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How do we build organizations that are skilled enough, smart enough, and, most of all, enduring enough to maneuver through a treacherous competitive environment--without choking on the systems and procedures that create that strength? How do we ensure crisp execution and flawless performance--without suffocating the democratic spirit and individual creativity that are the heart of innovation? These are the questions that will occupy companies and managers through the end of the century, for they strike at the heart of business and life in the New Economy. They are also the central questions in the three books discussed in this issue's Books in Review section: Out of Control: The Rise of Neo-Biological Civilization by Kevin Kelly, Built to Last: Successful Habits of Visionary Companies by James C. Collins and Jerry I. Porras, and Show-Stopper! The Breakneck Race to Create Windows NT and the Next Generation of Microsoft by G. Pascal Zachary.

On November 1, 1994, P. Roy Vagelos retired after nearly 20 years at Merck. As head of the research labs from 1975 to 1985 and then as CEO, Vagelos turned Merck into a pharmaceutical powerhouse through a series of breakthrough drugs. More recently, Vagelos shocked this once conservative corner of the medical industry with Merck's acquisition of the prescription-benefits-management company (PBM) Medco Containment Services, which provides prescription drugs to HMOs and employees of large corporations. Merck's acquisition of Medco represents a $6.6 billion bet on where the future of the pharmaceutical industry lies. In today's managed-care environment, Vagelos argues, the company that best controls the information flow from doctor to patient to pharmacist to plan sponsor has the greatest chance of succeeding. Medco has information on 38 million patients, which allows Merck to learn a lot more about how its drugs are prescribed and used and, ultimately, how effective they are in fighting disease.

How should a company behave in a "multifaceted relationship," when a supplier, customer, or partner is also a competitor? This dilemma is faced by a growing number of firms, especially in high-technology and global industries. Aside from technology and globalization, trends in regulation, diversification, product characteristics, and outsourcing often lead to these multifaceted relationships. What are the methods for managing them? One response is "stay away or get out," but avoiding or exiting complicated relationships can be costly. Another method is to "divide and conquer"; by carefully partitioning the separate modes of interaction with the other firm, the company can act as if the multifaceted relationship does not exist. An alternative approach is to "centralize intelligence," either by having different departments or divisions that interact with the competitor keep each other informed, or by creating a task force or committee whose function is to pool all information about the relationship. It is simplistic to urge all firms to launch blithely into multifaceted relationships; but when such relationships are inevitable, companies that learn to live with and benefit from them can stake out a better position for the future.

During the last decade, U.S. manufacturers have narrowed if not eliminated the competitive gap between themselves and such foreign rivals as the Japanese and the Germans. But how can they take the lead and retain it? What will it take to stay ahead? To answer those daunting questions, an ad hoc group of 27 academics and industry executives formed the Manufacturing Vision Group in 1988. They studies development projects at Chaparral Steel, Digital Equipment, Eastman Kodak, Ford Motor, and Hewlett-Packard. Development projects are microcosms of an organization. And when designed and managed well, they generate powerful, distinctive capabilities as well as winning products or processes. The most successful projects combine seven key elements, which, when applied comprehensively, optimize development, foster learning, and initiate change throughout an organization. Those elements are: core capabilities, guiding visions, organization and leadership, ownership and commitment, "pushing the envelope," prototypes, and integration.

To be a leader in global manufacturing in the 1990s, a company must excel in two seemingly contradictory ways. First, it must constantly build and refresh its individual areas of expertise so that it has the critical capabilities needed to stay ahead. And second, it must get its ever-changing mix of disciplines to work together in an ever-changing competitive environment. Most manufacturers, especially those companies that have reorganized themselves by cross-functional processes, have already discovered how difficult it is to integrate various disciplines and still maintain functional excellence. But development projects offer a solution. Development projects are the critical juncture where functional groups meet and are therefore the true test of an organization's integrative abilities. More important, they can be used as a tool for strengthening the relationship among functions, while still giving those functions the room they need to advance their own expertise. The Kodak FunSaver project illustrates how a company can encourage functions to work together effectively, enhance functional expertise, and create a winning product to boot.

Leadership is the key to developing great products--products that surprise and delight customers. To achieve that goal, all the technical elements of a product must work well together as a system. The manufacturing process must produce everything that the design requires and the product must be delivered to customers in an outstanding fashion. And if the development of a great product is not an isolated case--if one great product is followed by another and another--the result is a great enterprise. Leadership is the key to achieving that kind of consistency. Eastman Kodak's FunSaver camera and Hewlett-Packard's DeskJet printer are examples of development efforts that created great products. Each became the basis for a whole family of products that has created a significant business for its company. The Manufacturing Vision Group studies successful projects that had powerful guiding visions for business strategy, project, and product. Moreover, these three visions were mutually reinforcing, energizing the people on the teams, focusing attention and effort on the right things, and getting them done in the right way.

Do well-regarded representatives of the business world often check their toughness at the door of the nonprofit boardroom? A number of widely publicized cases suggest that the answer is yes, and many business executives agree. What is the explanation? In this adaptation from his most recent book, William Bowen, president of the Andrew W. Mellon Foundation and the former president of Princeton University, argues that nonprofit boards have much to learn from the business world. But a combination of inappropriate motivations and unfamiliar and uncomfortable situations can prevent business people from contributing effectively in a nonprofit setting. People from the for-profit world often join a nonprofit board to take a vacation from the bottom line and to shed their "barbarian" image. They may therefore be less disciplined than nonprofit organizations need them to be. The management and staff of nonprofit organizations can help facilitate more effective participation by business executives, but business people themselves must make a considerable effort to contribute their skills, discipline, and know-how in this unfamiliar realm.

The next wave of economic growth is going to come from knowledge-based businesses. What will those businesses and their products look like? A tire that notifies the driver of its air pressure and a garment that heats or cools in response to temperature changes are early versions of knowledge-based, or "smart," products already on the market. They are smart because they filter and interpret information to enable the user to act more effectively. The development of knowledge-based business reflects an even larger transformation occurring in our society. Education is no longer focused on the student years but is considered a lifelong pursuit. In knowledge economies, the rapid pace of technological change means that learning must be constant and that education must be updated throughout one's working life. Business, more than government, is instituting the changes that are required for the emerging knowledge-based economy. And over the next few decades, the private sector will come to eclipse the public sector as our predominant educational institution.

In his thirty-first article for HBR, Peter F. Drucker argues that what underlies the current malaise of so many large and successful organizations worldwide is that their theory of the business no longer works. The story is a familiar one: a company that was a superstar only yesterday finds itself stagnating and frustrated, in trouble and, often, in a seemingly unmanageable crisis. The root cause of nearly every one of these crises is not that things are being done poorly. It is not even that the wrong things are being done. Indeed, in most cases, the right things are being done--but fruitlessly. What accounts for this apparent paradox? The assumptions on which the organization has been built and is being run no longer fit reality. These are the assumptions that shape any organization's behavior, dictate its decisions about what to do and what not to do, and define what an organization considers meaningful results. These assumptions are what Drucker calls a company's theory of the business.

The mission of industrial design has traditionally been to support engineering and marketing by improving the look and feel of a product. But a handful of pioneering companies--such as Thomson Consumer Electronics, Apple Computer, and Northern Telecom--are extending the parameters of design, pushing to the forefront something that has been an afterthought at most companies: a product's usability. User-centered design goes beyond ergonomics to encompass the cognitive aspects of using a product, or how logical and natural a product is to use, as well as the emotional aspects, or how people feel about using it. Thomson, for example, has declared that all its entertainment products must be engaging, foster a sense of discovery, and eliminate fear. And Northern Telecom has defined usability as simplicity, ease of use, and conspicuous customer value. Photographs of Thomson's System Link universal remote, Apple's PowerBook computer, and Northern Telecom's Vista modular phone illustrate how the new definition of usability can be incorporated into products.

In the last 10 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 more and more evidence is indicating the pitfalls of such aggressive tactics. The strategic role of each product becomes muddled when a line is oversegmented. Also, a company that extends its line risks undermining brand loyalty. Some companies, such as Procter & Gamble, Chrysler, and a leading U.S. snack foods company, have discovered that a carefully focused and well-managed line can increase profits and sales volume. John A. Quelch and David Kenny describe how marketing managers can sharpen their product-line strategies by improving cost accounting, allocating resources to popular products, researching consumer behavior, coordinating marketing efforts, working with channel partners, and fostering a climate in which product-line deletions are not only accepted but also encouraged.

With one-quarter of the world's population, and consumer spending increasing by as much as 10% annually, China offers an opportunity that marketers of branded goods can't ignore. Foreign companies seeking to win a piece of this growing market must overcome nagging uncertainties about the country's stability. They must also understand guo qing ("Chinese characteristics" or "the special situation in China") in order to deliver a product with the value, quality, and convenience that will appeal to Chinese consumers. Given the fragmentation of most Chinese consumer markets, Western marketers should concentrate on 3 to 5 key cities and then build sales, distribution, and manufacturing capabilities over a wider area. Multinationals already operating in China should try to cover 15 to 20 key cities by the end of this century. The challenge for both new entrants and seasoned marketers is to continue adapting products and marketing practices to guo qing.

In "Making Competition in Health Care Work" (July-August 1994), Elizabeth Olmstead Teisberg, Michael E. Porter, and Gregory B. Brown ask a question that has been absent from the national debate on health care reform: How can the United States achieve sustained cost reductions while at the same time maintaining quality of care? The authors argue that innovation driven by rigorous competition is the key to successful reform. A lasting cure for health care in the United States should include four basic elements: Corrected incentives to spur productive competition, universal insurance to secure economic efficiency, relevant information to ensure meaningful choice, and innovation to guarantee dynamic improvement. In this issue's Perspectives section, eleven experts examine the current state of the health care system and offer their views on the shape that reform should take.

Many academics and public relations specialists have suggested that, when responding to crises, executives should make full and immediate disclosures about the circumstances surrounding the event. Corporate legal advisors, on the other hand, often caution their clients against unnecessary public statements. This article examines the pros and cons of a full disclosure policy and the circumstances in which it should or should not be used. In some instances, what you don't say can hurt you. For example, nondisclosure might lead journalists--hard pressed by deadlines--to seek other sources, many of which might have a vested interest in making the company appear in the worst light. But in other situations, what you do say can hurt you. Cases are cited in which organizations revealed information that shocked constituents, and such news became a separate and more damaging crisis in itself. The point is, we have scant knowledge about firms that managed crises successfully by withholding information; we see only those cases in which crises were played out in the media, so we have a distorted view of how crises should be handled. Disclosure is rarely an all-or-nothing choice; the decision-maker's goal should be that of finding the appropriate amount and pace of reporting to the public.

The new but now familiar techniques of corporate communication--focus groups, surveys, management-by-walking-around--can block organizational learning even as they help solve certain kinds of problems. These techniques do help gather simple, single-loop information. But they also promote defensive reasoning by encouraging employees to believe that their proper role is to criticize management while the proper role of management is to take action and fix whatever is wrong. Managers focus so earnestly on "positive" values--employee satisfaction, upbeat attitude, high morale--that it would strike them as destructive to make demands on employee self-awareness. Yet employees dig deeper and harder into the truth when the task of scrutinizing the organization includes looking at their own roles, responsibilities, and potential contributions to corrective action.

Collaboration in business is no longer confined to conventional two-company alliances, such as joint ventures or marketing accords. Today groups of companies are linking together for a common purpose. Consequently, a new form of competition is spreading across global markets: group vs. group. Call them networks, clusters, constellations, or virtual corporations, these groups consist of companies joined together in a larger overarching relationship. The individual companies in any group differ in size and focus, but they fulfill specific roles within their group. Furthermore, within the network or group, companies may be linked to one another through various kinds of alliances, ranging from the formality of an equity joint venture to the informality of a loose collaboration.

Is your company a rule maker or a rule follower? Does your company focus on catching up or on getting out in front? Do you spend the bulk of your time as a maintenance engineer preserving the status quo or as an architect designing the future? Difficult questions like these go unanswered not because senior managers are lazy--most are working harder than ever--but because they won't admit that they are less than fully in control of their companies' future. In this adaptation from their upcoming book, Hamel and Prahalad urge senior managers to look toward the future and ponder their ability to shape their companies in the years and decades to come. Creating the future, as Electronic Data Systems has done, for example, requires industry foresight. Since change is inevitable, managers must decide whether it will happen in a crisis atmosphere or in a calm and considered manner. Too often, profound thinking about the future occurs only when present success has been eroded.

More than ever, the public is looking to the nonprofit sector to address the pressing social problems that are hobbling the United States. As a result, all nonprofits face increased scrutiny from both benefactors and government regulators. To survive under this spotlight, a nonprofit needs a powerful and proactive board of directors to provide oversight. The board must assume the roles played in a business by owners and the market, ensuring that the nonprofit accomplishes its mission efficiently and devising its own system of measurement and control. Four questions help board members create such a system: 1) Are the organization's goals consistent with its financial resources? 2) Is the organization practicing intergenerational equity? 3) Are the sources and uses of funds appropriately matched? 4) Is the organization sustainable?

When companies join forces--whether on research or as full-scale partners--they often tend to emphasize the legal or financial aspects of the deal. But smart managers know that alliances involve much more. Like human relationships, business partnerships are living systems that have endless possibilities. And companies that know how to tap those possibilities and manage alliances effectively have a key corporate asset. Rosabeth Moss Kanter calls it a collaborative advantage. After completing a study of more than 37 companies from 11 parts of the world, Kanter concludes that relationships between companies grow or fail much like relationships between people. By paying attention to the human aspects of alliances, managers can leverage the maximum value from them, Kanter believes. Examples of companies enjoying a collaborative advantage today are FCB and Publicis; Northern Telecom and Matra Hachette; and the European Retail Alliances partners, Ahold, Argyll, and Groupe Casino.

In this article, Stanford economist Paul Krugman argues that fears about the impact of Third World competition are questionable in theory and flatly rejected by the data. After examining the consequences of isolated productivity improvements in three increasingly realistic economic models, Krugman concludes that an increase in Third World labor productivity means an increase in world output. And an increase in world output shows up in higher wages for Third World workers, not in decreased living standards for the First World. Yet if the West responds to the widespread fears about Third World economic success by erecting import barriers, the effects could be disastrous--dashing any hope of a decent living standard for hundreds of millions of people throughout the developing world.