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The most important contribution of management in the 20th century was to increase manual-worker productivity fifty-fold. The most important contribution of management in the 21st century will be to increase knowledge-worker productivity--hopefully by the same percentage. So far it is abysmally low and in many areas (hospital nurses, for instance, or design engineers in the automobile industry) actually lower than it was 70 years ago. So far, almost no one has addressed it. Yet we know how to increase--and rapidly--the productivity of knowledge workers. The methods, however, are totally different from those that increased the productivity of manual workers.

This article analyzes how Knowledge Management (KM) is likely to affect competition in the management consulting industry. KM represents a fundamental and qualitative change in this industry's basic production technology. Because management consultants acquire information directly from their customers, for these firms, KM technology exhibits increasing returns to scale. As such, although KM clearly represents an opportunity for some consultants to build a sustainable competitive advantage, it is likely to lead to a shake-out. Based on the industry's early experience with KM systems, this article describes a number of possible future outcomes as well as strategies that consultants can follow.

Silicon Valley is built on social capital, but it is social capital of a fundamentally different type from the concept of "deep civic engagement" that has come to dominate development theory and to influence policy. Social capital in Silicon Valley is best understood as performance-based trust. It emerges among economic and institutional actors in the pursuit of objectives related specifically to innovation and commercialization. In Silicon Valley, the sequence runs from performance to trust, not from community to trust as the civic engagement theorists would have it, Silicon Valley is an open society--open to ideas, to institutions, and especially to people. Community-based trust implies a closed society. The openness of Silicon Valley to foreigners is one of the region's most valuable assets; it has also been the best social capital investment for the home countries.

This survey of employees at six large American companies asked the question: "What works and what hurts in corporate ethics/compliance management?" The study found that a values-based cultural approach to ethics/compliance management works best. Critical ingredients of this approach include leaders' commitment to ethics, fair treatment of employees, rewards for ethical conduct, concern for external stakeholders, and consistency between policies and actions. What hurts effectiveness most are an ethics/compliance program that employees believe exists only to protect top management from blame and an ethical culture that focuses on unquestioning obedience to authority and employee self-interest. The results of effective ethics/compliance management are impressive. They include reduced unethical/illegal behavior in the organization, increased awareness of ethical issues, more ethical advice seeking within the firm, greater willingness to deliver bad news or report ethical/legal violations to management, better decision making because of the ethics/compliance program, and increased employee commitment.

This is an MIT Sloan Management Review article. Why has the strategy star begun to dim? Why is strategy no longer a "big idea" in most companies? According to the author, strategy innovation is key to creating new wealth. Only those companies that are constantly able to reinvent themselves will survive in a discontinuous world. Yet, no one seems to know how to develop innovative strategies that create wealth. The author calls for the development of a theory of strategy innovation and offers several propositions: that strategy is emergent, much like life itself; that strategists have been working on the "strategy," rather than on the preconditions that give rise to strategy innovation; that strategy is poised on the border between perfect order and total chaos; and that great strategy is both luck and foresight. The author goes on to offer five preconditions for the emergence of strategy: First, the entire organization, not just top management, should have a voice in creating strategy. Second, conversations about strategy must cut across industries and organizations so that knowledge can be combined in new ways. Third, people will embrace change when they see opportunities for rewards and growth. Fourth, managers must help companies reconceive themselves, customers, competitors, and opportunities. Finally, companies must do some market experimentation to determine which new strategies work.

This is an MIT Sloan Management Review article. Commitment and competence are embedded in how each employee thinks about and does his or her work and in how a company organizes to get work done. It is, according to the author, a firm's only appreciable asset. As the need for intellectual capital increases, companies must find ways to ensure that it develops and grows. There are five tools for increasing competence in a firm, site, business, and plant: hire outside, new talent; invest in employee learning and training; hire consultants and form partnerships with suppliers, customers, and vendors to share knowledge, create new knowledge, and bring in new ways to work; remove employees who fail to change, learn, and adapt; and find ways to keep valuable workers. Companies also need to foster employees who are not only competent but committed. Employees with too many demands and not enough resources to cope with those demands quickly burn out, become depressed, and lack commitment. A company can build commitment in three ways: First, reduce demand on employees by prioritizing work, focusing only on critical activities, and streamlining work processes. Second, increase resources by giving employees control over their own work, establishing a vision for the company that creates excitement about work, compensating workers fairly, sharing information on the company's long-range strategy, and providing new technologies, among other things. Third, turn demands into resources by exploring how company policies may erode commitment, ensuring that new managers and workers are clear about expectations, understanding family commitments, and having employees participate in decision making.

This is an MIT Sloan Management Review article. Why do companies frequently make bad investment decisions and continue to blunder, even after the weaknesses in their capital budgeting analyses are evident? Because, according to the authors, they don't integrate capital budgeting into their overall strategy. The authors' capital budgeting framework has six key features: it is dynamic, it is integral to the firm's strategy, it recognizes sequences of options, it is cross-functional, it aligns employee compensation with capital allocation, and it emphasizes performance-based training. The three steps of this framework should take place simultaneously: First, identify a status quo strategy and how it must perform to maximize shareholder value. The strategy helps the company determine the trade-off in capital budgeting between cycle time and risk. Second, establish a system for evaluating projects and preparing capital allocation requests that is consistent with the strategy. Finally, develop a culture consistent with the strategy and the evaluation system.

This is an MIT Sloan Management Review article. As companies continue to downsize, they need to consider how to maintain their employees' morale to realize gains such as higher productivity and more flexibility. Those who survive layoffs and the managers who must implement those layoffs frequently exhibit reduced commitment. Their trust in the company may be destroyed and they may feel powerless in the wake of top management's actions. The authors propose a four-stage approach to downsizing, gleaned from interviews and surveys, that will retain workers' trust and sense of empowerment. First, consider downsizing only as a last resort. Also downsizing should be part of a clearly defined, long-term vision that fits into the company's overall strategic plan. Second, consider all stakeholders' needs--survivors, laid-off employees, the community, local and national press, and any affected government agencies. The company should form a cross-functional team to represent all stakeholders' interests. Third, at the announcement stage, senior managers should explain the necessity of the downsizing and how it helps the firm in the long term. The fourth stage, implementation, is the most important. Management should communicate frequently and be open and honest. The company should do its best to ensure that laid-off employees are employed elsewhere and offer them generous benefits packages. It should seek remaining employees' ideas about restructuring work processes and provide any necessary training.

In this article, authors James Anderson, professor at the Kellogg Graduate School, Northwestern University, and James Narus, associate professor at the Babcock Graduate School, Wake Forest University, illustrate several ways in which suppliers can figure out exactly what their offerings are worth by creating and using what they call customer value models. Field value assessments--the most commonly used method for building customer value models--call for suppliers to gather data about their customers firsthand whenever possible. Through these assessments, a supplier can build a value model for an individual customer or for a market segment, drawing on data gathered from several customers in that segment. Suppliers can use customer value models to create competitive advantage in several ways. First, they can capitalize on the inevitable variation in customers' requirements by providing flexible market offerings. Second, they can use value models to demonstrate how a new product or service they are offering will provide greater value. Third, they can use their knowledge of how their market offerings specifically deliver value to craft persuasive value propositions. And fourth, they can use value models to provide evidence to customers of their accomplishments. Doing business based on value delivered gives companies the means to get an equitable return for their efforts. Once suppliers truly understand value, they will be able to realize the benefits of measuring and monitoring it for their customers.

In New Rules of the New Economy, Kevin Kelly urges companies to rethink their business strategies--to base their decisions on a new set of rules in which networks are everything. Easy electronic communication is indeed altering business strategies in many industries, and Kelly's book provides colorful examples and analysis of the opportunities ahead. But are networks, in fact, everything? In reviewing Kelly's book, economics consultant Peter Bernstein reminds readers that networks have been influencing businesses for centuries. Consider the railroad, which boosted living standards enormously by connecting isolated economies into a worldwide market. The Internet is just one more step in the growing interconnectedness of business, and hardly the most important. Nevertheless, Bernstein agrees that a "new economy" has arrived. Network-based opportunities are just one of several facets of this new orientation, all made possible by the regime of low inflation and intense competition introduced in the 1980s. Paul Volcker and his colleagues at the Federal Reserve gave managers the monetary stability necessary for taking risks. T. Boone Pickens and Michael Milken successfully challenged the old guard of corporate leaders that had been slow to respond to competitive challenges from Europe and Asia. The companies emerging from the turmoil of this period are intensely focused on innovation, competitiveness, risk management, and profitability. Without the environment created by Volcker, Pickens, and Milken, Kelly's highly interconnected economy could not have become the dazzling reality that it is.

Using actual examples from front-line managerial situations, this article explains and explores three work-life principles executives can adopt to create wins for their organizations and individual employees. Most companies view work and personal life as competing priorities in a zero-sum game, in which a gain in one area means a loss in the other. From this traditional perspective, managers decide how their employees' work and personal lives should intersect and often view work-life programs as just so much social welfare. A new breed of managers, however, is trying a new tack, one in which managers and employees collaborate to achieve work and personal objectives to everyone's benefit. These managers are guided by three principles. The first is to clearly inform their employees about business priorities and to encourage them to be just as clear about personal priorities. The second is to recognize and support their employees as whole people, not only acknowledging but also celebrating their roles outside the office. The third is to continually experiment with the way work gets done, looking for approaches that enhance the organization's performance and allow employees to pursue personal goals. The managers who are acting on these principles have discovered that conflicts between work and personal priorities can actually be catalysts for identifying inefficiencies at the workplace.

In order to solve high-tech's employee retention problems, Bill Gross, the chairman and founder of Idealab, proposes a radical solution: give all workers a significant equity stake. In 1994, when the software maker Knowledge Adventure decided to spin out a new venture--Worlds, Inc.--founder Bill Gross expected the worst. He had argued with the board that it was in KA's best interests to maintain a controlling ownership stake in Worlds, whose powerful new software technology had enormous revenue potential. But the board prevailed, and KA took only a 20% ownership in the new company, giving the rest to Worlds' employees. Within a year, the company's performance had surpassed all expectations, and instead of owning 80% of a $5 million business, KA owned 20% of a $77 million business. The arithmetic may have been counterintuitive, but the lesson was clear. When KA let go of Worlds and gave its employees near total ownership, the company unleashed a new level of employee performance. That, in turn, led to the creation of economic value that more than made up for the equity KA had surrendered. So compelling was this "new math of ownership" that Gross founded a new company, Idealab, on this principle. The company, which develops ideas for Internet-based businesses and seeds the most promising ones, takes no more than a 49% equity stake in the new ventures and gives at least 1% of ownership to each employee. For Gross, this radical approach to ownership is the key to inspiring stellar performances. In part, employee-owners are motivated by their potential to earn great financial reward. But the drama of ownership, he argues, is even more important. In that drama, employees become personally involved in the struggle to outdo the competition and emerge victorious.

The orchestra conductor is a popular metaphor for managers today--up there on the podium in complete control. But that image may be misleading, says McGill University and INSEAD Professor Henry Mintzberg, who recently spent a day with Bramwell Tovey, conductor of the Winnipeg Symphony Orchestra, in order to explore the metaphor. He found that Tovey does not operate like an absolute ruler but practices instead what Mintzberg calls covert leadership. Covert leadership means managing with a sense of nuances, constraints, and limitations. When a manager like Tovey guides an organization, he leads without seeming to, without his people being fully aware of all that he is doing. That's because in this world of professionals, a leader is not completely powerless--but neither does he have absolute control over others. As knowledge work grows in importance, the way an orchestra conductor really operates may serve as a good model for managers in a wide range of businesses. For example, Mintzberg found that Tovey does a lot more hands-on work than one might expect. More like a first-line supervisor than a hands-off executive, he takes direct and personal charge of what is getting done. In dealing with his musicians, his focus is on inspiring them, not empowering them. Like other professionals, the musicians don't need to be empowered--they're already secure in what they know and can do--but they do need to be infused with energy for the tasks at hand. This is the role of the covert leader: to act quietly and unobtrusively in order to exact not obedience but inspired performance.

In this article, Michael Porter, the C. Christensen Professor of Business Administration at the Harvard Business School, explains how clusters foster high levels of productivity and innovation and lays out the implications for competitive strategy and economic policy. Economic geography in an era of global competition poses a paradox. In theory, location should no longer be a source of competitive advantage. Open global markets, rapid transportation, and high-speed communications should allow any company to source any thing from any place at any time. But in practice, location remains central to competition. Today's economic map of the world is characterized by what Porter calls clusters: critical masses in one place of linked industries and institutions--from suppliers to universities to government agencies--that enjoy unusual competitive success in a particular field. The most famous examples are found in Silicon Valley and Hollywood, but clusters dot the world's landscape. Porter explains how clusters affect competition in three broad ways: first, by increasing the productivity of companies based in the area; second, by driving the direction and pace of innovation; and third, by stimulating the formation of new businesses within the cluster. Geographic, cultural, and institutional proximity provides companies with special access, closer relationships, better information, powerful incentives, and other advantages that are difficult to tap from a distance. The more complex, knowledge-based, and dynamic the world economy becomes, the more this is true. Competitive advantage lies increasingly in local things--knowledge, relationships, and motivation--that distant rivals cannot replicate.

In this article, University of California at Berkeley professors Carl Shapiro and Hal Varian explain how a "versioning" strategy can enable a company to distinguish its products from the competition and protect its prices from collapse. This insightful article will be essential reading for any executive competing in the information economy. Many producers of information goods assume that their products are exempt from the economic laws that govern more tangible goods. But that's just not so. Information goods are subject to the same market and competitive forces that govern the fate of any product. And their success, too, hinges on traditional product-management skills: gaining a clear understanding of customer needs, achieving genuine differentiation, and developing and executing an astute positioning and pricing strategy. What makes information goods tricky is their "dangerous economics." Producing the first copy of an information product is often very expensive, but producing subsequent copies is very cheap. In other words, the fixed costs are high and the marginal costs are low. Because competition tends to drive prices to the level of marginal costs, information goods can easily turn into low-priced commodities, making it impossible for companies to recoup their up-front investments and eventually bringing about their demise. The best way to escape that fate, the authors say, is to create different versions of the same core of information by tailoring it to the needs of different customers. The authors draw on a wide range of examples to illustrate how companies use different versioning strategies to appeal to customers with different needs. The power of versioning is that it enables managers to apply tried-and-true product-management techniques in a way that takes into account both the unusual economics of information production and the endless malleability of digital data.

In this article, Bob Zider, president of the Beta Group, a California-based firm that invests in commercializing new technologies, presents an analysis of present-day venture capitalists and shows why its practitioners have a lot more in common with investment bankers than you might think. The popular mythology surrounding the U.S. venture-capital industry derives from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk taking and for their hands-on operating experience. But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S. economy. Today's venture capitalists are more like conservative bankers than the risk takers of days past. They have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. They are the linchpins in an efficient system for meeting the needs of institutional investors looking for high returns, of entrepreneurs seeking funding, and of investment bankers looking for companies to sell. Venture capitalists must earn a consistently superior return on investments in inherently risky businesses. The myth is that they do so by investing in good ideas and good plans. In reality, they invest in good industries--that is, industries that are more competitively forgiving than the market as a whole. And they structure their deals in a way that minimizes their risk and maximizes their returns. Although many entrepreneurs expect venture capitalists to provide them with sage guidance as well as capital, that expectation is unrealistic. Given a typical portfolio of 10 companies and a 2,000-hour work year, a venture capital partner spends on average less than 2 hours per week on any given company. In addition to analyzing the current venture-capital system, the author offers practical advice to entrepreneurs thinking about venture funding.

As product complexity and the rate of market change have dramatically increased over the last years, firms find it increasingly difficult to forecast product requirements in their development processes. This article redefines the problem from one of improving forecasting to one of increasing product development agility and thus reducing the need for accurate long-term forecasts. It introduces the notion of development flexibility, shows how it can be measured, and presents results from a large empirical study on integrated systems development, which found that projects using flexible technologies outperformed projects using inflexible technologies by a factor of 2.2 (in person-months). Finally, the article proposes three major strategies for introducing flexibility into organizations. These strategies can help firms increase their agility and position themselves to succeed in accelerating and more turbulent markets.

The long-term trend of manufacturing management to adopt "best practice" has had an expressed preference for Japanese production systems as a means of generating industrial success. While commentators have noted the lack of correlation between imitation and competitive advantage, one of the reasons for this failure--namely, the very range of operating methods among Japanese producers--has not been so fully explored. This article uses evidence from the U.K. automobile industry to illustrate the disappointing impact of Japanization and best practice, and it suggests that managers should concentrate on the development of strategic competencies and the aligning of manufacturing with corporate strategy.

This is an MIT Sloan Management Review article. Once viewed as "less developed countries," emerging markets (EMs) now offer a significant growth opportunity for multinational corporations. Because EMs differ dramatically from mature markets, they raise new strategic questions that traditional marketing frameworks do not resolve. Traditional models argue against first-mover advantages in EMs. However, additional sources of advantage--favorable government relations, pent-up demand, marketing productivity, marketing resources, and consequent learning--can make early market entry a desirable option. The authors provide a framework, oriented toward demand rather than risk, that enables companies to assess long-term market potential, identify business prospects, and predict potential benefits. Using the framework, companies can categorize EMs on the basis of short- and long-term potential. Once a multinational corporation decides to enter a market, it needs new frameworks to guide product and partner policy decisions. The different patterns of market development in EMs imply that, contrary to conventional models, companies can expand the market rapidly, should offer a combination of global imported brands and locally made joint venture brands, and use EMs to test product innovations. The design and management of relationships with local distributor partners is the most critical challenge for executives. In the areas of industry experience, direct selling, local autonomy, and exclusivity, experienced multinationals are adapting the approaches employed in developed markets in ways that are appropriate for emerging ones.

This is an MIT Sloan Management Review article. Global business today requires leaders to be like explorers, guiding their organizations through unfamiliar and turbulent environments. With markets, suppliers, competitors, technology, and customers around the world constantly shifting, traditional leadership models no longer work. The authors' three-year study across Europe, North America, and Asia indicates that companies seek more global leaders and desire future global leaders of higher caliber and quality. Research results reveal that every global leader needs certain core qualities: exhibit character, or the capacity to build relationships with people from different backgrounds and to act with high ethical standards; embrace duality, or know when and whether to act and initiate change, depending on country or region; and demonstrate savvy, or recognize worldwide market opportunities and understanding firm capabilities. Inquisitiveness--a sense of adventure and a desire to experience new things--must underlie each of these characteristics. Four strategies are particularly effective in developing global leaders: foreign travel, with immersion in the country's way of life; the formation of teams comprising individuals with diverse backgrounds and perspectives; training that involves classroom and action learning projects; and overseas assignments, which serve to broaden the outlook of future global leaders.