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Who wouldn't want loyal customers? Surely they should cost less to serve, they'd be willing to pay more than other customers, and they'd actively market your company by word of mouth, right? Maybe not. Careful study of the relationship between customer loyalty and profits plumbed from 16,000 customers in four companies' databases tells a different story. The authors found no evidence to support any of these claims. What they did find was that the link between customers and profitability was more complicated because customers fall into four groups, not two. Simply put: Not all loyal customers are profitable, and not all profitable customers are loyal. Traditional tools for segmenting customers do a poor job of identifying that latter group, causing companies to chase expensively after initially profitable customers who hold little promise of future profits. The authors suggest an alternative approach, based on well-established "event-history modeling" techniques, that more accurately predicts future buying probabilities. Armed with such a tool, marketers can correctly identify which customers belong in which category and market accordingly. The challenge in managing customers who are profitable but disloyal--the "butterflies"--is to milk them for as much as you can while they're buying from you. A softly-softly approach is more appropriate for the profitable customers who are likely to stay loyal--your "true friends." As for highly loyal but not very profitable customers--the "barnacles"--you need to find out whether they have the potential to spend more than they currently do. And, of course, for the "strangers"--those who generate no loyalty and no profits--the answer is simple: Identify early and don't invest anything.

Most organizations must change if they're to stay alive. Change is tough to accomplish, but it's not impossible and can be systematized. The author, who has been involved in change initiatives at scores of companies, believes that the success of such programs has more to do with execution than with conceptualization. The successful change programs he observed had one thing in common: They employed three distinct but linked campaigns--political, marketing, and military. A political campaign creates a coalition strong enough to support and guide the initiative. A marketing campaign must go beyond simply publicizing the initiative's benefits. It focuses on listening to ideas that bubble up from the field as well as on working with lead customers to design the initiative. A clearly articulated theme for the transformation program must also be developed. A military campaign deploys executives' scarce resources of attention and time. Successful executives launch all three campaigns simultaneously. The three always feed on one another, and if any one campaign is not properly implemented, the change initiative is bound to fail.

Like all primary care physicians, Dr. Bob Goldszer must stay on top of approximately 10,000 different diseases and syndromes, 3,000 medications, 1,100 laboratory tests, and many of the 400,000 articles added each year to the biomedical literature. That's no easy task. And it is, quite literally, a matter of life and death. The Institute of Medicine's 1999 report, To Err Is Human, suggests that more than a million injuries and 90,000 deaths are attributable to medical errors annually. Something like 5% of hospital patients have adverse reactions to drugs, another study reports, and of those, 43% are serious, life threatening, or fatal. Many knowledge workers have problems similar to Dr. Goldszer's (though they're usually less life threatening). No matter what the field, many people simply can't keep up with all they need to know. In the early years of knowledge management, companies established knowledge networks and communities of practice, built knowledge repositories, and attempted to motivate people to share knowledge. But each of these activities involved a great deal of additional labor for knowledge workers. A better approach, say the authors, is to bake specialized knowledge into the jobs of highly skilled workers. Partners HealthCare has started to embed knowledge into the technology that doctors use in their jobs so that consulting it is no longer a separate activity. Now when Dr. Goldszer orders medicine or a lab test, the order-entry system automatically checks his decision against a massive clinical database as well as the patient's own medical record. Knowledge workers in other fields could likewise benefit from a just-in-time knowledge-management system tailored to deliver the right supporting information for the job at hand.

Take a look at this list of corporate values: Communication. Respect. Integrity. Excellence. They sound pretty good, don't they? Maybe they even resemble your own company's values. If so, you should be nervous. These are the corporate values of Enron, as claimed in its 2000 annual report. And they're absolutely meaningless. Indeed, most values statements, says the author, are bland, toothless, or just plain dishonest. And far from being harmless, as some executives assume, they're often highly destructive. Empty values statements create cynical and dispirited employees and undermine managerial credibility. But coming up with strong values - and sticking to them - isn't easy. Organizations that want their values statements to really mean something should follow four imperatives. First, understand the different types of values: core, aspirational, permission-to-play, and accidental. Confusing them with one another can bewilder employees and make management seem out of touch. Second, be aggressively authentic. Too many companies view a values initiative in the same way they view a marketing launch: a onetime event measured by the initial attention it receives, not by its content. Third, own the process. Values initiatives are about imposing a set of fundamental, strategically sound beliefs on a broad group of people. That's why the best values efforts are driven by small teams. Finally, weave core values into everything. It's not enough to hang your values statement on the wall; it must be integrated into every employee-related process - hiring methods, performance management systems, even dismissal policies. Living by stated corporate values is difficult. But the benefits of doing so can be profound; so can the damage from adopting a hollow set of corporate values.

This is an MIT Sloan Management Review article. In an often overemphasized focus on efficiency, many companies turn to packaged information technology systems to manage business processes. University of Michigan Business School professors C.K. Prahalad and M.S. Krisnhan suggest they should be more concerned with strategy--and getting line managers and IT managers to use information systems in ways that facilitate strategic change. A new applications-portfolio scorecard helps managers assess information infrastructure before making investments. Six key considerations are: each IT application's role in strategy, whether the knowledge embodied in the application (say, salaries in a payroll application) is stable or evolving, how much change will be needed, where the application will be sourced, whether the data are proprietary or public, and the application's freedom from conformance defects. Those parameters differ for different functions. Only those companies that deeply analyze what they need from each IT application will acquire the right portfolio. The authors' work with 500 executives reveals that few managers believe their information infrastructure can handle the pressures from deregulation, globalization, ubiquitous connectivity, and the convergence of industries and technologies. Though fully aware their organizations lack rapid-response capability or flexibility, the managers rarely knew how to fix the disconnection between the quality of IT infrastructures and the need for strategic change. Considering that information-infrastructure expenditures are generally 2% to 8% of companies' revenues, new measures to address the disconnection are essential. A corresponding change in the mind-sets and skill sets of smart line managers and IT managers also helps improve overall competitiveness.

This is an MIT Sloan Management Review article. Why do your customers choose to buy from you rather than from your competition? For the past three years, marketing professors Mark Vandenbosch and Niraj Dawar have posed that question to more than 1,500 senior executives in interviews and group discussions. And despite the vast range of industries represented by the executives they probed, the responses they got were remarkably similar: Customers often value how they interact with their suppliers as much or more than what they actually buy. As the main drivers of customer choice, the executives cited cost-oriented factors such as convenience, ease of doing business, and product support and risk-oriented factors such as trust, confidence, and the strength of relationships. Strategies built around reducing customers' interaction costs and risk offer a systematic way to tap into new sources of customer value while avoiding the often futile attempt to compete on product innovation. The authors illustrate five different strategies that some companies are using to build a sustainable advantage.

This is an MIT Sloan Management Review article. When companies first plunged into e-commerce, they thought success meant cutting out middlemen. That approach didn't work, in part because e-businesses misunderstood the role of intermediaries. Middlemen are not costly, necessary evils. They solve problems for customers and, in so doing, enable sales and create value for producers. INSEAD's Philip Anderson and Erin Anderson show how intermediaries are helping smart companies realize the promise of the Web. They explain intermediaries' nine ways of adding value, suggesting that three will change, three will survive in a new form, and three (reducing uncertainty about quality, preserving customer anonymity, and tailoring offerings to customer needs) present growth opportunities. Middlemen can co-opt the Internet by offering services that would be too difficult for individual producers to provide. However, the authors caution, intermediaries must be open to new ways of doing business with suppliers and vice versa. The Web transforms but does not eliminate the advantages of the middleman's central lookout position. But what was once thought of as a straight distribution channel from supplier through middleman to customer is now more accurately described as a service hub. The player that takes the customer order--possibly a Web site--occupies the center and interacts with many partners. The authors specify appropriate, fair incentives (for example, Ethan Allen's quasi-independent furniture stores that customers browse before buying directly from the manufacturer's Web site automatically receive a 10% tip). And they describe service-hub management that will generate enough trust to permit producers to get closer to customers--indirectly.

This is an MIT Sloan Management Review article. In recent years, the need to develop next-generation leaders--people who can translate strategy into results and core values into day-to-day behaviors--has become the paramount challenge for many CEOs and their top teams. Yet, most executives admit that they are failing at the effort. For more than a decade, Douglas A. Ready, founder of the Massachusetts-based International Consortium for Executive Development Research, has led a series of large-scale studies to identify the most pressing leadership development challenges in more than 40 global companies. He has found that storytelling by a company's senior executives is a powerful way of developing new leaders. In a corporate setting, storytelling is hard work that requires careful planning and preparation; it does not involve "winging it" or telling war stories about past successes. Identifies and explains the five ingredients of effective stories and presents a case study. Outlines how top teams can implement a storytelling leadership program.

This is an MIT Sloan Management Review article. The product development process is often seen as an undependable black box that rarely produces results that exceed business expectations. Traditional financial models have limited success exposing the numerous product development risks that underlie the assumptions in a typical business case. Applying the same rules to development as they do to research, managers often accept unpredictable performance as normal. Most companies' evaluation and approval processes are driven by accounting-based metrics such as discounted cash flow or net present value (NPV) that make understanding the underlying risks of development difficult for decision makers. When risk is discussed in the business case, technology uncertainty is often confused with product development risk, and the narrative discussion of risk is designed more to persuade than inform. In this environment, decision makers are often hard-pressed to evaluate the potential commercial success of the new product development investment. With an approach called "net present value, risk-adjusted," author Craig R. Davis, CFO of product development consulting firm Product Genesis, offers an operational framework that gives decision makers quantitative tools to evaluate relative project risks. He shows how to integrate these tools into existing stage-gate methodologies to create a risk-adjusted NPV that considers the impacts of product portfolio, user needs, and technical and marketing risks. The framework also provides insights into the value of additional research in advance of full commitment to development. The framework provides a vocabulary appropriate for complex technology products in medical, commercial, and industrial products but is easily adapted to the unique terms, methods, and measures for each risk assessment area.

Why is it that two firms can use the Internet in the same way (e.g., to reach new customers) and achieve very different outcomes? How can firms better allocate and subsequently leverage the investments they make in Internet technologies? This article shows that e-commerce technologies cannot be successfully leveraged without considering the organizational relationships in which the technologies are being embedded. By properly matching the B2B context with Internet technologies, firms can be in a better position not only to achieve significant economic outcomes, but also to attain sustainable competitive advantages, improve coordination and collaboration processes, and decrease channel resistance.

This study profiles the changing demographics and unique consumption patterns of the African-American consumer segment of the financial services market. When it comes to the selection and purchase of financial products and services, African-American consumers differ markedly from their white counterparts. This is especially apparent in the case of relatively high-risk, high-return financial assets, resulting in a diminished rate of wealth accumulation over time in African-American households. This article offers suggestions to marketers seeking to render more effective service to this attractive and growing segment of the financial services marketplace. For example, promotional materials should reflect the key role of African-American women in determining household consumption patterns. Moreover, successful marketing to African-American households requires a strong educational component.

In both the business press and academic journals, corporate leadership typically is portrayed as a solo activity, the responsibility of one person at the top of an organizational hierarchy. However, evidence shows that shared leadership is not only common in the corporate world, it is often more effective than the storied "one-man shows." Ongoing research at the University of Southern California's Center for Effective Organizations pinpoints several factors needed to make joint leadership a success. Where two--or more--individuals share leadership, it turns out that making the arrangement work is more complicated than simply "divvying up the tasks." For example, sharing the limelight seems harder than sharing responsibility.

The Roman Republic embraced a system of co-leadership that thrived for over four centuries before dissolving into the dictatorship of the Empire. Many modern firms are evolving in the opposite direction, as sole leadership structures are replaced or augmented by shared leadership. This modern evolution has been prompted by the increasing prevalence of job sharing and teams in the workplace, joint leadership in the family, and complex technology and massive mergers in the marketplace. This article identifies ten key lessons that the republicans of Rome understood and that are extremely relevant for the modern organization attempting to institute or sustain co-leadership. These ten lessons find parallels in the successes and failures of co-leadership at such firms as Goldman Sachs, Citigroup, Unilever, and DaimlerChrysler.

Based on a survey of 317 firms and in-depth cases on 6 firms, this article examines the management of the most intangible asset of the firm--its knowledge. This article examines the sources, uses, and outcomes of knowledge and shows how successful firms acquire and absorb more information and know-how. More importantly, these firms have more effective decision-making processes that enable them both to create new knowledge and to apply this knowledge to generating more innovation in products and processes. Greater levels of innovation, in turn, lead to improved market and financial performance. This article identifies eight key lessons for knowledge managers and demonstrates how rather than attempting to manage knowledge, firms should measure the change in the innovative outputs that arise from their knowledge management strategies and practices.

You can learn a lot from closely observing a business committed to excellent customer service; you can learn even more from actually trying to provide that service. Paul Hemp, an HBR senior editor, spent a week being trained and then working as a room-service waiter at Ritz-Carlton's Boston Common hotel. His tale, though sometimes humbling, offers lessons that managers in any service business might use to improve employee-customer interactions. The author first participated in a two-day orientation program at the Ritz-Carlton, which gave him a chance to learn how the company inculcates its service philosophy in new employees. Upon completion of the program, he went to work, first with a veteran room-service waiter at his side, then on his own. His aim was to put into practice the Ritz-Carlton service precepts, including its motto: "We are Ladies and Gentlemen serving Ladies and Gentlemen." The author draws a number of conclusions from his experiences. Great service, he finds, should be based on dynamic principles rather than rigid formulas. Also, managers can build employees' emotional commitment to their jobs by emphasizing company traditions. Such commitment serves as a driver of excellent customer service only when employees are empowered to take initiative. And that empowerment has no potency unless employees are motivated to seize it. This depends in part on the kind of people you hire. For one thing, job candidates should exhibit not only concern for others but also genuine empathy--the ability to get inside customers' heads and anticipate their needs and desires.

Let's face it, to lead is to live dangerously. Although leadership is often viewed as an exciting and glamorous endeavor, one in which you inspire others to follow you through good times and bad, such a portrayal ignores leadership's dark side: the inevitable attempts to take you out of the game. This is particularly true when a leader must steer an organization through difficult change. When the status quo is upset, people feel a sense of profound loss and dashed expectations. They may need to undergo a period of feeling incompetent or disloyal. It's no wonder they resist the change and often try to eliminate its visible agent. This "survival guide" offers a number of techniques--relatively straightforward in concept but difficult to execute--for protecting yourself as you lead such a change initiative. Adapted from the book Leadership on the Line: Staying Alive Through the Dangers of Leading (Harvard Business School Press, 2002), the article has two main parts. The first looks outward, offering tactical advice about relating to your organization and the people in it. It is designed to protect you from those who would push you aside before you complete your initiatives. The second looks inward, focusing on your own needs and vulnerabilities. It is designed to keep you from bringing yourself down. The hard truth is that it is not possible to experience the rewards and joys of leadership without experiencing the pain as well. But staying in the game and bearing that pain is worth it, not only for the positive changes you can make in the lives of others but also for the meaning it gives your own.

Few companies have a clear strategic vision. The problem, say the authors, stems from the strategic-planning process itself, which usually involves preparing a large document, culled from a mishmash of data provided by people with conflicting agendas. That kind of process almost guarantees an unfocused strategy. Instead, companies should design the strategic-planning process by drawing a picture: a strategy canvas. A strategy canvas shows the strategic profile of your industry by depicting the various factors that affect competition. And it shows the strategic profiles of your current and potential competitors as well as your own company's strategic profile--how it invests in the factors of competition and how it might in the future. The basic component of a strategy canvas--the value curve--is a tool the authors created in their consulting work and have written about in previous HBR articles. This article introduces a four-step process for actually drawing and discussing a strategy canvas. Readers will learn how one European financial services company used this process to create a distinct and easily communicable strategy. The process begins with a visual awakening. Managers compare their business's value curve with competitors' to discover where their strategy needs to change. In the next step--visual exploration--managers do field research on customers and alternative products. At the visual strategy fair, the third step, managers draw new strategic profiles based on field observations and get feedback from customers and peers about these new proposals. Once the best strategy is created from that feedback, it's time for the last step--visual communication. Executives distribute "before" and "after" strategic profiles to the whole company, and only projects that will help move the company closer to the "after" profile are supported.

A personal coach to help your most promising executives reach their potential--sounds good, doesn't it? According to Steven Berglas, executive coaches can make a bad situation worse. Because of their backgrounds and biases, they ignore psychological problems they don't understand. Companies need to consider psychotherapeutic intervention when the symptoms plaguing an executive are stubborn or severe. Executives with issues that require more than coaching come in many shapes and sizes. Consider Rob Bernstein, an executive vice president of sales at an automotive parts distributor. According to the CEO, Bernstein had just the right touch with clients but caused personnel problems inside the company. The last straw came when Bernstein publicly humiliated a mail clerk who had interrupted a meeting to ask someone to sign for a package. At that point, the CEO assigned Tom Davis to coach Bernstein. Davis, a former corporate lawyer, worked with Bernstein for four years. But Davis only exacerbated the problem by teaching Bernstein techniques for "handling" employees--methods that were condescending at best. Although Bernstein appeared to be improving, he was in fact getting worse. Bernstein's real problems went undetected, and when his boss left the company, he was picked as the successor. Soon enough, Bernstein was again in trouble, suspected of embezzlement. This time, the CEO didn't call Davis; instead, he turned to the author, a trained psychotherapist, for help. Berglas soon realized that Bernstein had a serious narcissistic personality disorder and executive coaching could not help him. As that tale and others in the article teach us, executives to be coached should at the very least first receive a psychological evaluation. And company leaders should beware that executive coaches given free rein can end up wreaking personnel havoc.

The most successful private-equity firms regularly spearhead dramatic business transformations, creating exceptional returns for their investors. To understand how those firms do it, the authors studied more than 2,000 PE transactions over the past 10 years and discovered that the top performers' success stems from the rigor with which they manage their businesses. This article describes the 4 management disciplines vital to the success of the best PE firms. First, for each business, they define an investment thesis: a brief, clear statement of how to make the business more valuable within 3 to 5 years. The thesis, which guides all actions by the company, usually focuses on growth. PE firms know that the demonstration of a path to strong growth produces the big returns on investment. Second, they don't measure too much. They zero in on a few financial indicators that most clearly reveal the business's progress in increasing its value. They watch cash more closely than earnings and tailor performance measures to each business, rather than impose 1 set of measures across their entire portfolio. Third, they work their balance sheets, mining undervalued assets, turning fixed assets into sources of financing, and aggressively managing their physical capital. Last, they make the center the shareholder. Corporate staffs in PE firms make unsentimental investment decisions, buying and selling businesses when the price is right and bringing in new management when performance falters. These firms also keep their corporate centers extremely lean. By adopting these four disciplines, executives at public companies should be able to reap significantly greater returns from their own business units.

Managers invariably use their personal contacts when they need to, say, meet an impossible deadline or learn the truth about a new boss. Increasingly, it's through these informal networks--not just through traditional organizational hierarchies--that information is found and work gets done. But to many senior executives, informal networks are unobservable and ungovernable--and, therefore, not amenable to the tools of management. As a result, executives tend to work around informal networks or, worse, try to ignore them. When they do acknowledge the networks' existence, executives fall back on intuition--scarcely a dependable tool--to guide them in nurturing this social capital. It doesn't have to be that way. It is entirely possible to develop and manage informal networks systematically, say management experts Cross and Prusak. Specifically, senior executives need to focus their attention on four key role-players in informal networks: Central connectors link most employees in an informal network with one another; they provide the critical information or expertise that the entire network draws on to get work done. Boundary spanners connect an informal network with other parts of the company or with similar networks in other organizations. Information brokers link different subgroups in an informal network; if they didn't, the network would splinter into smaller, less effective segments. And finally, there are peripheral specialists, who anyone in an informal network can turn to for specialized expertise but who work apart from most people in the network. The authors describe the four roles in detail, discuss the use of a well-established tool called social network analysis for determining who these role-players are in the network, and suggest ways that executives can transform ineffective informal networks into productive ones.