A smarter way to buy.

Few companies can pinpoint just how much they're spending on procurement. Here's a matrix that gives companies a systematic way to identify and organize the full costs of their relationships with their suppliers.     

A simpler way to pay

There have been many changes in professional services since Egon Zehnder founded his executive search firm nearly four decades ago--not the least of which has been a shift in the way professionals pay themselves. When he started, compensation everywhere was strongly tied to seniority. Today, partners at most professional services firms are paid according to the size of their client billings and their ability to bring in new clients. But Egon Zehnder International, which now has 57 offices worldwide, has stuck with the old-fashioned way to pay. In addition to giving partners base salaries and equal shares in a percentage of the profit, the firm apportions another fraction of the profit based only on length of tenure as partner. Yet the firm attracts outstanding consultants, and its turnover rate is low. The reasons, the author says, are simple: the firm's approach to compensation forces it to hire team players--consultants who get more pleasure from the group's success than from their own advancement. And the seniority-based system requires the firm to find people who want to stay for the long haul. Call the system a relic, says Zehnder, but don't call it nonsense. It works. In this article, the author describes the extremely intensive interview process used to hire the right kind of people. By the time the interviews are over, he says, potential hires know that people in the firm's Boston office think and act the same way as people in its Brazil offices--and that they themselves must think and act that way if they are to succeed at the firm.     

A better way to innovate

Harvard professor Henry Chesbrough takes a look at leading-edge companies' latest moves to harvest ideas from outside and to benefit from sharing their own R&D with others--even with competitors.     

A better way to manage risk

Through an innovative new policy forged with a single insurer, Honeywell is consolidating risks as diverse as fire protection and currency fluctuations--and saving a bundle.     

Price smarter on the Net

Companies generally have set prices on the Internet in two ways. Many start-ups have offered untenably low prices in a rush to capture first-mover advantage. Many incumbents have simply charged the same prices on-line as they do off-line. Either way, companies are missing a big opportunity. The fundamental value of the Internet lies not in lowering prices or making them consistent but in optimizing them. After all, if it's easy for customers to compare prices on the Internet, it's also easy for companies to track customers' behavior and adjust prices accordingly. The Net lets companies optimize prices in three ways. First, it lets them set and announce prices with greater precision. Different prices can be tested easily, and customers' responses can be collected instantly. Companies can set the most profitable prices, and they can tap into previously hidden customer demand. Second, because it's so easy to change prices on the Internet, companies can adjust prices in response to even small fluctuations in market conditions, customer demand, or competitors' behavior. Third, companies can use the clickstream data and purchase histories that it collects through the Internet to segment customers quickly. Then it can offer segment-specific prices or promotions immediately. By taking full advantage of the unique possibilities afforded by the Internet to set prices with precision, adapt to changing circumstances quickly, and segment customers accurately, companies can get their pricing right. It's one of the ultimate drivers of e-business success.     

A real-world way to manage real options

Each corporate growth project is an option, in the sense that managers face choices--push ahead or pull back--along the way. Yet many companies hesitate to apply options theory to initiatives such as R&D and geographic expansion, partly because these "real" options are highly complex. In this article, the authors make the case that the complexity of real options can be eased through the use of a binomial valuation model. Many of the problems with real-options analysis stem from the use of the Black-Scholes-Merton model, which isn't suited to real options. Binomial models, by contrast, are simpler mathematically, and you can tinker with a binomial model until it closely reflects the project you wish to value. Suppose your company is considering investing in a new plant. To use the binomial model, you must create an "event tree" to figure out the full range of possible values for the plant during the project's lifetime--next year, at the end of the design phase, upon completion. Then you work backward from the value at completion, factoring in the various investments, to determine the value of the project today. These calculations provide you with numbers for all the possible future values of the option at the various points where a decision needs to be made on whether to continue with the project. The authors also address another criticism of real options: that gaps often arise between theoretical and realized values of options of all types. Such gaps may be largely the result of managers exercising options at the wrong time. To improve the way it manages its real options, a company can look out for the decision trigger points that correspond to the nodes on a binomial decision tree. The trigger points should not only tell managers when they need to decide on exercise but also specify rules governing the exercise decisions.     

A better way to deliver bad news

In an ideal world, a subordinate would accept critical feedback from a manager with an open mind. He or she would ask a few clarifying questions, promise to work on certain performance areas, and show signs of improvement over time. But things don't always turn out that way. Such conversations can be unpleasant. Emotions can run high; tempers can flare. Fearing that the employee will become angry and defensive, the boss all too often inadvertently sabotages the meeting by preparing for it in a way that stifles honest discussion. This unintentional--indeed, unconscious--stress-induced habit makes it difficult to deliver corrective feedback effectively. Insead professor Jean-Fran?ois Manzoni says that by changing the mind-set with which they develop and deliver negative feedback, managers can increase their odds of having productive conversations without damaging relationships. Manzoni describes two behavioral phenomena that color the feedback process--the fundamental attribution error and the false consensus effect--and uses real-world examples to demonstrate how bosses' critiques can go astray. Managers tend to frame difficult situations and decisions in a way that is narrow (alternatives aren't considered) and binary (there are only two possible outcomes--win or lose). And during the feedback discussion, managers' framing of the issues often remains frozen, regardless of the direction the conversation takes. Manzoni advises managers not to just settle on the first acceptable explanation for a behavior or situation they've witnessed. Bosses also need to consider an employee's circumstances rather than just attributing weak performance to a person's disposition. In short, delivering more effective feedback requires an open-minded approach, one that will convince employees that the process is fair and that the boss is ready for an honest conversation.     

The struggle for a smarter world

The coming knowledge society will see an acceleration in the trend towards increasing human intelligence begun hundreds of thousands of years ago. Many converging technologies will facilitate this acceleration of intelligence, including psychopharmacology, genetic engineering, nanotechnology and communications technology. The accelerating increase in intelligence will not just be in individual brains, but also in the social, political and economic systems that link those brains together. From growing individual and social intelligence we will create increasingly accurate models of the way the social and natural world works, and how best to achieve human ends. But the struggle for a smarter world will require a political struggle for greater liberty and equality to enable everyone to participate fully in social decision-making and to benefit from human enhancement.     

Is smarter better? A comparison of adaptive, and simple moving average trading strategies

This study examines the comparative performance of an Adaptive Moving Average (AMA) on the Australian All Ordinaries, Dow Jones Industrial Average, and Standard and Poor's 500 stock market indices. The theoretical advantage of the Adaptive Moving Average over fixed length Simple Moving Average (SMA) trading systems is its ability to automatically respond to changing market conditions dependant upon the level of volatility in the market. While the strategy is confirmed to have some market timing ability, the overall results show returns to the Adaptive Moving Average cannot compensate for the cost of trade therefore lending support for the use of a long run passive strategy.     

The way to economic prescribing

Cost‐consciousness has been a major objective in public management in the 1980s. Others who spend public money may have to develop a similar awareness in the 1990s. A study of general practitioners in Scotland reveals a low level of knowledge about the cost of drugs.     

Swarm intelligence. A whole new way to think about business

What do ants and bees have to do with business? A great deal, it turns out. Individually, social insects are only minimally intelligent, and their work together is largely self-organized and unsupervised. Yet collectively they're capable of finding highly efficient solutions to difficult problems and can adapt automatically to changing environments. Over the past 20 years, the authors and other researchers have developed rigorous mathematical models to describe this phenomenon, which has been dubbed "swarm intelligence," and they are now applying them to business. Their research has already helped several companies develop more efficient ways to schedule factory equipment, divide tasks among workers, organize people, and even plot strategy. Emulating the way ants find the shortest path to a new food supply, for example, has led researchers at Hewlett-Packard to develop software programs that can find the most efficient way to route phone traffic over a telecommunications network. South-west Airlines has used a similar model to efficiently route cargo. To allocate labor, honeybees appear to follow one simple but powerful rule--they seem to specialize in a particular activity unless they perceive an important need to perform another function. Using that model, researchers at Northwestern University have devised a system for painting trucks that can automatically adapt to changing conditions. In the future, the authors speculate, a company might structure its entire business using the principles of swarm intelligence. The result, they believe, would be the ultimate self-organizing enterprise--one that could adapt quickly and instinctively to fast-changing markets.     

The science of thinking smarter. Interview by Diane Coutu

Advances in neurobiology have demonstrated that the brain is so sensitive to external experiences that it can be rewired through exposure to cultural influences. Experiments have shown that in some people, parts of the brain light up only when they are presented with an image of Bill Clinton. In others, it's Jennifer Aniston. Or Halle Berry. What other stimuli could rewire the brain? Is there a Boeing brain? A Goldman Sachs brain? No one really knows yet, says Medina, a developmental molecular biologist, who has spent much of his career exploring the mysteries of neuroscience with laypeople. As tempting as it is to try to translate the growing advances to the workplace, he warns, it's just too early to tell how the revolution in neurobiology is going to affect the way executives run their organizations. "If we understood how the brain knew how to pick up a glass of water and drink it, that would represent a major achievement," he says. Still, neuroscientists are learning much that can be put to practical use. For instance, exercise is good for the brain, and long-term stress is harmful, inevitably hurting productivity in the workplace. Stressed people don't do math very well, they don't process language very efficiently, and their ability to remember--in both the short and long terms--declines. In fact, the brain wasn't built to remember with anything like analytic precision and shouldn't be counted on to do so. True memory is a very rare thing on this planet, Medina says. That's because the brain isn't really interested in reality; it's interested in survival. What's more, and contrary to what many twentieth-century educators believed, the brain can keep learning at any age. "We are lifelong learners," Medina says. That's very good news indeed."     

How you slice it: smarter segmentation for your sales force

Three years ago, 70-year-old Hill-Rom Incorporated was in a position familiar to many mature businesses: The company was strong but needed to be stronger. It was a top producer of hospital beds and specialty mattresses, its core product lines. It also had competitive complementary lines of stretchers, furniture, and architectural equipment. It had an extensive customer base, a respected sales force, and solid profit margins. But by the time Ernest Waaser took over as chief executive in early 2001, revenue growth had been slowing, and competition was on the rise. To secure Hill-Rom's place in the market, Waaser decided to focus first on the sales organization--partly because the cost of sales had risen gradually over the past five years and partly because acquisitions and other initiatives had made the sales organization more complex. The CEO took several steps to restructure the sales force. First, the company changed its customer segments to better reflect customers' demands and financial status, ultimately targeting two main groups: key and prime customers. It then changed the overall structure of the sales organization so it could tailor its approach to these two segments; key customers received more specialized service than prime customers. Finally, Hill-Rom adjusted the sales force after the company took an in-depth look at historical data on products and services and sales completed. Reasons for staffing changes were carefully communicated to the sales force. Because of Hill-Rom's initiatives, the cost of sales is down, short-term revenue growth is up, the outlook for long-term revenue growth looks bright, sales and profit margins are up, and customer satisfaction has increased. Best practice, indeed.     

A neural network approach to understanding implied volatility movements

The expected response of an index volatility surface to index movements is quite different in high and low volatility environments     

Financing nationalised industries: A third way

Efforts to find a way of allowing nationalised industries to raise money while remaining subject to financial controls have regularly come up against ideology on the one hand and self‐interest on the other. However, it is possible to devise a method short of full‐scale privatisation that still preserves the present structure of the public enterprise sector. Though the authors were both involved in background work on the nationalised industries for the National Economic Development Officer (NEDO), the views expressed are their own and should not be attributed to the Corporation.     

Postnormal network futures: A rejoinder to Ziauddin Sardar

Sardar's “Welcome to Postnormal Times” describes the chaotic, contradictory and uncertain climate today, and analyses the failure of progress, modernisation or efficiency to provide ethical, political or even trustworthy economic solutions to the instability of the present. Missing in his analysis is the role of knowledge, especially as it is migrating from individuals to technical networks. This paper argues that recent developments in the networking of knowledge point towards a new constellation in which networks are emerging as major powers alongside the nation and the market, the two pillars of global political economy in the 20th and early 21st century. It responds to Sardar's challenge to imagine the future by imagining the political consequences of recognising non-human agencies as political actors.