The Innovator's Dilemma
by Clayton M. Christensen

(Harvard Business School Press)

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail demonstrates why outstanding companies that focus on competitiveness, listen closely to customers, and invest aggressively in new technologies may still lose market dominance.

Drawing on observations from a variety of industries, HBS associate professor Clayton Christensen argues that otherwise sound business practices - such as concentrating investments and technology on the most profitable products, on satisfying the sources of highest demand, and on pleasing the best customers - can ultimately weaken a strong firm.

In The Innovator's Dilemma, Christensen shows how significant breakthroughs in products and services are often initially rejected by mainstream customers unready to use them. Consequently, a firm with a strong customer orientation may allow important innovations to languish, leaving a void that more entrepreneurial companies in the same field may successfully fill. While keeping close to customers may be critical for short-term success, Christensen says, long-term growth and profit depend upon a different managerial formula. His book is designed to help managers understand that distinction and show them how to adapt and respond accordingly.

The Service Profit Chain
by James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger

(Free Press)

Few managers can fully explain why certain service firms continue to outperform equally service-conscious competitors year after year. But in The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, HBS professors James Heskett, Earl Sasser, and Leonard Schlesinger show how managers in top-rank service firms use a quantifiable set of relationships that directly links profit and growth not only to customer loyalty and satisfaction but to employee loyalty, satisfaction, and productivity. The authors emphasize that mutually reinforcing relationships (e.g., customer satisfaction as a factor affecting employee satisfaction, and vice versa) constitute a service profit chain that can form the foundation for strategic service vision and help guide managers in their operations and marketing.

The authors explain how any service industry firm can measure service profit chain relations across operating units, evaluate and stimulate continual improvements in performance, and convey best practice information throughout the organization.

Matsushita Leadership
by John P. Kotter

(Free Press)

Born to poverty, Konosuke Matsushita founded and presided over the phenomenal growth of Matsushita Electric, a company whose revenues would eventually exceed the combined sales of Bethlehem Steel, Colgate-Palmolive, Gillette, B.F. Goodrich, Kellogg, Olivetti, Scott Paper, and Whirlpool.

In his new book, Matsushita Leadership: Lessons from the 20th Century's Most Remarkable Entrepreneur, HBS professor John Kotter describes how Matsushita helped lead Japan's economic growth after World War II, inventing business practices that were adopted fifty years later by many of the world's great corporations. An exemplar of leadership and entrepreneurship, Matsushita used his wealth to revivify Japan-ese society and government, wrote books of philosophy, founded a school of leadership, and created Japan's version of the Nobel Prize.

Matsushita's ability and willingness to learn, adapt, and grow throughout his lifetime, concludes Kotter, are characteristics that will be the mark of outstanding business leaders in the 21st century.

Competition and Strategy Unit at HBS Sets Pace In Its Field

The follow article is the tenth in a series on the activities and research taking place in each academic unit at HBS.

The powerful ideas that come under the umbrella of the School's Competition and Strategy (C&S;) unit are making an impact at local, national, and international levels. Whether it's Professor Michael E. Porter's seminal work on the competitive advantage of nations or Professor Cynthia A. Montgomery's recent book on corporate strategy, HBS C&S; faculty are a leading voice in the strategic management arena.

Most of the fourteen members of the unit, which grew out of the former Business Policy area, are economists with particular expertise in competitive strategy. Professor Stephen P. Bradley, who heads the unit, is enthusiastic about the group's influence: "We are at the forefront of our field," he says, "doing leading-edge research and having an important impact on practice." Indeed, C&S; faculty have recently published a number of books that have been well received in the academic and business press. Professor Adam M. Brandenburger's Co-opetition, for instance, is a Business Week bestseller while Professor David B. Yoffie's Competing in the Age of Digital Convergence is an authoritative examination of the rapidly evolving digital environment. As they break new ground in their research, C&S; faculty are promptly disseminating their research findings into publications, colloquia, and MBA and Executive Education courses.

The C&S; unit can be divided, with some overlap, into four areas: competitive strategy, corporate strategy, global competition, and technology strategy. The largest of the subgroups, competitive strategy - essentially the core of the unit - looks at the techniques a firm uses to compete within its industry. Michael Porter's recent research on the theoretical foundations of competitive positioning and sustained competitive advantage fits into this area. He explores these topics in his seminar on Competition and Competitiveness as well as in a recent Harvard Business Review article "What Is Strategy?" In a forthcoming book, Porter challenges traditional views about the source of Japan's competitive success.

Professor Pankaj Ghemawat, head of the unit's required course, Competition and Strategy, focuses on strategic commitments - decisions that involve significant amounts of irreversibility, such as entry into new markets, exit from old ones, capacity expansion, and product and process innovation. Ghemawat is the author of a widely cited book, Commitment, as well as seminal articles on the sustainability of competitive advantage. His latest book, Games Businesses Play, will be published this year. Along with a number of colleagues, he has also begun looking at how competitive shocks affect industry structure and business strategy in emerging markets.

Adam Brandenburger and Assistant Professor Harborne W. Stuart, Jr., have worked together over a number of years, developing a theory of business that emphasizes entrepreneurship, joint action, and the creation of value. Their work shows that value creation is an interdependent process in which an enterprise must align itself with customers, suppliers, employees, and many others. In addition to being the foundation of Brandenburger's book Co-opetition (coauthored with Yale's Barry J. Nalebuff), this theory is also the basis of the MBA elective Changing the Game that he currently teaches. A game theorist, Professor Elon Kohlberg is studying the foundations of the equilibrium concept in game theory, which has been at the heart of much of the economic research on competitive strategy over the past fifteen years. Last fall, Kohlberg taught Analytical Reasoning, a new elective he developed around his research.

Associate Professor Anita M. McGahan, with Michael Porter, is working on a series of statistical papers on the sources of company and industry profitability. McGahan currently teaches the elective Strategy, Commitment, and Choice, which focuses on strategy at the business-unit level. Assistant Professor Kenneth S. Corts studies competition in segmented markets and the relationships between firms and their distributors.

In the area of technology, Stephen Bradley and David Yoffie have both hosted on-campus research colloquia. "Multi-media and the Boundaryless World" featured the research of Bradley and his frequent collaborator Professor Richard L. Nolan, a member of the School's MIS Interest Group. Bradley and Nolan will soon publish Sense and Respond: Capturing the Value of Network Era Technologies, a book that documents the technology-aided shift many companies are currently undertaking from a "make-and-sell" mentality to one in which they are able to "sense and respond" to customers' actual requirements in real time. Bradley's 1993 book (edited with Nolan and Jerry Hausman), Globalization, Technology, and Competition, examines changes driven by the integration of computers and telecommunications in the 1990s. The pair's research is the basis of two new MBA electives, Competing in the Informa-tion Age and Business and the Internet: Strategy, Law, and Policy.

Yoffie's Competing in the Age of Digital Convergence, the recent book he edited from the proceedings of his 1994 colloquium, addresses the merging of computer, telecommunications, and consumer electronics technologies. His work suggests that competitive advantage is achieved more effectively through creative combinations of available technologies and smart management than through radical technological innovations. He has also published on topics such as strategic management, international trade, and global competition in high-tech industries.

Professor Richard S. Rosenbloom, with almost four decades of service on the HBS faculty, is an editor of and contributor to Engines of Innovation: U.S. Industrial Research at the End of an Era, published last year. He teaches Technology and Competitive Strategy, an elective that examines the strategic choices posed by emerging technologies.

Looking at corporate strategy, Cynthia Montgomery and Associate Professor David J. Collis recently published Corporate Strategy: Resources and the Scope of the Firm, a work that presents an integrated framework for analyzing corporate strategy. Central to the book is the idea that a firm's business and corporate level are inextricably linked: most corporate-level advantage is ultimately realized through enhanced performance at the business-unit level. This is made possible by leveraging critical resources and capabilities across businesses. Collis and Montgomery have also developed an Executive Education program, Creating Corporate Advantage, and an elective MBA course based on this framework. Also in corporate strategy, Assistant Professor Tarun Khanna is studying the corporate strategy of diversified business groups in several emerging economies in Asia and Latin America.

Global competition lends itself to much overlap with the other subgroups of the C&S; unit. Here, Khanna and Ghemawat are both studying corporate strategy in developing countries. Yoffie's work, including Beyond Free Trade: Firms, Governments, and Global Competition, a book that he edited, has a global perspective as does Porter's The Competitive Advantage of Nations. Indeed, Porter has published books on the national competitiveness initiatives in New Zealand, Canada, Sweden, and Switzerland, and his Competitive Strategy has been translated into seventeen languages.

Bradley is proud not only of the Competition and Strategy faculty members' contributions to their field but also the way "each of them integrates his or her research and course development." Concludes Bradley, "We work on building theory that, in turn, has an impact on practice."

by Susan Young

Short Takes

A summary of selected new research by HBS faculty.

Diversification Best Bet in Emerging Markets

In today's era of global competitiveness, companies in the industrialized world have slimmed down their operations in order to focus on doing a few things well. These focused operations contrast sharply with the ungainly conglomerates assembled in the 1960s and 1970s that provided a variety of seemingly mismatched products and services. And while many consultants and investors are seeking to extend this focused model into emerging markets such as India, China, and Malaysia, one size may not fit all, say Professor Krishna G. Palepu and Assistant Professor Tarun Khanna, authors of "Corporate Strategies for Business Groups in Emerging Markets," a working paper slated to be published (under a different title) in the July-August issue of the Harvard Business Review. This new study makes a case for diversification efforts for companies in business environments where big may, in fact, be beautiful. "Focus is successful only when the existing economy provides the necessary institutions to support it. A company's strategy should be context-dependent," explains Palepu, who, with Khanna, analyzed statistical data from five hundred business groups in India and spoke to dozens of managers in Malaysia, Indonesia, and Chile.

The pair found that companies outside the United States perform better when they replicate the quality certification institutions, financial services, business training, and regulatory bodies that are taken for granted in the West but are not available in emerging markets. "Companies can create value by developing these systems for themselves," notes Palepu. For example, large diversified companies doing business in India and South Korea, where there are few business schools, have benefited from setting up internal management development programs and facilities in order to maintain a qualified pool of employees.

Replicating U.S. business practices in other countries is a very complex challenge, asserts Palepu. "In order to do venture capital, you need a stock market so that the venture capitalists can cash out their investments. To have a stock market, you need reliable financial reporting, reputable auditing bodies, and an independent financial press. Creating institutions similar to those we have in the United States takes a very long time because of such interdependencies."

Looking Out for Number One

The tension between the desire to maintain cordial relations with others and the need to act in one's own self-interest affects all human relations. This conflict is particularly apparent in the workplace, where employees must cooperate in order to achieve the company's goals at the same time they are competing to enhance their careers. In a working paper titled "Cloaking Self-Interest with High-Minded Principle," HBS doctoral student Justine Fenwick and Assistant Professor Robert J. Robinson explore how these contradictory forces can play out in the business world.

In one part of this study, the researchers asked their subjects to allocate a company's year-end bonus money. Half of the participants were to share the money with either a partner or subordinates, and half were to divide the bonus for others, keeping none of it for themselves. Not surprisingly, the subjects who had a personal stake in how the cash was awarded gave themselves a larger chunk than the nonbenefiting subjects thought they merited. "When people stand to gain from a situation," says Fenwick, "their decision-making process is altered."

One interesting finding was the subtle manner in which participants revealed their self-interest. When participants could share in the cash bonus, they divided the entire bonus equally between themselves and their partner. However, nonbenefiting subjects viewing the same situation did not feel that either employee deserved half of the entire bonus. Thus, it appears that subjects cloak their self-interest under the guise of the high principle of equality. In this experiment they behaved fairly with their partner but more generously than those observing felt was warranted.

"People will always tend to err in their own favor, yet they are convinced that they are being just," notes Fenwick. "Managers should recognize that there will always be a potential for conflict when decision-makers stand to gain from their choices."

by Judith A. Ross

Alumni may request copies of HBS working papers by calling 617-495-6852.