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A study of the diversification records of 33 large U.S. companies from 1950 to 1986 shows that diversification--whether through acquisition, joint venture, or start-up--generally has not brought the competitive advantages or profitability expected. Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market. Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities. McKinsey Award Winner.

Two stories illustrate the American way of thinking about entrepreneurship. The first is the story of the entrepreneurial hero--found in every story by Horatio Alger--who uses energy, effort, daring, and good luck to rise in the world. But the story has an unhappy ending. The second story holds more promise, focusing not on the individual but on the team, as in Tracy Kidder's description of how a group of engineers pooled their talents to design a new computer. The differences between these two versions are profound. The first celebrates the individual and the second celebrates the group--even the organization.

One key to a successful retail business is friendly, knowledgeable, motivated salespeople. But, even in some of America's best-known stores, one encounters indifferent clerks or must search for a clerk willing to take one's money. An effective technique - used for years by J.B. Robinson Jewelers - for teaching salespeople a natural and friendly sales manner is role playing. Employees like role playing. It's dramatic, and they retain more through these sessions than they would from manuals or lectures.

A mezzanine financing package may be the right thing for a small business that is having trouble finding long-term capital to finance its growth. Mezzanine loans are flexible. In most cases the lender provides from $500,000 to $5 million in subordinated debt over a five- to seven-year term at an interest rate costing no more, sometimes less, than senior debt. In exchange the borrower gives the investor warrants to purchase a small amount of the company's common stock--usually 5% to 15%--at a later stage. For lenders, mezzanine loans provide a higher total rate of return than most conventional loans because of the equity feature. For businesses, they provide affordable long-term debt without diluting the owners' equity.

As coach, general manager, and now president of the Boston Celtics, Auerbach has followed his own management philosophy based on loyalty, pride, teamwork, and discipline. The lessons he discusses in this interview are applicable to managers everywhere. The manager of a sports franchise encounters the same problems as any manager running an organization. Unions, uncooperative owners, and the difficulties of keeping players disciplined and motivated all play a part in Red Auerbach's job.

Since 1977, British Petroleum (BP) has operated a post-project appraisal unit - a team of inside analysts and investigators who scrutinize projects several years after they have been completed to learn why they succeeded or misfired. The appraisal process has helped managers be more accurate in developing project proposals and more efficient in implementing them. At BP, every project generates a return on investment at least as high as that in the project's forecast.

The Hartford Steam Boiler Inspection and Insurance Co. (HSB) dominates the market segment in which it operates. Its success comes largely from the company's service delivery system, a joint product of HSB's marketing and operating managers. Vital to strategy implementation is involving the employees who deliver the service. Successful companies focus on shared values, control by peer groups, generous incentives, and--where possible--a close relationship with the customer. Using databases imaginatively permits many of these businesses to substitute information for assets that both enhance service effectiveness to existing customers and attract new ones.

Business owners who have found venture capitalists (VCs) willing to put money into their companies may be tempted to take the money on any terms. Because they need the capital, the last thing they want to do is upset a deal. Owners don't have to agree without negotiation to each provision the VCs want. Owners do have some leverage in the negotiations, particularly if their businesses already show a profit or if they are selling a highly desirable service or product.

Traditional compensation systems that value status instead of contribution do not reward the entrepreneurial activity U.S. companies need. They're also unfair, costly, and inefficient. Now U.S. employers are changing their pay practices to forge better links between compensation and performance. Traditional ideas about hierarchy come into question every time one of these changes is made, so attacks on pay that look like fine-tuning are actually revolutionary in what they portend for organizational design.

No matter what their business, managers need to know how much cash they have to pay their obligations. Unfortunately, some of the cash flow measures they usually use to check their cash position--including net income plus depreciation (NIPD) and earnings before interest and taxes (EBIT)--only work when sales are steady. When sales skyrocket, the measures overestimate cash; when sales plummet, they underestimate cash. A new concept, net operating cash flow--double prime, more clearly indicates the position of a company's cash bottom line.

Managers often take projects well past the point at which they should drop them. To see if they have come to this point, managers must look closely at themselves and recognize which of the influences they may be under. Some influences are psychological--they've been rewarded in the past for sticking to their guns, so why shouldn't the same thing happen this time? Some are social--no one likes a loser. And some are structural--important members of the organization are publicly committed to the project. The rest of the job belongs to top management. Its course is to rethink what behavior it rewards and how it staffs projects and to ensure that its information systems report the real odds.

Many U.S. companies have written off the Japanese market, believing that Japan's distribution system is impenetrable or that the Japanese buy only Japanese products. U.S. companies are represented in more than 85% of Japanese industrial sectors, however, and at least 12 hold the number one market position. These companies have been both creative and tenacious in obtaining this position. Their experience teaches some important lessons.

In many companies, corporate accountants preparing financial statements face intense deadline pressure. Using standard methods of allocating selling, general, and administrative (SG&A) expenses is a quick and easy way for them to calculate nonmanufacturing costs for different product lines. But management pays a price when company accountants take this shortcut. To allocate SG&A costs properly, controllers need to compile all expense data to produce a precise breakdown of all expense categories for each product line. The next step is to incorporate this information into the annual financial plan, with the goals of making fair and reasonable cost allocations.

When managers make decisions, they think forward and backward whether they know it or not. Thinking backward means looking for patterns, linking events, and searching for metaphors that explain causes and effects. Thinking forward entails weighing variables, making calculations, and preparing alternative plans. You will think backward well if you use more than one metaphor to describe a situation, resist the temptation to infer a cause from just one clue, and sometimes look for unexpected causes to explain effects. You will think forward well if you learn when to rely on the computations and models of computer science and how to compensate for the errors they produce.

Without a system to measure goals and performance, managers of nonprofits often mistakenly continue with projects that no longer serve organizational goals or start activities of questionable usefulness just because there's money in the till. They tend to fear accountability and think that systemizing their organization will take the romance out of their mission. But only when nonprofits institute and rigorously maintain a system of standards will they become purposeful, effective, and efficient.

The Logistics and Distribution unit of Xerox's Business Systems Group was gaining 3% to 5% a year in productivity - not good enough in light of industrywide price cuts in business machines. One solution, benchmarking, measures L&D's warehouse and distribution performance against comparable activities in other industries. After a search, L&D found the best warehousing and materials handling organization was at L.L. Bean. By looking closely at the operation of Bean and other noncompetitors, L&D has raised its productivity 10% each year and gained a better position against its real competition.

When Procter & Gamble launched Pampers in Europe, it directed the marketing strategy from European headquarters. The result: a big flop. In pushing new strategies successful MNCs diverge from traditional hierarchical structures in which the top formulates--and the national subsidiary simply implements--strategy and planning. By cooperating and co-opting capabilities, the parent's sales and market share get a big boost from the country unit's technical expertise, market knowledge, and competitive awareness--all without losing boundary-crossing benefits like scale economies.

When workers withdraw commitment to their jobs or allow resentments toward bosses, subordinates, and others to grow and fester, it isn't because bosses are power hungry or subordinates naturally rebellious. Conflict and misunderstanding usually arise because of power differences. Many managers can't see how their behavior toward subordinates and superiors alike is distorted by hierarchical differences. Because they are masters and servants of power, one might expect that they could transfer their experience from one role to the other. In reality, few managers link their experience as superiors and subordinates or change their behavior in response.

Most U.S. companies have developed fairly rigid marketing structures to achieve certain and predictable results, when the business climate is equally certain and predictable. But such engines of efficiency have a price. As top executives come to rely on routinized marketing structures instead of management imagination, they neglect managers' marketing skills. Companies can nourish such constructive subversion by seeking out "hungry" managers, rewarding good performance, and making creative rule breaking possible.

For more than ten years, U.S. manufacturers have tried to narrow their competitive gap with Japan by investing in flexible automation. But having the technology and using it well are two different things. A study of more than half the installed systems in both countries shows that American companies are using computerized manufacturing for the same old-fashioned, high-volume, low-variety production they have always pursued, while the Japanese are utilizing the new technology in remarkably flexible and effective ways.