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Increasingly, senior executives who wish to expand their company's product, geographic, or customer reach consider alliances to be the strategic vehicle of choice. In the past five years, the number of domestic and cross-border alliances has grown by more than 25% annually. But the term alliance can be deceptive: in many cases, it really means an eventual transfer of ownership. The median life span for alliances is only about seven years, and nearly 80% of joint ventures end in a sale by one of the partners. Based on the author's experience with more than 200 alliances in various stages, they have developed a way for managers to diagnose whether an alliance is likely to lead to a sale and to devise an appropriate strategy--to assess bargaining positions and the risks of unplanned outcomes, and to plan for the partnership's evolution. They distinguish six types of alliances based on their probable outcomes: collisions between competitors, alliances of the weak, disguised sales, bootstrap alliances, evolutions to a sale, and alliances of complementary equals.

One of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when technologies or markets change. Why is it that established companies invest aggressively--and successfully--in the technologies necessary to retain their current customers but then fail to make the technological investments that customers of the future will demand? The fundamental reason is that leading companies succumb to one of the most popular, and valuable, management dogmas: they stay close to their customers. To remain at the top of their industries, managers must first be able to spot disruptive technologies. To pursue these technologies, managers must protect them from the processes and incentives that are geared to serving mainstream customers. And the only way to do that is to create organizations that are completely independent of the mainstream business.

The ability to gather, arrange, and manipulate information with computers has given business people new tools for managing. But data processing tools have done more than simply enable executives to do the same tasks better. They have changed the very concepts of what a business is and what managing means. To manage in the future, executives will need an information system integrated with strategy, rather than individual tools that so far have been used largely to record the past. The executive's tool kit has four kinds of diagnostic information: foundation information, productivity information, competence information, and resource-allocation information. The sources of the information are so diverse, and sifting through and interpreting it for a specific business are so difficult, that even small companies will need help from data specialists.

The hierarchical organization based on the strategy-structure-systems doctrine of management no longer delivers competitive results. While a top-down structure of corporate divisions gives managers tight control and allows companies to grow, it also fragments resources and creates a vertical organization that prevents small units from sharing their strengths with one another. Structural fixes, such as skunk works, alliances, and acquisitions, have not solved the problem. Based on a study of 20 companies with vanguard management styles, the authors predict a managerial revolution that will focus on horizontal processes rather than vertical structures. The job of management will be to promote three core organizational processes: frontline entrepreneurship, competence building, and renewal.

An internal guarantee is a commitment by one part of an organization to another to deliver its product or service to the complete satisfaction of the internal customer. If it fails to do so, it will incur a meaningful penalty, monetary or otherwise. Moreover, it is the employees involved--not management--who devise the commitment. The result? A spirit of partnership develops between different parts of the organization, and an environment of blameless error takes hold in which employees are rewarded, not punished, for identifying problems instead of sweeping them under the rug. In developing a guarantee, a department must first identify its mission in the organization. This leads to the second step: the ability to state exactly who its internal customers are. Third, the department should identify what its internal customers need. Fourth, drawing on their input, the department should design a guarantee that reflects those needs. Finally, those involved must decide on a penalty that is meaningful to the internal customer as well as to the supplier.

If the 1980s were the decade when the movement to empower U.S. factory and office workers took root, the 1990s are the decade when empowerment is sweeping corporate boardrooms. Empowerment means that outside directors have the capability and independence to monitor the performance of top management and the company; to influence management to change the strategic direction of the company if its performance does not meet the board's expectations; and, in the most extreme cases, to change corporate leadership. Because the chief executive is also the board chair in more than 80% of the country's publicly held corporations, most CEOs view board empowerment with trepidation. But, Jay Lorsch argues, if CEOs resist the trend, they and their companies will be the losers because the empowered board is here to stay. What is required is a new form of teamwork in which directors and senior managers understand one another's roles and collaborate effectively to achieve corporate success.

The nation-state has begun to crumble. What is emerging in its place is the region-state, which is defined by economic activity, not political borders. The factors behind the shift are threefold: First, people, capital, and information can move across borders so quickly that economic decisions are often based on the fear that needed resources will go elsewhere. Second, as consumers see how other people live, they pressure their governments to give them access to the best and cheapest products. And third, as governments defer to special interests and try to provide constituents with a civil minimum of services, they invest inefficiently and as a result destroy wealth. Although political leaders will resist acknowledging the demise of the nation-state, only those who can accept it and promote region-states within and across their borders will be able to provide the best quality of life for their constituents.

The use of derivatives--a broad term referring to such diverse instruments as futures, swaps, and options--has become increasingly popular in recent years as corporations look for new and better ways to manage risk. The high-profile losses of Procter & Gamble, Metallgesellschaft, and other companies are sending an important signal to senior managers: financial decisions that were previously designed and implemented by specialists need to be monitored more closely from the very top of organizations. In "Framework for Risk Management" (November-December 1994), Kenneth A. Froot, David S. Scharfstein, and Jeremy C. Stein present a guide for helping managers develop a coherent risk-management strategy. This issue's Perspectives section opens up the discussion on derivatives to a group of experts.

Presents results from a study of how young managers define ethical issues, think about these issues, and resolve them. Several patterns emerge from this study. First, in many cases, young managers received explicit instructions from their middle-manager bosses or felt strong organizational pressures to do things that they believed were sleazy, unethical, or sometimes illegal. Second, corporate ethics programs--codes of conduct, mission statements, hot lines, and so forth--proved to be of little help to these young managers. Third, many of them believed that their companies' executives were out-of-touch on ethical issues, either because they were too busy or because they sought to avoid responsibility. Fourth, the young managers resolved the dilemmas they faced largely on the basis of personal reflection and individual values, not through reliance on corporate credos, company loyalty, the exhortations and examples of senior executives, or philosophical principles or religious reflection. Ironically, however, while the interviewees typically described their experiences as difficult or even traumatic, many believed they had learned important lessons about themselves and their work.

A business strategy must be congruent with the capabilities of a firm as well as both its market and nonmarket environments. The market environment includes those interactions between the firm and other parties that are intermediated by markets or private agreements. The nonmarket environment includes those interactions that are intermediated by public institutions. A business strategy must integrate both market and nonmarket components.

This is an MIT Sloan Management Review article. In a global economy, managers constantly negotiate with people from other cultures, whether the issue is coordinating operations within a multinational firm, arranging a joint venture, or convincing a foreign government to approve construction of a plant. Yet, managers have had to rely on simplistic formulas--following lists of "dos and don'ts"--or very demanding ones--"Do as the Romans do"--to deal with the cultural aspects of these negotiations. But a number of strategies are available. The author presents these strategies according to the parties' level of familiarity with each other's cultures and the extent to which they can explicitly coordinate their strategies. These factors determine the subset of strategies that are realistically feasible for an individual manager.

Structure follows strategy; and systems support structure. In the high-growth environment of post-World War II, a management doctrine rose up around these two aphorisms. But today the business environment has changed. A change in management doctrine is needed to match this new landscape. After 5 years researching 20 leading European, U.S., and Japanese companies, the authors concluded that senior managers must change their own priorities and way of thinking. Beyond designing corporate strategy, they must shape a shared institutional purpose. They must expand their focus from devising formal structures to developing organizational processes. And more than just managing systems, they must develop people. Top management's role in the companies researched already reflects the changes the authors prescribe. Consequently, 3M has managed to retain an entrepreneurial spirit despite its $14 billion bulk. ABB transformed two "also-ran" companies into the leading competitors in the global power-equipment industry. And companies like AT&T, Royal Dutch/Shell, Intel, Andersen Consulting, Kao, and Corning are doing well despite what some predicted as the inevitable decline of large corporations.

The United States has the best stock markets in the world, many people believe. And the SEC works hard to keep them that way. The U.S. markets are the broadest and fairest anywhere. The average American can trade with little fear of rigged markets or insider dealings. But there is a dark side to this environment of perfectly liquid markets. Unwittingly, the U.S. system nurtures market liquidity at the expense of good governance. The system prevents shareholders from engaging managers in candid dialogues and providing informed oversight and counsel. It encourages capable executives to neglect their fiduciary duties, thus injuring the long-term interests of companies and shareholders. Clever tinkering with insider-trading and disclosure laws cannot get around the basic conflict between market liquidity--which requires transient, arm's length shareholding--and close, honest shareholder-manager relationships.

U.S. managers know that the formidable success of Japanese automakers stems to a great extent from their close relationships with suppliers. Toyota, Nissan, and others, working closely with their respective lean-production networks of parts suppliers, produce high-quality vehicle models quickly and inexpensively; competitors rooted in traditional mass-production operations, which have typically compelled manufacturers to keep suppliers at arm's length, are left struggling to catch up. Most competitors know that a key factor in the success of Japanese network relationships is the practice of dedicating supplier assets to the customer. Nevertheless, many U.S. managers still do not fully appreciate just how profitable the practice of using dedicated assets can be. A two-year study that Jeffrey Dyer conducted of production networks in the auto industry strongly reinforces the contention that dedicated assets provide Japanese manufacturers with substantial competitive advantages. U.S. managers who face closing plants, building plants, or changing suppliers have much to learn from their Japanese competitors.

In recent years, managers have become aware of how their companies can be buffeted by risks beyond their control. To insulate themselves from such risks, many companies are turning to the derivatives markets, taking advantage of instruments like forwards, futures, options, and swaps. Although heavily involved in risk management, most companies do not have clear goals underlying their hedging programs. Without such goals, using derivatives can be dangerous. The authors present a framework to guide top-level managers in developing a coherent risk-management strategy. That strategy cannot be delegated to the corporate treasurer--let alone to a hotshot financial engineer. Ultimately, a company's risk-management strategy needs to be integrated with its overall corporate strategy. A risk-management program should have one overarching goal: to ensure that a company has the cash available to make value-enhancing investments.

Many companies throughout the world, seeking ways to develop products more efficiently, are recasting their relationships with suppliers--often modeling their efforts on approaches used by world-class Japanese manufacturers like Toyota and Nissan. The favored Japanese practices include using fewer suppliers and forging longer-term relationships with them, prodding suppliers to improve continually, and involving suppliers in design and development. But many managers who adopt Japanese-style practices have an incomplete understanding of them and, as a result, may be unable to gain all the benefits Japanese manufacturers enjoy. Successful partnerships depend on the balance among a supplier's technological capabilities, a customer's willingness to share information, and both companies' strategic requirements. Using the Japanese approach as a model, the authors describe four roles that suppliers can play in a long-term cooperative relationship. Each role carries different responsibilities during product development, and the relationships between supplier and customer vary considerably in closeness and intensity.

Merck's acquisition of Medco Containment Services in November 1993 set off a wave of controversial mergers between pharmaceutical companies and prescription-benefits-management companies. Drug-company executives argue that PBMs can provide valuable information about the way drugs are prescribed and used. But critics of the mergers question the PBMs' practice of offering incentives to retail pharmacists who persuade physicians to prescribe certain drugs. Critics also speculate that aggressive growth of acquired PBMs contributes to price competition, which may decrease profits and incentives for new-drug research. The PBM acquisitions are attempts to confront profound changes in the industry, but does ownership of PBMs create competitive advantage? Proponents of the mergers argue that a PBM can provide a pharmaceutical company with superior information, better access to customers, and the opportunity to introduce new products, such as capitation and disease management. But before drug companies can fully exploit the potential of alliances with PBMs, they face enormous challenges, including an environment that may favor less investment in R&D and important ethical and legal questions.

In the last ten years, products have proliferated in every category of consumer goods and services, and the deluge shows few signs of letting up. Most companies are pursuing product expansion strategies--in particular, line extensions--full steam ahead. But as John Quelch and David Kenny argue in "Extend Profits, Not Product Lines" (September-October 1994), evidence indicates that such aggressive tactics can be hazardous. Quelch and Kenny offer several guidelines for avoiding the pitfalls of wanton line extensions and sharpening product line strategies: improve cost accounting, allocate resources to popular products, research consumer behavior, coordinate marketing efforts, work with channel partners, and foster a climate in which product-line deletions are encouraged. In this issue's Perspectives section, nine experts offer their views on product-line management and the logic of line extensions.

One of the profound consequences of the ongoing information revolution is its influence on how economic value is created and extracted. Specifically, when buyer-seller transactions occur in an information-defined arena, that information is more easily accessed and absorbed, and arranged and priced in different ways. Most important, the information about a product or service can be separated from the product or service itself. In some cases, the information can become as critical as the actual product or service in terms of its effect on a company's profits. As a result, information-defined transactions--or value creation and extraction in the marketspace--create new ways of thinking about making money and thus a new value proposition. Today both marketplace and marketspace transactions are occurring. The authors have researched how companies work marketplace and marketspace to their best advantage. These companies' experiences provide a useful backdrop for thinking about the marketspace and suggest a strategic model for maximizing opportunities in this emerging area.

The industralized world has been undergoing a crisis during the last three years--its worst since 1945. Even now, as the long-awaited recovery finally begins to gather momentum, it is failing to make itself felt in the most critical domain: employment. In Europe, unemployment is expected to continue increasing, probably until the end of 1995. The authors argue that the failure of the current recovery to translate into a significant improvement in employment is evidence that what the world has been going through is not merely a crisis but also an economic revolution. Perhaps the most spectacular component of this revolution is the shift in the world economy's center of gravity to Asia. These changes are creating new rules and necessitating a new modus operandi for the key players in the world economy. If they play by those rules, the authors argue, there is no reason to think they cannot bring about a period of widespread prosperity similar to the one following World War II.