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In the past, companies took a cost-plus approach to pricing, charging high prices when a product was first released, then lowering prices when production was scaled up. Lean competitors make that approach impossible, however, as they are quick to introduce competitive "me too" products to market. To gain and hold market leadership today, a company must design the cost out of its products from the outset. Target costing is a cost-management technique that lets a company do just that: The company determines how much customers are willing to pay for a product and then designs the product within cost limits that will permit it to sell profitably at the predetermined price.

Bill Gates and Warren Buffett are by far the two most successful and admired businessmen in the United States. They share a unique friendship, a love of business, and a passion for hamburgers and mathematical puzzles. In a review of Roger Lowenstein's Buffet: The Making of an American Capitalist, Gates reflects on his relationship with the man he affectionately calls Warren. In his first-person account of their time together, Gates talks about creating value and sharing values. Of Buffett, Gates says, "I had never met anyone who thought about business in such a clear way."

Should politicians turn to business leaders for advice in formulating economic policy? Not according to economist Paul Krugman, who argues that executives' advice is often disastrously misguided. Business leaders who have been promoted to economic advisers are no more likely to be great economists than are military experts. People who have mastered the complexities of running a multibillion-dollar enterprise may think they can make pronouncements whenever the subject is money, but before they can offer sound economic advice, they must master a new vocabulary and a new set of concepts. In short, they must go back to school.

How real is the private-label threat to branded products? What should national-brand manufacturers do about it? On the one hand, manufacturers have reason to be concerned. There are more private labels on the market than ever before; collectively, unit share of store-brand goods place first, second, or third in 177 of 250 supermarket product categories in the United States. But many manufacturers have not fully recognized two important points in considering this threat. First, private-label market share generally goes up when the economy is suffering and down in stronger economic periods. Second, manufacturers of brand-name products can have significant influence on the seriousness of the challenge posed by private-label goods. It is difficult for managers to look at a competitive threat objectively and in a long-term context when day-to-day performance is suffering. But the authors strongly advocate keeping the private-label challenge in perspective.

The electric utility market is in upheavel. Deregulation and a wave of megamergers are sweeping the industry. With states proceeding in piecemeal fashion however, it is unclear what final form deregulation will take. In his article, Peter Navarro, an expert on utility regulation at the University of California, Irvine, argues that removing most regulation and opening up the electricity market to free competition would improve U.S. competitiveness. He contends that the state-by-state approach to deregulation will create more turmoil than a rapid, federally coordinated restructuring.

From the mid-1960s to the mid-1980s, the nonprofit performing-arts industry in the United States enjoyed unprecedented growth. But in recent years, the arts have been hard hit by shrinking audiences, rising debt, and cuts in government funding. Can arts organizations succeed in this environment and fulfill their own special mission? The authors have observed one way in which they can succeed: through strategic collaborations--intensive, durable commmitments created for mutual gain.

Practitioners of a new technical specialty--financial engineering--can help senior managers achieve their objectives. Financial engineering can not only reduce the cost of existing activities but also make possible the development of new products, services, and markets. Peter Tufano presents five case studies that illustrate innovative applications of financial engineering and help managers determine when such techniques are appropriate.

Provides a framework for developing global strategies for service businesses. Integrates existing, separate frameworks on globilization and on service businesses, analyzes how the distinctive characteristics of service businesses affect globalization and the use of global strategy, and diagnoses which aspects favor globalization and which do not. Applies the new framework to numerous industry and company examples, with particular emphasis on the role of information technology.

Firms in high-technology industries frequently face the dangers and opportunities associated with strategic inflection points in their development trajectory. Strategic inflection points (SIPs) are caused by changes in fundamental industry dynamics, winning strategies, and dominant technologies. SIPs generate strategic dissonance in the organization because they are associated with divergences between the basis of competition and the firm's distinctive competence, and between top management's strategic intent and strategic action. Top management can take advantage of the information generated by strategic dissonance to develop new strategic intent and lead the organization through the turbulence and uncertainty associated with SIPs. This requires a capacity for strategic recognition on the part of top and senior management. Strategic recognition in turn is facilitated by an internal selection environment that allocates resources based on competitive reality and values dissent and debate. Strategic recognition is the foundation for exerting strategic leadership: encouraging debate and bringing debate to a conclusion that realigns the basis of competition and distinctive competence.

This is an MIT Sloan Management Review article. Among the many tools a manager can use for strategic planning, scenario planning stands out for its ability to capture a range of possibilities in rich detail. By identifying basic trends and uncertainties, a manager can construct a series of scenarios what help to compensate for the usual errors in decision making--overconfidence and tunnel vision. Through case studies of Interpublic, an international advertising agency, and Anglo-American Corp. in South Africa, the author describes how to build scenarios in a step-by-step process and how to use the resulting stories to plan a company's future.

Real estate escapes the thoughtful attention of most senior managers. It often falls within the realm of their responsibilities, but many do not appreciate its potential impact on company performance. So they delegate real estate to specialists, who operate on a deal-by-deal basis and consider their decisions as administrative and technical tasks. Recently, however, some companies--IBM, AT&T, Chemical Bank, Dun & Bradstreet, and Sun Microsystems, for example--have recognized that by managing real estate as a business function, they can cut costs significantly and, at the same time, increase productivity.

New reports announcing that yet another business has stumbled into a crisis--often without warning and through no direct fault of its management--seem as regular as the tide. And the spectrum of business crises is so wide that it is impossible to list each type. On a single day this year, the Washington Post reported a series of crashes suffered by American Eagle Airlines, the bankruptcy of Orange County, and Intel's travails with its Pentium microprocessor. Fortunately, almost every crisis contains within itself the seeds of success as well as the roots of failure. Finding, cultivating, and harvesting that potential success is the essence of crisis management.

A decade of process improvements has transformed the way most corporations operate and, at the same time, the job of the senior executive. Top-down autocrats are out and bottom-up teams are in. The message seems to be: Get the processes right, and the company will manage itself. But this message belies a simple truth: Managers, not processes, run companies. In fact, process-focused companies need more top-down management, not less. However, given the complexities of modern business competition, no single individual can do all that it takes to achieve success for a company. Success depends on the willingness and ability of the entire senior executive group to address not just their individual functional or divisional responsibilities but also their collective responsibility for the company as a whole.

Most managers rejoice if the majority of customers that respond to customer-satisfaction surveys say they are satisfied. But some of those managers may have a big problem. When most customers are saying they are satisfied but not completely satisfied, they are saying that they are unhappy with some aspect of the product or service. If they have the opportunity, they will defect. Companies that excel in satisfying customers excel both in listening to customers and in interpreting what customers with different levels of satisfaction are telling them.

Just because the competition is tough, that's no reason to be tough on customers, says Sir Colin Marshall, chairman of British Airways. Even in a cutthroat, mass-market business such as air travel, he argues, many people will pay a premium for good service--even those who travel economy. Marshall's views may be unconventional, but so is his company's performance: While the world airline industry has racked up billions of dollars in losses, British Airways has remained solidly profitable.

For large corporations that are refocusing their portfolios, the problem of how best to dispose of basically sound but underperforming businesses remains. Putting a business up for sale can be its kiss of death, with employee morale plummeting and prospective buyers unaware of the business's true potential value. The solution may be a restructuring joint venture, an arrangement that allows the buyer to learn about the business's untapped possibilities before buying it outright, and that often results in higher returns to the seller than a straight sale would. The authors contrast the successful joint venture involving Whirlpool and Philips with the disastrous results of Maytag's purchase of the Chicago Pacific Corp.

Wherever you look in business, there's a new level of interest in entrepreneurship. As attention at corporations swings away from retrenchment and toward growth, more and more people are wondering why some companies are able to stimulate creativity and initiative among their employees more effectively than others. What do those organizations do to convert intriguing ideas into commercial ventures?

Every business today competes in two worlds; a physical world of resources that managers can see and touch and a virtual world made of information. Executives must pay attention to how their companies create value in both arenas--the marketplace and the marketspace. But the processes for accomplishing this are not the same in the two worlds. Managers who understand how to master both can create and extract value in the most efficient and effective manner. Creating value in any stage of a virtual value chain involves a sequence of five activities: gathering, organizing, selecting, synthesizing, and distributing information. Just as someone takes raw material and refines it into someting useful, so a manager today collects raw information and adds value through these five steps.

When Jim Merrick left a well-known computer graphics company for California Vision Tools, he was excited about creating a dynamic marketing department of his own. But he failed to ascertain how much financial support his new company was likely to provide for dynamic product campaigns. Founder and CEO Mark Felton had seen his first product take off like a rocket. But now, when there are imitators all around, will Felton understand the importance of a big marketing push for his second product? Some on the executive staff like Merrick's ideas for a marketing campaign but don't see why he needs an extra $100,000 over his budget. Is Merrick just trying to keep his department's new hires happy? Should he try to implement his intro without incremental funds? Or are the other members of the executive staff being myopic? Five experts try their hands at setting California Vision Tools on the right course.

This is an MIT Sloan Management Review article. Why are some companies able to remain vital, even after extensive reengineering, while others flounder and fail? The answer, according to these authors, lies in a company's ability to rejuvenate its employees by establishing a behavioral context with four characteristics: discipline, support, trust, and stretch. The authors trace postwar corporate history to identify the pernicious qualities that have ossified many companies, using Westinghouse as an example of an oppressive context based on the elements of compliance, control, constraint, and contract. They also show how companies like Intel and 3M have renewed themselves by creating an environment in which people are the most important resource.