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A "reverse logistics" value chain strategy--what you do with goods your customers send back--can strengthen your company's competitiveness according to the authors of a recent article in the "Academy of Management Perspectives." Estee Lauder built a $250-million product line from returned cosmetics.

The CEO of the British Library explains how the United Kingdom's exclusive repository for rare books, manuscripts, and scientific papers has loosened up the design of its Business & IP Centre to encourage entrepreneurship and innovation.

Arresting thieves and investing in technology, the main approaches to retail loss prevention, haven't managed to diminish it over the past 15 years. A study of companies that have successfully reduced shrinkage uncovers nine practices behind their success, beginning with organizational and senior management commitment to making loss prevention a priority.

Recent neuroscientific research shows that the health of your brain isn't, as experts once thought, just the product of childhood experiences and genetics; it reflects your adult choices and experiences as well. Professors Gilkey and Kilts of Emory University's medical and business schools explain how you can strengthen your brain's anatomy, neural networks, and cognitive abilities, and prevent functions such as memory from deteriorating as you age. The brain's alertness is the result of what the authors call cognitive fitness--a state of optimized ability to reason, remember, learn, plan, and adapt. Certain attitudes, lifestyle choices, and exercises enhance cognitive fitness. Mental workouts are the key. Brain-imaging studies indicate that acquiring expertise in areas as diverse as playing a cello, juggling, speaking a foreign language, and driving a taxicab expands your neural systems and makes them more communicative. In other words, you can alter the physical makeup of your brain by learning new skills. The more cognitively fit you are, the better equipped you are to make decisions, solve problems, and deal with stress and change. Cognitive fitness will help you be more open to new ideas and alternative perspectives. It will give you the capacity to change your behavior and realize your goals. You can delay senescence for years and even enjoy a second career. Drawing from the rapidly expanding body of neuroscientific research as well as from well-established research in psychology and other mental health fields, the authors have identified four steps you can take to become cognitively fit: understand how experience makes the brain grow, work hard at play, search for patterns, and seek novelty and innovation. Together these steps capture some of the key opportunities for maintaining an engaged, creative brain.

Snowden and Boone have formed a new perspective on leadership and decision making that's based on complexity science. The result is the Cynefin framework, which helps executives sort issues into five contexts. Simple contexts are characterized by stability and cause-and-effect relationships that are clear to everyone. Often, the right answer is self-evident. In this realm of "known knowns," leaders must first assess the facts of a situation--that is, "sense" it--then categorize and respond to it. Complicated contexts may contain multiple right answers, and though there is a clear relationship between cause and effect, not everyone can see it. This is the realm of "known unknowns." Here, leaders must sense, analyze, and respond. In a complex context, right answers can't be ferreted out at all; rather, instructive patterns emerge if the leader conducts experiments that can safely fail. This is the realm of "unknown unknowns," where much of contemporary business operates. Leaders in this context need to probe first, then sense, and then respond. In a chaotic context, searching for right answers is pointless. The relationships between cause and effect are impossible to determine because they shift constantly and no manageable patterns exist. This is the realm of unknowables (the events of September 11, 2001, fall into this category). In this domain, a leader must first act to establish order, sense where stability is present, and then work to transform the situation from chaos to complexity. The fifth context, disorder, applies when it is unclear which of the other four contexts is predominant. The way out is to break the situation into its constituent parts and assign each to one of the other four realms. Leaders can then make decisions and intervene in contextually appropriate ways.

As the dust settles on the recent frenzy of private equity deals (including transactions topping $20 billion), what lessons can companies glean? Directors and executives of public companies may now be slightly less fearful of imminent takeover, yet the pressure remains: They face shareholders who wonder why they aren't getting private-equity-level returns. Rather than dismiss the value private equity has created as manipulated or aberrant, public company leaders should recognize the disciplined management that often underlies it. Pozen, a longtime leader in the financial services industry, finds that in the aftermath of buyouts, companies undergo five major thrusts of reform. These translate into five key questions that directors should pose to senior management: Have we left too much cash on our balance sheet instead of raising our cash dividends or buying back shares?; Do we have the optimal capital structure, with the lowest weighted after-tax cost of total capital, including debt and equity?; Do we have an operating plan that will significantly increase shareholder value, with specific metrics to monitor performance?; Are the compensation rewards for our top executives tied closely enough to increases in shareholder value, with real penalties for nonperformance?; Finally, does our board have enough industry experts who have made the time commitments and been given the financial incentives necessary to maximize shareholder value? The era of private equity is far from over--the top funds have become very large and are likely to play an influential role in future market cycles. Boards that ask these questions, and act on them, won't just beat the takeover artists to the punch. They will build stronger businesses.

In his interviews and data analysis, Harvard Business School professor Bower found that companies performed better when they appointed insiders to the job of CEO. Other researchers, including Jim Collins in "Good to Great," have come to similar conclusions working from different data sets. Yet Bower finds far too many companies are managed without leadership development as an objective; as a result, when the time comes to name a new chief executive, those firms turn to outsiders. Both insider and outsider CEOs have strengths and weaknesses at the start. Insiders know the company and its people but are often blind to the need for radical change. Outsiders see the need for a new approach but can't make the necessary changes because they don't know the organization or industry sector well enough. What companies must do, then, is find a way to nurture what Bower calls inside-outsiders--internal candidates who have outside perspective. Often such executives have spent much of their time away from the mainstream of the organization, and away from headquarters, living with new opportunities and threats. Before becoming CEO, Procter & Gamble's A.G. Lafley, for instance, worked for years building P&G's Chinese operation rather than the core detergent business. IBM's Sam Palmisano was a champion of software and open systems at a time when Big Blue was essentially a closed-system, hardware-oriented company. To groom potential leaders, a development process for inside-outsiders needs to be in place. Ideally by the time they are 30 a talented manager can be given the opportunity to manage a whole business, so that they become good insiders. But they also need to be mentored with an eye toward preserving their outsider perspective, so they learn how to turn their new ideas into great businesses and are protected from senior managers who believe out-of-the-box thinkers need a lesson.

Executing complex initiatives like acquisitions or an IT overhaul requires a breadth of knowledge that can be provided only by teams that are large, diverse, virtual, and composed of highly educated specialists. The irony is, those same characteristics have an alarming tendency to decrease collaboration on a team. What's a company to do? Gratton, a London Business School professor, and Erickson, president of the Concours Institute, studied 55 large teams and identified those with strong collaboration despite their complexity. Examining the team dynamics and environment at firms ranging from Royal Bank of Scotland to Nokia to Marriott, the authors isolated eight success factors: (1) "signature" relationship practices that build bonds among the staff, in memorable ways that are particularly suited to a company's business; (2) role models of collaboration among executives, which help cooperation trickle down to the staff; (3) the establishment of a "gift culture," in which managers support employees by mentoring them daily, instead of a transactional "tit-for-tat culture;" (4) training in relationship skills, such as communication and conflict resolution; (5) a sense of community, which corporate HR can foster by sponsoring group activities; (6) ambidextrous leadership, or leaders who are both task-oriented and relationship-oriented; (7) good use of heritage relationships, by populating teams with members who know and trust one another; (8) role clarity and task ambiguity, achieved by defining individual roles sharply but giving teams latitude on approach. As teams have grown from a standard of 20 members to comprise 100 or more, team practices that once worked well no longer apply. The new complexity of teams requires companies to increase their capacity for collaboration by making long-term investments that build relationships and trust, and smart near-term decisions about how teams are formed and run.

A price-benefit positioning map helps you see, through your customers' eyes, how your product compares with all its competitors in a market. You can draw such a map quickly and objectively, without having to resort to costly, time-consuming consumer surveys or subjective estimates of the excellence of your product and the shortcomings of all the others. Creating a positioning map involves three steps. First, define your market to include everything your customers might consider to be your product's competitors or substitutes. Second, track the price your customers actually pay (wholesale or retail? bundled or unbundled?) and identify what your customers see as your offering's primary benefit. This is done through regression analysis, determining which of the product's attributes (as described objectively by rating services, government agencies, R&D departments, and the like) explains most of the variance in its price. Third, draw the map by plotting on a graph the position of every product in the market you've selected according to its price and its level of primary benefit, and draw a line that runs through the middle of the points. What you get is a picture of the competitive landscape of your market, where all the products above the line command a price premium owing to some secondary benefit customers value, and all those below the line are positioned to earn market share through lower prices and reduced secondary benefits. Using examples as varied as Harley-Davidson motorcycles, Motorola cell phones, and the New York restaurant market, Tuck professor D'Aveni demonstrates some of the many ways the maps can be used: to locate unoccupied or less-crowded spaces in highly competitive markets, for instance, or to identify opportunities created through changes in the relationship between the primary benefit and prices. The maps even allow companies to anticipate--and counter--rivals' strategies.

Corporate alliances are growing in number--by about 25% a year--and account for up to a third of revenues and value at many companies. Yet some 60% to 70% of them fail. What is going wrong? Because alliances involve interdependence between companies that may be competitors and may also have vastly different operating styles and cultures, they demand more care and handling than other business arrangements, say Hughes and Weiss, management consultants at Vantage Partners. The authors have developed five principles--based on their two decades of work with alliances--to complement the conventional advice on alliance management: (1) Focus less on defining the business plan and more on how you and your partner will work together; (2) Develop metrics pegged not only to alliance goals but also to performance in working toward them; (3) Instead of trying to eliminate differences, leverage them to create value; (4) Go beyond formal systems and structures to enable and encourage collaborative behavior; and (5) Be as diligent in managing your internal stakeholders as you are in managing the relationship with your partner. Companies that have adopted these principles have radically improved their alliance success rate. Schering-Plough, for example, engages in a systematic "alliance relationship launch": four to six weeks of meetings at which the partners explore potential challenges, examine key differences and develop shared protocols for managing them, and establish mechanisms for day-to-day decision making. Blue Cross and Blue Shield of Florida measures the quality of alliance progress through regular surveys of both its own staff and its partners'. These companies have learned that the conventional advice is not so much wrong as incomplete. The five simple rules can help fill in the blanks.

Communication may not be on managers' minds at companies that design complex, highly engineered products, but it should be. When mistakes take place, it's often because product-component teams fail to talk. The consequences can be huge: Ford and Bridgestone Firestone lost billions by not coordinating the design of the Explorer with the design of its tires. The major delays and cost overruns involved in the development of Airbus's A380 "super jumbo"--which most likely led to the CEO's exit--were a result of unforeseen design incompatibilities. To help managers mitigate such problems, the authors present a new application of the design structure matrix, a project management tool that maps the flow of information and its impact on product development. Drawing on research into how Pratt & Whitney handled the development of the PW4098 jet engine, they have developed an approach that uncovers (a) areas where communication should be occurring but is not (unattended interfaces, usually bad) and (b) areas where communication is occurring but has not been planned for (unidentified interfaces, usually good). After finding the unattended and unidentified interfaces, the next step is to figure out the causes of the critical ones. If a significant number of unattended interfaces cross organizational boundaries, executives may need to redraw organizational lines. Executives can then manage the remaining critical interfaces by extending the responsibilities of existing integration teams (those responsible for cross-system aspects, such as a jet engine's fuel economy) to include supervising the interaction, by dedicating teams to specific interfaces, or by formally charging teams already involved with the interfaces to oversee them. Finally, it's important to ensure that the teams are working with compatible design equipment; inconsistencies between CAD tools have cost Airbus dearly.

As the demands of the workplace keep rising, many people respond by putting in ever longer hours, which inevitably leads to burnout that costs both the organization and the employee. Meanwhile, people take for granted what fuels their capacity to work--their energy. Increasing that capacity is the best way to get more done faster and better. Time is a finite resource, but energy is different. It has four wellsprings--the body, emotions, mind, and spirit--and in each, it can be systematically expanded and renewed. In this article, Schwartz and McCarthy of the Energy Project describe how to establish rituals that will build energy in the four key dimensions. For instance, harnessing the body's ultradian rhythms by taking intermittent breaks restores physical energy. Rejecting the role of a victim and instead viewing events through three hopeful lenses defuses energy-draining negative emotions. Avoiding the constant distractions that technology has introduced increases mental energy. And participating in activities that give you a sense of meaning and purpose boosts the energy of the spirit. The new workday rituals succeed only if leaders support their adoption, but when that happens, the results can be powerful. A group of Wachovia Bank employees who went through an energy management program outperformed a control group on important financial metrics like loans generated, and they reported substantially improved customer relationships, productivity, and personal satisfaction. These findings corroborated anecdotal evidence gathered about the effectiveness of this approach at other companies, including Ernst & Young, Sony, and Deutsche Bank. When organizations invest in all dimensions of their employees' lives, individuals respond by bringing all their energy wholeheartedly to work--and both companies and their people grow in value.

Since its founding, in 1995, Amazon.com's bold moves have often left observers scratching their heads, if not predicting the company's demise. Why open up an effective proprietary retail platform to competition from third-party sellers? Why make tools that Amazon developed for its own use available to other website developers? (Why, for that matter, post negative reviews of your products?) Two HBR editors interviewed Bezos, the founder and CEO, to learn what's different about strategy formulation at Amazon. They came away with the sense that the company's strategy and culture are rooted in a sturdy entrepreneurial optimism and rest on the single question of what's better for the customer. Bezos describes himself as "congenitally customer focused." He knows that the buyers in Amazon's consumer-facing business want selection, low prices, and fast delivery--and he's confident that won't change. "I can't imagine," he says, "that 10 years from now [our customers] are going to say, 'I love Amazon, but if only they could deliver my products a little more slowly.'" Competitor-focused companies risk complacency when they become industry leaders, he maintains, but customer-focused companies must always keep improving. "Years from now," Bezos says, "when people look back at Amazon, I want them to say that we uplifted customer-centricity across the entire business world." If Amazon has made strategic mistakes, he says, they have been errors of omission. So when something seems like an opportunity, Bezos asks the question, "Why not?" which leads to maximizing the number of experiments companywide: "People say, 'We're going to do this. We're going to figure out a way.'" That's the institutional yes.

They're nominally and ultimately responsible for strategy, but today's CEOs have less and less time to devote to it. As a result, CEOs are appointing "chief strategy officers" (CSOs)--executives specifically tasked with creating, communicating, executing, and sustaining a company's strategic initiatives. In this article, three authors from Accenture share the results of their research on this emerging organizational role. The typical CSO or top strategy executive is not a pure strategist, conducting long-range planning in relative isolation. Most CSOs consider themselves doers first, with the mandate, credentials, and desire to act as well as advise. They are seasoned executives with a strong strategy orientation who have usually worn many operations hats before taking on the role. Strategy executives are charged with three critical jobs that together form the very definition of strategy execution. First, they must clarify the company's strategy for themselves and for every business unit and function, ensuring that all employees understand the details of the strategic plan and how their work connects to corporate goals. Second, CSOs must drive immediate change. The focus of the job almost always quickly evolves from creating shared alignment around a vision to riding herd on the ensuing change effort. Finally, a CSO must drive decision making that sustains organizational change. He or she must be that person who, in the CEO's stead, can walk into any office and test whether the decisions being made are aligned with the strategy and are creating the desired results. When decisions below the executive suite aren't being made in accordance with strategy, much of the CSO's job involves learning why and quickly determining whether to stay the course or change tack.

According to the traditional view, judgment is an event: You make a decision and then move on. Yet Tichy, of the University of Michigan's Ross School of Business, and Bennis, of the University of Southern California's Marshall School of Business, found that good leadership judgment occurs not in a single moment but throughout a process. From their research into the complex phenomenon of leadership judgment, the authors also found that most important judgment calls reside in one of three domains: people, strategy, and crisis. Understanding the essence of leadership judgment is crucial. A leader's calls determine an organization's success or failure and deliver the verdict on his or her career. The first phase of the judgment process is preparation--identifying and framing the issue that demands a decision and aligning and mobilizing key stakeholders. Second is the call itself. And third is acting on the call, learning and adjusting along the way. Good leaders use a "story line"--an articulation of a company's identity, direction, and values--to inform their actions throughout the judgment process. Boeing CEO Jim McNerney, for instance, focused on a story line of Boeing as a world-class competitor and ethical leader to make a judgment call that launched the company's recovery from a string of ethical crises. Good leaders also take advantage of "redo loops" throughout the process, reconsidering the parameters of the decision, relabeling the problem, and redefining the goal in a way that more and more people can accept. Procter & Gamble's A.G. Lafley and Best Buy's Brad Anderson have both used redo loops--in preparation and execution, respectively--to strengthen not only support for their calls but also the outcomes.

Scientific advances have begun to give doctors the power to customize therapy for individuals. However, adoption of this approach has progressed slowly and unevenly because the trial-and-error treatment model still governs how the health care system develops, regulates, pays for, and delivers therapies. Aspinall, the president of Genzyme Genetics, and Hamermesh, chair of a Harvard Business School initiative to improve leadership in health care organizations, discuss the barriers to personalized medicine and suggest ways to overcome them. The blockbuster model for developing drugs, the authors point out, is still what most major pharmaceutical companies follow, even though its days are numbered. What the industry must embrace in its place is a business model based on a larger portfolio of targeted--and therefore more effective and profitable--treatments, not a limited palette of one-size-fits-all drugs. The current regulatory environment overemphasizes large-scale clinical trials of broad-based therapies. Instead, the focus should be on enrolling subpopulations, based on diagnostic testing, in trials of targeted drug treatments and on monitoring and assessing effectiveness after drugs are approved. A dysfunctional payment system complicates matters by rewarding providers for performance of procedures rather than for accurate diagnosis and effective prevention. Aspinall and Hamermesh call for coordinating regulation and reimbursement so that incentives are provided for the right outcomes. Finally, the authors urge changing physicians' habits through education about genomics, diagnostic testing, and targeted therapies. They say that medical schools and physician organizations must become committed advocates of personalized medicine so that patients and the medical industry can get all the benefits it offers.

Traditionally, markets have been viewed as simply the confluence of supply and demand. But to function properly, they must be able to attract a sufficient number of buyers and sellers, induce participants to make their preferences clear, and overcome congestion by providing both enough time to make choices and a speedy means of registering them. Solutions to these challenges are the province of market design--a blend of game theory and experimental economics. Roth, a professor of both business and economics at Harvard, is a leading market designer. He and his colleagues have rescued failing markets by, for example, designing labor clearinghouses through which U.S. doctors get their first jobs and auctions through which the Federal Communications Commission sells licenses for parts of the radio broadcast spectrum. They have also created market-like allocation procedures that involve neither prices nor an exchange of money; these include systems for assigning children to schools in Boston and New York and for facilitating exchanges of kidneys. Computers enable the design of "smart markets" that combine the inputs of users in complex ways: In kidney exchange, they run through every possible match of donors and recipients to arrange the greatest possible number of transplants. In the future, computers may make it possible to auction bundled goods, such as airport takeoff and landing slots. As online markets--like those for jobs and dating--proliferate, a growing understanding of markets in general will provide virtually limitless opportunities for market design.

Rory Stewart, a Scot in his 30s, left his career in the British Foreign Office to walk 6,000 miles across central Asia and then spent a year with the Coalition Provisional Authority (CPA), which temporarily ran Iraq after the U.S.-led invasion. In this edited conversation with HBR senior editor Lew McCreary, Stewart describes his stint as deputy governor of the Maysan and Dhi Qar provinces and other experiences that taught him to balance principled commitment with canny pragmatism. Without much direction from Baghdad, Stewart and the other CPA delegates tried to create conditions of relative stability, prepare the way for democratic institutions, and orchestrate a modicum of cooperation among tribal and ethnic factions. But Iraqi distrust, compounded by security conditions that went from bad to worse, made progress extremely difficult. As he faced these challenges, Stewart drew heavily on lessons from his trek, particularly from his time in Afghanistan. The nature of that journey had sharpened his senses. He'd learned to quickly size up people and situations, so when he joined the CPA, he showed ingenuity, flexibility, and uncommon insight into Arab cultures. Now back in Kabul, Stewart is the CEO of the Turquoise Mountain Foundation, a nongovernmental organization devoted to preserving the city's old commercial district, teaching vanishing artisan skills to young Afghans, and developing markets for Afghan crafts. Stewart's foundation aims to reclaim some of the glory of Kabul's heritage while giving purpose to lives that might otherwise drift toward anarchy or nihilism.

The customers who buy the most from you are probably not your best marketers. What's more, your best marketers may be worth far more to your company than your most enthusiastic consumers. Those are the conclusions of professors Kumar and Petersen at the University of Connecticut and professor Leone at Ohio State University, who analyzed thousands of customers in research focused on a telecommunications company and a financial services firm. In this article, the authors present a straightforward tool that can be used to calculate both customer lifetime value (CLV), the worth of your customers' purchases, and customer referral value (CRV), the value of their referrals. Knowing both enables you to segment your customers into four constituent parts: those that buy a lot but are poor marketers (which they term Affluents); those that don't buy much but are very strong salespeople for your firm (Advocates); those that do both well (Champions); and those that do neither well (Misers). In a series of one-year experiments, the authors demonstrated the effectiveness of this segmentation approach. Offering purchasing incentives to Advocates, referral incentives to Affluents, and both to Misers, they were able to move significant proportions of all three into the Champions category. Both companies reaped returns on their marketing investments greater than 12-fold--more than double the normal marketing ROI for their industries. The power of this tool is its ability to help marketers decide where to focus their efforts. Rather than waste funds encouraging big spenders to spend slightly more while overlooking the power of customer evangelists who don't buy enough to seem important, you can reap much higher rewards by nudging big spenders to make referrals and urging enthusiastic proponents of your wares to buy a bit more.

This is an MIT Sloan Management Review article. Drawing upon a wealth of data, informed experience, and expert opinion--from Thomas Friedman to Bjarne Stroustrup, from David Gelernter to Nicholas Carr -- the author builds a case that enterprise software in large organizations has not delivered on its promise to fully integrate and intelligently control complex business processes while remaining flexible enough to adapt to changing business needs. Instead, ERP systems--including both software applications and the data they process--are variegated patchworks, containing 50 or more databases and hundreds of separate software programs installed over decades and interconnected by idiosyncratic, Byzantine, and poorly documented customized processes. To manage this growing complexity, IT departments have grown substantially: Today's IT departments spend 70% to 80% of their budgets just trying to keep existing systems running. The research shows, says the author, that the typical IT structure is so dense and extensive that it's often a miracle that it works at all. Enterprise systems that were supposed to streamline and simplify business processes instead have brought high risks, uncertainty, and a deeply worrying level of complexity. Rather than agility, they have produced rigidity and unexpected barriers to change, a veritable glut of information containing myriad hidden errors, and a cloud of questions regarding their overall benefits. How did this happen? Rettig points to the inherent limitations in the nature of software, the costs of implementation, and the vagaries of data. Indeed, she offers, enterprise software may be just too complex to deliver on its promises. She also suggests that the next new thing--service-oriented architecture (SOA)--is not likely to fare much better, for many of the same reasons. There are no easy fixes, cautions Rettig, save a large dose of sobriety, clear-eyed analysis, and emphasis on simplicity and efficiency.