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How do managers at firms that compete primarily in local markets stay abreast of broader industry trends and innovations? In this article, the authors highlight an interesting way in which managers at some smaller regional firms in the United States seek to combat forces of inertia and myopia in their businesses: by networking with managers of noncompeting firms that operate in the same industry but in other geographic regions. The authors call these networks “industry peer networks” (IPNs) and have conducted research into how common such networks are and how they function. In the United States, industry peer networks apparently originated in the auto-retailing industry in 1947, when an owner of several auto dealerships began bringing managers from those dealerships together to exchange ideas. The concept spread both geographically and into a number of other industries, and industry peer networks now exist in businesses ranging from advertising agencies to office furniture distributors. A typical industry peer network consists of a number of small groups, each containing no more than 20 managers from noncompeting companies. These groups usually have face-to-face meetings two to four times a year to discuss management issues; they often share confidential financial data with each other as well.

New products suffer from notoriously high failure rates. Many new products fail, not because of technical shortcomings, but because they simply have no market. Not surprisingly, then, studies have found that timely and reliable knowledge about customer preferences and requirements is the single most important area of information necessary for product development. To obtain such data, many organizations have made heavy -- but often unsuccessful -- investments in traditional market research. The authors provide an alternative. Companies including Threadless, Yamaha and Ryohin Keikaku have begun to integrate customers into the innovation process by soliciting new product concepts directly from them. These firms also ask for commitments from customers to purchase a new product before the companies commence final development and manufacturing. This process -- called "collective customer commitment"-- can help companies avoid costly product failures. In essence, collective customer commitment enables firms to serve a market segment efficiently without first having to identify that segment, and it helps convert expenditures in market research directly into sales.

Although the pursuit of opportunity promises outsized rewards to entrepreneurs and established enterprises, it also entails great uncertainty. The critical task of entrepreneurship lies in effectively managing the uncertainty inherent in trying something new. Some entrepreneurs foolishly try to ignore uncertainty; others go to the opposite extreme of attempting to avoid it altogether. Rather than ignore uncertainty or attempt to avoid it in the na_ve belief that every contingency can be anticipated, entrepreneurs should instead manage uncertainty by taking a disciplined approach. Over the past five years, the author conducted systematic research into how entrepreneurs manage the inevitable risks while pursuing opportunities. A synthesis of the research revealed that discipline -- and its byproduct, the successful management of uncertainty -- comes through the adoption of an iterative experimentation model. In this three-step process, an entrepreneur first formulates a working hypothesis about an opportunity, then assembles the resources to test the hypothesis, and finally designs and runs real-world experiments. Depending on the results of a round of experimentation, the entrepreneur may revise the hypothesis and run another experiment, harvest the value created through a sale, or abandon the hypothesis and pull the plug. The model provides insights into some of the most daunting questions entrepreneurs face -- including how to screen an opportunity, how much money to raise, when to make key hires and how to use limited resources most efficiently.

Traditional models for developing and managing corporate portfolios are based on financial frameworks, business synergies or leveraging core competencies into related businesses. In this article, the author goes beyond those traditional approaches and offers an alternative & #8212; the corporate sphere of influence. Like nations, says the author, companies build spheres of influence that protect their cores, project their power outward to weaken rivals and prepare the way for future moves. By recognizing the strategic purpose of each part of the portfolio, the sphere of influence model focuses attention on the company’s overall strategy, including how it wants to structure the division of product and geographic markets in an industry, which threats it will address or ignore, and how the company’s portfolio enhances or detracts from its competitive or alliance strategy. Thinking in terms of building a sphere of influence forces managers to draw together corporate- and business-level strategic analyses that are often treated as separate. The corporate-level concern about where to fight and the business-level concern about with whom and how to fight are brought together into a coherent view. In this article, the author defines the components of a sphere of influence and explains how senior executives can use his framework to assess their company’s current sphere and map their desired one. Then he offers examples of how companies have managed their spheres. He draws examples from a wide range of industries and companies, including Microsoft, Procter & ; Gamble, Johnson & ; Johnson, Anheuser-Busch, Nokia, Harley-Davidson and Mexican cement company CEMEX. For an extended discussion of how companies can leverage their spheres of influence to support their overall grand strategy, see “The Balance of Power,” by Richard D’Aveni (MIT Sloan Management Review 45, no. 4 [2004]: 46a-46i).

Many companies organize employees into self-managing teams that are basically left to run themselves with some guidance from an external leader. In fact, comprehensive surveys report that 79% of companies in the Fortune 1,000 currently deploy such “empowered,” “self-directed” or “autonomous” teams. Because of their widespread use, much research has been devoted to understanding how best to set up self-managing teams to maximize their effectiveness. Interestingly, though, relatively little attention has been paid to the leaders who must oversee such working groups. At first, it seems contradictory: Why should a self-managing team require any leadership at all? But the authors’ research has shown that self-managing teams require a particular kind of leadership. Specifically, the external leaders who contribute most to their team’s success tend to excel at one skill: managing the boundary between the team and the larger organization. That process requires specific behaviors that can be grouped into four basic functions: (1) moving back and forth between the team and the broader organization to build relationships, (2) scouting necessary information, (3) persuading the team and outside constituents to support one another, and (4) empowering team members.

Several recent spectacular management failures call into doubt the ability of nontechnical managers to supervise the complex engineered systems for which they are increasingly responsible. However, the author of this article believes effective generalist managers in technical fields need to understand the risks faced and must sufficiently grasp the technology to effectively "talk the talk" with their staff and colleagues. To accomplish this, he contends that managers should focus relentlessly on key corporate priorities, continuously measuring employee performance to emphasize these crucial metrics. The author also recommends establishing official and unofficial pathways for collecting unfiltered and accurate information -- in particular, by developing a "back channel" of direct personal contact with one or two trusted technical staff with real insight into the unvarnished truth. In the end, the author contends, an insistence on facts rigorously applied, along with a cultivation of a "push back" culture that encourages people to raise concerns must underlie the commitments a technical organization makes. In this way, the author insists, a healthy organization can effectively handle both routine activities and serious crises regardless of who's in charge.

The product-development process is often seen as an undependable black box” that rarely produces results that exceed business expectations. Traditional financial models have limited success exposing the numerous product-development risks that underlie the assumptions in a typical business case. Applying the same rules to development as they do to research, managers often accept unpredictable performance as normal. Most companies’ evaluation and approval processes are driven by accounting-based metrics such as discounted cash flow or net present value (NPV) that make understanding the underlying risks of development difficult for decision makers. When risk is discussed in the business case, technology uncertainty is often confused with product-development risk, and the narrative discussion of risk is designed more to persuade than inform. In this environment, decision makers are often hard-pressed to evaluate the potential commercial success of the new-product-development investment. With an approach called “net present value, risk-adjusted” (NPVR), author Craig R. Davis, CFO of product-development consulting firm Product Genesis, offers an operational framework that gives decision makers quantitative tools to evaluate relative project risks. He shows how these tools can be integrated into existing stage-gate methodologies to create a risk-adjusted NPV that considers the impacts of product portfolio, user needs, and technical and marketing risks. The framework also provides insights into the value of additional research in advance of full commitment to development. The framework provides a vocabulary appropriate for complex technology products in medical, commercial and industrial products but is easily adapted to the unique terms, methods and measures for each risk-assessment area.

Because software is an increasingly pervasive part of the New Economy, delegating decisions about its development to technical staff can be risky for executives. Today's general manager needs to have a good grasp of the most effective methods for developing and deploying software products and services throughout the organization. So what is the best approach to software development? Recent research from Harvard Business School professor Alan MacCormack and colleagues proves a theory about software development that has been gaining adherents for some time: The best process is an evolutionary one. Focusing on the area of Internet-software development, the researchers uncovered four practices that lead to success: an early release of the evolving product design to customers, daily incorporation of new software code and rapid feedback on design changes, a team with broad-based experience of shipping multiple projects, and major investments in the design of the product architecture. Among the development projects cited are Linux, the poster child of the open-source movement, and Internet Explorer 3.0. Commenting on the latter, a project in which Microsoft came from behind with a product equal to Netscape's, a team member declared, "If someone asked what the most successful aspect of [Internet Explorer 3.0] was, I would say it was the job we did in componentizing the product." The new research supports componentizing. Getting a low-functionality version of the product into customers' hands at the earliest opportunity was shown to improve quality dramatically. The research also demonstrates that although age doesn't count, experience still does. The more projects shipped, the more capable a programmer becomes. But in environments with rapidly changing markets and technologies, the usefulness of the evolutionary model extends beyond developing software. By dividing tasks into microprojects, a company can tailor the model to reflect any context. Traditional market research has limited value in the uncertain context of the Internet-software industry, and short microprojects are called for, with an early working version for feedback on the product concept. In more-mature environments, however, companies can specify more of the product design upfront, use longer microprojects and develop greater functionality before feedback is needed. Flexibility is key. Thus, an evolutionary-delivery model represents a transcendent process for managing the development of all types of software, with the details tailored to reflect each project's unique challenges.

Companies such as Lego, British Petroleum, Baxter, Virgin and Unilever are reversing the law of diminishing returns. How? By redefining what business they are in and then practicing a powerful kind of customer focus. The author, an international-marketing professor at the University of London, defines customer focus as obtaining value for customers (even if you sometimes help them buy from your competitors) and from customers (who voluntarily continue to patronize your company because of that value). To achieve a high level of customer focus, Lego, for example, must see itself as being in the "edutainment" business, not the construction-toy business. Focusing on what customers want in the edutainment market space, Lego can find numerous growth opportunities -- in amusement parks, Web software, television and more. Instead of selling more Lego blocks and suffering ever decreasing returns, Lego can serve edutainment customers in ways that will inspire them to give the company increased amounts of their leisure-time spending. Traditionally, businesses have concentrated on getting more market share and moving more products and services at the maximum margins. But that approach is too easy for competitors to emulate, and cost advantages eventually diminish. Virgin, like Lego, is proof that the new customer-focus approach works better. Virgin has merged travel and leisure into an integrated customer experience, and in so doing, it has enjoyed an increasing share of the same customers' spending. It avoids the added expense of finding new customers and learning their preferences. Vandermerwe delves into the six vital components for a successful strategy based on customer focus: giving power to the customer, getting customers to choose a particular business over its competitors, articulating new market spaces, delivering an integrated experience, taking advantage of abundant and reusable resources such a knowledge and information, and creating reinforcing interactions. She explains that, to use customer focus to their advantage, enterprises don't have to be big, be inventors or even own anything. The only requirement is to leave behind transactional, linear thinking and focus on increasing returns.

Compared to new companies or niche players, established companies find it difficult to innovate strategically -- to reconceptualize what the business is all about and, as a result, to play the game in an existing business in a dramatically different way. Drawing on examples of highly profitable companies in diverse industries, the author explains how long-time players can overcome the four chief obstacles to strategic innovation. 1. Inertia of success. Strategic innovators monitor their strategic health for early signals of trouble and are willing, if necessary, to abandon the status quo for the uncertainty of change. These companies also work to convince employees that current performance is good but not good enough. They develop a new challenge to galvanize the organization into active thinking, and they expend significant time and effort selling the challenge to everyone. 2. Uncertainty about what to change into. Strategic innovators challenge their dominant way of thinking and shift emphasis away from determining how they need to compete toward questioning who their customers are and what they really want. They institutionalize a questioning attitude and find ways to shake up the system every few years. 3. Uncertainty surrounding new strategic positions. At a given time, a company does not know which idea will succeed and which core competencies will be essential. Successful strategic innovators follow the model of capitalism: they create internal variety, even at the expense of efficiency, and allow the outside market to decide the winners and losers. 4. The challenges of implementation. Successful companies set up a separate organizational unit to support a new strategic innovation and create a context that supports integration between different units within the company. In managing the transition from the old to the new, they let the two systems coexist but gradually allocate resources to the new so that it grows at the expense of the old. For established companies, the challenge of strategic innovation is organizational: developing a culture that questions current success while promoting experimentation. Strong leadership is essential in creating that culture. Only those companies that strive for self-renewal, the author argues, will succeed in the long term.