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The rise of the computer and the increasing importance of intellectual assets have compelled executives to examine the knowledge underlying their businesses and how it is used. Because knowledge management as a conscious practice is so young, however, executives have lacked models to use as guides. To help fill that gap, the authors recently studied knowledge management practices at management consulting firms, health care providers, and computer manufacturers. They found two very different knowledge management strategies in place. In companies that sell relatively standardized products that fill common needs, knowledge is carefully codified and stored in databases, where it can be accessed and used--over and over again--by anyone in the organization. The authors call this the codification strategy. In companies that provide highly customized solutions to unique problems, knowledge is shared mainly through person-to-person contacts; the chief purpose of computers is to help people communicate. They call this the personalization strategy. A company's choice of knowledge management strategy is not arbitrary--it must be driven by the company's competitive strategy. Emphasizing the wrong approach or trying to pursue both can quickly undermine a business. The authors warn that knowledge management should not be isolated in a functional department like HR or IT. They emphasize that the benefits are greatest--to both the company and its customers--when a CEO and other general managers actively choose one of the approaches as a primary strategy.

The theory of complexity, which began as a way to understand complicated natural phenomena, has attracted growing attention in business circles interested in the new economy. In Open Boundaries, Howard Sherman and Ron Schultz of the Santa Fe Center for Emerging Strategies see many parallels between complex natural systems and markets. Both involve so many intricate interactions that outcomes cannot be predicted. The authors advise managers to stop trying to plan and prepare for change and instead build companies into self-organizing teams ready to adapt to whatever opportunities emerge. Thomas Hout of the Boston Consulting Group finds much that is useful in complexity theory, particularly for turbulent industries. But there are limits to the pursuit of flexibility and self-organization, he argues. Flexible, information-driven companies may be too quick to jump at superficially attractive market opportunities that their seasoned rivals wisely shun. And teams, for all their virtues, can't entirely manage themselves. The combination of fast-growing entrepreneurial companies and smart, mobile, ambitious workers creates a workplace that may actually be more fragile than its industrial predecessors. Solutions to workplace problems are more likely to come from good managers than from the teams themselves. Hout also points out that most businesses do not move so fast that foresight, commitment, preemption, deterrence, and other traditional strategic elements no longer build business value. Even in the fastest industries, good managers can still add value by creating the right working conditions to spur creativity. In other words, management still matters a lot, Hout says, even in the new economy.

A gap has existed between the conventional wisdom about how managers work and the actual behavior of effective managers. Business textbooks suggest that managers operate best when they carefully control their time and work within highly structured environments, but observations of real managers indicate that those who spend their days that way may be undermining their effectiveness. In this HBR Classic, John Kotter explains that managers who limit their interactions to orderly, focused meetings actually shut themselves off from vital information and relationships. He shows how seemingly wasteful activities like chatting in hallways and having impromptu meetings are, in fact, quite efficient. General managers face two fundamental challenges: figuring out what to do despite an enormous amount of potentially relevant information, and getting things done through a large and diverse set of people despite having little direct control over most of them. To tackle these challenges, effective general managers develop flexible agendas and broad networks of relationships. Their agendas enable them to react opportunistically to the flow of events around them because a common framework guides their decisions about where and when to intervene. And their networks allow them to have quick and pointed conversations that give the general managers influence well beyond their formal chain of command. Originally published in 1982, the article's ideas about time management are all the more useful for today's hard-pressed executives. Kotter has added a retrospective commentary highlighting the article's relevance to current concepts of leadership.

As the stock market began its ascent in the mid-1990s, executive pay--always the subject of heated debate--mounted along with it. That's because among the largest U.S. companies, stock options now account for more than half of total CEO compensation and about 30% of senior operating managers' pay. One problem became particularly clear during the bull market's astonishing run: even below-average performers reap huge gains from stock options when the market is rising rapidly. The author proposes steps to close the gap between existing compensation practices and those needed to promote higher levels of achievement at all levels of the corporation. For top managers, he recommends replacing conventional stock options with options that are tied to a market or peer index. Below-average performers would not be rewarded under such plans; superior performers could, depending on the way plans were structured, receive even more. He notes that managers at the business unit level should not be judged on the company's stock price--over which they have little control--and advocates an approach that accurately measures the value added by each unit. Finally, he suggests how certain indicators of value can be used to measure the contribution of frontline managers and employees. The concept of pay for performance has gained wide acceptance, but the link between incentive pay and superior performance is still too weak. Reforms must be adopted at all levels of the organization. Shareholders will applaud changes in pay schemes that motivate companies to deliver more value.

What happens when the world is changing but your organization isn't? And what if that organization has 340,000 employees in 200 countries? In this interview, Jacques Nasser, the new CEO of Ford Motor Company, talks with HBR senior editor Suzy Wetlaufer about these challenges and explains how his company is overcoming them through a unique education program. Since its very beginnings, says Nasser, Ford has comprised dozens of far-flung divisions and units, each with its own "fiefdom" mind-set. The fiefdoms didn't share information, let alone great ideas. Such behavior stifled creativity and drove up costs. Today's global environment demands a new and different way of doing business, says Nasser, and to that end, Ford has launched a multifaceted teaching initiative that will reach every one of Ford's employees by year-end. The goal of the program: to help employees view the company in its entirety as shareholders do, and then act that way, too. At the heart of the initiative is the teachable point of view, a five-part written explanation of what a person knows and believes about what it takes to succeed in business. It is more than just a document to be discussed and then filed. It has proven to be a powerful tool for organizational transformation, and not only at Ford. In a commentary accompanying Nasser's interview, Noel Tichy, leadership expert and consultant to Ford, describes the building blocks of the teachable point of view and explores how it can be implemented in any organization determined to change for the better.

In the global economy, having a workforce that is fluent in the ways of the world is a competitive necessity. That's why more and more companies are sending more and more professionals abroad. But international assignments don't come cheap: on average, expatriates cost a company two to three times what they would cost in equivalent positions back home. Most companies, however, get anemic returns on their expat investments. The authors discovered that an alarming number of assignments fail in one way or another--some expats return home early, others finish but don't perform as well as expected, and many leave their companies within a year of repatriation. To find out why, the authors recently focused on the small number of companies that manage their expats successfully. They found that all those companies follow three general practices: 1) When they send people abroad, the goal is not just to put out fires. Once expats have doused the flames, they are expected to generate new knowledge for the organization or to acquire skills that will help them become leaders. 2) They assign overseas posts to people whose technical skills are matched or exceeded by their cross-cultural skills. 3) They recognize that repatriation is a time of upheaval for most expats, and they use a variety of programs to help their people readjust. Companies that follow these practices share a conviction that sustained growth rests on the shoulders of individuals with international experience. As a result, they are poised to capture tomorrow's global market opportunities by making their investments in international assignments successful today.

In today's competitive markets, every company has an action plan. Yet for most managers, the processes used to create these plans don't work. The root of the problem, suggests Campbell, may be that too many companies benchmark their processes and by doing so, prevent managers from focusing on what is unique to their situation. Good planning processes, the author argues, are not generic processes but ones in which both analytic techniques and organizational processes are carefully tailored to the needs of individual businesses and to the skills of corporate managers. The author cites examples of three companies that have successfully individualized their processes: Granada, Dow Chemical Company, and Emerson Electric. A mature electrical-products business such as Emerson, he says, has different planning needs than a fast-growing entertainment business like Granada or a highly cyclical chemicals business like Dow. Different chief executives may have different insights about how to go about adding value. Take the CEOs of Granada and Dow. Both set tough targets to stretch their businesses, but the way each CEO gets his managers to commit to his targets differs considerably. Bad planning can actively destroy value, the author says. It wastes people's time and money. It sends the wrong signals to managers. It can even lead managers to follow bad advice. That's why managers should go to the effort of reexamining and possibly changing their company's planning process.

The accounting construct known as Economic Value Added (EVA) has met with growing interest, and is described by some as the real key to creating wealth. The main argument proposed in favor of EVA over ROA is that the former will encourage managers to undertake desirable investments that the latter would discourage. But EVA, like any numbers derived from a firm's accounting system, can be affected by the methods used in determining operating income and asset values. A series of examples illustrate how accounting method choice can heavily influence reported EVA, and that alleged distortions caused by a particular accounting procedure may make matters worse rather than better.

The goal of strategy is clear--to increase shareholder value. But in volatile markets, it's difficult to predict how a particular investment will affect a company's value. In this article, Martha Amram, a partner with the consultancy Onward Inc., and Nalin Kulatilaka, a professor at Boston University's School of Management, explain how managers can draw on the frameworks and information of the financial markets to make better, more sure-footed strategic investments. The financial markets are adept at calculating the value of an investment under uncertain conditions--exactly the challenge faced by business strategists. By applying the discipline of the markets, executives can avoid basing important decisions on subjective judgments about the future. The application of market discipline to strategy involves three components. First, the decision is framed in terms of the real options it creates. Second, in evaluating an investment, all the relevant information on value and risk available in the financial markets is taken into account. Third, actual financial transactions are used, when appropriate, to acquire options or otherwise mitigate risk. In a series of cases, the authors show how applying market discipline can help illuminate a range of common business decisions--whether to add production capacity, or to invest in a new venture, or to upgrade an information system, for example. By providing disciplined insight into the uncertainty present in all markets, the real-options approach lets executives think more clearly and realistically about complex and risky strategic decisions.

American institutions of higher learning have long played a disproportionate role in supplying leadership talent to the world's business and professional organizations. New research by William Bowen and Derek Bok, former presidents of Princeton and Harvard respectively, suggests that the experience of these institutions can provide insight on how to create diverse organizations that succeed. The first insight has to do with clarity of mission. It is not enough to pursue diversity because it is "the right thing to do." The second insight concerns recruiting. The authors challenge what they call "the myth of pure merit," the notion that recruiting is a precise science based only on grades and test scores. Instead, they argue, merit is about assembling a team by deciding which applicants, considered individually and collectively, will contribute most to achieving the company's goals. The third insight concerns how organizations help employees perform to their potential. Of the factors contributing to high graduation rates at the most selective schools, higher expectations and the efforts of mentors stand out as most important. Finally, the fourth insight is about how to achieve accountability in a corporate setting. Boards must ask: Are our recruiting policies working? and How are recruited employees doing? While the authors' research was intended specifically to inform the debate over race in higher education, here the authors report on their findings, and with the help of Glenda Burkhart, a corporate executive working with them, they draw out the major lessons for business leaders. Ray Gilmartin, the CEO of Merck, discusses diversity initiatives at his company in light of the research.

In the last decade or so, technological changes--mainly voice mail and e-mail--have made a lot of face-to-face interaction unnecessary. Face-to-face contact has also fallen victim to "virtuality"--many people work at home or are otherwise off-site. Indeed, most people today can't imagine life without such technology and the freedom it grants. But Edward Hallowell, a noted psychiatrist who has been treating patients with anxiety disorders--many of them business executives--for more than 20 years, warns that we are in danger of losing what he calls the human moment: an authentic psychological encounter that can happen only when two people share the same physical space. And, he believes, we may be about to discover the destructive power of its absence. The author relates stories of business people who have dealt firsthand with the misunderstandings caused by an overreliance on technology. An e-mail message is misconstrued. Someone forwards a voice-mail message to the wrong people. A person takes offense because he was not included on a certain circulation list. Was it an accident? Often the consequences of such misunderstandings, taken individually, are minor. Over time, however, they take a larger toll--both on individuals and on the organizations they work for. The problem, however, is not insoluble. The author cites examples of people who have worked successfully to restore face-to-face contact in their organizations. The bottom line is that the strategic use of the human moment adds color to our lives and helps us build confidence and trust at work. We ignore it at our peril.

Most companies focus on matching and beating their rivals. As a result, their strategies tend to take on similar dimensions. What ensues is head-to-head competition based largely on incremental improvements in cost, quality, or both. The authors, Chan Kim and Renee Mauborgne from INSEAD, have studied how innovative companies break free from the competitive pack by staking out fundamentally new market space--that is, by creating products or services for which there are no direct competitors. This path to value innovation requires a different competitive mind-set and a systematic way of looking for opportunities. Instead of looking within the conventional boundaries that define how an industry competes, managers can look methodically across them. By so doing, they can find unoccupied territory that represents real value innovation. Rather than looking at competitors within their own industry, for example, managers can ask why customers make the trade-off between substitute products or services. Home Depot, for example, looked across the substitutes serving home improvement needs. Intuit looked across the substitutes available to individuals managing their personal finances. In both cases, powerful insights were derived from looking at familiar data from a new perspective. Similar insights can be gleaned by looking across strategic groups within an industry; across buyer groups; across complementary product and service offerings; across the functional-emotional orientation of an industry; and even across time. To help readers explore new market space systematically, the authors developed a tool, the value curve, that can be used to represent visually a range of value propositions.

The current worldwide economic crisis illustrates how global the economy has become. But are global markets creating globally minded companies? Bruce Kogut, a professor of management at the Wharton School of Business, answers this question in his review of The Myth of the Global Corporation. The book, written by Paul N. Doremus, William W. Keller, Louis W. Pauly, and Simon Reich, argues that multinational corporations are still heavily influenced by the characteristics of their home country. It focuses on differences in corporate governance and research and development, and it finds that multinational companies are generally not accessing a global technology base. Kogut agrees that these and other national differences remain a steep hurdle in the way of creating a corporate strategy, but he says they do not imply that national differences are actually undermining the global competitiveness of multinational companies. As goods and people move freely across borders, companies are increasingly able to compete on a worldwide basis without straying far from headquarters. And when countries open up to international trade and investment, the theory of comparative advantage indicates that their companies tend to specialize in whatever the country of operation does best. This specialization can actually strengthen national differences, not weaken them. In this new environment, Kogut says, managers and other leaders face a difficult balancing act. They must meet the demands for global convergence in economic institutions while supporting the national policies that undergird a nation's distinctive competitiveness.

The idea of one-to-one marketing (also called "relationship marketing") is simple: accommodating a customer based on your knowledge of that customer, as well as the customer's input. This Manager's Tool Kit includes exhibits designed to help managers understand one-to-one marketing and provide guidance for those who may be interested in implementing their program. One-to-one marketing promises to increase the value of your customer base by establishing a learning relationship with each customer. Although the theory behind one-to-one marketing is simple, implementation is complex. The authors offer practical advice for implementing a one-to-one marketing program correctly. They describe four key steps: identifying your customers, differentiating among them, interacting with them, and customizing your product or service to meet each customer's needs. This tool kit will help you determine what type of program your company can implement now, what you need to do to position your company for a large-scale initiative, and how to set priorities.

In this article, William P. Ryan, a Cambridge-based consultant to foundations and nonprofit organizations, examines how nonprofits need to adapt to the new competitive environment. For most of this century, society's caring functions have been the work of government and charities. But social services in the United States are in a period of transition. Today the U.S. government no longer considers nonprofits to be entitled--or even best qualified--to provide social services. Profit-seeking companies like Lockheed Martin are now winning contracts for such services. The author describes how government outsourcing and a new business mind-set have changed the landscape of social services. The change raises fundamental questions about the mission and future of nonprofits. Ryan attributes the growth of for-profits in the social service industry to four factors: size, capital, mobility, and responsiveness. While those attributes give for-profits an advantage in acquiring new contracts, nonprofits have not yet lost their foothold. Ryan cites examples of organizations like the YWCA and Abraxas to demonstrate various ways that nonprofits are responding--from subcontracting to partnership to outright conversion to for-profit status. By playing in the new marketplace, nonprofits will be forced to reconfigure their operations and organizations in ways that could compromise their missions. Because nonprofits now find themselves sharing territory with for-profits, sometimes as collaborators and sometimes as competitors, the distinctions between these organizations will continue to blur. The point, Ryan argues, is not whether nonprofits can survive opposition from for-profits. Many have already adjusted to the new competitive environment. The real issue is whether nonprofits can adapt without compromising the qualities that distinguish them from for-profit organizations.

The topic of empowerment is receiving a lot of attention, but how many employees are truly empowered? At the global electricity giant AES Corporation, the answer is all 40,000 of them. In this interview with HBR Senior Editor Suzy Wetlaufer, AES Chairman Roger Sant and CEO Dennis Bakke reflect on their trials and triumphs in creating an exceptional company and explain how their employee-run company works. When they founded AES in 1981, Sant and Bakke set out to create a company where people could have engaging experiences on a daily basis--a company that embodied the principles of fairness, integrity, social responsibility, and fun. Putting those principles into action has created something unique--an ecosystem of real empowerment. What does that system look like? Rather than having a traditional hierarchical chain of command, AES is organized around small teams that are responsible for operations and maintenance. Moreover, AES has eliminated functional departments; there's no corporate marketing division or human resources department. For the system to work, every person must become a well-rounded generalist--a mini-CEO. That, in turn, redefines the jobs of the people at headquarters. Instead of setting strategy and making the "the big decisions," Sant and Bakke act as advisers, guardians of the principles, accountability officers, and chief encouragers. Can other companies successfully adopt the mechanics of such a system? Not unless they first adopt the shared principles that have guided AES since its inception. "Empowerment without values isn't empowerment," says Sant. "It's just technique," adds Bakke.

Competition on the Internet is creating fierce battles between industry giants and small-scale start-ups. Smart start-ups can avoid those conflicts by moving quickly to uncontested ground and, when that's no longer possible, turning dominant players' strengths against them. Authors David Yoffie from HBS and Michael Cusumano from MIT call this competitive approach judo strategy. They use the Netscape-Microsoft battles to illustrate the three main principles of judo strategy: rapid movement, flexibility, and leverage. In the early part of the browser wars, for instance, Netscape applied the principle of rapid movement by being the first company to offer a free stand-alone browser. This allowed Netscape to build market share fast and to set the market standard. Flexibility became a critical factor later in the browser wars. In December 1995, when Microsoft announced that it would "embrace and extend" competitors' Internet successes, Netscape failed to give way in the face of superior strength. Instead it squared off against Microsoft and even turned down numerous opportunities to craft deep partnerships with other companies. The result was that Netscape lost deal after deal when competing with Microsoft for common distribution channels. Netscape applied the principle of leverage by using Microsoft's strengths against it. Taking advantage of Microsoft's determination to convert the world to Windows or Windows NT, Netscape made its software compatible with existing UNIX systems. While it is true that these principles can't replace basic execution, say the authors, without speed, flexibility, and leverage, very few companies can compete successfully on Internet time.

On January 1, 1999, 11 European nations formally adopted the euro as a common currency. What will the new monetary union mean for managers? In this Perspectives piece, senior executives from Merloni Elettrodomestici, PricewaterhouseCoopers, DaimlerChrysler, Sara Lee/DE, and ICI discuss how the euro will alter the European business landscape and change the rules of management. The contributors suggest that the single currency will require executives to rethink many of their long-held assumptions about doing business in Europe. Because consumers will be able to easily compare prices across the Continent, for example, it will become much more difficult to have different product positioning and pricing strategies from country to country. Similarly, the need for pan-European thinking may require companies to reconsider their decentralized organizational structures, which grant autonomy to national units. And at the operational level, fragmented supply chains may turn into severe disadvantages. There are many other changes that managers must consider with the introduction of the euro. Not only will they have to cope with confused and suspicious customers, they will also incur major up-front costs in implementing the changeover to the new currency. No two companies will take the same course in responding to the myriad challenges, but the practical insights of these five contributors will help all companies think clearly about their options.

Competition in the information age often takes the form of a standards war: a battle for market dominance between incompatible technologies. A company's success or failure can easily hinge on its ability to wage such a standards war. Standards wars are especially bitter in markets with strong network effects, where consumers place great value on compatibility and interconnection with each other. These markets tend to exhibit positive feedback and "tip" to a single winner. Based on a study of dozens of standards wars going back over 100 years, this article offers a "battle guide" for waging a standards war. After classifying standards wars and identifying seven key assets that firms can use to successfully establish a new technology, the authors recommend three tactics in standards battles: building alliances, exploiting first-mover advantages, and managing consumer expectations.

Corporate restructuring has been the focus of much debate in the past few years. This article addresses the debate about the effectiveness of corporate restructuring by examining 52 studies presented within 25 research articles on restructuring and its impact on economic performance. The authors distinguish three forms of restructuring: financial, portfolio, and organizational. Based on the research reviewed here, financial restructuring has the highest positive impact on performance, followed by portfolio restructuring. Organizational restructuring has little consistent impact on performance.