Articles

Indirect purchases represent a large part of a company’s costs, yet many companies have neglected such expenditures, sheltering them from rigorous competitive scrutiny in favor of supplier partnerships. The authors suggest that companies should examine their indirect purchases more closely. First they delineate indirect purchases & #8212; those not directly associated with end products or services & #8212; into five major expense clusters: advertising and marketing, technology, overhead, human resources, and those specific to the business such as store fixtures or collection agencies. Three problems prevent most companies from managing these purchases effectively: (1) inadequate information & #8212; companies have confusing, inaccurate data about indirect purchases; (2) insufficient resources & #8212; the people negotiating purchases lack skill or have other incentives in making purchasing decisions; (3) improper techniques & #8212; few companies gather sufficient information or solicit competitive proposals. Kapoor and Gupta propose five approaches for improving purchasing programs that are rooted in a competitive, free-market view: 1. Measure pragmatically. Managers should be extremely selective and focused when defining pricing data for purchasing. 2. Assign resources selectively. Companies should increase the resources assigned to indirect purchasing and clearly define the roles of people assigned to administer supplier relationships. 3. Demystify business requirements. Companies must establish precise quality requirements for indirect purchases. 4. Clarify the pricing basis. Lax pricing practices work to the buyer’s disadvantage. In order to compare prices, the buyer must establish discipline in pricing by creating and enforcing a standard vocabulary. 5. Leverage the free market. Buyers must be willing to use free-market competition to reduce costs and must take business away from suppliers if necessary. The five approaches run counter to the prevailing “partnership” purchasing model, according to the authors. In a supplier partnership, they suggest, companies give up their right to investigate alternative sources by making a commitment to work with a partner through good and bad. Such partnerships may be appropriate when there are few viable alternatives or when changing suppliers would be difficult. Otherwise, they say, companies should establish free-market competition as their standard operating procedure and form partnerships only on an exception basis.

Is it possible to protect the environment and foster economic growth at the same time? Yes, according to these authors, who call for cooperative ecosystem management that goes beyond the win-lose negotiations that plague most environmental debates. They advocate a balanced approach that considers environmental and development interests simultaneously. After an overview of the Endangered Species Act and the controversies surrounding its implementation, Hoffman et al. suggest the economic benefits that can be gained from protecting endangered species. For example, some pharmaceutical companies see nature as one large R&;D lab in which millions of years of evolution have developed new products for human use. Some plant materials and plant by-products are stronger and more lightweight than synthetic materials. Food and animal stocks rely on genetic diversity. Wetlands can serve as purification and detoxification systems. And an increasingly urban population is more interested in recreational use of land, rather than logging, mining, and grazing. On the other hand, say the authors, economics should not be the sole criterion for determining the merit of endangered species protection. By moving away from an extractive view of natural resources, we shift toward stewardship; a shift in mind-set is crucial in enhancing economic competitiveness rather than diminishing it. To improve the implementation of the ESA, the authors propose: 1. Promoting economic incentives by reforming tax codes, establishing special trust funds, swapping government land for more valuable private land, and charging land-use fees for hunting, fishing, hiking, and camping. 2. Reducing uncertainty for affected groups by establishing fixed time periods and streamlining ESA procedures. This involves generating more information about species and ecosystems, encouraging collaborative problem solving, and providing adequate resources for implementation. 3. Allocating adequate resources for implementation by ensuring funding for generating information and training personnel. 4. Involving stakeholders in decisions by forming advisory boards of affected, interested groups and ensuring negotiations through federal mandates. 5. Moving toward ecosystem management by making science-based decisions, involving stakeholders, articulating social values, and planning for the long term. A broad look at all aspects of ecosystem management -- economic, environmental, and political -- will foster environmental protection along with economic growth.

Software product development at Microsoft allows teams to retain the autonomy of small groups by frequently synchronizing and stabilizing continuous design changes.

Financial institutions must consider when and under what circumstances they should use their own resources to provide services, and how they should manage their portfolios to achieve the highest value for stakeholders. Oldfield and Santomero, in addressing these two issues, define the role of institutions in the financial sector and focus on risk management. They explain when an institution should transfer risk to the purchases of assets that the firm has issued and when it should itself absorb the risk. Managers can consider three strategies for mitigating risk: 1. Avoid risk by eliminating those that are unessential to the financial service. 2. Transfer risks rather than absorbing them. 3. Aggressively manage risks that are inherent in the business activity. The authors delineate the various types of financial institutions and the different services and risk associated with each. Services are divided into six categories: origination, distribution, servicing, packaging, intermediation, and market making. Principal and agency activities vary in each service because the risks and incentives are quite different. There are five generic risks in providing services: systematic, credit, counterparty, operational, and legal. To some extent, all financial institutions face these risks. The authors focus, however, on those businesses in which the institutions participate as principals. The authors contrast two different types of intermediaries at opposite ends of the spectrum -- a REMIC (real estate mortgage investment conduit) and a commercial bank. In the banking business, given its nature, risk management assumes a much more important role than in the passive REMIC. The difference is the transparency or permanency of each organization's investor interests. The authors envision principal financial institutions as transparent, translucent, or opaque in information and either active or passive in operation. For example, in transparent institutions with passive investment strategies, such as unit trusts or REMICs, rules replace management. The authors propose four ways that a firm can actively manage risk: 1. Establish standards and reports. Managers need consistent information to understand the portfolio risks; investors need standard reports to gauge asset quality. 2. Impose position limits and rules. Each person who can commit capital -- trader, lender, and portfolio manager -- should have a well-defined limit. 3. Set investment guidelines and strategies. The firm should outline strategies for risk taking. 4. Align incentive contracts and compensation. The firm should compensate managers in line with the risks they bear. To implement risk management across the firm, the authors offer five guiding principles: (1) make risk management integral to the business plan; (2) define specific risks of each activity and measure them; (3) establish procedures so that risk management begins at the point nearest the assumption of risk; (4) develop databases and measurement systems that relate to how the firm does business, for example, systems that record positions on a trade-date basis; and (5) ensure that senior managers use the overall risk management system to evaluate businesses, individual performance, and value added.

The authors trace the development of Japanese subcontracting from just after World War I when the labor market in Japan divided into two areas: large firms, especially heavy industries, and the rest of the economy. During World War II, the demand for munitions, cheap labor, changes in infrastructure and technology, and politics led to the further development of subcontracting. After the war, government protections aided its continued growth, until a major transformation in the 1960s during Japan's high-growth economy. The modern form of Japanese subcontracting relies on distinct practices that have developed around the system of clustered control and joint problem solving: -- Target costing. Japanese manufacturers lower costs of new products at the design stage by first determining the sale price, decomposing the price into desired profit and costs, and then breaking down costs to evaluate and price every part. Throughout the process, suppliers provide input. -- Value analysis. In joint problem-solving with prime contractors and subcontractors, Japanese manufacturers decompose increasingly complex cost structures to identify cost-sensitive elements item by item. -- Bilateral design. Modularization, which leads to cost reductions and ease of design changes, results from suppliers' proposals. -- Subcontractor evaluation. The prime contractor continually evaluates subcontractors' performance on quality, price, delivery, engineering, management competence, and long-term viability. -- Purchasing agents' role. Purchasing agents are not mere negotiators but have the technical knowledge to evaluate subcontractors' competence and teach them new production systems. Nishiguchi and Brookfield address several prevalent theories for the evolution and growth of Japanese subcontracting: dualism, flexible specialization, transaction cost economics, and cultural specificity. In their view, no single theory can fully explain the growth of subcontracting. Instead, they posit, it is the product of interaction among market demand, politics, technology, and producer strategy.

The flat structures, service-oriented workforce, and participative decision processes of professional service firms are a model for larger organizations.

Simulation tools can help business leaders with strategy and stewardship.

Successful IT specialists work on trustworthiness and good client relationships at the same time.

Loyalty programs must enhance the overall value of the product or service and motivate buyers to make their next purchase.

To retain loyal managers, companies must nurture an apolitical culture that places high priority on meeting career needs.