reorganization, Southwest's former CFO, Gary Kelly, took the helm. His message was that the Southwest brand was under attack, and the company would have to change. Kelly had to overcome many challenges within this turbulent environment if Southwest was to continue the impressive track record of profitable growth that they had enjoyed for 35 years. Could Southwest preserve the Herb-centric culture and, more importantly, was this culture critical to their future success? Would Southwest lose its leadership position to copycats, or, worse, have to copy the copycats to meet customer expectations? What could Southwest do to maintain their cost advantage in light of spiraling fuel prices, costly labor concessions, intense competition, and aggressive industry consolidation? Finally, was it time to reinvent the 40-year-old legendary company?

Large corporations have long been seen as lumbering, inflexible, bureaucratic - and clueless about global developments. But recently some multinationals seem to be transforming themselves: They're engaging employees, moving quickly, and introducing innovations that show true connection with the world. Harvard Business School's Kanter ventured with a research team inside a dozen global giants - including IBM, Procter & Gamble, Omron, CEMEX, Cisco, and Banco Real - to discover what has been driving the change. After conducting more than 350 interviews on five continents, she and her colleagues came away with a strong sense that we are witnessing the dawn of a new model of corporate power: The coordination of actions and decisions on the front lines now appears to stem from widely shared values and a sturdy platform of common processes and technology, not from top-down decrees. In particular, the values that engage the passions of far-flung workforces stress openness, inclusion, and making the world a better place. Through this shift in what might be called their guidance systems, the companies have become as creative and nimble as much smaller ones, even while taking on social and environmental challenges of a scale that only large enterprises could attempt. IBM, for instance, has created a nonprofit partnership, World Community Grid, through which any organization or individual can donate unused computing power to research projects and see what is being done with the donation in real time. IBM has gained an inspiring showcase for its new technology, helped business partners connect with the company in a positive way, and offered individuals all over the globe the chance to contribute to something big.

In recent decades an infusion of economics has lent the study of strategy much needed theory and empirical evidence. Strategy consultants, armed with frameworks and techniques, have stepped forward to help managers analyze their industries and position their companies for strategic advantage. Strategy has come to be seen as an analytical problem to be solved. But, says Montgomery, the Timken Professor of Business Administration at Harvard Business School, the benefits of this rigorous approach have attendant costs: Strategy has become a competitive game plan, separate from the company's larger sense of purpose. The CEO's unique role as arbiter and steward of strategy has been eclipsed. And an overemphasis on sustainable competitive advantage has obscured the importance of making strategy a dynamic tool for guiding the company's development over time. For any company, intelligent guidance requires a clear sense of purpose, of what makes the organization truly distinctive. Purpose, Montgomery says, serves as both a constraint on activity and a guide to behavior. Creativity and insight are key to forging a compelling organizational purpose; analysis alone will never suffice. As the CEO - properly a company's chief strategist - translates purpose into practice, he or she must remain open to the possibility that the purpose itself may need to change. Lou Gerstner did this in the 1990s, when he decided that IBM would evolve to focus on applying technology rather than on inventing it. So did Steve Jobs, when he rescued Apple from a poorly performing strategy and expanded the company into attractive new businesses. Watching over strategy day in and day out is the CEO's greatest opportunity to shape the firm as well as outwit the competition.

Companies have always found it hard to balance pressing operational concerns with long-term strategic priorities. The tension is critical: World-class processes won't lead to success without the right strategic direction, and the best strategy in the world will get nowhere without strong operations to execute it. In this article, Kaplan, of Harvard Business School, and Norton, founder and director of the Palladium Group, explain how to effectively manage both strategy and operations by linking them tightly in a closed-loop management system. The system comprises five stages, beginning with strategy development, which springs from a company's mission, vision, and value statements, and from an analysis of its strengths, weaknesses, and competitive environment. In the next stage, managers translate the strategy into objectives and initiatives with strategy maps, which organize objectives by themes, and balanced scorecards, which link objectives to performance metrics. Stage three involves creating an operational plan to accomplish the objectives and initiatives; it includes targeting process improvements and preparing sales, resource, and capacity plans and dynamic budgets. Managers then put plans into action, monitoring their effectiveness in stage four. They review operational, environmental, and competitive data; assess progress; and identify barriers to execution. In the final stage, they test the strategy, analyzing cost, profitability, and correlations between strategy and performance. If their underlying assumptions appear faulty, they update the strategy, beginning another loop. The authors present not only a comprehensive blueprint for successful strategy execution but also a managerial tool kit, illustrated with examples from HSBC Rail, Cigna Property and Casualty, and Store 24. The kit incorporates leading management experts' frameworks, outlining where they fit into the management cycle.

In 1979, a young associate professor at Harvard Business School published his first article for HBR, "How Competitive Forces Shape Strategy." In the years that followed, Michael Porter's explication of the five forces that determine the long-run profitability of any industry has shaped a generation of academic research and business practice. In this article, Porter undertakes a thorough reaffirmation and extension of his classic work of strategy formulation, which includes substantial new sections showing how to put the five forces analysis into practice. The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. That value may be drained away through the rivalry among existing competitors, of course, but it can also be bargained away through the power of suppliers or the power of customers or be constrained by the threat of new entrants or the threat of substitutes. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation. In exploring the implications of the five forces framework, Porter explains why a fast-growing industry is not always a profitable one, how eliminating today's competitors through mergers and acquisitions can reduce an industry's profit potential, how government policies play a role by changing the relative strength of the forces, and how to use the forces to understand complements. He then shows how a company can influence the key forces in its industry to create a more favorable structure for itself or to expand the pie altogether. The five forces reveal why industry profitability is what it is. Only by understanding them can a company incorporate industry conditions into strategy.

Most companies aren't half as innovative as their senior executives want them to be (or as their marketing claims suggest they are). What's stifling innovation? There are plenty of usual suspects, but the authors finger three financial tools as key accomplices. Discounted cash flow and net present value, as commonly used, underestimate the real returns and benefits of proceeding with an investment. Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming - incorrectly - that the present health of the company will persist indefinitely if the investment is not made. In most situations, however, competitors' sustaining and disruptive investments over time result in deterioration of financial performance. Fixed- and sunk-cost conventional wisdom confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack. Executives in established companies, bemoaning the expense of building new brands and developing new sales and distribution channels, seek instead to leverage their existing brands and structures. Entrants, in contrast, simply create new ones. The problem for the incumbent isn't that the challenger can spend more; it's that the challenger is spared the dilemma of having to choose between full-cost and marginal-cost options. The emphasis on short-term earnings per share as the primary driver of share price, and hence shareholder value creation, acts to restrict investments in innovative long-term growth opportunities. These are not bad tools and concepts in and of themselves, but the way they are used to evaluate investments creates a systematic bias against successful innovation. The authors recommend alternative methods that can help managers innovate with a much more astute eye for future value.

Spiegel Online (www.spiegel.de) is the leading news Web site in Germany. The site was first designed to accompany Der Spiegel, one of Europe's largest and Germany's most influential weekly magazine, which has a weekly circulation of around one million. The site's content is produced by a team of more than fifty journalists writing in several categories: politics, business, networld, panorama, arts and entertainment, science, university, school, sports, travel, weather, and automobiles. The original content is complemented by articles purchased from news agencies and selected articles from the print edition. Spiegel-Verlag is a major contributor to the Hamburg Media School, which offers professional master's degree programs in Media Management (MBA), film, and journalism. In their second year, MBA students typically engage in consulting projects with major media companies. In a recent assignment, Spiegel Online posed two questions to the MBA team: are there any chances for an economically successful entry into the market for interactive classifieds? And if so, what should the business model look like in detail? A student team analyzed markets for classified ads and found one market segment that appeared to be particularly promising: the market for art objects. During the development of a business plan for a new venture in this market it became apparent that there is much uncertainty about the key input parameters to the business plan. As a result, it is very difficult to assess the viability of the business idea. How can the team properly account for the uncertain input parameters? What is the impact of this uncertainty on the bottom line? Will a Web site for art objects earn or lose money? How can the team communicate this uncertainty to a group of high-level decision makers who want a simple "go or no-go" recommendation?

Two Hawaiian airlines' cooperative environment is disrupted by the entry of a third competitor, Mesa Airways. The price war leads to fares as low as $0 and causes more than $100 million in losses in the first year with no end in sight. Industry risk factors for price competition were reduced in 2001 when the government granted a one-year reprieve from anti-trust laws, but increased dramatically after Mesa's announced entry.

The western world bought the wrong thinking system from Aristotle, says the author, and this ranks as one of the worst investment decisions we ever made. The thinking system we invested in was Aristotle's 'analytics', which monopolizes what most people characterize as 'thinking.' As a result, our thinking processes remain dominated by the culture of the sciences, and traditional approaches to strategy sit squarely at the table of logic and Science. But Aristotle actually conceived of two thinking systems, not one: he also conceived an entirely different thinking pathway that combined invention, judgment and decision wrapped up in a social process of debate. He called this process 'rhetoric', which the author calls 'design thinking' -- the Second Road to truth. The critical difference between the two roads is best understood by the different domains they address: analytics is the road by which we diagnose what already exists; rhetoric is the road by which we design alternative futures.

Despite the differences between their fields, ecologists have produced many insights that are potentially useful to strategic management. The authors show that Ecology and Strategy have much to learn from one another, and that an exchange between the fields can lead to the development of a richer and more compelling understanding of organizational strategy. They identify and describe three particular areas for cross-pollination between the disciplines: demography and competition; positional advantages; and inertia and change.

In a highly-connected world, signals from the periphery of our environment are initially difficult to capture, but they can be vital early warning signs of both threats and opportunities. Unfortunately, most of us are 'passive scanners' of our environment, say the authors: we wait for information to reach us, and deal with it as it arrives. The danger in this practice is that it is all-too easy to miss unexpected and unfamiliar weak signals on the periphery - that blurry zone at the edge of our vision, where not many people or firms focus their attention. The authors provide four guidelines for addressing the periphery of your organization.

Business strategists tend to be well-versed in the identification and analysis of constraints, says the author, but what of possibilities? If the ability to see new possibilities is fundamental to creating innovative designs - whether of products, cities or business strategies - what do we know about state-of-the-art possibility thinking? Not much, she says. Business strategy has historically been a largely analytic endeavor, with relatively little attention paid to the creative aspects of strategy formulation. She describes eight ways to illuminate new possibilities taken from Engineering success stories. Engineers have long viewed design as a core activity, says the author, and managers would be wise to turn to them for creative inspiration.

Radical innovation requires both evidence and intuition: evidence to become informed, and intuition to inspire us in imagining and creating new and better possibilities. Research can be an immensely positive force in the innovation journey, says the author (from leading design firm IDEO), but to derive value from it, we must be willing to complement, challenge, and evolve many of the approaches and practices that traditionally prevail. She shows that design research demands commitment from innovators to reach new levels of understanding about what matters to the people they want to connect with. Three types of design research are defined - generative, evaluative and predictive - as well as how they can lead to business innovation.