Nonprofits: check your attention to customers

Nonprofit organizations chronically face financial difficulties. Now the situation has worsened because they are being squeezed between the uncertain economic climate and cutbacks in government support. While the managers of these institutions may think that they have already tried everything possible, more than ever they must be innovative in developing additional funding sources. As Mr. Andreasen argues, most nonprofits have failed to exploit marketing techniques which can build support from users or customers that leads to improved cash flow. The author contends that managers of nonprofit organizations focus too closely on their products or services; he admonishes them to give more attention to the needs and wants of their consumers.     

Six dangerous myths about pay

Every day, executives make decisions about pay, and they do so in a landscape that's shifting. As more and more companies base less of their compensation on straight salary and look to other financial options, managers are bombarded with advice about the best approaches to take. Unfortunately, much of that advice is wrong. Indeed, much of the conventional wisdom and public discussion about pay today is misleading, incorrect, or both. The result is that business people are adopting wrongheaded notions about how to pay people and why. In particular, they are subscribing to six dangerous myths about pay. Myth #1: labor rates are the same as labor costs. Myth #2: cutting labor rates will lower labor costs. Myth #3: labor costs represent a large portion of a company's total costs. Myth #4: keeping labor costs low creates a potent and sustainable competitive edge. Myth #5: individual incentive pay improves performance. Myth #6: people work primarily for the money. The author explains why these myths are so pervasive, shows where they go wrong, and suggests how leaders might think more productively about compensation. With increasing frequency, the author says, he sees managers harming their organizations by buying into--and acting on--these myths. Those that do, he warns, are probably doomed to endless tinkering with pay that at the end of the day will accomplish little but cost a lot.     

Bridging Sustainability and Finance: The Value Driver Adjustment Approach

Even though most large corporations view sustainability considerations and concerns as having the potential to affect their revenue and profits, and studies have shown that sustainability can affect stock returns, investors and corporate managers continue to struggle to incorporate such concerns into their financial decision‐making. As a consequence, the valuation effects of sustainability issues are not fully reflected in either the valuation of companies by investors or in capital investment decisions by corporate managers. The author argues that sustainability can be integrated into both of these kinds of financial decision‐making by linking it to business models, competitive positions, and value drivers using what the author calls a “value‐driver adjustment” (VDA) approach. The basic idea is simple: material sustainability issues affect business models and competitive positions, which in turn affect the company's value drivers—notably, sales, margins, and capital. The VDA approach explicitly considers these linkages by taking three steps: (1) identifying a company's material sustainability issues; (2) analyzing how these issues are expected to affect the company's business model and competitive position; and (3) quantifying the effects of such changes in business model and competitive position on the company's value drivers, including its cost of capital. In the first part of the article, the author provides an investor perspective that shows how sustainability can be integrated into investment decisions by asset managers. There he explains how and why ESG integration has so far failed to become mainstream, and what needs to be done to make it successful. The second part of this article takes the corporate perspective and shows how sustainability can be linked to value drivers using much the same ingredients as in asset management, but slightly different tools that can help corporate managers incorporate sustainability concerns into strategy and operations, including the finance function. And in closing, the author brings together corporate and investor perspectives while showing how sustainability programs can be used to make the relationship between companies and their shareholders both stronger and longer‐lasting.     

UNIVERSITY OF TEXAS ROUNDTABLE ON ENERGY DERIVATIVES AND THE TRANSFORMATION OF THE U.S. CORPORATE ENERGY SECTOR

In this roundtable, a successful oil entrepreneur and a group of ex‐bankers whose careers have taken them into the energy business discuss the deregulation of energy markets and the emergence of energy derivatives, and how these two developments have affected both the way companies do business with each other, and how the companies themselves are organized internally. The first part of this two‐part discussion explores how derivatives and corporate risk management have produced a strikingly new business model for a number of once traditional energy companies, including Enron Corp. and Mirant Corporation (until recently, Southern Energy). In addition to its ability to change corporate strategy, the panelists also consider how the hedging of price risks can affect a company's financing strategy and cost of capital. A notable feature of the new business model is a corporate structure that differs greatly from that of conventional large energy companies. And in the second half of the discussion, the focus shifts from risk management and strategy to issues of corporate structure, such as: How do companies divide themselves into business centers for reporting and accountability; how much decision‐making authority is entrusted to the managers of those divisions; and how many layers of corporate management are necessary to coordinate and control the activities of the business units? Also discussed at great length are questions of performance evaluation and incentive compensation: How do companies evaluate their own performance on a year‐to‐year basis? And what basis do they use for rewarding their managers?     

Micromanager

George Latour considers himself a good leader. As CEO of Retronics, George has a mandate to grow revenues with an eye toward taking the software-engineering firm public by 2006. At the behest of the chairman of the board, he has hired a new marketing director, Shelley Stern--"a thoroughbred" who, the chairman insists, just needs a little training in the business. George does his best to bring his new hire up to speed. He has Shelley sit in on developers' meetings, has her accompany the sales force on client calls, and even has the CFO explain the company's cash flow situation to her. He also takes pains to help her correctly position marketing and press materials. But Shelley never seems to really take the bit. In fact, Shelley considers George's hands-on management style oppressive, and she's dreadfully unhappy. What George sees as efforts to bring her up to speed, like making her go on those sales calls when she has other work to do, she views as signs that he doesn't trust her judgment. What's more, Shelley is spread too thin. Yet when she asks for help--if not additional staff, at least an outside contractor--George asks for a list of everything she's working on and tells her he'll help her prioritize. In this fictional case, a he-said, she-said debate erupts over competing management styles. Four commentators--Jim Goodnight, the CEO of SAS Institute; Mark Goulston, a psychiatrist and the senior vice president at Sherwood Partners; J. Michael Lawrie, the CEO of Siebel Systems; and Craig Chappelow, the senior manager of assessment and development resources at the Center for Creative Leadership--offer their perspectives on the problem and how to solve it.     

The leadership journey

It isn't always easy to change leadership hats or to alter the way you assess a business problem. Under pressure, most executives fall back on the management style or approach that worked in the last crisis they faced. But old approaches rarely work in new and demanding situations. Just ask Leonard Schaeffer, chairman and CEO of WellPoint Health Networks, one of the country's largest and most successful managed-care companies. In this account, he describes how he consciously adopted three very different styles of leadership at critical points during his 30-year career, depending on the business challenges at hand. Schaeffer headed up the U.S. Health Care Finance Administration during the Carter years--and led the charge toward more efficient work practices at that agency. Then he transformed Blue Cross of California from a floundering bureaucracy losing close to $1 million each day into a strong public company, WellPoint. The dire circumstances at Blue Cross had dictated that Schaeffer initially be an autocratic leader, which he considers the managerial equivalent of being an emergency room surgeon--forced to do whatever it takes to save a patient's life. But as the company rebounded, the CEO shed that "any decision is better than no decision" style. He has become a participative, hands-off leader-setting strategies and goals from above but letting WellPoint's line managers and executives figure out how best to achieve those goals. Most recently, Schaeffer has turned into a reformer--a leader who works with one foot outside the company to spur changes in health care and society. There are pitfalls in switching leadership styles, Schaeffer admits, but this flexibility is necessary for realizing corporate- and personal-success.     

The CEO as organizational architect: an interview with Xerox's Paul Allaire. Interview by Robert Howard

As chairman and CEO of the Xerox Corporation, Paul Allaire leads a company that is a microcosm of the changes transforming American business. With the introduction of the first plain-paper copier in 1959, Xerox invented a new industry and launched itself on a decade of spectacular growth. But easy growth led Xerox to neglect the fundamentals of its core business, leaving the company vulnerable to low-cost Japanese competition. Starting in the mid-1980s, Xerox embarked on a long-term effort to regain its dominant position in world copier markets and to create a new platform for future growth. Thanks to the company's Leadership through Quality program, Xerox became the first major U.S. company to win back market share from the Japanese. Allaire describes his efforts to take Xerox's corporate transformation to a new level. Since becoming CEO in 1990, he has repositioned Xerox as "the document company" at the intersection of the worlds of paper-based and electronic information. And he has guided the company through a fundamental redesign of what he calls the "organizational architecture" of Xerox's document processing business. Few CEOs have approached the process of organizational redesign as systematically and methodically as Allaire has. He has created a new corporate structure that balances independent business divisions with integrated R&D and customer operations organizations. He has redefined managerial roles and responsibilities, changed the way managers are selected and compensated, and renewed the company's senior management ranks. And he has articulated the new values and behaviors Xerox managers will need to thrive in a more competitive and fast-changing business environment.     

A SENIOR MANAGER'S GUIDE TO INTEGRATED RISK MANAGEMENT

This paper provides an overview of corporate risk management for senior managers. The author discusses the integrated risk management framework, emphasizing that a company can implement its risk management objectives in three fundamental ways: modifying its operations, using targeted financial instruments, or adjusting its capital structure. "Integration" refers both to the aggregation of all risks faced by the firm into a net exposure and to the coordinated use of these three risk management techniques. The author provides a functional analysis of integrated risk management using a wide-ranging set of case illustrations to show how the risk management process influences, and is influenced by, a company's overall strategy and business activities. Based on such analysis, the article concludes by sketching a framework intended to help managers design a value-maximizing, enterprise-wide corporate risk management system.     

The discipline of innovation. 1985

How much of innovation is inspiration, and how much is hard work? The answer lies somewhere in the middle, says management thinker Peter Drucker. In this HBR classic from 1985, he argues that innovation is real work that can and should be managed like any other corporate function. Success is more likely to result from the systematic pursuit of opportunities than from a flash of genius. Indeed, most innovative business ideas arise through the methodical analysis of seven areas of opportunity. Within a company or industry, opportunities can be found in unexpected occurrences, incongruities of various kinds, process needs, or changes in an industry or market. Outside a company, opportunities arise from demographic changes, changes in perception, or new knowledge. There is some overlap among the sources, and the potential for innovation may well lie in more than one area at a time. Innovations based on new knowledge tend to have the greatest effect on the marketplace, but it often takes decades before the ideas are translated into actual products, processes, or services. The other sources of innovation are easier and simpler to handle, yet they still require managers to look beyond established practices, Drucker explains. The author emphasizes that innovators need to look for simple, focused solutions to real problems. The greatest praise an innovation can receive is for people to say, "That's so obvious!" Grandiose ideas designed to revolutionize an industry rarely work. Innovation, like any other endeavor, takes talent, ingenuity, and knowledge. But Drucker cautions that if diligence, persistence, and commitment are lacking, companies are unlikely to succeed at the business of innovation.     

The weird rules of creativity

For at least the past decade, the holy grail for companies has been innovation. Managers have gone after it with all the zeal their training has instilled in them, using a full complement of tried and true management techniques. The problem is that none of these practices, well suited for cashing in on old, proven products and business models, works very well when it comes to innovation. Instead, managers should take most of what they know about management and stand it on its head. In this article, Robert Sutton outlines several ideas for managing creativity that are clearly odd but clearly effective: Place bets on ideas without much heed to their projected returns. Ignore what has worked before. Goad perfectly happy people into fights among themselves. Good creativity management means hiring the candidate you have a gut feeling against. And as for the people who stick their fingers in their ears and chant, "I'm not listening, I'm not listening," when customers make suggestions? Praise and promote them. Using vivid examples from more than a decade of academic research to illustrate his points, the author discusses new approaches to hiring, managing creative people, and dealing with risk and randomness in innovation. His conclusions? The practices in this article succeed because they increase the range of a company's knowledge, allow people to see old problems in new ways, and help companies break from the past.     

Timeless leadership

The historian David McCullough, a two-time Pulitzer Prize winner and well-known public television host, has spent his career thinking about the qualities that make a leader great. His books, including Truman, John Adams, and 1776, illustrate his conviction that even in America's darkest moments the old-fashioned virtues of optimism, hard work, and strength of character endure. In this edited conversation with HBR senior editor Bronwyn Fryer, McCullough analyzes the strengths of American leaders past and present. Of Harry Truman he says, "He wasn't afraid to have people around him who were more accomplished than he, and that's one reason why he had the best cabinet of any president since George Washington....He knew who he was." George Washington--"a natural born leader and a man of absolute integrity"--was unusually skilled at spotting talent. Washington Roebling, who built the Brooklyn Bridge, led by example: He never asked his people to do anything he wouldn't do himself, no matter how dangerous. Franklin Roosevelt had the power of persuasion in abundance. If McCullough were teaching a business school leadership course, he says, he would emphasize the importance of listening--of asking good questions but also noticing what people don't say; he would warn against "the insidious disease of greed"; he would encourage an ambition to excel; and he would urge young MBAs to have a sense that their work maters and to make their good conduct a standard for others.     

Is this the right time to come out? Case study

In this fictional case study, Adam Lawson is a promising young associate at Kirkham McDowell Securities, a St. Louis underwriting and financial advisory firm. Recently, Adam helped to bring in an extremely lucrative deal, and soon he and a few other associates will be honored for their efforts at the firm's silver anniversary dinner. George Campbell, vice president in mergers and acquisitions, is caught unprepared when Adam tells him that, after serious reflection, he has decided to bring his partner, Robert Collins, to the banquet. George is one of Adam's biggest supporters at the firm, and he personally has no problem with Adam being gay. But it is one thing for Adam to come out of the closet at the office. It is quite another to do so at a public company-client event. After all, Kirkham McDowell's client roster includes some very conservative companies--one of the country's largest defense contractors, for example. George is concerned with how Adam's openness about his sexual orientation will play with their clients and, as a result, how senior management will react. Adam has not come to George for permission to bring Robert to the dinner. But clearly Adam wants some sort of response. George has never faced sexual diversity issues in the workplace before, and there is no company policy to guide him. Just how negative an effect could Robert have on Adam's career with the firm and the firm's relationship with its clients? Isn't it possible that even the firm's most conservative clients will simply decide that Adam's choice of guest is a personal matter--not a business one?(ABSTRACT TRUNCATED AT 250 WORDS)     

'Nonprofits' need surplus too

By definition profit refers to the difference between revenue and expenses. In for-profit organizations profit or surplus gives a return to the owners of the company and serves as a source of financing for capital acquisitions and working capital. Nonprofit organizations, which are not allowed a surplus, don't suffer on the first count because they have no owners. But they do suffer on the second count because, if expected to grow, they need to finance asset replacement and growth. In these days when funds for long-term debt are becoming scarcer, this author asserts, the need for regulators to allow 'nonprofits' to keep a surplus is increasing. In this article, he argues for a surplus and then discusses how managers and regulators can determine how much a nonprofit organization should be allowed. He presents a combination of a modified version of the return-on-asset pricing model used in for-profit organizations and a model for assessing working capital needs associated with growth.     

Making business sense of the Internet

For managers in large, well-established businesses, the Internet is a tough nut to crack. It is very simple to set up a Web presence and very difficult to create a Web-based business model. Established businesses that over decades have carefully built brands and physical distribution relationships risk damaging all they have created when they pursue commerce through the Net. Still, managers can't avoid the impact of electronic commerce on their businesses. They need to understand the opportunities available to them and recognize how their companies may be vulnerable if rivals seize those opportunities first. Broadly speaking, the Internet presents four distinct types of opportunities. First, it links companies directly to customers, suppliers, and other interested parties. Second, it lets companies bypass other players in an industry's value chain. Third, it is a tool for developing and delivering new products and services to new customers. Fourth, it will enable certain companies to dominate the electronic channel of an entire industry or segment, control access to customers, and set business rules. As he elaborates on these four points, the author gives established companies a systematic way to sort through the risks and rewards of doing business in cyberspace.     

Making nonroutine decisions--what cost measure is appropriate?

It would be simple if there were just one correct measure of cost. Unfortunately, every time we use cost information, the most important thing we do is determine which costs are appropriate for answering the question that has been asked. The degree of accuracy in calculating those costs will have to depend on how valuable the information is. The more important it is to have very accurate information, the more effort should be made to get such information. However, we cannot even begin the process of cost measurement until we have defined which costs to measure. In routine management, we have taken the time to refine the definition of what cost information is appropriate for the efficient running of ongoing activities. In the area of nonroutine decisions, however, everything is new. It is therefore critical for managers to spend some time thinking about which things really will change as a result of the change. Only those factors should enter into the calculation.     

Public management: A third approach?

The idea that management in the public sector has everything to learn from the private sector has been dominant in the 1980s. There is, however, scope for mutual learning across the sectoral divide if the primary concern of managers ‐whether in business or government — is to be effectiveness.     

Is American business working for the poor?

At first glance, poverty seems to have little to do with business. When most people--managers included--think about poverty, they assume that people are poor because they are isolated from the mainstream economy, not productive participants in it. But according to Harvard University professors Mary Jo Bane and David Ellwood, this is a misleading image of the true face of poverty in the United States today. Most poor adults--and a full 90% of poor children--live in families where work is the norm, not the exception. Poor people often work or want to work. But at the low-wage end of the American economy, having a job is no guarantee of avoiding poverty. Poverty is a business issue, then, because the American poor are part of the American work force. And this poses a problem for managers. In a more competitive and fast-changing economic environment, the performance of companies increasingly depends on the capabilities of their employees. In response to this human-resource challenge, more and more managers are embracing the language of "empowerment". And yet how can low-wage employees believe empowerment when their experience of work is, quite literally, impoverishment? It is unlikely that American companies can create the work force of the future with the poverty policies of the past. Fortunately, there are some simple policy mechanisms that can assist the working poor without putting an undue burden on business. Enacting them, however, requires managers to see poverty policy as one part of a national human-resource strategy that links the strategic concerns of companies to a broad social agenda.     

Making behavioral science more useful

Universal theories do not always fit the situation in which they are used, and management practice is no exception. In fact, the difficulty in applying such behavioral science theories has been the interpretation that they are applicable to all situations. This author asks managers and academics alike to recognize that the easy way does not always work, that more theories should be developed to fit different situations, and that staffs should be educated in the theories and techniques that are available.     

Entering China: an unconventional approach

Conventional wisdom has it that the best way to do business in China is through an equity joint venture (EJV) with a well-connected Chinese partner. But pioneering companies are starting a trend toward a new way to enter that market: as a wholly foreign-owned enterprise, or WFOE. Increasingly, says the author, joint ventures do not offer foreign companies what they need to succeed in China. For example, many companies want to do business nationally, but the prospects for finding a Chinese partner with national scope are poor. Moreover, there are often conflicting perceptions between partners about how to operate an EJV: Chinese companies, for example, typically have a more immediate interest in profits than foreign investors do. By contrast, the author asserts, WFOEs are faster to set up and easier to manage; and they allow managers to expand operations more rapidly. That makes them the perfect solution, right? The answer is a qualified yes. First, foreign companies will still need sources of guanxi, or social and political connections. Second, managers must take steps to avoid trampling on China's cultural or economic sovereignty. Third and perhaps most important, foreign companies must be prepared to bring something of value to China-usually in the form of jobs or new technology that can help the country develop. Companies willing to make the effort, says the author, can reap the rewards of China's burgeoning marketplace.     

Big hat, no cattle: managing human resources

When faced with business problems, managers naturally make identifying the trouble their priority. Once that is done, at least half the job is over; finding solutions is just a matter of time. This hasn't been so, however, with the human resources problem: how to motivate employees. Sixty years ago, the Hawthorne experiments revealed the issue, and ever since, managers, researchers, and consultants have been searching for the answer to the human resources problem. Why aren't employees as productive, loyal, and dedicated to their companies as their managers know they can be? The author of this article proposes four reasons why actuality has fallen so far below expectation in personnel management, namely, that managers' expectations have been too high in the first place, that the concepts staff professionals offer managers are frequently contradictory, that the corporate role of personnel has always been problematic, and finally, that managers hold assumptions concerning their employees that undermine efforts to motivate them.