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Millions of people are communicating at home and at work in an explosion of connectivity that threatens to undermine the established value chains for businesses in many sectors of the economy. What will happen, for instance, to dominant retailers such as Toys "R" Us and Home Depot when a search through the Internet gives consumers more choice than any store? What will be the point of cultivating a long-standing supplier relationship with General Electric when it posts its purchasing requirements on an Internet bulletin board and entertains bids from anybody inclined to respond? The authors present a conceptual framework for approaching such questions--for understanding the relationship of information to the physical components of the value chain and how the Internet's ability to separate the two will lead to the reconfiguration of the value proposition in many industries.

The rise of the World Wide Web provided one of the most challenging environments for product development in recent history. The market needs that a product is meant to satisfy and the technologies required to satisfy them can change radically--even as the product is under development. In response to such factors, companies have had to modify the traditional product-development process, in which design implementation begins only once a product's concept has been determined in its entirety. In place of that traditional approach, they have pioneered a flexible product-development process that allows designers to continue to define and shape products even after implementation has begun. This innovation enables Internet companies to incorporate rapidly evolving customer requirements and changing technologies into their designs until the last possible moment before a product is introduced to the market.

In our personal life, experience is often the best teacher. Not so in corporate life. After a major event--a product failure, a downsizing crisis, or a merger--many companies stumble along, oblivious to the lessons of the past. Mistakes get repeated, but smart decisions do not. Most important, the old ways of thinking are never discussed, so they are still in place to spawn new mishaps. In an effort to solve this problem, a group of social scientists, business managers, and journalists at MIT have developed and tested a tool called the learning history. It is a written narrative of a company's recent critical event, nearly all of it presented in two columns. In one column, relevant episodes are described by the people who took part in them, were affected by them, or observed them. In the other, learning historians--trained outsiders and knowledgeable insiders--identify recurrent themes in the narrative, pose questions, and raise "undiscussable" issues. The learning history forms the basis for group discussions, both for those involved in the event and for others who also might learn from it.

John Browne believes that all companies battling it out in the global information age face a common challenge: using knowledge more effectively than their competitors do. And he is not talking only about the knowledge that resides in one's own company. "Any organization that thinks it does everything the best and that it need not learn from others is incredibly arrogant and foolish," he says. British Petroleum's chief executive, who engineered the revival of BP Exploration and Production and poised BP for spectacular growth, never accepts that something can't be done and is always asking if there is a better way and if someone might have a better idea. Under his leadership, BP is doing the same. And no matter where knowledge comes from, Browne says, the key to reaping a big return is to leverage that knowledge by replicating it throughout the organization so that each unit is not learning in isolation.

Two decades after affirmative action became law, progress on increasing diversity in the U.S. workplace--particularly beyond the entry level--is mixed. On one hand, people of color make up a larger percentage of senior managers than at any point in the past. On the other hand, many people of color still struggle with the closed doors of institutional racism. For its 75th anniversary issue, HBR asked a group seldom heard from in the media--executives of color--to address the central questions on race and work in the United States: How far has American business come? Is there reason for optimism? Which programs work and which fail? Who is primarily responsible for bringing about advances in diversity? And what does the future hold?

The world's current system of intellectual property rights has in recent years become unworkable and ineffective. Designed more than 100 years ago to meet the needs of an industrial era, it is inadequate to handle the ownership and distribution of intellectual property generated by the brainpower industries that have come to dominate the world's economy. The prevailing wisdom is that minor tweaking can remedy the problem. But MIT economist Lester Thurow challenges such thinking and calls instead for a new system--one redesigned from the ground up. In making his case for why the old system doesn't work anymore, Thurow lays out the challenges the new system must meet.

These days, a Western company's toughest competition in Asia is likely to come not from familiar rivals but from lesser-known Asian companies based in countries other than Japan. These companies often use unusual tactics and strategies, and those who wish to compete with them should learn eight new rules of Asia's competitive game. First, it is better to be always first than always right. Second, control the bottlenecks in the supply chain. Third, build walled cities; that is, create a dominant position in an industry. Fourth, bring market transactions in-house. Fifth, leverage your government's goals. Sixth, use a networked style of company organization. Seventh, make commercialization the equal of invention, and eighth, remember that what you don't know, you can learn. Western companies must learn the rules of the new competitive game and then decide whether to follow them or to break them.

Top level managers know that conflict over issues is natural and even necessary. Management teams that challenge one another's thinking develop a more complete understanding of their choices, create a richer range of options, and make better decisions. But the challenge--familiar to anyone who has ever been part of a management team--is to keep constructive conflict over issues from degenerating into interpersonal conflict. From their research on the interplay of conflict, politics, and speed in the decision-making process of management teams, the authors have distilled a set of tactics characteristic of high-performing teams. These tactics work because they keep conflict focused on issues; foster collaborative, rather than competitive, relations among team members; and create a sense of fairness in the decision-making process.

Many global companies believe they have a moral duty to respond to the world's problems but are unsure how to do that and still pursue a reasonable profit for their shareholders. Ryuzaburo Kaku, honorary chairman of Canon, the Japanese technology company, suggests that companies consider kyosei, a business credo that he defines as a "spirit of cooperation" in which individuals and organizations work together for the common good. Kyosei, Kaku claims, has helped Canon make a significant and positive impact on many world problems as the company has grown to become one of the world's preeminent innovators and manufacturers of technology.

Core competencies and focus are now the mantras of corporate strategists in Western economies. But while managers in the West have dismantled many conglomerates assembled in the 1960s and 1970s, the large, diversified business group remains the dominant form of enterprise throughout many emerging markets. As those markets open up to global competition, consultants and foreign investors are increasingly pressuring groups to conform to Western practice by scaling back the scope of their business activities. Already a number of executives have decided to break up their groups in order to show that they are focusing on only a few core businesses. There are reasons to worry about this trend, say the authors. Focus is good advice in New York or London, but something important gets lost in translation when that advice is given to groups in emerging markets.

Can the U.S. economy grow much faster than the two-point-something percent it has in recent years? Standard economic analysis suggests that it cannot. But many influential business leaders and journalists--and even a few economists--have embraced a radical economic theory that argues that the old speed limits to growth are obsolete. According to this so-called new paradigm, rapid technological change means that the economy can grow much faster than it used to; global competition means that a booming economy will not produce high inflation. Many people in the business community take the new doctrine very seriously, notes MIT economist Paul Krugman. Unfortunately, he says, it is riddled with gaping conceptual and empirical holes. Krugman lays out in clear terms the macroeconomic principles that explain how markets interact and why there are limits on growth. We would all like the U.S. economy to grow faster than it has, says Krugman, but all the evidence suggests that it cannot.

Innovate or fall behind: The competitive imperative for virtually all businesses today is that simple. Responding to that command is difficult, however, because innovation takes place when different ideas, perceptions, and ways of processing and judging information collide. And it often requires collaboration among players who see the world differently. As a result, the conflict that should take place constructively among ideas all too often ends up taking place unproductively among people. Disputes become personal, and the creative process breaks down. The manager successful at fostering innovation figures out how to get different approaches to grate against one another in a productive process the authors call creative abrasion. Managers who want to encourage innovation need to examine what they do to promote or inhibit creative abrasion.

Most profitable strategies are built on differentiation: offering customers something they value that competitors don't have. But most companies concentrate only on their products or services. In fact, a company can differentiate itself at every point where it comes in contact with its customers--from the moment customers realize they need a product to service to the time when they dispose of it. The authors believe that if companies open up their thinking to their customers' entire experience with a product or service--the consumption chain--they can uncover opportunities to position their offerings in ways that neither they nor their competitors thought possible. The authors show how even a mundane product such as candles can be successfully differentiated. By analyzing its customers' experiences and exploring various options, Blyth Industries, for example, has grown from a $2 million U.S. candle manufacturer into a global candle and accessory business with nearly $500 million in sales and a market value of $1.2 billion.

Every seasoned investor knows that detailed financial projections for a new company are an act of imagination. Nevertheless, most business plans pour far too much ink on the numbers--and far too little on the information that really matters. Why? William Sahlman suggests that a great business plan is one that focuses on a series of questions. These questions relate to the four factors critical to the success of every new venture: the people, the opportunity, the context, and the possibilities for both risk and reward. A great business plan is not easy to compose, Sahlman acknowledges, largely because most entrepreneurs are wild-eyed optimists. But one that asks the right questions is a powerful tool. A better deal, not to mention a better shot at success, awaits entrepreneurs who use it.

In the two decades following World War II, U.S. productivity grew at an annual rate of 3%. But since the beginning of the 1970s, it has grown at only about 1%. What is preventing a productivity revival in the U.S. economy? Clearly not the manufacturing sector, which has rebounded since the early 1980s. The service sector, on the other hand, has seen productivity growth rates stagnate during the same period. Why? Michael Van Biema and Bruce Greenwald believe that the usual explanations are incomplete and have resulted in some serious misconceptions. The authors point out the limitations of those explanations and offer one of their own. They lay the blame in two places: the ineffectiveness of many service-sector managers at improving productivity and the inherent complexity of the sector itself.

As the traditional system of health care in the United States gives way to a regime run increasingly by the private sector, a powerful force is emerging: the patient. According to Harvard Business School professor Regina Herzlinger, health care is much like other service industries. Providers that hope to survive must cater to increasingly demanding and well-educated consumers. In a review of Herzlinger's book Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry, Alexandra Wyke, managing editor at the Economist Intelligence Unit, argues that the path to consumerism in medicine will be longer and bumpier than Herzlinger suggests.

A thriving semiconductor industry has been created in Taiwan over the course of the past two decades by the use of advanced organizational techniques of technology leverage and accelerated technology diffusion. By the mid-1990s, the industry had reached a level of output that placed it behind only the United States, Japan, and Korea. Almost all of Taiwan's semiconductor industry is located in the Hsinchu Science-Based Industry Park, which was created in emulation of California's Stanford Research Park, but with more direct government involvement. This article explores the extent to which this emergent Silicon Valley in Taiwan shares the "industrial ecology" that has powered innovation in California and examines the extent to which the Taiwan industry suffers from weaknesses attributed to its rapid creation through technology leverage.

Honda of America has developed a comprehensive approach to teaching the principles of lean production to its suppliers, in which Honda and the supplier work intensively on narrowly targeted improvement projects in the supplier's plant. Called BP (for "Best Process," "Best Performance," "Best Practice"), this approach has been quite successful in enhancing supplier performance; suppliers participating in the program in 1994 averaged productivity gains of 50% on lines reengineered by BP. However, Honda has found there is high variation in the extent to which suppliers were able to transfer the lessons taught beyond the line or plant where the BP intervention occurred. Drawing on case studies of three of Honda's U.S. suppliers, this article explores how the BP process interacts with the broader relationship between customer and supplier in terms of organizational learning, technology transfer, and the transplantation of Japanese management practices to the United States. These cases illustrate the dynamics of the learning process and the complex relationship that emerges between the "teacher" (provider) of valuable knowledge and the "student" (recipient).

This is an MIT Sloan Management Review article. Three forces are changing the customary rules of distribution channel management: proliferating customer needs, shifts in the balance of power in channels, and changing strategic priorities. Many firms are outsourcing the distribution function to third parties. Others, using IT, direct marketing, database marketing, and other variations, contact customers directly, so the roles of the distributor or dealer are evolving. And some firms are simultaneously experimenting with a number of distribution options before committing to one system. Firms are also dealing through specialists rather than generalists, because specialists tend to be more focused and nimble than the manufacturer in a turbulent environment. The authors propose a strategic approach to planning for future channel configurations, control of the channel, and resource commitment. The channel must address customer needs, ensure that the customer sees the value in the company's offering, be cost efficient, and handle any new products and services that emerge. The authors suggest that a company first assess its current distribution channels, each channel's profitability, its market coverage, and the cost of each channel function. Next, a company should choose a channel arrangement based on sound design principles that recognize that the distribution strategy must contribute to the business' overall objectives.

This is an MIT Sloan Management Review article. A company that initiates a customer loyalty program usually wants to retain existing customers, maintain sales levels and profits, increase the potential value of existing customers, and encourage customers to buy its other products as well. But, based on a review of behavioral loyalty research, the authors posit that the schemes do not fundamentally alter market structure and, instead, increase market expenditures without really creating any extra brand loyalty. Research shows that only about 10% of buyers for many types of frequently purchased consumer goods are 100% loyal to a particular brand over a one-year period. Consumers do not buy only one brand. For any loyalty program to be effective, say the authors, it must leverage the value of the product to the customer. Therefore, the program must have: (1) a direct or indirect effect, such as the General Motors rebate scheme that builds up savings toward a new car; (2) a perception of value, such as cash; and (3) timing--when rewards are available. The more delayed the reward, the less powerful. The authors suggest ways to design an effective program: ensure that it enhances the value proposition of the product or service, fully cost the program, maximize the buyer's motivation to purchase again, and consider the market conditions when planning.