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In an average week, more than 300 companies fail. And more than 75% of those desperate firms file for a "liquidation bankruptcy," agreeing to a complete distribution of their assets to creditors. The remaining 25% refuse to surrender until a final option is exhausted: petitioning the courts for a "reorganization bankruptcy," trying to persuade its creditors to freeze their claims temporarily while it reorganizes to rebuild profitable operations. Proper and timely use of reorganization bankruptcy can bring relief from otherwise devastating indebtedness; chosen for the right reasons and correctly implemented, it can provide a financially, strategically, and ethically sound basis for serving the interests of all stakeholders. A model is offered for analysis of the bankruptcy situation and the turnaround response. The successful integration of reorganization bankruptcy as a key component of a strategic plan is based on an understanding of bankruptcy law and how its provisions affect the company, as well as the timely use of Chapter 11 protection as it was intended--to retrench systematically and put together a new strategy that evokes support of all stakeholders. It should never become a popular strategic choice; but if properly exercised, it can revive a deserving organization.

Based on 22 years of breakthrough research, this article by Teresa Amabile, MBA Class of 1954 Professor of Business Administration at the Harvard Business School, provides insightful guidelines for any executive who wants to nurture and stimulate one of the most powerful competitive weapons in the realm of business today: creativity. In today's knowledge economy, creativity is more important than ever. But many companies unwittingly employ managerial practices that kill it. How? By crushing their employees' intrinsic motivation--the strong internal desire to do something based on interests and passions. Managers don't kill creativity on purpose. Yet in the pursuit of productivity, efficiency, and control--all worthy business imperatives--they undermine creativity. It doesn't have to be that way. Business imperatives can comfortably coexist with creativity. But managers will have to change their thinking first. Specifically, managers will need to understand that creativity has three parts: expertise, the ability to think flexibly and imaginatively, and motivation. Managers can influence the first two, but doing so is costly and slow. It would be far more effective to increase employees' intrinsic motivation. Take challenge as an example: Intrinsic motivation is high when employees feel challenged but not overwhelmed by their work. The task for managers, therefore, becomes matching people to the right assignments. Managers can make a difference when it comes to employee creativity. The result can be truly innovative companies in which creativity doesn't just survive but actually thrives.

In a comparative study, authors M. Bensaou from INSEAD and Michael Earl from the London Business School found fundamental differences in how Japanese and Western managers think about technology. Too many managers in the West are intimidated by the task of managing technology. They tiptoe around it, supposing that it needs special tools, special strategies, and a special mind-set. Well, it doesn't, the authors say. Technology should be managed--controlled, even--like any other competitive weapon in a manager's arsenal. The authors came to this conclusion in a surprising way. Having set out to compare Western and Japanese IT-management practices, they were startled to discover that Japanese companies rarely experience the IT problems so common in the United States and Europe. In fact, their senior executives didn't even recognize the problems that the authors described. When they dug deeper into 20 leading companies that the Japanese themselves consider exemplary IT users, they found that the Japanese see IT as just one competitive lever among many. Its purpose, very simply, is to help the organization achieve its operational goals. The authors found five principles of IT management in Japan that, they believe, are not only powerful but also universal. They contrast these principles against the practices commonly found in Western companies. While acknowledging that Japan has its own weaknesses with technology, particularly in white-collar office settings, they nevertheless urge senior managers in the West to consider the solid foundation on which Japanese IT management rests.

In 1994, Continental Airlines was headed for a crash landing--it was quickly running out of customers and cash. Today, the airline is one of the great turnaround stories of the decade. What explains its reversal of fortune? A simple strategy, executed fast, right away, and all at once, says Greg Brenneman, president and COO of the company. There's no time to think too much during a turnaround, he notes in this outspoken first-person account, and that happens to be a very good thing. More specifically, he describes the five lessons he learned during this dramatic turnaround. At the beginning, there was so much wrong with Continental that he felt as if any one misstep could bring the whole effort down. But in a time of crisis, when time is tight and money is tighter, you can't afford to mull over complex strategy. With Gordon Bethune, Continental's chairman and CEO, Brenneman devised the Go Forward Plan, a straightforward strategy focused on four key elements: understanding the market, increasing revenues, improving the product, and transforming the corporate culture. He admits that the plan wasn't complicated--it was pure common sense. The tough part was getting it done. "Do it now!" became the rallying cry of the movement, and the power of momentum has carried Continental to success.

Managers can separate the real opportunities for synergy from the mirages, say Michael Goold and Andrew Campbell of the Ashridge Strategic Management Centre, by taking a more disciplined approach to synergy. Corporate executives have strong biases in favor of synergy, and those biases can lead them into ill-advised attempts to force business units to cooperate--even when the ultimate benefits are unclear. These biases take four forms: 1) the synergy bias, which leads executives to overestimate the benefits and underestimate the costs of synergy; 2) the parenting bias, a belief that synergy will be captured only by cajoling or compelling business units to cooperate; 3) the skills bias--the assumption that whatever know-how is required to achieve synergy will be available within the organization; and 4) the upside bias, which causes executives to concentrate so hard on the potential benefits of synergy that they overlook the possible downside risks. In combination, these four biases make synergy seem more attractive and more easily achievable than it truly is. As a result, corporate executives often launch initiatives that ultimately waste time and money and sometimes even severely damage their businesses. To avoid such failures, executives need to subject all synergy opportunities to a clear-eyed analysis that clarifies the benefits to be gained, examines the potential for corporate involvement, and takes into account the possible downsides. Such a disciplined approach will inevitably mean that fewer initiatives will be launched. But those that are pursued will be far more likely to deliver.

In this article, Timothy A. Luehrman explores how option pricing can be used to improve decision making about the sequence and timing of a portfolio of strategic investments. In financial terms, a business strategy is much more like a series of options than like a single projected cash flow. Executing a strategy almost always involves making a sequence of major decisions. Some actions are taken immediately while others are deliberately deferred so that managers can optimize their choices as circumstances evolve. While executives readily grasp the analogy between strategy and real options, until recently the mechanics of option pricing were so complex that few companies found this method practical to use when formulating strategy. But advances in both computing power and our understanding of option pricing over the last 20 years now make it feasible to apply real-options thinking to strategic decision making. To analyze a strategy as a portfolio of related real options, this article exploits a framework presented by the author in "Investment Opportunities as Real Options: Getting Started on the Numbers" (HBR July/August 1998). That article explained how to get from discounted-cash-flow value to option value for a typical project; in other words, it was about reaching a number. This article extends that framework, exploring how, once you've worked out the numbers, you can use option pricing to improve decision making about the sequence and timing of a portfolio of strategic investments. The author shows executives how to plot their strategies in two-dimensional "option space," giving them a way to "draw" a strategy in terms that are neither wholly strategic nor wholly financial, but some of both. Such pictures inject financial discipline and new insight into how a company's future opportunities can be actively cultivated and harvested.

In this interview, Li & Fung Chairman Victor Fung explains both the philosophy behind supply-chain management and the specific practices that Li & Fung has developed to reduce costs and lead times, allowing its customers to buy "closer to the market." Li & Fung, Hong Kong's largest export trading company, has been an innovator in supply-chain management--a topic of increasing importance to many senior executives. Li & Fung has also been a pioneer in "dispersed manufacturing." It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. To be run effectively, Victor Fung maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its growing size and geographic scope: its organization around small, customer-focused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. As Asia's economic crisis continues, chairman Fung sees a new model of companies emerging--companies that are, like Li & Fung, narrowly focused and professionally managed.

In this eye-opening article, Thomas W. Malone and Robert J. Laubacher of the Massachusetts Institute of Technology look at how a new kind of organization could form the basis of a new kind of economy--an e-lance economy--where all the old rules of business are overturned and big companies are rendered obsolete. Drawing on their research at MIT's Initiative on Inventing the Organizations of the 21st Century, the authors postulate a world in which business is not controlled through a stable chain of management in a large, permanent company. Rather, it is carried out autonomously by independent contractors connected through personal computers and electronic networks. These electronically connected freelancers--e-lancers--would join together into fluid and temporary networks to produce and sell goods and services. When the job is done--after a day, a month, a year--the network would dissolve and its members would again become independent agents. Far from being a wild hypothesis, the e-lance economy is, in many ways, already upon us. We see it in the rise of outsourcing and telecommuting, in the increasing importance within corporations of ad-hoc project teams, and in the evolution of the Internet. Most of the necessary building blocks of this type of business organization--efficient networks, data interchange standards, groupware, electronic currency, venture capital micromarkets--are either in place or under development. What is lagging behind is our imagination. But, the authors contend, it is important to consider sooner rather than later the profound implications of how such an e-lance economy might work. They examine the opportunities, and the problems, that may arise and anticipate how the role of managers may change fundamentally--or possibly even disappear altogether.

Signs of prosperity abound in the United States, fueling optimism that the economy has finally risen out of a long productivity slump. But Stephen Roach, chief economist at Morgan Stanley Dean Witter, takes a skeptical look at current conditions in reviewing two books in the optimist's camp. In Prosperity, Wall Street Journal reporters Bob Davis and David Wessel argue that information technology is sparking a productivity breakthrough that will sustain prolonged prosperity. The authors foresee a powerful collaboration between industry and community colleges, working together to produce skilled workers. In The Productive Edge, MIT Professor Richard Lester pins his hopes on recent turnarounds in the U.S. industry in response to innovation, globalization, and deregulation--and concludes that these forces can drive an economywide productivity revival. Roach agrees that the books provide impressive anecdotes, but he points out that industry-based gains may stem from cost-shifting and rampant outsourcing. Long-lasting improvements in productivity, by contrast, would depend on boosting capital and educational endowments--and here the news is sobering. Despite the enormous corporate gamble on IT, the net stock of capital per worker has stayed constant because of frequent upgrading. "Human capital," as reflected in aptitude tests, also remains at low levels. Accordingly, Roach finds no hint in national data that productivity is emerging from its subpar trend. In fact, hours worked--a key factor in productivity calculations--may actually be rising. White-collar work, which depends more on mental acuity and creativity than on computers, just may not be capable of the sort of productivity advances seen on farms and in factories.

According to author Rick Yan, a vice president in the Beijing office of Bain & Company, making money in the China market in the short run is the best indicator we have that a company's current strategy and practices are well suited to success in the longer term. Despite concerns about the continuation of China's economic boom and the country's political future, multinationals are flocking to China. Why? Because China may soon be one of the world's most important economies. Companies that don't consider exploring this vast market may be overlooking a tremendous growth opportunity. Investing in China now to build sustainable long-term positions is a credible strategy. Some companies, however, have taken the long-term argument too far. They tolerate poor short-term results in the mistaken belief that such results are a trade-off for future profitability. But underperformance in the short term is a good indicator that a company's strategy or practices may not measure up over the long run. Drawing on the examples of multinationals already competing in China, the author finds that success is more a factor of managerial capability, critical mass scale, and product portfolio than it is length of stay. Although some early movers are market leaders, being number one requires more than longevity. Take Coca-Cola, for instance. To see it as a passive player that "waited it out" is to misunderstand the company's aggressive strategy: Coca-Cola planned carefully for success and executed a series of smart short-term moves to make it happen. In the final analysis, players that want to be around over the long run had better make the right moves today. One mistake won't seal a company's fate, but organizations need to learn from their mistakes quickly and use their new knowledge to build winning strategies. Companies that fail to adapt to the fast-paced market will never enjoy long-term success in China.

Drawing on a rich set of company examples, Thomas H. Davenport, a professor at the University of Texas's Graduate School of Business, provides a fresh, high-level perspective on enterprise systems that will help senior executives think rationally about their large-scale investments in this technology. Enterprise systems present a new model of corporate computing. They allow companies to replace their existing information systems, which are often incompatible with one another, with a single, integrated system. By streamlining data flows throughout an organization, these commercial software packages, offered by vendors like SAP, promise dramatic gains in a company's efficiency and bottom line. It's no wonder that businesses are rushing to jump on the ES bandwagon. But while these systems offer tremendous rewards, the risks they carry are equally great. Not only are the systems expensive and difficult to implement, they can also tie the hands of managers. Unlike computer systems of the past, which were typically developed in-house with a company's specific requirements in mind, enterprise systems are off-the-shelf solutions. They impose their own logic on a company's strategy, culture, and organization, often forcing companies to change the way they do business. Managers would do well to heed the horror stories of failed implementations. FoxMeyer Drug, for example, claims that its system helped drive it into bankruptcy. Using examples of both successful and unsuccessful ES projects, the author discusses the pros and cons of implementing an enterprise system, showing how a system can produce unintended and highly disruptive consequences. Because of an ES's profound business implications, he cautions against shifting responsibility for its adoption to technologists. Only a general manager will be able to mediate between the imperatives of the system and the imperatives of the business.

In this interview with Harvard Business School professor Linda Hill and HBR senior editor Suzy Wetlaufer, Franco Bernabe discusses the six-year period in which he transformed his organization from an unprofitable, politically-controlled collection of operating companies into a lean, competitive, global enterprise. Few CEOs will face crises as disruptive and dramatic as those encountered--and overcome--by Bernabe. In 1992, when Bernabe was appointed CEO of Eni, Italy's large, energy-focused industrial group, his announced goal was to transform the company from a political quagmire into a clean, market-driven business ready for its first public offering. The resistance to his plans was intense, but that wasn't the worst of it. Soon after he took power, an investigation known as Mani Pulite--Clean Hands--led to the arrest of much of Eni's senior management team, including the company's chairman. One of those senior managers even made the false claim--based on hearsay--that Bernabe himself had taken a huge bribe. Simply put, Bernabe's story is not just that of a CEO steering a massive strategic reinvention. It is a story of leadership, and an unlikely one at that. In this interview, it becomes clear how Bernabe survived his tumultuous first months as CEO and then led the company's transformation. To begin with, he was unique in having both an encyclopedic knowledge of Eni's operations and a view of the company's future from 30,000 feet. But perhaps more than anything, Bernabe's power to lead has come from within. He follows, he says, an inner compass pointed toward humanity and justice. In difficult times, Bernabe seeks consultation from others. But ultimately, he makes all important decisions alone so as not to be buffeted by the needs, emotions, or agendas of others. Such solitude, he believes, is one of the burdens--and necessities--of leadership.

While it is true that there is great promise in integrated cost systems, there is also great peril, according to Harvard Business School Professor Robert Kaplan and Claremont Graduate School Professor Robin Cooper. The authors explain that unless managers approach integration very thoughtfully--with extremely careful customization--they could end up with a system that performs neither function well and that drives decision making in the wrong direction altogether. Operational-control and ABC systems have fundamentally different purposes. Their requirements for accuracy, timeliness, and aggregation are so different that no single, fully integrated approach can be adequate for both purposes. If an integrated system used real-time cost data instead of standard rates in its ABC subsystem, for example, the result would be dangerously distorted messages about individual product profitability--and that's precisely the problem ABC systems were originally designed to address. Proper linkage and feedback between the two systems is possible, however. Through activity-based budgeting, the ABC system is linked directly to operations control: managers can determine the supply and practical capacity of resources in forthcoming periods. Linking operational control to ABC is also possible. The activity-based portion of an operational control system collects information that, while it mustn't be fed directly into the activity-based strategic cost system, can be extremely useful once it's been properly analyzed. Finally, ABC and operational control can be linked to financial reporting to generate cost of goods sold and inventory valuations--but again, with precautions.

In this article, Timothy A. Luehrman presents a framework that can bridge the gap between the practicalities of real-world capital projects and the higher mathematics associated with formal option-pricing theory. His step-by-step approach maps out the exact relationship between a project's characteristics and the five variables that determine the value of a simple call option on a share of stock. By going through these steps, executives not regularly steeped in finance can discover value hidden in their projects that their standard discounted cash flow analysis would overlook. The analogy between financial options and corporate investments that create future opportunities is both intuitively appealing and increasingly well accepted. Executives readily see that today's investment in R&D, or in a new marketing program, or even in a multiphased capital expenditure can generate the possibility of new products or markets tomorrow. But for many, the leap from the puts and calls of financial options to actual investment decisions has been difficult and deeply frustrating. The calculations required to value real options have been dauntingly complex, and practical how-to advice on the subject has been scarce and mostly aimed at specialists, preferably with Ph.D.s in finance. Luehrman's methodology is designed to be used by general managers, not technical specialists. It deliberately sacrifices absolute precision in order to generate a number "good enough" to provide executives with valuable insight into their most important and complex investment decisions.

A new science called evolutionary psychology--sometimes called Modern Darwinism because it is based on the theory of natural selection--is drawing widespread support and sparking fierce controversy. The reason: evolutionary psychology asserts that human beings today retain the mentality of our Stone Age ancestors. We are, in other words, "hard wired" for certain attitudes and behaviors. If that is so, what are the implications for managers? In this article, Nigel Nicholson, a professor of organizational behavior at London Business School and dean of the school's Division of Research, explores this provocative question. Of course, evolutionary psychology is still an emerging discipline, and its strong connection with the theory of natural selection has sparked significant controversy. But, as Nicholson suggests, evolutionary psychology is now well established enough that its insights into human instinct will prove illuminating to anyone seeking to understand why people act the way they do in organizational settings. Take gossip. According to evolutionary psychology, our Stone Age ancestors needed this skill to survive the socially unpredictable conditions of the Savannah Plain. Thus, over time, the propensity to gossip became part of our mental programming. Executives trying to eradicate gossip at work might as well try to change their employees' musical tastes. Better to put one's energy into making sure the "rumor mill" avoids dishonesty or unkindness as much as possible. Evolutionary psychology also explores the dynamics of the human group. Clans on the Savannah Plain, for example, appear to have had no more than 150 members. The message for managers? People will likely be most effective in small organizational units. As every executive knows, it pays to be an insightful student of human nature.

In this article, co-authors B. Joseph Pine II and James Gilmore, founders of the management consulting firm Strategic Horizons, preview the likely characteristics of the experience economy and the kinds of changes it will force companies to make. First there was agriculture, then manufactured goods, and eventually services. Each change represented a step up in economic value--a way for producers to distinguish their products from increasingly undifferentiated competitive offerings. Now, as services are in their turn becoming commoditized, companies are looking for the next higher value in an economic offering. Leading-edge companies are finding that it lies in staging experiences. An experience occurs when a company uses services as the stage--and goods as props--for engaging individuals in a way that creates a memorable event. And while experiences have always been at the heart of the entertainment business, any company stages an experience when it engages customers in a personal, memorable way. The lessons of pioneering experience providers, including the Walt Disney Company, can help companies learn how to compete in the experience economy. The authors offer five design principles that drive the creation of memorable experiences. First, create a consistent theme, one that resonates throughout the entire experience. Second, layer the theme with positive cues--for example, easy-to-follow signs. Third, eliminate negative cues, those visual or aural messages that distract or contradict the theme. Fourth, offer memorabilia that commemorate the experience for the user. Finally, engage all five senses--through sights, sounds, and so on--to heighten the experience and make it more memorable.

Challenged by world-class competitors, manufacturing companies in the United States have greatly improved their product development efforts as well as their factory operations. Today, however, U.S. companies are beginning to see the effectiveness of their product development systems plateau. More important, that effectiveness seems to have leveled off far short of the best Japanese companies. The authors, Durward Sobek, assistant professor of engineering at Montana State University, Jeffrey Liker, associate professor of engineering at the University of Michigan, and Allen Ward, head consultant at Ward Systems, explore how one of those companies, Toyota, manages its vehicle development process. Toyota's managerial practices can be grouped into six organizational mechanisms. Three of them are primarily social processes: mutual adjustment, mentoring supervision, and integrative leadership from product heads. The other three are forms of standardization: standard skills, standard work processes, and design standards. Alone, each mechanism would accomplish little, but every piece has its own role and at the same time reinforces the others, unlike many of the sophisticated tools and practices at U.S. companies that tend to be implemented independently. Together, the mechanisms give Toyota a tightly linked product-development system that relies on training and standardization to achieve cross-functional coordination while still building functional expertise. Toyota has added a number of twists to ensure that each project has the flexibility it needs and still benefits from what other projects have learned. This balance allows Toyota to achieve integration across projects and over time, as well as within projects.

This is an MIT Sloan Management Review article. By sharing components and production processes across a platform of products, companies can develop differentiated products efficiently, make their manufacturing processes more flexible, and take market share away from competitors that develop only one product at a time. The platform approach also enables companies to manufacture products in high volumes that are tailored to meet the needs of individual customers. A platform is a collection of assets--components, processes, knowledge, people, and relationships--that a set of products share. The platform planning effort involves two key tasks. First, product planning, where marketing managers determine which market segments to enter, what the customers in each segment want, and what product attributes will appeal to those customers. Second, system-level designers decide which product architecture to use to deliver the different products while sharing parts and production steps across the products. Three key ideas underlie the platform planning process. First, customers care about distinctiveness, how closely the product meets their needs. At the same time, the cost of a firm's internal operations is driven by the level of parts held in common among a group of products. Second, given a particular product architecture, there is a trade-off between distinctiveness and commonality. Third, product architecture dictates the nature of this trade-off. By developing and aligning three tools--a product plan, a differentiation plan, and a commonality plan--managers can balance the need for distinctiveness with the need for commonality. The process must involve all key functions and be guided by top management.

Although most companies confine their operations organizations to restricted, tactical roles, in some of the most successful firms operations has served as the foundation for--indeed, the driver behind--successful strategic attacks and defenses. This is most clearly seen in cases where small companies--although lacking the advantages of size, market position, and proprietary technology--take on big companies and in a relatively short time push their way to industry dominance. In such cases, the key to success often is an operations-based advantage. The peculiar nature of this advantage provides insight into the reasons many former industry leaders did not react more promptly and vigorously to such attacks, and why others, in contrast, were able to defend themselves successfully.

This article unbundles the relation between commitment and flexibility by distinguishing between firm-specific and usage-specific resources. This distinction turns out to be valuable because firm-specificity does not always imply (nor is it always implied by) usage-specificity. Firm-specific resources are more strategic than usage-specific resources. More broadly, the distinction between these two kinds of specificity helps explain why the tension between commitment and flexibility can easily be overdone: the two aren't always negative measures of each other.