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Companies make capital investments to create and exploit profit opportunities. Opportunities are options--rights but not obligations to take some future action. The old net present value presumption that investment decisions are either reversible or now-or-never propositions turns out to be flawed. Irreversibility, uncertainty, and the choice of timing alter the investment decision in critical ways. Investment expenditures are irreversible when they are specific to a company or to an industry. The simple NPV rule should be modified: Instead of being merely positive, the present value of the expected stream of cash from a project must exceed the cost of the project by an amount equal to the value of keeping the investment option alive. Because they create and preserve options, decisions such as those to test a market or conduct R&D enhance a company's flexibility and should be made more readily than a naive NPV would suggest; but decisions that reduce flexibility should be made more hesitantly and be subjected to stiffer hurdle rates than the cost of capital.

The technological possibilities of the virtual organization are seductive. But its managerial and personal implications require rethinking old notions of control. As it becomes possible for more work to be done outside the traditional office, trust will become more important to organizations. Handy proposes seven rules of trust. Trust is not blind: It needs fairly small groupings in which people can know each other well. Trust needs boundaries: Define a goal, then leave the worker to get on with it. Trust demands learning and openness to change. Trust is tough: When it turns out to be misplaced, people have to go. Trust needs bonding: The goals of small units must gel with the larger group's. Trust needs touch: Workers must sometimes meet in person. Trust requires leaders. Virtuality's Three I's (information, ideas, intelligence) can improve quality of life. The question Handy asks is, Will they be for everyone? He believes the potential exists for the Three I's to benefit not just organizations but also those with whom they do business and society as a whole.

Once the rage of Western capitalism, leveraged buyouts have lost their glamour and much of their respectability. Suggest an LBO as a healthy way to create value, and most people will assume you are just trying to stimulate lively conversation. Propose it as a means of improving operating performance by restoring strong, constructive relationships among owners, managers, and other corporate stakeholders, and you may be viewed as a refugee of the 1980s, deluded by the decade of greed. Although some LBOs may have deserved the criticism they have received, the overall perception about them is distorted, the authors contend. Their research at one LBO firm, Clayton, Dubilier & Rice (CD&R), reveals an approach to ownership and governance that challenges the dominant view. Instead of finding impersonal transactions in which buyers put a lid on investment, growth, and managerial autonomy, the authors found that chief executives had more freedom to exercise discretion under LBO ownership than they had had under corporate ownership. CD&R's experience over more than a decade offers insights into what constitutes best practice in the ownership and governance of corporate enterprises.

Executives pondering which parts of their information technology (IT) function should be outsourced and which should be kept in-house usually ask themselves, Does the particular IT operation provide a strategic advantage or is it a commodity that doesn't differentiate us from our competitors? If it is a strategic service, they keep it in-house. If it is a commodity--especially one that a supplier claims it can provide inexpensively--they outsource it. If only the decision were that simple. Between 1991 and 1993, the authors studied 40 U.S. and European companies that had grappled with the issue of outsourcing IT. Their conclusion: The strategic-versus-commodity approach usually led to disappointments. Instead, the authors argue, a company's overarching objective should be to maximize flexibility and control so that it can pursue different options as it learns more or as its circumstances change. The way to accomplish that goal is to maximize competition. Managers should not make a onetime decision whether to outsource. They should create an environment in which potential suppliers--external as well as internal--are constantly battling to provide IT services.

Although reviled in the business press as short-term fads, rewards programs are gaining popularity. Rewards can and do build customer loyalty. Unfortunately, they are widely misunderstood and often misapplied. A rewards program needs to share value in proportion to the value the customer loyalty creates for the company. A company must first make sure that its rewards align with company capabilities, then take into account the five elements that determine value to a customer: cash value, choice, aspirational value, relevance, and convenience. Any company can attain access to the full set of capabilities. Some businesses choose to band together with others in a rewards network. The authors detail the ways American Express, General Motors, State Farm, Neiman Marcus, Saks Fifth Avenue, MCI, Air Miles, and others are building customer loyalty.

No industrialized nation can be an economic island, yet Japan continues to behave like one. When foreign goods and services--such as food, airline tickets, and postal service--are priced much lower than those provided in Japan, the government's response is to tighten regulations or make it illegal for Japanese companies and consumers to buy those goods. Consumers have paid for such protections through higher-priced goods, smaller living spaces, and longer commutes. The results are clear when one looks at the decreasing affluence of each successive generation--from those who rebuilt the country after World War II and reaped the promise of a good life to the Nintendo kids who have replaced family and country with on-line relationships. With the youngest generation, the frayed thread of culture and values that has bound the generations has finally snapped. Interactive games have given Nintendo kids the opportunity, not readily available in Japanese culture, to experiment with different roles and outcomes and to believe that they can control their own fate. As they grow up, their economic and political decisions will force their government to participate in the global economy.

The economic distress of America's inner cities may be the most pressing issue facing the nation. The lack of businesses and jobs in disadvantaged urban areas fuels not only a crushing cycle of poverty but also crippling social problems such as drug abuse and crime. And, as inner cities continue to deteriorate, the debate on how to aid them grows increasingly divisive. The efforts of the past several decades to revitalize inner cities have failed. The time has come to recognize that revitalizing the inner cities will require a radically new approach. While social programs will continue to play a critical role in meeting human needs and improving education, they must support--and not undermine--a coherent economic strategy. The question we should be asking is how inner-city-based businesses and nearby employment opportunities for inner city residents can proliferate and grow. A sustainable economic base can be created in the inner city, but only as it has been created elsewhere: through private, for-profit initiatives and investment based on economic self-interest and genuine competitive advantage.

The news media and the government are entwined in a vicious circle of mutual manipulation, mythmaking, and self-interest. Journalists need crises to dramatize the news, and government officials need to appear to be responding to crises. Together, they have woven a web of lies and have misled an increasingly skeptical public. Three books--News and the Culture of Lying: How Journalism Really Works, by Paul H. Weaver; Who Stole the News?: Why We Can't Keep Up with What Happens in the World, by Mort Rosenblum; and Tainted Truth: The Manipulation of Facts in America, by Cynthia Crossen--all deal with the corruption of the press. The news media's focus on facades rather than issues reflects a culture obsessed with personalities and a public plagued with a short attention span. What passes as business news is often corporate propaganda taken from press releases. While many of the reforms offered by the books' authors--such as breaking up media monopolies and reverting to drab reports of events and issues rather than stories of people and crises--are sensible, they are unlikely ever to come about. For years to come, businesses are likely to need more corporate propagandists, not fewer.

The expanded use of project management techniques is not always met by a concomitant increase in the pool of competent project managers. Senior managers readily acknowledge the ad hoc manner in which most project managers acquire their skills, but are unsure how better to develop a supply of well-trained project leaders for the future. Over the last several years, we have conducted interviews with dozens of senior project managers asking the question: "What information were you never given as a novice product manager that, in retrospect, could have made your job easier?" From the responses, we offer some rules as a useful means of understanding the challenge project managers face and some ways to address these concerns: understand the unique context of project management; recognize project team conflict as progress; understand who the stakeholders are and what they want; accept and use the political nature of organizations; understand what "success" means, operationally; remember that enthusiasm and despair are both infectious; build and maintain a cohesive team; and use time carefully, or it will use you.

In July 1991, Lawrence A. Bossidy became chairman and CEO of AlliedSignal, the $13 billion industrial supplier of aerospace systems, automotive parts, and chemical products. The company's story since then appears to be the typical slash-and-burn turnaround, but the view from the inside is far more interesting for anyone grappling with what it takes to lead a competitive organization and sustain its performance over the long term. Bossidy is a straight-shooting, tough-minded, results-oriented business leader. But he is also a charismatic and persistent coach, determined to help people learn and thereby to provide his company with the best-prepared employees. In this interview, Bossidy explains his views on the leader's role in changing a large organization. He discusses how he uses values and goals to "coach people to win." And he explains his efforts to focus AlliedSignal's management on three core processes--strategy, operations, and human resources.

While the core competence concept appealed powerfully to companies disillusioned with diversification, it did not offer any practical guidelines for developing corporate-level strategy. To fill the gap, the authors propose the parenting framework, with tools for answering two questions: Which business should a company own? What parenting approach will get the best performance from those businesses? To determine the fit between a parent and its businesses, corporate strategists should look at four areas: the critical success factors of the business, the parenting opportunities in the business, the characteristics of the parent, and the financial results. Next, to determine which businesses to keep and which to divest, they should rank them into five categories: those that fit well; those that fit in some ways; those that fit but have little potential; those with a possibility of value destruction; and those that fit in parenting opportunities but not in critical success factors.

In January 1990, with inflation at 50%, the newly democratic Polish government introduced a draconian plan for a market economy. Most observers expected the Balcerowicz Plan, sometimes referred to as shock therapy, to spur reform through the restructuring of large state enterprises. When it failed to do so, they criticized it. But the plan succeeded in encouraging entrepreneurship, which now appears to be the main force driving economic reform in Poland. It was as if the Polish economy started over in January 1990. The central mechanism for the reallocation of labor and capital from state to private activity has enabled the growth of hundreds of thousands of private businesses. The authors argue that, although state enterprises have proved too unwieldy for rapid change, the Balcerowicz Plan has not failed. If anything, it could have gone further to stabilize inflation and help private enterprise.

Orange County, Metallgesellschaft, Procter & Gamble, and Gibson Greetings all have one thing in common: all are losers in the new global derivatives markets. Those visible losses in a market that has long been suspected of being uncertain and dangerous have raised new concerns about the stability of the international financial system. Two new publications provide contrasting perspectives on the issue. In The Vandals' Crown: How Rebel Currency Traders Overthrew the World's Central Banks, U.S. journalist Gregory J. Millman warns about the potential power of the free marketers from Chicago who trade anything that can be priced. The other perspective comes from a report by the Bretton Woods Commission led by Paul Volcker, former chairman of the Federal Reserve. The authors of Bretton Woods: Looking to the Future argue that regulators must defend and strengthen the markets against the speculative attacks of the traders. Richard O'Brien, chief economist of American Express Bank, gives his perspective on the struggle, and John Calverley, American Express Bank's chief investment strategist, writes a companion piece on the currency wars between governments and the markets.

Britain's Imperial Chemical Industries (ICI), founded in 1926, was for decades the dominant producer in its home market. As early as the 1940s, the board wondered whether a company so big and diverse was manageable, but ICI kept growing. During the 1980s, the company sought new sources of growth to offset sluggish sales of older products. The result was increased complexity of an already hard-to-manage portfolio. The stock price failed to reflect the value of many of ICI's businesses, and a takeover threatened the company in 1991. A company task force, aided by outsiders, discovered that ICI's businesses could be divided into two clusters. Each group needed its own style of corporate parenting, and ICI could not parent both of them effectively. In 1992, ICI spun off its pharmaceuticals, agrochemicals, and specialty chemicals into a second company called Zeneca. So far, the demerger has been a financial success. ICI's story shows how parenting skills that are developed in one phase of an industry's evolution may become less relevant in the next. The challenge for managers of multibusiness companies is to recognize the shift--and act on it before a crisis.

The age of the empowered board of directors is here. Major public corporations now acknowledge that they have no choice but to make management more accountable to shareholders and that strengthening the hand of outside directors is the logical means for doing so. But exactly how to proceed remains an open question. More specifically, directors and managers wonder how the relationship between the board and the CEO should be recast. Most directors and managers agree that the board should be a more effective watchdog without undermining management's ability to run the business. They also say boards need to decide how to distance themselves more from their CEOs without turning a constructive relationship into an adversarial one. Five corporate leaders--John G. Smale, Alan J. Patricof, Sir Denys Henderson, Bernard Marcus, and David W. Johnson--share their views.

Customers, whether consumers or businesses, do not want more choices. They want exactly what they want--when, where, and how they want it--and technology now makes it possible for companies to give it to them. But few companies are exploiting that potential. Most managers continue to view the world through the twin lenses of mass marketing and mass production. They try to churn out a greater variety of goods and services and to tailor their messages to ever finer market segments. But they end up bombarding their customers with too many choices. A company that aspires to give customers exactly what they want must use technology to become two things: a mass customizer that efficiently provides individually customized goods and services, and a one-to-one marketer that elicits information from each customer. The process of acquiring those skills will bind producer and consumer together in what the authors call a learning relationship--an ongoing collaboration to meet the customer's needs over time that will continually strengthen their bond.

At its core, corporate governance is not about power but about ensuring that decisions are made effectively. That is why reforms of power relationships will not by themselves create more smoothly run organizations. What is needed is a system in which senior managers and the board truly collaborate on decisions and both regularly seek the input of shareholders. The first step to improving a company's governance system is rethinking the role of directors. They must have expertise in the company's industry and in finance; meeting procedures should focus on new strategies, not just on reviewing past performance; directors need better access to company information; they should be required to devote substantial time to the corporation; and their compensation should be linked to stock performance. Second, managers, board members, and shareholders must set up lines of regular and direct communication.

A problem facing managers in the 1990s is how to exercise adequate control in organizations that demand flexibility, innovation, and creativity. How do senior managers protect their companies from control failures when employees are encouraged to redefine how they do their jobs? Today's managers must permit employees to initiate process improvements and new ways of responding to customers' needs--but in a controlled way. Fortunately, the tools to reconcile the conflict between creativity and control are at hand: Belief systems communicate core values and inspire all participants to commit to the organization's purpose. Boundary systems establish rules and identify pitfalls. Diagnostic control systems allow managers to ensure that employees are meeting goals efficiently and effectively. And interactive control systems enable top-level managers to focus on strategic uncertainties.

Increasingly, companies are outsourcing the manufacture of parts for their products. But what should they be looking for in a supply partner and what form should these partnerships take? The authors look to the auto industry for answers.

Virtually all managers are aware that the key to winning in the market today is tailoring one's offerings to the needs of each customer while maintaining low costs and prices. But most manufacturers have focused only on the products themselves, largely ignoring another element that differentiates a company's offerings and has a huge impact on costs and profits: services. Instead of tailoring their packages of services to customers' individual needs, many suppliers simply add layers of services to their offerings. The authors have found that suppliers usually give customers more services than they want at prices that reflect neither their value to customers nor the cost of providing them. But some companies are realizing that they can lower the cost of providing services and use them more effectively to meet customers' needs, gain more business, and enhance profits. From the authors' study of the best practices of those companies, they have developed a model for providing flexible service offerings.