Articles

Most large corporations developed in an era of abundant raw materials, cheap energy, and limitless sinks for waste disposal. It has become increasingly clear that many technologies developed during this earlier period contribute to the destruction of the ecological systems on which the global economy depends. In the absence of dramatic change, few would dispute that the world is destined to devolve toward environmental degradation, social upheaval, and mass migration. Hart and Milstein argue that the emerging challenge of global sustainability will catalyze a new round of "creative destruction" that innovators and entrepreneurs will view as one of the biggest business opportunities in the history of commerce. In this article, the authors propose a framework to help managers look beyond continuous, incremental improvement of existing products and processes to see the business world differently and make sustainable opportunities more apparent. To better understand sustainability-driven creative destruction, managers must evaluate business opportunities on the basis of three types of markets or economies that exist in all countries or geographical regions: developed (nearly 1 billion global customers), emerging (estimated at roughly 2 billion people), and surviving (roughly half of humanity or 3 billion customers). The authors discuss the different strategies required to achieve sustainable development in each economy. To compete in the consumer economy, managers must focus on reducing the life-cycle ("cradle to grave") impacts -- that is, the "ecological footprint" of their firms' activities -- by reinventing their products and processes. The combination of large footprint and technological maturity widens the gap between price and life-cycle cost, producing the technological and environmental forces that drive creative destruction. Because it is unlikely that senior managers will commit resources without a clear understanding of how sustainability-driven creative destruction can improve a firm's economic payoff, the authors offer ideas for sustainability metrics tied to the three economies discussed and show how they relate to key business and financial payoffs. Managers who treat sustainable development as an opportunity will drive the creative destruction process and build the foundation to compete in the twenty-first century.

Manufacturers have four strategic options when facing the dynamics of consolidating channels.

Faced with increasing global competition, many firms are finding that price-based or target costing is emerging as a key strategic tool. The target cost is a financial goal for the full cost of a product, derived from estimates of selling price and desired profit (which top management sets on the basis of firm strategy and financial goals). Product selling price is constrained by the marketplace and is determined by analysis along the entire industry value chain and across all functions in a firm. Common to most target-cost applications is a belief that large-scale cost planning and reduction must occur early in the product life cycle. However, Shank and Fisher believe there is no conceptual reason the methodology cannot be a value-added exercise applied to existing products during manufacturing. They posit that if managers were to believe that, during manufacturing, only incremental (i.e., slight) change is possible (through kaizen costing or controlling costs with standard-cost systems), firms would likely miss significant strategic opportunities. Shank and Fisher present a case study that demonstrates the relevance of target-costing techniques for a process-industry plant built in the 1890s that had been making largely the same products for fifty years. The firm's managers, who had used a standard-cost system for many years, might have concluded that kaizen costing was most appropriate for this plant. However, competitive realities necessi-tated a major strategic change that employed target costing as an important ingredient in cost-reduction efforts leading to strategic revitalization. At the beginning of this field study, plant managers focused too much attention on standard cost versus actual cost. There was heavy pressure to move standard cost toward actual cost in order to minimize unfavorable variances for public financial reporting. Managers focused too little attention on ideal manufacturing cost, and target costing received no attention. At the end of the field study, the most useful cost-management tool focused on ideal manufacturing cost versus target cost in relation to actual cost. The standard cost concept essentially dropped out of the picture. Target costing forced managers to rewrite the rules of the game by changing the way the mill delivered value to the customer. Because standard costing accepts the existing game rules and the existing value chain, the authors believe that fundamental cost breakthroughs are much more probable when using target costing.

Some industry observers claim that the steady increase in trade promotion expenditures in the packaged goods industry is symptomatic of a shift in power toward retailers and away from manufacturers. As firms sell more goods on deal, managers complain that promotions are eroding the power of brands. More preferable, they say, are "everyday low prices" (EDLP) rather than strategies that involve price discounts and other allowances. Trade promotion is a prime cause of the "bullwhip effect" in channels, and EDLP is perceived as a solution. However, the authors point out that EDLP may cause its own unexpected side effects. Because certain incentives and trade deals may perform important functions, managers must consider the second- and third-order effects of discontinuing them. The same logic applies to channels, so managers must assess how channel members are likely to react to various pricing strategies. In this article, the authors discuss the underappreciated role of well-designed trade promotions. Using the example of a single manufacturer selling to and through a retailer, they show how certain promotions increase total channel profits and the manufacturer's share of those profits beyond levels achievable with a single price and without promotions. Furthermore, they believe that firms can implement these promotions in ways that avoid many issues associated with retailer forward-buying and gray markets. In fact, certain trade promotions may benefit the manufacturer as much as the retailer -- if not more. Although some trade promotions create more problems than they solve, not all forms of trade promotion are bad. Manufacturers can effectively influence a retailer's selling activity and coordinate the distribution channel by using price-up and deal-down strategies that link manufacturer prices to the price featured by the retailer. However, manufacturers and retailers must set margins in a sustainable way, which requires a combination of margin and volume that produces acceptable profits for both channel partners.

Evidence indicates that satisfied customers defect at a high rate in many industries. Because satisfaction alone does not translate linearly into outcomes such as loyalty in terms of purchases, businesses must strive for 100 percent, or total, customer satisfaction and even delight to achieve the kind of loyalty they desire. Current studies attribute a higher degree of emotionality to the dissatisfaction end of the satisfaction continuum than in the past. For example, customers who have experienced service failures feel annoyed or victimized. Although victimization is felt at a deeper emotional level than irritation, both can result in outrage. By focusing on more intense customer emotions, such as outrage and delight, the authors explore the dynamics of customer emotions and their effect on customer behavior and loyalty. Schneider and Bowen base their conceptualization on people's needs rather than the more conventional model that focuses on customer expectations about their interactions with a firm. The authors propose a complementary needs-based model for service businesses that assumes customer delight and outrage originate with the handling of three basic human needs -- security, justice, and self-esteem. By recasting a situation as one that has violated any of a customer's fundamental needs, the deeper emotional outcome (e.g., outrage) does not seem incongruous. The authors describe each need and offer specific managerial tactics for avoiding outrage and creating delight. Recent emphasis on relationship marketing -- that is, attracting, developing, and retaining customers -- is pertinent because building relationships requires that companies view customers as people first and consumers second. Service is an exchange relationship in which customers swap their money and loyalty for what Schneider and Bowen argue is need gratification -- a psychological contract with service firms to have their needs gratified. The authors discuss strategies that help firms gratify and, in some cases, delight customers, while avoiding the perception that they do not respect customer needs. Companies must manage how they show concern for customer needs in all actions, including the activities of the back office (e.g., billing, shipping), not just front-office personnel who directly contact the customer.

How faulty decision making led to the ruin of a once profitable ordnance manufacturer.

What do managers and executives believe and feel about workplace spirituality or assessments of its purported benefits? In this article, the authors present the results of a two-year empirical study based on face-to-face interviews and questionnaires. Participants differentiated strongly between religion and spirituality, viewing religion as a highly inappropriate form of expression and spirituality as a highly appropriate subject for the workplace. Most believed strongly that organizations must harness the immense spiritual energy within each person in order to produce world-class products and services. Meaning and purpose on the job are imparted by (ranked from highest to lowest in importance): (1) "the ability to realize my full potential as a person"; (2) being associated with a good organization or an ethical organization; (3) interesting work; (4) making money; (5) having good colleagues and serving humankind; (6) service to future generations; and (7) "service to my immediate community." Beyond a certain threshold, the authors point out, pay ceases to be the most important factor in work life, and higher needs prevail; the desire for "self-actualization" becomes paramount. The authors observed five basic designs or models in which organizations are religious or spiritual: -- The religious-based organization may be positive toward religion and spirituality or positive toward religion and negative toward spirituality. -- The evolutionary organization begins as strongly associated or identified with a particular religion and moves toward a more ecumenical position. -- The recovering organization adopts the principles of Alcoholics Anonymous as a way to foster spirituality. -- The socially responsible organization is led by someone guided by strong spiritual principles or values that are applied directly to the business for the betterment of society. -- The values-based organization is guided by general philosophical principles or values that are not aligned or associated with a particular religion or even with spirituality. -- Characterized by the underlying principle of hope, the models appear to have been precipitated by a critical event that caused intense difficulties for the company founders, heads, or the entire organization. All incorporate a principle or mechanism for limiting greed -- both the unlimited accumulation of money and the unrestrained pursuit of power. With a few notable exceptions, people who consider their organizations as being spiritual also see them as better than their less spiritual counterparts.

To survive today, firms must become adept at developing products that deliver the quality and functionality that customers demand while generating the desired profits. To ensure that products are sufficiently profitable when launched, many firms subject them to target costing, a profit management technique. The authors studied the mature, highly effective target costing systems of seven Japanese companies and documented their costing procedures. Although practices differ among these firms, the authors identified an underlying generic approach for implementing target costing systems. A highly disciplined process, effective target costing comprises the following facets that the authors discuss in detail: -- Market-driven costing consists of three companywide tasks -- setting the company's long-term sales and profit objectives, structuring product lines to achieve maximum profitability, and establishing a product's target selling price -- and two steps applicable to new products -- setting a target profit margin consistent with the company's long-term profit objectives and computing the product's allowable cost (by subtracting the target profit margin from the target selling price). -- Product-level target costing comprises setting a reasonably achievable product-level target cost, imposing discipline upon the development process to attain the target cost (whenever feasible), and achieving the cost goal without sacrificing functionality and quality (primarily through value engineering and other engineering-based cost reduction techniques). -- Component-level target costing includes decomposing the product-level target cost to the major functions or subassemblies (e.g., in a car, the engine, transmission, cooling system, air conditioning system, and audio system), setting component-level target costs, and managing suppliers (clearly conveying to them the competitive cost pressures facing the lean enterprise). The cardinal rule of the companies studied is: "Never exceed the target cost." They enforce this rule in three ways -- by offsetting design improvements that result in increased costs with savings elsewhere in the design, by not launching products that exceed the target cost, and by carefully managing the transition to manufacturing in order to achieve the target cost.

Firms can derive significant benefits from consciously, proactively, and aggressively managing their explicit and explicable knowledge, which many consider the most important factor of production in the knowledge economy. Doing this in a coherent manner requires aligning a firm's organizational and technical resources and capabilities with its knowledge strategy. However, appropriately explicating tacit knowledge so it can be efficiently and meaningfully shared and reapplied -- especially outside the originating community -- is one of the least understood aspects of knowledge management. This suggests a more fundamental challenge, namely, determining which knowledge an organization should make explicit and which it should leave tacit -- a balance that can affect competitive performance. The management of explicit knowledge utilizes four primary resources that the author details: repositories of explicit knowledge; refineries for accumulating, refining, managing, and distributing the knowledge; organization roles to execute and manage the refining process; and information technologies to support the repositories and processes. On the basis of this concept of knowledge management architecture, a firm can segment knowledge processing into two broad classes: integrative and interactive -- each addressing different knowledge management objectives. Together, these approaches provide a broad set of knowledge-processing capabilities. They support well-structured repositories for managing explicit knowledge, while enabling interaction to integrate tacit knowledge. The author presents two case studies of managing explicit knowledge. One is an example of an integrative architecture for the electronic publishing of knowledge gleaned by industry research analysts. The second illustrates the effective use of an interactive architecture for discussion forums to support servicing customers. Zack also discusses several key issues about the broader organizational context for knowledge management, the design and management of knowledge-processing applications, and the benefits that must accrue to be successful. In summary, organizations that are managing knowledge effectively (1) understand their strategic knowledge requirements, (2) devise a knowledge strategy appropriate to their business strategy, and (3) implement an organizational and technical architecture appropriate to the firm's knowledge-processing needs.

Processes to solidify and streamline supplier-customer relationships can result in mutually beneficial commercial success.