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A $200 billion market has appeared on your business horizon, but you may not have noticed it. It's the new U.S. military. Virtually all aspects of the military are changing to ensure that it can fight unpredictable threats while sustaining the infrastructure needed to support and train forces. The military is turning to nontraditional business partners to meet a wide range of needs, from health care to housing to information technology. The Defense Department is yielding its monopoly on every aspect of national security and adopting a more businesslike model in which the military's warfighting capabilities are supported through outsourcing and business alliances. Market standards are replacing the heavy customization that has locked many companies out of this marketplace. The authors have participated in the transformation process from different perspectives--one civilian, the other military. Together, they highlight the prospects that transformation is creating for companies outside the traditional defense industry and reveal paths to success in this complex market. They also present six principles for doing business with the military that require persistence, integrity, and a willingness to master the intricacies of a distinctive culture.

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.

All companies in a technology-intensive industry must worry about the development of their ecosystems and, in particular, the availability and cost of complementary assets. One strategy for promoting complements is to invest in them directly. Explores Intel's strategy to invest in complements through Intel Capital, perhaps the largest corporate venture capitalist in the world. Compares Intel's approach to the approaches of Panasonic, Microsoft, and Texas Instruments and asks how Intel should address its emerging areas of concern in the digital home. To examine and evaluate different strategies for investing in complementary assets.

eBay, Yahoo!, and Amazon.com entered the online auction market within four years of one another, along with a host of smaller Web sites. Five years later, eBay clearly outstripped its competitors, despite the fact that Yahoo! and Amazon both had a huge installed base of users. Why? Presents background on the entry and strategies of the top three players to discuss the economics of the online auction market, why the market tipped to eBay, and where the industry will go from here.

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How should Canyon Ranch leverage its uniqueness in the face of increasing competition and an entrenched customer definition of the firm? The firm is attempting to create demand for return visits and foster the customization and personalization of the Canyon Ranch experience.

In the spring of 1999, Matrix Semiconductor was a young start-up on the verge of what the founders considered to be a major technological breakthrough. For more than a year, the company had focused almost exclusively on the invention of its technology 3-D semiconductor memory chips that would offer acceptable performance at selling prices significantly lower than competitive and substitute products available on the market. As the company neared the completion of its first prototype, the founders recognized the need to create a more holistic business strategy for the organization. Director of Marketing Dan Steere had recently joined the Matrix team. In his new role, he was asked to help define the practical parameters of a 3-D product, choose which markets to pursue, and decide on an appropriate business model for the company. Through an evaluation of the alternatives available to the company, the case explores the importance of strategy and strategic decision making, even in the early phases of a company. Also highlights some of the success factors and pitfalls young companies must address as they prepare to begin focusing on the development of a legitimate new business.

The Rainforest Action Network (RAN) worked "to protect the Earth's rainforests and support the rights of their inhabitants through education, grassroots organizing, and nonviolent direct action." RAN accomplished its mission by organizing campaigns to redirect corporations away from the destruction and exploitation of nonsustainable forest resources. RAN worked with other nongovernmental organizations, student groups, and indigenous forest communities. Founded in 1985, RAN had 10,000 members and an annual budget of $2 million in 2003. Over time, the scope of RAN's campaigns had broadened. RAN sought to stop the logging of old growth forests, protect fragile ecosystems, and reduce the threat to forests and the environment due to climate change. RAN's three campaigns in 2004--the Old Growth Campaign, the Global Finance Campaign, and Jumpstart Ford--focused on these objectives. In April 2003, RAN's board of directors appointed as executive director Michael Brune, the former campaigns director for the organization. Brune and the board of directors began a review of RAN's strategy and mission in light of the expanded scope of RAN's campaigns. RAN had limited resources and was stretched to conduct three campaigns. What changes to RAN's strategy, structure, and resource base would be required if it were to expand its mission, for example, to include natural systems such as clean air, clean water, and the climate?

Describes Novell's open source software strategy and the business environment in which it has arisen. Introduces open source software and strategies based on open source and offers opportunities to discuss IT strategy, IT management, and organizational change. One key issue is how to capture value via a strategy that leverages intellectual property that is in the public domain.

To support a strategy that puts decisions about instruction and resources in the hands of school communities, the superintendent of the San Francisco Unified School district implemented a weighted formula to allocate resources to school sites based on the learning characteristics of the students attending each school. Considers full in-district choice for parents regarding which school their child will attend, academic planning and resource allocation by local school site councils, and an accountability system with performance consequences for schools unable to meet academic targets or attract enough students to remain financially viable.

In the spring of 1999, Matrix Semiconductor was a young start-up on the verge of what the founders considered to be a major technological breakthrough. For more than a year, the company had focused almost exclusively on the invention of its technology: 3/4 3-D semiconductor memory chips that would offer acceptable performance at lower prices. As the company neared the completion of its first prototype, the founders needed to create a more holistic business strategy for the organization. Dan Steere recently joined the Matrix team, and in his new role as director of marketing, was asked to help define the practical parameters of a 3-D product, choose what markets to pursue, and decide on an appropriate business model for the company (drawing on input from the rest of the Matrix team). Evaluates the alternatives available to the company, exploring the importance of strategy and strategic decision making. Also highlights some of the success factors and pitfalls young companies must address as they prepare to stop focusing solely on the definition of a business opportunity and begin focusing on the development of a legitimate new business.

In early 2004, with the organizational integration of the Compaq acquisition mostly completed, top management was looking toward capitalizing on the potential competitive advantages of the strategic integration of both companies to achieve the goal of becoming the leading technology company in the world. Top management had to make sure that HP would achieve superior profitable growth with its portfolio strategy. This would require high performance from its individual businesses in increasingly competitive environments, the development of new strategic leadership skills to capitalize on opportunities for strategic integration across the organization, and continued significant innovation.

Describes the strategic analysis that went into identifying Compaq as an acquisition target to help HP achieve its objective of becoming the leading technology company in the world. Through in-depth interviews with HP senior executives, including chairman and CEO Carly Fiorina and others, the case describes the planning and execution of the merger and the actual processes created to achieve the strategic, administrative, and cultural integration of the two companies.

The 1990s saw the world's industrial companies turn away in droves from the strategy of product diversification. The causes for such change include recognition of the poor performance of highly diversified firms, a trend toward decision frameworks based on market allocation of resources among disparate activities, and the rise of institutional shareholders that demand performance and clarity. These developments will continue to raise the intensity of global industrial competition, requiring managers to cope by thinking more about multinational than multiproduct expansion. Will the few remaining conglomerates and highly diversified corporate holdouts remain strategically viable? And what will happen to firms that persist in diversifying outside their core industries in spite of all the evidence?

A new technology platform conceived in the early 1990s, Linux developed into a force to be reckoned with in the operating system marketplace. At first, Linux was dismissed as a renegade option used only by tech geeks. By 2004, however, Linux had exploded into the mainstream and was being used throughout the enterprise, running everything from Web servers to mission-critical financial operations. Linux was, at the same time, the soul of the open source movement; the bread and butter of specialist companies like Novell and Red Hat; a strategic tool for larger players like IBM and Sun; a credible threat to the market leader, Microsoft; and a tactical alternative for governments around the world. Linux's new and multifaceted roles in the technology landscape makes it a complex case through which to examine a wide variety of business problems.

Examines the strategic opportunities available to Samsung Electronics in 2004 and beyond as the company attempts to penetrate the digital home. Key issues include the role of horizontal industry models versus vertical industry models in consumer electronics, and how a global conglomerate like Samsung can best participate in the fast-changing, digital-based consumer electronics industry.

Hundreds of books on business growth are published each year, but which ones are really worth reading? Harvard Business School professor Pankaj Ghemawat takes a close look at three recent offerings: Chris Zook's Beyond the Core, Ram Charan's Profitable Growth Is Everyone's Business, and Adrian Slywotzky and Richard Wise's How to Grow When Markets Don't. He finds that all three are likely to succeed at prompting readers to take action. Zook defines the various adjacencies along which a business might extend its scope. Charan presents 10 tools that can be put to use immediately. And Slywotzky and Wise advise executives to inventory their companies' "hidden assets" and conduct an analysis of ways to solve customer problems. But Ghemawat wonders if the current crop of books harbors a subtle pro-growth bias. Ghemawat makes a sobering case for the dangers of setting growth targets too high. Ryanair and Coca-Cola, for instance, stumbled badly when they set unreachable growth targets. Even companies that are considered efficient growth machines run into constraints related to their size. Wal-Mart, for example, has had to accept declining growth rates as it has grown ever larger. Yet none of the three books discusses this dynamic. According to Ghemawat, readers interested in growth would be well advised to revisit a classic: Alfred Chandler's The Visible Hand. Chandler's propositions about growth and the managerial enterprise have withstood years of scrutiny, and his central idea--that technological changes, broadly defined, can affect the relative efficiency of different modes of organizing economic activity--still provides a frame for rich debate.

Many companies have posted impressive top-line growth over the past two decades in their respective economic regions--for instance, Wal-Mart in North America, BP in Europe, Toyota in Asia, and News Corp. in the Southern Hemisphere. But which were the best at converting all of that revenue growth into shareholder value? Harvard Business Review asked G. Bennett Stewart III, senior partner of the consulting firm Stern Stewart & Co., and his colleagues to come up with the answer. For the period 1983 to 2003, they assembled a list of the top 20 high-growth value adders (and laggards) in each of the four regions cited above. Their calculations gave equal weight to companies' revenue growth and market-value-added scores, revealing the important effect of region on the performance of companies in the same industry. For instance, whereas automakers are positioned high on the Asian list of high-growth value adders, U.S. carmakers GM and Ford--each of which reported revenue growth in excess of $100 billion between 1983 and 2003--are among the value laggards on the North American list, as are DaimlerChrysler and Volkswagen on the European list. The Japanese win through better efficiency, higher quality, and narrower product mixes, the author says. And although there are four telecom companies represented among the European high-growth value adders, there is none on the North American list. That's probably because the European telecoms enjoyed more protective regulation, made fewer high priced acquisitions, and didn't bet as big on the overblown dot-com economy, the author says.

Everyone knows that corporate growth--true growth, not just agglomeration--springs from innovation. And the common wisdom is that companies must spend lavishly on R&D if they are to innovate at all. But in these fiscally cautious times, where every line item of every budget in every company is under intense scrutiny, many organizations are doing just the opposite. They tighten their belts, subject nascent product development programs to rigorous screening, and train R&D staffers to think in business terms so the researchers will be better able to decide whether an idea for a product or service is worth pursuing in the first place. Such efficiency measures are commendable, say authors Gary Hamel and Gary Getz. But frugality is not a growth strategy, they point out and, in truth, there is very little correlation between corporate performance and the amount spent on innovation. Companies like Southwest, Cemex, and Shell Chemicals have shown that businesses don't have to spend a fortune on R&D to reap the benefits of innovation. To produce more growth per dollar invested, companies must produce more innovation per dollar invested. Hamel and Getz explain how businesses can dramatically improve their innovation yields. They offer these five imperatives: Increase the number of innovators among existing employees (whatever their job titles) by involving them in innovation processes and events. Focus on developing truly radical ideas--ones that change customer expectations and behaviors and industry economics--not just incremental ideas. Look for innovation sources outside the organization, as well as inside. Increase the learning from small, low-risk experiments. And commit to long-term, consistent development efforts.

As commercial processes commoditize in a developed economy, they are outsourced or transferred offshore, leaving onshore companies with unrelenting, Darwinian pressure to come up with the next wave of innovation. But "innovation" is a broad term. There are many types, from the ballyhooed disruptive innovation to more mundane forms such as process and experiential, which might involve, respectively, doing such things as streamlining the supply chain and delighting customers with small product modifications. Many executives find it hard to decide which kind to focus on. The best way to choose is to consider the phases of a market's life span. In a market's earliest phase, a new technology attracts enthusiasts and visionaries. Eventually, the market reaches the Main Street section of its life, when growth slows, flattens, and finally subsides. Different types of innovation produce more bang for the buck at different points in the life cycle. Disruptive innovation, for example, is rewarded most during the earliest phase. Once the life cycle advances to Main Street, however, the marketplace is no longer willing to yield the revenue or margin gains necessary to fund that type of innovation, so other forms, including process and experiential, yield better returns. But attempts to change the company's direction are often thwarted by the inertia that success creates. To overcome the inertia demon, managers must introduce new types of innovation while aggressively extracting resources from legacy processes and organizations. By running the two efforts in parallel, they can defeat the demon and renew the company.