The Conference Board

Report Number 1024

Leading the Global Enterprise

At a conference cosponsored by The Conference Board and Booz•Allen & Hamilton, business leaders discuss:

* opportunities worldwide—caution in Eastern Europe; promise in Latin America

* the key to globalization—focus on customers

* CEO: risk manager, technology visionary, quality leader

* cementing core capabilities and forging partnerships

Serving Business and Society Since 1916

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# Leading the Global Enterprise

Edited by Theresa Brothers

## Contents

5 FROM THE PRESIDENT

7 EXECUTIVE SUMMARY

9 GLOBAL REALITIES: RISKS AND OPPORTUNITIES
**Henry Kissinger**
Kissinger Associates, Inc.
*Looking for a good investment bet? Look to South and Central America, not Eastern Europe.*

13 CAPABILITIES OF THE GLOBAL CORPORATION
**Martin Waldenstrom**
Booz Allen & Hamilton, Inc.
*Waldenstrom says odds are your company won't survive an industry restructuring unless it has a global focus. He offers some practical suggestions that could improve your chances of success.*

17 GLOBAL REACH THROUGH OWNERSHIP AND ALLIANCES
**Robert H. Malott**
FMC Corporation
*The popularity and importance of strategic alliances are growing. By avoiding some common pitfalls, companies can improve their chances of success.*

21 GLOBALIZATION: A JOURNEY, NOT A DESTINATION
**Charles W. Moritz**
The Dun & Bradstreet Corporation
*Moritz offers insights on the globalization journey and describes the attributes of a successful global enterprise. Two case studies illustrate his points.*

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# Executive Summary

The distinction between foreign and domestic business is becoming ever more blurred. Even companies that operate in a single country must compete with other firms that view all countries as potential markets. Moreover, multinational companies are looking for ways to improve services to clients, regardless of location. Executives gathered to discuss these and other issues at The Conference Board's 1992 Global Enterprise Conference.

## The World From the Political Perspective

Deciding which markets deserve attention is a prime consideration for many companies. An overview of the political situation in various regions was given by Henry Kissinger, former U.S. Secretary of State and Chairman of Kissinger Associates, Inc. The end of the Cold War will not bring democracy, free enterprise and peace to international affairs, states Kissinger. Quite the contrary; for example, he predicts turmoil in the former Soviet Union because the West does not know how to handle the formation of the Commonwealth of Independent States or the region's attempt to open its markets. Kissinger also points to a potential for disadvantage in the Pacific Rim: "If the United States fails to include China in Asian policy, it gives the Japanese greater standing and unbalances the situation."

Kissinger feels the most constructive piece of U.S. foreign policy right now is the North American Free Trade Agreement. "The big revolution is not in Russia but in Mexico, Argentina and Chile. This is where democracy and the free enterprise system are really taking hold, and if we build a trading group with them, we will be able to enter international negotiations as a regional player, not just as a single nation up against regional blocs," he says.

## Developing a Successful Global Enterprise

Martin Waldenstrom, President of Worldwide Commercial Consulting for Booz Allen & Hamilton, Inc., be-

lieves companies often follow a predictable pattern of growth: They start as domestic firms, expand by exporting and establishing international operations, then, as the need arises, begin to globalize their operations. The considerable costs involved in building an export market and replicating it worldwide often result in draining "profit valleys," he says.

To avoid or at least reduce the length of such "low-profit valley zones," Waldenstrom cites three capabilities that often prove crucial: "developing the company's strengths in order to position it at the forefront of the industry, rapidly expanding into new and existing markets through acquisitions and alliances, and developing new and different ways to lead and organize the company."

## Financing a Global Company

Understanding the intricacies of global financial management is no small task. Frederick S. Addy, Executive Vice President and Chief Financial Officer of Amoco Corporation, explains that the financial options available for companies are much broader today than they were 10 years ago. For example, he says, "Debt can be structured in virtually any way the issuer chooses, in a variety of locations, and with instruments such as swaps or forward contracts to provide the optimal currency denomination, maturity and variability of interest rate."

Addy stresses the need to keep in contact with the global financial community, to manage currency risk prudently, to carefully weigh tax considerations before making investments, and to exercise patience in negotiating investments in foreign locales. He also advocates "hiring and developing high caliber people with an international perspective in all areas of the finance function."

## Developing Strategic Alliances

Strategic alliances can be one of the most useful methods of expanding global operations. For many companies, however, they have not lived up to expectations. According to Robert H. Malott, Chairman of the Execu-

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tive Committee and former Chief Executive Officer of FMC Corporation, alliances often fail due to an absence of common or complementary objectives between the partners, to incompatible philosophies and values, or to unrealistic expectations of what each company can bring to the partnership.

Malott believes companies can increase the chances for successful partnerships by being alert to these often overlooked stumbling blocks. He adds that companies should never compromise core assets when creating strategic alliances. "While erecting fences around key sources of values (such as customer or supplier relationships, technologies or operating skills) makes cooperation with partners more difficult, the risk of failing to segregate and protect these resources far outweighs the frustration of attempting to do so," Malott says. Finally, he strongly advocates spelling out all the details of the alliance in advance. This ensures an "amicable separation" in the event that the partnership fails.

## The Race in Technology

For technology-driven companies, globalization will be an imperative for survival. As Robert W. Galvin, Chairman of the Executive Committee of Motorola, Inc., points out, many regions (including Japan, Western Europe and Russia) are important centers for innovation. If the United States is to maintain its technological lead, Galvin suggests that several things must occur. First, he says, "We must find a way to encourage and allow substantially more cooperation at the precompetitive level." Second, scientists must learn to work with engineers to hasten the application of science, and companies' development departments—regardless of geographic location—must learn to coordinate their activities.

Third, both the nation as a whole and individual companies must establish direction, or road maps, for research. "Motorola started using technology road maps about 25 years ago. We discovered that both the analytic and creative components of research can be scrutinized and its outcome predicted with some degree of certainty. In fact, we can invent on purpose without ever having gone to the lab," says Galvin.

Ultimately, however, Galvin insists that the success of a company's technological development depends on

its leaders. He recommends that each leader retain a ledger to record predictions about which technological developments will be most important in the future. By comparing these entries and monitoring the efforts of competitors, a company can gauge the accuracy of its leaders.

## Case Study of the Globalization Process

The Dun & Bradstreet Company is one organization that is forging ahead with globalization. Charles W. Moritz, Chairman and Chief Executive Officer at D&B, notes that different parts of his company have undergone globalization at different times and in different ways. He provides the examples of D&B's Nielsen Marketing Research and I.M.S. International. "Nielsen, responding to the interests of its customers (primarily regional and national food manufacturers), developed its operations through strong management at the country level. I.M.S., born in the early stages of the Information Age and serving the more global pharmaceutical industry, basically had to think globally right from the start," he says.

Moritz also outlines eight traits of successful global companies. These include instilling and reinforcing a shared sense of vision and values, beliefs and practices; communicating visions and plans to so employees understand corporate objectives; focusing on the customer; using resource diversity as a competitive weapon; encouraging risk-taking; sharing capabilities among divisions and across countries; maintaining the lowest prices possible; and being community-friendly. "These attributes are critical because they make the globalization process tangible; they help move globalization from a soft concept to concrete objectives and improved performance," says Moritz.

Companies are often forced to globalize their vision and operations to survive intense competition, noted many speakers. Ultimately, however, globalization offers superior growth and profitability potential. Notes Robert Galvin of Motorola: "Fortunately for business, the world is not static. With change comes opportunity for growth and the betterment of the world. However, only companies who are prepared to change will live to see it."

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# Global Realities: Risks and Opportunities

## Henry Kissinger

*Chairman, Kissinger Associates, Inc.*

*Former U.S. Secretary of State*

Some currently popular opinions about international affairs are that the United States is the only superpower left, that democracy and free enterprise have triumphed around the world, that we are heading into a period of peace, and that the West won the Cold War. I agree that we won the Cold War, but I hold a minority view on almost all the other statements. I think we are heading into a period of increasing turbulence, and I do not believe that we have witnessed the ultimate triumph of democracy.

## American Foreign Policy: Hampered by History

I believe that the deepest problem the United States faces now is how to handle the post-Cold War world. If you look at American history, the United States has not really had to conduct foreign policy except in its very early days; between the Monroe Doctrine in 1853 and World War I, we did not participate in international affairs at all. This did not stop Woodrow Wilson, when he showed up in Paris at the end of World War I, from proclaiming a set of unheard of propositions as eternal verities and announcing that everything that had gone before was wrong. We see today in the break up of Yugoslavia and Czechoslovakia that these prescriptions were not necessarily scientifically based. Not to mention that World War II happened 20 years after World War I.

Between World War I and World War II, the United States again lapsed into isolation. Since emerging as the dominant country at the end of World War II, we have oscillated between isolation and dominance, neither of which is the way foreign policy has conventionally been conducted. Our nuclear superiority allowed us to keep this untraditional stance toward foreign policy.

Our economic power was also a factor. We had nearly 50 percent of the world's gross national product

(GNP) in the 1940s. When you are the only supplier of capital and the principal supplier of security, you do not have to conduct foreign policy; you identify problems and then overwhelm them with resources. This way of handling problems is much more like domestic policy than foreign policy for other countries.

This went on until the mid-1970s when the Soviet Union gained more or less nuclear equality with the United States, and Germany and Japan captured a larger and larger share of world GNP. Then the Soviet Union started to decline in the 1980s. Even in a two-power world, however, the mobilization of resources seemed more important than an understanding of historical trends.

What do I mean by "normal foreign policy?" Normal foreign policy, the way it developed in Europe in the 17th century after the breakup of the Holy Roman Empire and the way it is still sometimes conducted today, involves a number of basically equal players whose combinations affect the possibilities of risks and opportunities. In a five-, six- or seven-power world, no single country can be dominant except by an effort that is almost certain to unite all the others against it. In a five-, six- or seven-power world everything depends on your ability to assess trends before they happen and to gamble based on an assessment that you cannot prove true when you make it. The difference between great statesmen like Winston Churchill or Charles de Gaulle and run-of-the-mill statesmen is their ability to understand historical forces, grasp where things are heading, and then make better decisions based on these judgments.

In the 1930s, Winston Churchill wrote about British foreign policy, explaining that for 400 years British policy was based on supporting the weaker against the stronger in Europe. He lists all the peoples that Britain opposed over the centuries, noting that who Britain supported had nothing to do with likes or dislikes or quali-

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ties of the rulers. He said not to accuse him of being pro-French and anti-German; if circumstances were reversed, he would be pro-German and anti-French. Through this type of foreign policy, Britain aided in maintaining the balance of power and preserving liberty in Europe.

The United States, on the other hand, is incapable of doing this. Take as an example the current debate about Iraq. When Iraq invaded Iran in 1980, American policymakers said, "Iraq is weaker, and it is in our national interest to support it. Iraq has also had a conversion; it is more moderate and has become a good country. It is now a hope for peace in the area." Then, of course, when it won the war, why cut off aid to this moderate country? But since it had not yet done anything, the United States had to wait until Iraq did something, like invade Kuwait. This is typical American foreign policy. Once Iraq got as strong or stronger than Iran, American policy should have been to cut off support or even to tilt support over to the other side a bit.

Americans believe in the conversion of adversaries. We say, for instance, that we have to save democracy in the former Soviet Union and therefore must give it aid so that it can remain democratic. Never mind that there is no historical example of democracy in Russia or the various republics. The current political system in Russia is more conducive to doing business than the former totalitarian system was, but it is still a combination of chaos, autocracy and anarchy. It is hardly a democracy.

But with the $24 billion a year that has been proposed to aid Russia, we believe we can save democracy. West Germany has spent $220 billion in the last two years on eastern Germany. The West German civil service and West German entrepreneurs have also stepped in, but the former East Germany still has 20 percent unemployment. I think the reunified Germany is going to be a roaring success, so I do not worry about it. My point is that if you transpose the scale of the German effort onto the Soviet territory, $1.5 trillion a year for an indefinite period of time is what it would take to make a fundamental breakthrough.

So the ability of America to look at the world when there are five or six major players—the United States, Japan, Europe, China, whatever ends up on former Soviet territory, and maybe India—is the big challenge of our period. Before we can establish ourselves in this New World Order, we will first need some concept of our own national interest—that whatever we are doing is because it serves some specific national purpose. Yet over the decades, American presidents have proudly boasted that the United States has no national interests. President Bush kept saying that the reason we were leading the Gulf War was to defend international law and international principles and that everybody understood the disinterested nature of that effort. This kind of statement scares other countries because if you have no inter-

ests, you are totally unpredictable and become incalculable; you are capable of doing anything. Nobody expects disinterested foreign policy from a country or a business. They expect something that they can calculate and compare with their own interests. This is what we will be facing.

## A Perspective on the Former Soviet Union

Two simultaneous revolutions are going on in the former Soviet Union: one is against communism and the other is against Russian imperialism. The one against communism is essentially economically motivated and has very little to do with Jeffersonian principles of democracy. It has to do with the inefficiency and corruptness of a system in which every article of commerce moves by allocation; therefore, the only free market is at the administrative discretion of the people who make the allocations. This leads to phenomenal corruption, stagnation, over-employment, and all the other attributes now visible in the former Soviet Union.

One of the major problems with communism is that it corrupts the meaning of money. Perquisites rather than money become the economic base. Anyone who has done business in ex-communist countries—with the possible exception of China—knows how difficult it is to get any perception of cost accounting or taxation. Recently, the Russian Republic passed a law that every company that does business in the Soviet Union should pay 60 percent of its global earnings in taxes to the Russian Republic. This shows that they have no grasp of economic reality.

Another problem the West refuses to face is that a territory four times the size of Europe is now broken up into 15 independent states and extends from the Polish border to Vladivostok, from the Arctic Circle to the Middle East. The political organization of that territory will determine the degree of political stability or turbulence that will exist in the world. What happens in Western Russia will affect Europe; what happens in Central Asia will affect the Middle East. If the Soviets reoccupy Ukraine and the Baltic states, Europe will revert to its traditional posture of fear and armament toward Russia. What happens in Central Asia will depend on the interaction of Iran, Turkey, Russia, and the United States. But nobody wants to think about this. The current political thinking of the Western world is, "Let's keep it quiet now, then there will be an election and maybe someone else will have to deal with it or maybe something will happen."

I make the following propositions: First, most anti-communists in the former Soviet Union are not democrats. Second, not every democrat is anti-imperialist. In fact, most democrats in the former Soviet Union are imperialists in the sense that they do not accept the breakup of the Soviet Union as a political entity. There

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is no true Commonwealth there; Russia claims to have
some sort of control over all the other states, which
want to get as free as they can from the Commonwealth.

Note the following absurd situation: The European Security Conference and other institutions to which the Soviet Union belonged have admitted each of the 15 republics as its members. What is Uzbekistan doing in the European Security Conference? In what way is Uzbekistan, or any of these other Central Asian republics, European? They are there because in the back of everyone's mind these republics still belong to the Soviet Union.

Another problem is that the Soviet army is still dis-
tributed over the entire territory; it comes and goes as it
pleases, and it maneuvers on the territory at will. It
does not even inform the local authorities that it is do-
ing it. The army is run out of the Defense Ministry in
Moscow—an organization that knows what it is doing.
The only problem is that the Defense Ministry is not re-
porting to anybody because it is the only existing insti-
tution of the Commonwealth.

How can that end well? The borders are not recog-
nized. It is a prelude to Yugoslav-type conditions. But
nobody in the outside world is complaining. There will
be turmoil in that region and paralysis in the outside
world. In my view, we should be telling Yeltsin that he
will get economic help only if he gets his army inside
his borders; he should send ambassadors to the 15 sister
republics. But everything the West is doing seems to be
an obsessive attempt to reconstruct the Soviet Union. It
cannot be in our interest to create a ruble zone to link
all the republics when they do not want to be linked.

A Quick Overview of the Pacific Rim and NAFTA

The U.S. approach to policy is built on the ideal that
everyone should take some responsibility for the prob-
lems which arise around the world. How much responsi-

bility a country should carry depends on its ability to
pay. The Japanese certainly do not think this way. Japa-
nese society is built like a family in conscious competi-
tion with the rest of the world. It has very unique
institutions, is very competitive, and is quite capable of
adjusting to reality but not on the basis of some abstract
consideration like responsibility. The reality in Asia is
that China, Japan, Russia, the United States, and soon
Korea will be in interplay with each other. The Japa-
nese understand that. If the United States fails to in-
clude China in its Asian policy, it gives the Japanese
greater standing and unbalances the situation in the Pa-
cific. We must deal with China as a nation and as a
power, not as a foundation. I am not defending the Chi-
nese human rights record; I am saying that we need
them as a player in Asia. We need to have contact with
China for that purpose only—no more, no less—on the
basis of mutual benefit.

I believe that the most constructive thing going on
now in American foreign policy is the North American
Free Trade Agreement (NAFTA) with Mexico and Can-
ada. The big revolution is not in Russia but in Mexico,
Argentina and Chile. This is where democracy and the
free market are really taking hold, and if we build a
trading group with them, we will be able to enter inter-
national negotiations as a regional player, not just as a
single nation up against regional blocs.

Although the United States faces many challenges, I
would not trade these for anyone else's. The problems I
have described are all manageable; they are mostly con-
ceptual difficulties. However, the nation that has had a
terrific victory in the Cold War now has no experience
in dealing with the results of this victory. I would have
to say, though, that trying to figure out how to manage
victory is a lot better than having to salvage something
from defeat. It is a brand new situation in which we are
all starting from scratch, and in which the United States
really has a huge advantage.

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Capabilities of the Global Corporation

Martin Waldenstrom

President, Worldwide Commercial Consulting
Booz Allen & Hamilton, Inc.

For several years, an important part of Booz Allen's work has been based on defining, building and deploying clients' core capabilities. We believe that there are specific capabilities that can facilitate and accelerate the globalization process, perhaps the major challenge and opportunity facing many companies in the 1990s.

Not all companies are global or even close to it. The expression "global company" is an unfortunate one. Strategic business units and sometimes entire businesses can be global, but most corporate portfolios will continue to include distinctly local businesses. By the same token, globalization is not restricted to large organizations. Many small, new-generation companies are already operating in a globally competitive environment. In other, more traditional businesses, small- and medium-size companies are facing a growing threat from foreign competitors with more global ambitions. Indeed, powerful trends—such as opening markets, regionalization, expanding trade zones, deregulation, standardization, and emerging consumer trends for both products and services—are driving an increasing number of businesses toward the global competitive arena. In addition, worldwide privatization programs offer a unique opportunity for companies to expand their international reach.

Why Companies “Go Global”

Basically, there are two main reasons to globalize. For one, the globalization option, if available to a business, offers growth potential that is ultimately superior to other, more geographically restrictive forms of growth. For another, globalization may be the only way for some companies to ensure their survival.

Firms normally start with domestic operations. The time it takes for a company to step outside of its home market depends on the size of that market. The first at-

tempt at outward growth usually comes in the form of exporting. Regardless of how large it grows, an export business is still centered around some marketing, sales and distribution functions which start to emerge outside of the company's home market.

International export success leads to proximity requirements, and the company must replicate major parts of its business system in new markets. This replication, which marks the international company, does not represent a formula for long-term profitable growth. Therefore, the international company eventually needs to optimize its total business structure by adopting a global model of operation in which each function is situated in the most appropriate location worldwide.

A Booz Allen CEO survey of 250 companies across the United States, Europe and Japan demonstrates the growth potential of this journey. The findings indicate that, on average, companies with global operations have a world market share about 60 percent greater than international companies and over 3 times greater than export-only companies. Equally important, there is a strong correlation between increased market share abroad and at home. The survey found that globally operating companies have an average of 80 percent more domestic market share than international companies and 2.5 times more than export-only companies.

Among the companies surveyed, the global ones also enjoy the highest return on assets. However, profits hit two "peaks and valleys" in the global journey. Considerable start-up costs are incurred in building an export network and in replicating the business system worldwide. However, global companies ultimately achieve higher profitability by rationalizing their international business system while retaining the improved worldwide market share that they gained during the journey. So while ultimately superior, the global growth path is long and challenging.

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## Only the Strong Survive Restructuring

The search for growth is not the only reason for globalizing. Frequently, going global is a necessity, not a choice. The valley in the international phase of the journey often involves the restructuring of an industry: A group of competitors seek to achieve significant cost reductions by building market share through acquisitions and alliances while simultaneously rationalizing the total business system. When such a restructuring process is initiated, it often opens a global floodgate, and nobody can hide or escape the rush of change. Therefore, if the globalization of a business is indeed possible, it also becomes a competitive imperative, a sort of Darwinian struggle with the survival of the few and disappearance of many.

Booz&Allen has developed "restructuring trees" for many industries. Survival ratios are typically between 1 in 5 or 1 in 4 over a 10-year period. That is, if 20 companies compete in an industry before a restructuring, on average 4 or 5 will remain thereafter.

A few years ago, the European Commission asked Booz&Allen to compare the concentration levels in different industries in the United States and the 12 member countries of the European Community. Using the rather crude measure of market share, two principal observations were made. First, in many industries, U.S. concentration is significantly higher than in Europe. Second, concentration is still generally relatively low in many industries, particularly in the service sector. We believe that as globalization continues, many industries will see dramatic increases in concentration.

## Flattening the Profitability Curve

So if you are in a business with both the potential and an imperative to globalize, what strategy should you use? An ideal strategy would focus on long-term growth and try to find a way to spend as little time as possible in the low-profit valley zones by accelerating the transition between the peaks of the profitability curve. The objective would be to reduce or even avoid the costs traditionally associated with building an export network and then replicating the domestic system internationally. While it may be difficult to completely bridge these valleys, we believe that there are at least some ways to reduce their length and depth.

To accelerate the transition, we need to rapidly apply a proactive competitive approach to new and existing markets and to do so in a global business system. Each company probably has its own distinctive set of capabilities that are particularly well suited to meet these challenges. However, there are three generic capabilities that often prove critical to successful globalization: (1) Developing the company's strengths in order to position it at the forefront of the industry, (2) rapidly ex-

panding into new and existing markets through acquisitions and alliances, and (3) developing new and different ways to lead and organize the company.

*Positioning for success.* How can you enhance the competitive performance of the core business itself? The traditional method for managing and growing a business prescribes that you separate the various strategic planning processes. At the corporate level, the long-term market focus for investments is defined. The asset and resource plans to improve medium-term position are developed at the business level. And at the operating level, you execute these programs, mostly concentrating on the short term. This incremental model makes it hard to avoid the valleys and survive restructuring.

In today's highly competitive, global environment the question is not really whether but how to replace this top-down planning sequence. Booz&Allen suggests that companies need a fundamentally different attitude to managing the corporation. They must not only seek to remove structural inefficiencies from the existing organization but also establish new bounds on the CEO's role. The development of a company's core competencies into market-driving capabilities cannot be based on reactive responses to rapidly shifting markets. It is necessary *up front* to place a series of bets on which capabilities will be critical in shaping the corporation for the long term. This is clearly a CEO task requiring insight into the industry dynamics and the strengths and weaknesses of the organization, as well as a notion of how these strengths can be used to the company's advantage.

Once a vision for global leadership has been established, the next step is to build the market-driving capabilities at the operational level to fulfill this vision. Successful companies grow and globalize their businesses by mastering a few critical capabilities, not by being second best at everything. Moreover, successful companies continuously reinforce and enhance their capabilities in response to evolving market and competitive forces, thereby retaining their market-driving abilities. This "regeneration of capabilities" is typically done at the business-unit level. Only through a continuous process of selecting, developing and deploying capabilities in new and existing markets can a business survive the transition phases of the global journey.

*Establishing partnerships.* Acquisitions and alliances are the second factor that have often proven critical to successful globalization. By successful acquisitions and alliances, we mean whole-family or inter-corporate transactions, including joint ventures, license agreements and strategic alliances.

Another Booz&Allen survey of European, U.S. and Japanese executives showed that these capabilities are broadly used to affect international growth. However, the success of different forms of inter-corporate transactions and the resulting attitudes to them among executives vary significantly. According to survey re-

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sults, U.S. and Japanese companies have very different attitudes about strategic alliances, which may reflect different degrees of success that each has had in deploying this particular capability in the globalization process. Other survey findings include:

* quantum leaps in international and competitive position can be achieved through large mergers;

* access to culturally distinct business systems, as well as market share gains and cost and scale benefits, are available from acquisitions; and

* joint ventures and licensing agreements can prompt enterprising solutions and provide access to technology.

What makes an inter-corporate transaction successful? Balancing sequence and integration. Although there is a clear chronological sequence in most inter-corporate transactions, the real key is handling the more subtle details that link the steps in the sequence. These often do not fall neatly in any one part of the transaction negotiations. For example, one of these links is "sell the buyer." Basically, good businesses are not for sale; therefore, a key capability is to use the strength of your strategy to sell yourself and convince the target that you are the preferred partner.

Another link is "negotiate for information." Once you have approached a partner, it is critical to get more information on the target's strategy, operations and management and thereby complete your evaluation rather than just trying to minimize price. Price, particularly in an acquisition, is important, but very often the strategic and management fit proves to be even more so. A good acquisition would have been good even at a significantly higher price, while a bad acquisition is bad at any price.

A third step that can facilitate an inter-corporate transaction is to preplan for integration. The real challenge starts when the deal is done and the so-called synergies have to be realized in order to justify the price. Since integration can be preplanned based on what you learned during the evaluation phase, you can prepare for integration quite early in the chain. Moreover, you can often initiate the process well before the actual closing of the transaction.

**Leading and organizing globally.** The third set of capabilities that often proves critical to successful globalization relates to the leadership and organization of the global business. The commitment to travel the full length of the global journey often starts with leadership. The CEO must:

* inspire global objectives and values in words and deeds;

* clearly and consistently communicate strategy to all staff;

* ensure that public pronouncements about the organization are supported by substantive organizational and operational changes;

* stress the importance of multicultural and multinational management exposure;

* balance centers of power throughout the world; and

* stress the recruiting, training and rewarding of the multinational talent pool.

The critical element of the CEO's leadership role is to take ownership for building and deploying the market-driving capabilities. Traditionally, the CEO's role was restricted to long-term strategic thinking at the corporate level. However, when a company is focusing on market-driving capabilities, the CEO has to interact at the corporate, business and operating levels. In essence, leadership's role is to communicate the vision of how to compete in a global environment, and identify, build and deploy the key capabilities needed.

## When Globalization Pays

There are three essential questions when faced with the challenges of managing a business in global transition:

* **Is globalization worthwhile or necessary for your business?** You need to establish the right level of analytical aggregation. Many businesses will always center on domestic or export markets. The rest, however, must understand at the outset what the globalization process entails, including the financial and management resources required to become a truly global company.

* **How can a company accelerate the transition from export-oriented or international to global?** In some industries and circumstances, acquisitions or alliances may not be necessary; market-driving capabilities combined with proper leadership and organizational approach may be just as effective for an accelerated transition. Other helpful strategies are to build market share, reduce cost, and erect barriers to dissuade potential competitors from market entry. You will need these to bridge the profitability valleys and emerge successfully from industry restructurings.

* **How can you build and deploy the required capabilities?** Three sets of capabilities can prove particularly important. How can you build and deploy market-driving capabilities that change the parameters of competition to your advantage? How can you use acquisitions and alliances to gain competitive advantage? How can you develop the leadership style and organization that truly support a global business system?

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Realizing the global growth potential of the business
is as much a process as an objective because it is clear
that globalization is more of a journey than a destina-
tion. The basic rationale for this journey is to build

value through profitable growth. This demands that
companies make fundamental changes in their organiza-
tional structures and operations to overcome barriers
that would otherwise limit such growth.

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# Global Reach Through Ownership and Alliances

Robert H. Malott

Chairman of the Executive Committee and
former Chief Executive Officer, FMC Corporation

In the early 1950s, as an M.B.A. of relatively recent vintage, one of my first assignments was to improve the financial performance of an FMC subsidiary in Mexico. I found out that the company was hemorrhaging cash essentially because increasingly large sums of money—something like two times sales—were tied up in uncollected receivables. The division management, it turned out, was reluctant to “take advantage” of our southern neighbors by charging the prevailing local interest rate. Instead, we were charging the U.S. rate, which was about 50 percent below that in Mexico. Our Mexican customers, not surprisingly, perceived a terrific business opportunity and delayed payment, in effect borrowing money from FMC at substantially below market value. They were sure that we would never collect the collateral which we had asked them to put up.

Well, I decided to collect. Pretty soon we had a factory full of sewing machines, tractors and automobiles. At one time we even had an airplane in the backyard. Our customers quickly concluded that we really meant business. They paid up and retrieved their automobiles. Thereafter, we raised interest rates to local market levels, and our receivables promptly returned to reasonable levels.

I have one other rather vivid memory of that first assignment abroad. I spent a week traveling around Mexico's west coast with our leading territorial manager, Javier, who had a Ph.D. from Berkeley. He was highly skeptical of a smart-aleck M.B.A. from north of the border who knew nothing about chemical formulas associated with pesticides, much less anything about bugs.

But I finally won his respect, and in a very interesting way. One day he took me, at my request, to dinner at a fine Mexican restaurant. When our meal was served, he handed me a small dish of dried jalapeno peppers. He said, “Bob, to really enjoy the Mexican flavor you should take some of these and sprinkle them liberally over your food.” He obviously anticipated that this would put me in my place once and for all.

I said, “Javier, you don't understand jalapeno pepper. You dilute them in all that food. That is not the way you are suppose to do it. You should pop'em in your mouth.” This I promptly did, appearing to chew vigorously. His mouth dropped open and his eyes widened as I swallowed the food. From that day on, I had his respect. Of course, Javier didn't realize that I only pretended to chew the pepper; I actually swallowed it whole, realizing that if I didn't break the skin of that pepper I would not be burned.

While these adventures pertain to a subsidiary and not an alliance, several important points can be distilled from that formative first assignment abroad. First, to establish a successful partnership in the global marketplace, you have to recognize that certain business principles—such as maintaining cash flow—transcend national boundaries, while others—such as changing market interest rates—must reflect the realities of specific markets and cultures. Second, in any business relationship with customers, suppliers or partners, you have to understand one another's objectives—and to stand by your own. Finally and perhaps most important, you have to accept the risk of getting burned.

## Some Background on Strategic Alliances

The term strategic alliance is deliberately vague. It encompasses a wide range of business coalitions that fall short of mergers, such as joint ventures, licensing agreements, technology development consortia, and marketing agreements, among others. Whatever the precise definition of strategic alliance, the phenomena is obviously growing. Arthur D. Little estimates that the number of Fortune 500 companies involved in strategic alliances increased from around 25 in 1970 to more

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than 350 in 1990. A survey by A.T. Kearney found that between 1983 and 1986 the number of alliances in the communications, computer hardware and financial services industries was greater than the sum of all previous alliances in those sectors.

FMC has been involved in strategic alliances for quite some time now, and they have played a critical role in our overseas expansion. I was curious just how big—and just how successful or unsuccessful—that role has been. In 1991, I asked our staff to compile a list and a brief analysis of the strategic alliances FMC had entered since 1945. They came up with a number of around 75, which includes all of our formal joint ventures and many but not all of our licensing and informal cooperative relationships with other companies.

More than half of these arrangements were what I call “relationships of necessity.” A much higher proportion of our earlier alliances were of this nature. For much of the immediate post-World War II period, economic nationalism was rampant throughout the developing world. In many cases, this was based upon a theoretical and, in my judgment, completely unrealistic commitment to self-sufficiency. We discovered that we could not sell petroleum equipment in Venezuela, hydrogen peroxide in Mexico, or armored vehicles in many other parts of the world without a local partner. Even when we were legally permitted to act alone, we often needed a partner that was familiar with local customs and markets.

Another quarter of our alliances, and a higher portion of recent alliances, have been formed to develop or acquire technology. Currently, for example, we have formed a worldwide alliance with Du Pont Company to develop new membrane and film technologies for processing and packaging foods. We are also teamed with a number of small companies overseas in developing new crop protection chemicals.

Some alliances have helped us to achieve worldwide economies of scale in production, marketing or distribution. For example, we are a member of a Webb-Pomerene Corporation formed to sell soda ash outside the United States. Among the many advantages of this association, one is a sharp reduction in transportation and distribution costs. This has shaved, on average, more than $10 a ton off the delivery price of the product.

Without trying to categorize all of these arrangements, it appears that companies form alliances for three reasons:

* to extend their reach;

* to reduce their cost; and/or

* to react quickly to changes in market demands, customer needs or competitor challenges.

Note my emphasis on the word “quickly.” It takes a long time to acquire new technologies, develop new

products, or penetrate new markets, particularly when you have to start from scratch. As global competition has become keener, time has become a much more precious commodity. Therefore, more and more companies are attempting to shorten the time it takes to respond to new developments by entering into strategic alliances.

The three reasons I outlined are, of course, the same justifications companies use in making acquisitions. So what are the advantages of a less binding relationship?

Even when acquisitions might be feasible, alternative strategic alliances give companies access to new assets or new markets without necessarily diffusing the company's focus, and maybe more important, without compromising its core businesses.

## The Burning Question: Do Strategic Alliances Work?

The key question on everyone's mind is, "Do they work?" More often than we would like to admit, the answer is "no." According to a McKinsey survey, 70 percent of joint ventures break up within a fairly short period of time. A Columbia University study gives strategic alliances an average life span of 3.5 years—not a real strategic commitment. A survey by Coopers & Lybrand found that fewer than one-third of the collaborative ventures studied met or exceeded partners' original expectations.

By these standards—namely, the life span of alliances and whether or not they have met expectations—I would have to say that FMC has beaten the odds. The average length of our alliances, including a large number that are still quite active, is over 12 years. In reality, however, some of our termination dates reflect when the lawyers pronounced the partnership dead, not when the corpse stopped breathing.

As for whether FMC's alliances met or did not meet our expectations, I would classify roughly one-third of our alliances as successful, another one-third as failures, and the final third as somewhere in between. But that, I must admit, is an optimistic breakdown. If I applied the rigorous standards that we would use in evaluating internal investments, the "successful" category would probably shrink somewhat. However, even some alliances that produced lower-than-expected returns could still be considered successful for strategic reasons. In other words, I would say that FMC has had a pretty good but by no means stellar success rate.

## Why Are Alliances So Difficult?

Given our considerable experience with alliances and the apparently strong strategic arguments for these relationships, why don't more of them succeed?

There are a number of common reasons, such as partners who turn out to be dishonest or markets that disap-

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pear in a wave of hyperinflation. However, I would like to focus on three equally common but perhaps less obvious reasons why alliances fail: the absence of a common or complementary objective between the partners; overestimated synergies; and organizations with incompatible philosophies and values.

*The necessity of common objectives.* Many alliances begin with a vague sense that partners could both make more money if they tackled a market, developed a technology, or thwarted a competitive challenge by getting together. These otherwise plausible reasons for entering an alliance beg a number of very important questions, the most important of which is, do the potential partners view "making money" in the same way? Do they have the same definition of adequate return, discounted cash flow and payback?

For example, FMC is engaged in a long-standing disagreement with a Japanese joint venture partner. The venture has been extremely successful but has met an unexpected complication: an asset-rich balance sheet. We do not feel that we are getting an adequate return on these assets, but our partner, who unfortunately has a majority stake in the joint venture and, therefore, the determining voice, won't agree on asset redeployment or a larger dividend.

Another of our joint ventures, a product development alliance with a British chemical company, overcame major technological obstacles only to flounder when we finally started to make money. Our partner wanted to use the profits to expand the scope of the venture beyond the bounds originally established for the venture and beyond the point that we thought made any economic sense. It was our judgment that the excess cash flow should be remitted to partners. This fundamental difference could not be resolved, and we ended up selling our interest.

These differences in objectives, however, pale in comparison with one of the most serious threats from strategic alliances: The possibility that your partner's long-term objective is to take over your technology, your customers or even your business. While my assessment might seem somewhat skeptical and jaundiced, let me assure you that FMC has been burned in this area several times. Our former partners in a Spanish food machinery manufacturing joint venture, for example, are still selling copies of our citrus juice extractors from technology that they appropriated illicitly.

*Overestimated synergies.* Even when the partners' objectives are identical or complementary, many alliances fall short of expectations because both parties have overestimated what they can bring or will gain from collaboration. This problem, of course, is not unique to alliances, but it is compounded because partners have less knowledge of each other's strengths and weaknesses. This means each tends to overestimate not only their own strengths but also those of their partner.

Earlier I made reference to a joint venture that we formed with Du Pont. The idea was terrific: Du Pont wanted to find commercial applications for its membrane filtration technology, and one of the most promising markets was the fresher-tasting fruit juice processing market. At the same time, FMC, which has 75 percent of the world market share for citrus processing equipment, was looking for ways to improve the quality of our product. Although this appeared to be an excellent joint venture opportunity, both partners—so-phisticated multinationals with compatible objectives—soon discovered that each had overestimated its respective strengths. Du Pont's membrane technology wasn't as applicable to fruit juice as the company had assumed, and FMC didn't know as much about the non-citrus juice market as we had thought.

*Organizational barriers.* Finally, would-be partners generally underestimate the challenge of coordinating disparate corporate structures and cultures. Partnerships intended to enhance strategic mass frequently end up producing strategic mess.

For example, we actively explored an alliance with a major chemical company to develop a new bleach market for the pulp and paper industry. Eventually, we concluded that the organizational barriers between our companies were insurmountable. The chemical company's corporate bureaucracy was large and unwieldy, and their managers who had responsibility for selling in different world markets could not or would not even coordinate activities with each other, let alone with FMC.

## Improving the Odds of Success

Given the substantial benefits that can accrue from successful strategic alliances and the many barriers that can impede success, how can companies improve the odds? FMC has learned a number of lessons over the years.

Although I have mentioned some of the following points earlier, they are of such importance that I would like to highlight them one more time.

*Each partner's objectives need to be clearly understood and outlined in the alliance agreement.* All business leaders—especially dynamic ones—want to find new ways to expand their companies' global reaches. Many times, this desire to succeed causes potential partners to “paper over” differences and disregard apparently minor disagreements. This mutual inclination must be resisted.

*Partners should never compromise core assets.* While erecting fences around key sources of value (such as customer or supplier relationships, technologies or operating skills) makes cooperation with partners more difficult, the risk of failing to segregate and protect these resources far outweighs the frustration of attempting to do so.

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Companies should take great care to choose partners with complementary interests and organizational concepts, and a similar culture. When it comes time to choose a partner, a company might make an effort to analyze and understand the types of partnerships and partners that have worked well for them in the past. At FMC, for example, two very different kinds of partnerships appear to have worked well for us. One type is an alliance with a fairly large, sophisticated multinational corporation. These partnerships work because we operate in similar environments, are able to undertake complex negotiations, and can implement a detailed, specific agreement with common understanding.

Another type of partnership that has often, though by no means always, worked for FMC is an alliance with a small firm that can demonstrate integrity, common expectations and compatible philosophies. For example, we formed a partnership with a small, family-owned Brazilian company some 20 years ago. The business has earned steady high returns, and sales now exceed $100 million.

Not only do some organizations work better together than others, but some functional alliances are more successful than others. Scientists, for example, are accustomed to collaboration. Their methodology and past experience give them a basis when entering into more formal cooperative arrangements. Marketers, by contrast, have spent their careers looking for ways to differentiate their company and their products from the competition. People from that culture often find it extremely difficult to cooperate, especially with partners who are competitors in other areas.

*Spell out all the details of the alliance in advance.*
U.S. companies are often accused of being poor alliance partners. Critics contend that U.S. corporate culture is dominated by lawyers and preoccupied with contractual agreements, and does not focus enough on creating mutual

trust and understanding. I agree with the second part of that accusation as well as the corollary that Americans are not going about cross-cultural relationships in the right way. However, I strongly disagree with the notion that U.S. companies should pursue open-ended, casually drawn-up alliances based on faith and abandon their tendency to negotiate carefully crafted agreements.

My advice, based on my experience with both successful and unsuccessful alliances, is *spell it out*. Spell out each partner's financial, technological and marketing objectives. Spell out who has final say over what. And finally, in the prenuptial agreement, spell out the terms of divorce should the alliance fail to meet its objectives. Prenuptial contracts are not romantic, and nothing dissipates an aura of excitement surrounding a new alliance faster than a conference in which lawyers, accountants and patent experts on each side concentrate on the details and agonize over the procedures to be invoked if the alliance fails. However, I am convinced that strong relationships are founded on solid, specific understandings, just as amicable separations are facilitated by careful advanced planning.

As FMC's CEO in 1991, I led an initiative to transform our company from a successful multinational company into a formidable global competitor. In discussing how to attain this lofty objective, the topic of strategic alliances arose frequently. I am convinced that alliances will play an increasingly critical role in our global expansion. I told FMC's managers that despite their problems and the risk involved, strategic alliances offer us an unparalleled opportunity for more rapid commitment to new markets and allow us to do so, more often than not, with fewer resources than if we set out to accomplish those same objectives independently. I offer the same advice to you: Seek out and evaluate alliances with care and with caution, but do so with all possible speed.

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Globalization: A Journey, Not a Destination

Charles W. Moritz

Dun & Bradstreet (D&B) is a 150-year-old U.S. company. We opened our first overseas office in London in 1857. Today, our 16 divisions, including Dun & Bradstreet Information Services, A.C. Nielsen Company, I.M.S. International, Dun & Bradstreet Software Services, Inc., Moody's Investors Service, Inc., and The Reuben H. Donnelley Corporation, operate in more than 60 countries. More than half of our 58,000 associates work outside the United States, and non-U.S. operations generate roughly 40 percent of our total $4.6 billion in annual revenue.

Many differences exist between an international company and one that is truly global. For example, an international company manages segregated markets and consists of colonies directed from the home office. A global company manages integrated markets and operates as a federation of equal partners. In an international company, ideas, people and other resources are often isolated behind the nationalistic walls of "not invented here." In a global company, the walls come down and resources have no boundaries.

For many companies, including D&B, the need to become a global organization has been driven by irreversible market forces. For example, there are more demanding customers with a greater choice of suppliers, reduced regulations and new technologies. These and other factors have forged an increasingly integrated global marketplace full of both opportunity and risk. In this environment, adapting to the forces of globalization is no longer an option.

What Makes Globalization Successful?

D&B views globalization as a continuing, constant and challenging undertaking—a journey, not a destination. For this journey to proceed, a company must make

a firm commitment to removing the internal barriers to change. Success requires a willingness to:

* think and act creatively;

* use advanced technology to open new markets and improve internal processes;

* invest in a broad range of skills by hiring, developing and retaining the best people; and

* rethink and reorient the corporate culture.

One of the hardest things for companies to accept is that they must think and act in ways that break through the legacy of tradition, even if that tradition has been successful in the past.

The globalization process can be put in the following terms: "If globalization is the answer, what is the question?" For D&B, the broad question is, "What should we be doing to create information services and systems that help customers make better business decisions?"

As you can see from the question, customers are at the heart of our globalization process. While our customers cannot provide a tidy, uniform description of their business information needs, they all share the challenge of rapidly changing markets. They look to D&B to provide the global information infrastructure that will satisfy their individual needs, however they evolve. Moreover, while we focus on developing global capacities and competencies, our customers will continue to look to us to serve them one at a time, in their marketplace, in their culture and in their language.

For customer-focused organizations, globalization is an adaptive and often messy process. They must take a broad view of the marketplace in which complex and often contradictory forces are at work and in which global and local realities can come into conflict. For example, reduced trade barriers and rapid economic

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integration are creating new and broader markets, but national and market-level controls and regulations will remain commonplace. In the developing countries, many national markets are highly penetrated, and big companies are increasingly seeking to expand across borders. Yet small, local companies are constantly emerging, capturing share as markets are segmented. Consumers today have more product information and product choice and are looking beyond their national borders for products that can satisfy their needs. Nevertheless, for every product that goes global, countless others depend on national identity and local tastes for their success.

Faced with these increasingly complex market dynamics, many companies are decentralizing, putting their resources and management talents as close to the customer as possible. Some companies, on the other hand, are seeking greater standardization and centralization, hoping to capture economies of scale and to leverage the strength of their brands.

Despite these difficulties, globalization has a clear starting point. In determining the right balance between global and local, the focus must be on the reality of the customer and often on the customer's customer. For example, the reality is that customers are often themselves in different stages of globalization. Some remain national or local in their operations; others are in the early stages of testing multinational waters. A growing portion of companies have fully committed themselves to globalization. The overall trend among our customers is clearly to look beyond national boundaries, if not to find new customers then to identify and ward off new competitors.

## Case Study: Globalization at Nielsen

How globalization shapes an organization depends to a large extent on when the globalization takes place. This point is clearly illustrated by the experiences of two of our core businesses: Nielsen Marketing Research, which supplies information on product movement and causal factors to the packaged-goods industry, and I.M.S. International, which serves the marketing and sales-management information needs of the pharmaceutical industry. Each of these companies moved quickly to establish international operations, but in different eras—Nielsen just before World War II and I.M.S. in 1957.

Reflecting these different eras, the different views of the founders and the leaders, and the different interests of their customers, each brought its own philosophy to its approach to international business. Nielsen, responding to the interests of its customers (primarily regional or national food manufacturers), developed its operations through strong management at the country level. I.M.S., born in the early stages of the Information Age

and serving the more global pharmaceutical industry, basically had to think globally right from the start.

Today, Nielsen customers are expanding their marketing horizons, seeking ways to meet new customer demand for brands that previously had identity only within individual countries. These customers also want to take advantage of more open trading borders, such as in Germany where after 1993, any company in the world that makes beer will be able to enter the previously protected marketplace.

Marketers need information that is integrated and comparable across borders, a complex issue for Nielsen. For example, in the 26 countries where Nielsen provides marketing information to the Coca-Cola Company, there are 13 separate definitions of what constitutes a soft drink, not to mention differences in the way products are packaged and differences in competitive situations.

In keeping with its customer-focused philosophy, Nielsen's databases have traditionally been managed on a national basis. This is no longer sufficient. In Europe, for example, Nielsen is moving toward a single database capable of serving the local, regional, national and multinational needs of its customers. Using cross-functional teams, Nielsen is also looking for ways to better coordinate its technology, product development, and sales and marketing. This approach will help to break down historic operating walls and to bind Nielsen's country operations more closely together. This, in turn, will improve the range of services provided to both local and global customers.

Another important way to break barriers to globalization is the compensation system. In Europe, for example, a significant portion of country managers' annual bonuses will be based on the results of all European countries, not just their own.

## Case Study: Globalization at I.M.S. International

I.M.S. International got its start in the United States, but its first major success took place in Europe. In 1957, the company was just a small, struggling pharmaceutical advertising company. One of its founders discovered a major opportunity to supply market research information for German pharmaceutical companies. I.M.S. was quick to recognize that prescription drugs were inherently global products and that pharmaceutical manufacturers were among the most international of companies. I.M.S. rapidly introduced its service throughout Europe, expanded back in the United States, and continued its growth throughout the world.

Today, I.M.S. is the closest thing D&B has to a genuinely global organization. In the 1970s, it started to consolidate its largest national databases into a single global database. I.M.S. has no home office but is “at home” in each of the more than 60 countries it serves.

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The CEO is based in Switzerland, the CFO and senior systems executives in London, the head of human resources and the corporate client relations manager in Pennsylvania, and the senior production executive in Germany. A diverse mix of nationalities is found at all levels of I.M.S.

Functions are performed wherever it makes the most sense from both the customer's point of view and from the perspective of I.M.S.'s own needs for efficiency.

Senior I.M.S. executives have dual roles, holding both national and global management assignments, with clear performance targets in each arena. For example, an I.M.S. business unit director in Germany is also responsible for the coordination of I.M.S. hospital services across Europe. One of our I.M.S. executives in Belgium runs the European over-the-counter drug information service in addition to his local responsibilities. This management culture helps I.M.S. strike the right balance in meeting global and national needs and ensures full service to all customer segments.

While I.M.S. is certainly decentralized, the people of this global organization are linked through a strong system of values. Common standards of operation, quality and performance as well as common business practices and ethics unite I.M.S. and support the delivery of consistent service to customers worldwide.

## What Globalization Means for D&B

The history and experiences of I.M.S. and Nielsen, together with those of our other international businesses, are shaping the development of a D&B globalization strategy. We believe we must remain flexible, adaptive and dynamic, reflecting the need to address the realities and strategies of our customers.

The globalization process can be disturbing for our people. In many cases, we are breaking with tradition, not the least of which is our philosophy of giving local managers the autonomy, freedom and control of resources to respond quickly to the needs of local customers. Accordingly, in some of D&B's businesses, the prevailing culture resists the transition from an international to a global organization simply because of a long history of local control and success.

We do not want to change the philosophy that favors decentralization, but we do want to marry it to the philosophy of what we call "One Company." We want to use our local strength as the basis for the evolution of D&B from an amalgamation of loosely connected "colonies" around the world to a global whole. In short, we seek genuinely unified worldwide operations that respond to both the local and the global needs of customers with equal speed and skill. Our goal is to be "One Company" that provides superior customer service while constantly reaching out to new markets and new customers, capturing the benefits of scale, synergy and

customer service that can be derived from operating on a global basis.

## Attributes of a Global Company

No matter what stage of the process of globalization a company is in—and different parts of a business are likely to be at different stages—D&B believes distinct attributes characterize truly global organizations. These attributes are critical because they make the globalization process tangible; they help move globalization from a soft concept to concrete objectives and improved performance. Successful global companies:

* instill and reinforce a shared sense of vision and values, beliefs and practices that govern and, more important, unite all employees worldwide.

* communicate their visions and plans so employees understand corporate objectives, their role in reaching these goals, and the rewards for delivering on performance-based objectives.

* reinforce a constant focus on the customer. Globalization can become an end in itself, an effort to find a "global lowest common denominator" that may not bear any relationship to customer needs. Thus, the danger is a one-size-fits-all solution, perhaps driven by pressure to lower cost, that does not "fit" with the customers' changing realities.

* use their resource diversity as a competitive weapon. Managers must focus on synergies, scale and skills, rather than on specific products resident in narrowly defined business units.

* encourage risk-taking and change to meet customer needs which often do not match traditional definitions. Compensation, performance management and human resource development plans should all reflect personal and team accountability for cross-border management and results. At the same time, performance accountability must be extended to the level closest to the customer, with incentives to resolve issues quickly at the business unit level rather than looking for corporate approval or consensus.

* share capabilities across divisions and countries and track product success or failure on a global basis. Global product managers are teamed with local managers who are knowledgeable about specific customer needs. This kind of team approach can leverage resources to optimize the delivery of high value to the customer quickly and with reasonable cost.

* position themselves as a low-cost provider through the intelligent use of technology, by

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finding and utilizing the synergies among their businesses, by capturing economies of scale, by leveraging best practices wherever they exist, and by constantly simplifying and streamlining their organizational structure.

* are an asset to their communities. They have a sense of local issues and an awareness of the role that business is expected to play in a particular region or country.

Globalization contains a paradox: As we become more global, we become more reliant on an essentially local resource—people—to distribute our global capabilities to customers. We must recognize that the old adage “people are our most important asset” is the focal

point of globalization and the process of change. Thus, globalization requires new and higher standards for the selection, retention and motivation of human resources. In addition, globalization emphasizes the cross-border movement of people.

Because constructive change is the catalyst to business growth, we do not regard globalization as a wearisome yet unavoidable task. For our shareowners, customers and associates, the potential benefits of globalization are clear and highly motivating. More than anything, we are finding customer-focused globalization changes the mindset of an organization from internal to external. This critically important benefit infuses the organization with energy as the journey is undertaken. It is and will be an exciting trip.

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Financial Management of the Global Enterprise

Frederick S. Addy

Executive Vice President and Chief Financial Officer
Amoco Corporation

Historically, the financial organization's role was to keep the books, count the money, pay the bills, and handle miscellaneous matters such as insurance and cash management. Ten to fifteen years ago, however, interest rates soared, commercial paper markets expanded, and risk management skills became increasingly important as a way to add to profits and overall financial performance.

More recently, the growth in international trade spurred the collapse of the Bretton Woods Fixed Exchange Rate System, the expansion of international credit markets, and the creation of a myriad of financial instruments, such as Eurodollar bonds, options markets, and so forth. Finally, a whole new finance language has developed. Only recently have the words securitization, interest-rate swaps, and derivative instruments been coined. These changes have had—and will continue to have—a profound impact on individual firms.

Critical Aspects of Global Financial Management

Five aspects of global financial management are particularly important for adding value to a company: financing the enterprise, managing the cash flow, strategic tax planning, structuring and implementing financial arrangements, and organization and staffing.

Financing the Enterprise

The most obvious role of financial managers is supplying the corporation's capital and operating needs. The ultimate goal here is to raise capital at the lowest possible after-tax cost. In the past, a U.S. corporation would simply issue domestic 20- or 30-year fixed-rated bonds. Today, debt can be structured in virtually any way the issuer chooses, in a variety of locations, and with instruments such as swaps or forward contracts to

Equity, too, is marketed differently today. Recently, for instance, General Motors Corporation issued a record $2.1 billion in common stock. To absorb such a large issue, four different syndicates were established to distribute the stock in the United States, Japan, the United Kingdom, and Western Europe. Financing on this scale clearly requires a corporation to establish worldwide financial relationships. It is no longer sufficient to consistently rely on a single U.S. commercial or investment bank to serve as a company's sole agent. Even companies seeking financing on a smaller scale are likely to receive better information and more flexible terms if they maintain strong relationships in the worldwide financial community.

In its search for the cheapest source of capital, a global enterprise must not overlook the need to retain flexibility. Flexibility allows the company to react effectively to changing conditions in government regulations, financing needs, interest rates or tax provisions. For example, Amoco decided in the 1970s to require all concession agreements to specifically provide for interest deductibility. Simultaneously, we continued to include call provisions in new debt issues. This paid off for us in the mid-1980s when tax rates rose for crude oil and the United States changed its tax laws. We were able to call our U.S. debt and issue foreign debt in jurisdictions that provided for interest deductibility.

Managing the Cash Flow

Cash management is not what it used to be. Small manufacturers that had no export sales 10 years ago often find that exports are the key to their survival in the 1990s. For these companies, currency risks are of eminent concern.

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When operations are conducted in a multitude of countries, particularly with local manufacturing and/or marketing operations, the financial management process becomes both challenging and complex. Quite naturally, local managements want control of their own operations, including currency risk, and want to be measured and rewarded based on financial performance in the local currency. At the same time, it is not obvious that a manager in France who has a receivable in D-Marks, and another manager in Belgium who has a payable in D-Marks, should both be hedging their currency exposure. Furthermore, when all is said and done, the financial results for all operations of a U.S. company must still be reported in U.S. dollars for the annual report.

Several large companies never hedge currency exposures; others give local managers complete autonomy. Still others, like Amoco, have central management of all foreign currency issues including all decisions about hedging for currency exposure, borrowing in local or some other currency, or hedging foreign construction contracts, such as building a new tanker in Japan where we would have no other yen assets or liabilities.

International operations make it much harder to discern which operations are profitable and by how much. Exchange rate movements make it more difficult for managers to analyze historical performance, such as segment profitability and returns on assets, or evaluate potential returns on future investments. Sophisticated measurement devices, goal-based planning and currency management are absolutely necessary to facilitate decision-making in a multi-currency environment.

## Strategic Tax Planning

The second area of importance to global financial management is tax planning. Of course, all companies want to minimize their taxes. Doing this requires astute tax planning on a global basis. As a company expands abroad, its ability to understand and manage its tax position becomes increasingly critical, especially when taxes are one of its largest costs of doing business.

Truly effective financial management of global enterprises must be based on a thorough understanding of the tax systems of all countries in which we operate, many of which are radically different from the U.S. system. In countries that have only recently allowed outside investment, tax codes are frequently vague, and tax regulations are administered differently than in the United States. Often, there is little precedent as to how a company's earnings will be taxed by the host country or to what extent those taxes will be creditable in the company's home jurisdiction. Frequently, financial managers are forced to make decisions based on incomplete information.

Tax considerations can also play a critical role when companies negotiate investment projects with host governments. Many countries offer tax holidays and other

fiscal incentives to entice companies to invest within their borders. In fact, many developing countries are willing to negotiate on virtually the entire tax regime to be applied to a large project. The negotiated terms may include not only details of local taxes on operating earnings but also the tax treatment of income repatriated to the parent.

Since such a close interplay exists between host- and home-country tax positions, companies must conduct tax planning on a consolidated, centralized basis. This will optimize the company's tax position on a worldwide basis. Coordinated tax planning should be incorporated into virtually every stage of a company's financial management, from negotiating initial investment agreements to determining the choice source of financing.

## Structuring and Implementing Financial Arrangements

The third factor for successful global financial management involves structuring and implementing financial arrangements. Good negotiating skills are critical in this area. While conducting business in Canada or Western Europe normally means handling similar laws and business practices, operations in other parts of the world may appear less structured. For an inexperienced project team, this can create a minefield.

For example, Far Eastern cultures and business practices make it extremely important to negotiate factors such as capital structure, dividend policy and currency issues at the outset. Since many business practices are relatively new, negotiations are possible. This can include tax holidays, capital recovery rates, government or central bank guarantees of third-party loans, dividend and capital repatriation policies, and access to hard currency. Here, too, the need for strong financial management involvement is clear.

Negotiations of major financial and operating considerations can take years in locales such as China and the former Soviet Union. There are many sources of potential friction in the negotiations, as each party may have a different perspective on matters such as the appropriate leverage, dividend policy, and the reinvestment level for the venture. Nevertheless, patience is advisable until all issues are satisfactorily resolved. It is often the case that favorable terms laid at the venture's outset lead to higher profitability over the life of the venture.

## Organizing and Staffing the Finance Function

The final aspect of financial management of the global enterprise is related to organization and staffing. On the organization side, I believe that centralized control of the finance function assures consistency and coordination in planning and managing the financial affairs of the company. While it is important to deploy

26 The Conference Board

Technology on a Global Scale

Robert W. Galvin

Chairman of the Executive Committee
Motorola, Inc.

For the next 25 years, the United States will continue to be the principal driver of technology. However, the development of corporate/government and corporate/corporate synergies will become increasingly important to improve the productivity of science and maintain the rate of technological change.

Since 1945, the majority of U.S. scientific research has been conducted either in federal labs or through the allocation of federal funds to particular university projects. From that time, America's ability to apply innovation began to wane, particularly in manufacturing. To counter this trend, pure scientific research must be more effectively linked with its applications. Fortunately, we are moving in the right direction.

Despite the pre-eminence of U.S. scientific research, other countries are also important centers for innovation. Japan plans to be the major global research base. Japan has a long way to go in imputing science into its universities; in the meantime, private Japanese consortia will take the lead. The Russians will also be a significant force, as long as the Academy of Sciences remains intact. Because of unreliable computers, Russian programmers have developed ingenious standards and are uniquely competent at software design. Western Europe probably will be important but will lag in its impact.

Current Trends

Change is afoot in the scientific community. The pace of science and the speed with which it is transferred keeps increasing. As a result, the time it takes to develop and get a product to market will become even shorter.

Another improvement has been in the relationship between the science community and the engineering community. In the United States, there is a genuine move to increase collaboration. For some, such as the federal labs, it is an act of self-preservation to do more for the

commercial world. Consortia are also working better in America. Engineers, particularly in Japan, appreciate working with their competitors. If the relaxation of U.S. antitrust principles continues, collaboration will become an even more effective tool. Private alliances will continue to enhance and improve our ability to hasten applications of science.

A third change already under way is a deeper appreciation for the environmental impact of science. The clean environment factor will be a driving one in engineering and science. In fact, it has already been far more of a driver than most people realize.

Building Policy in the Public and Private Sectors

If the United States is to maintain its technological position, we must find a way to encourage and allow more cooperation at the pre-competitive level. We know how, but we must now cultivate the national intent and willingness to do it. Many new developments will be derived from a broad knowledge base, requiring a considerable amount of interdependence. At the same time, though, free enterprise must remain a tenet of our economy. Many people are now talking about the need for a national technology policy to properly direct resources to specific areas. Other nations already do so, with varying degrees of success. While some people are concerned that this will lead to an overbearing national industrial policy, one need not lead to the other.

From a U.S. public policy standpoint, there has to be an improvement in the funding process and an increase in funds earmarked to support emerging technology. National funding of science ought to be isolated as much as possible from the political process. Preferably, both funding and authorization processes should be governed by peer review, with the greatest influence coming from the private sector and the national science institutions.

Leading the Global Enterprise 29

[L]

Joint funding from the private and public sectors has been and ought to be an accepted principle. Those who contribute to the research and then employ the technology should be given various types of incentives for the risk they take. A fund recovery system should be available to ensure that those who contribute see a pay-back.

The issue of intellectual property rights is closely tied to our ability to apply technology. The United States is in the process of modifying its position. Hopefully, we will join the rest of the world on the first-to-file principle rather than first-to-invent. I believe that if we can agree with the majority of the world on this, other nations that have little respect for the intellectual property of others will fall in line. We must take away the excuse that our system is dissimilar to the others. We should *never* support the principle of government ownership of technology. The United States must have a solid stand on issues of this nature if we are going to be able to promulgate and use our technology effectively anywhere in the world. Protection of trademarks is also important since it enables us to finally take our technology to market.

## A "Map" to Technology

A national technology road map should flow from a national technology policy. Such a map determines where we should be heading. Some nations, particularly Japan, are going to use national technology road maps. So should the United States.

Motorola started using technology road maps about 25 years ago. We discovered that both the analytic and creative components of research can be scrutinized and its outcome predicted with some degree of certainty. In fact, we can invent on purpose without ever having gone to the lab.

A national technology road map is starting to emerge. Today's Administration is beginning to work with the academies in developing a checklist of things to focus on. Four areas that I believe ought to get priority are:

* materials, particularly the development of superconductive materials;

* electronics and information systems;

* manufacturing systems; and

* life sciences.

## Anticipating the Future

Motorola is managing its technological affairs based on assumptions as well as on a large dose of common sense. For example, we believe that in the future the United States—although continually robust—will account for only 5 to 10 percent of the healthier global economy. We are also sure that technological advances will be occurring in many locations simultaneously. The question is how and where should a company acquire, apply and sell technology. The obvious conclusion is to have labs everywhere. However, development departments must then learn to coordinate work in various distant locations.

For cross-border teams to operate effectively, a contract book approach is necessary rather than the traditional "laissez faire" approach. We discovered that writing a detailed contract specifying what we want our technology to achieve saves time. With such a contract, the design work takes half the time, and far better yields are realized in first-time productions.

Motorola also knows the importance of surprises in technology development. Whether or not a company can grasp the technological trends of the future depends to a large extent on the "influentials" in the company, including but not limited to the "chiefs." The leaders must anticipate the effects of the surprises, extend them with creativity, and anticipate as well as commit to the action customers expect. Most companies do not reach their 50th anniversary because they fail to either anticipate surprises or do not commit adequately to them. Motorola is in the process of testing an anticipations registry that will record how the ideas developed, how we committed to them, and whether or not we stay with them.

About 20 years ago, Motorola established an intelligence department staffed partly by former Central Intelligence Agency (CIA) personnel. The department collects public information to analyze the intents of our competitors. Since we also have an anticipations registry for our competitors, we can gauge whether our leaders are anticipating change better than other companies.

Fortunately for business, the world is not static. With change comes opportunity for growth and the betterment of the world. However, only companies who are prepared for change will live to see it.

30 The Conference Board

The Conference Board

DEC 28 1992 +

845 Third Avenue
New York, NY 10022-6601
Telephone 212 759 0900
Fax 212 980 7014

December 23, 1992

Dr. Henry A. Kissinger
Chairman
Kissinger Associates, Inc.
350 Park Avenue
New York, NY 10022-6022

Dear Dr. Kissinger:

Several times a year, The Conference Board publishes "Highlights" reports from its most popular conferences. These reports contain selected, edited speeches.

This year's "Managing the Global Enterprise" conference was highly successful and we are planning to include your speech in a report scheduled for Winter 1993 publication.

Enclosed is a copy of your speech edited for publication. Please take a moment to review it for accuracy; if any corrections are necessary, please note them directly on the manuscript and return it to my attention by January 11. Due to space limitations, we ask that you make as few additions to the manuscript as possible.

If there are any visuals you would like to accompany the text, please return them to my attention, as well. For your convenience, you may fax your comments to me at (212) 980-7014.

When published, a copy of the report will be sent to you.
Thank you for your interest in The Conference Board.

enclosure

Henry Kissinger
Chairman, Kissinger Associates, Inc.
Former U.S. Secretary of State

This went on until the mid-1970s when the Soviet Union gained more or
less nuclear equality with the United States, and Germany and Japan
captured a larger and larger share of world GNP. Then the Soviet Union
started to decline in the 1980s. Even in a two-power world, however, the
mobilization of resources *seemed* more important than an understanding of
historical trends.

3

[y]

In the 1930s, Winston Churchill wrote about British foreign policy,
explaining that for 400 years British policy was based on supporting the
weaker against the stronger in Europe. He lists all the people⁵ that
Britain opposed over the centuries, noting that who Britain supported
had nothing to do with likes or dislikes or qualities of the rulers. He
said not to accuse him of being pro-French and anti-German; if
circumstances were reversed, he would be pro-German and anti-French.
Through this type of foreign policy, Britain aided in maintaining the
balance of power and preserving liberty in Europe.

The United States, on the other hand, is totally incapable of doing
this. Take as an example the current debate about Iraq. When Iraq
invaded Iran in 1980, American policy-makers said, "Iraq is weaker, and
it is in our national interest to support it. Iraq has also had a
conversion; it is more moderate and has become a good country. It is now

a hope for peace in the area." Then, of course, when it wins the war, why should we cut off aid to this moderate country? It had not yet been done anything yet, so the United States had to wait until Iraq does something, like invade Kuwait. This is typical American foreign policy. Once Iraq got as strong or stronger than Iran, American policy should have been to cut off support or even to tilt out support over to the other side a bit.

Americans believe in conversion. We see it today in the Soviet Union. We say that we have to save democracy in the Soviet Union and give them aid so that they remain democratic. Never mind that there is no historical example of democracy in Russia or the various republics. In Russia the current political system is more conducive to doing business than the past totalitarian system, but it is a combination of chaos, autocracy and anarchy. It certainly is not democracy.

With the $24 billion a year that has been proposed to aid Russia, we believe we can save democracy. West Germany has spent $220 billion in the last 2 years on eastern Germany. The Western German civil service and Western German entrepreneurs have also stepped in, but Eastern Germany still has 20 percent unemployment. I think the reunified Germany is going to be a roaring success, so I do not worry about it. My point is that if you transpose the scale of the German effort onto the Soviet territory, $1.5 trillion a year for an indefinite period of time, would be needed to make a fundamental breakthrough.

5

[y]

six major players--the United States, Japan, Europe, China, ~~whatever ends up something on former~~
~~Soviet and~~ Russian territory, maybe India--is the big challenge of our period.

Before we can establish ourselves in this ~~New World Order~~, we will need ~~first~~
some concept of our national interest ~~own~~, that ~~whatever~~ is, a
~~Some~~ national
serves a specific purpose. Yet over the decades, American presidents
have proudly boasted that the United States has no national interests.

President Bush kept saying that the reason we ~~are~~ were leading the Gulf War
~~was~~ and, ~~ood~~ is that everybody understands the disinterested nature of our effort.
~~all we are doing is~~ defending international law and international
principles. This kind of statement scares other countries to death
because if you have no interests, you are totally unpredictable and
become incalculable; you are capable of doing anything. Nobody expects
disinterested foreign policy from a country or a business. They expect
something that they can calculate and compare with their own interests.
This is what we will be facing.

Simultaneous
Two revolutions are going on in the former Soviet Union: one against
communism and another against Russian imperialism. The one against
communism is essentially economically motivated and has very little to
do with Jeffersonian principles of democracy. It has to do with the
total inefficiency and total corruptness of a system in which every
article in commerce moves by allocation, and therefore, the only free
market is at the administrative discretion of the people who make the
allocations. This leads to phenomenal corruption, stagnation,
over-employment, and all the other attributes now visible in the

former
~~on~~ Soviet Union.

One of the major problems with communism is that it corrupts the meaning of money. Perquisites rather than money become the economic base. Anyone who has done business in ex-communist countries--with the possible exception of China--knows how difficult it is to get any perception of cost accounting or taxation. Recently, the Russian Republic passed a law that every company that does business in the Soviet Union should pay 60 percent of its global earnings in taxes to the Russian Republic, ~~absolutely~~ This shows that they have absolutely no grasp of economic reality.

Another problem that the West absolutely refuses to face is that a territory four times as large as Europe is now broken up into 15 independent states, extending from the Polish border to Vladivostok, from the Arctic Circle to the Middle East. The political organization of that territory will determine the degree of political stability or turbulence that will exist in the world. What happens in Western Russia will affect Europe; what happens in Central Asia will affect the Middle East. If the Soviets reoccupy the Ukraine and the Baltic states, Europe will revert to its traditional posture of fear and armament toward Russia. What happens in Central Asia will depend on the interaction of Iran, Turkey, Russia, and the United States. But nobody wants to think about this. The current political thinking of the Western world is, "Let's keep it quiet now, then there will be an election and maybe someone else will have to deal with it or maybe something will happen."

I make the following propositions: First, most anti-Communists in the former Soviet Union are not democrats. Second, not every democrat is anti-imperialist. In fact, almost every democrat is in the former Soviet Union, an imperialist in the sense that they do not accept the breakup of the Soviet Union as a political entity. There is no true Commonwealth there; Russia claims to have some sort of control over all the other states, which want to get as free as they can from the Commonwealth.

Note the following absurd situation: The European Security Conference and other institutions to which the Soviet Union belonged have admitted as its members each of the 15 republics. What is Uzbekistan doing in the European Security Conference? If Uzbekistan is really an independent state, what right does it have to be there? In what way is Uzbekistan, or any of these other Central Asian republics, European? They are there because in the back of everyone's mind these republics belong to the Soviet Union.

Another problem is that the Soviet army is still distributed over the entire territory; they come and go as they please, and they maneuver on the territory as they please. They do not even inform the local authorities that they are doing it. The army is run out of the Defense Ministry in Moscow--an organization that knows what it is doing. The only problem is that the Defense Ministry is not reporting to anybody because it is the only institution of the Commonwealth that exists. How can that end well? The borders are not recognized. It is a prelude to Yugoslav-type conditions. But nobody in the outside world is

complaining. There will be turmoil in that region and paralysis in the outside world. In my view, we should be telling Yelsin that he will get economic help only if he gets his army inside his borders; he should send ambassadors to the 15 sister republics. But everything the West is doing seems to be an obsessive attempt to reconstruct the Soviet Union. It cannot be in our interest to create a ruble zone, to link all the republics when they do not want to be linked. We can only hope that the ruble stabilization fund does not work.

## A Quick Overview of the Pacific Rim and the NAFTA

The U.S. approach to policy is built on the ideal that everyone should take some responsibility for the problems which arise around the world. How much responsibility a country should carry depends on its ability to pay. The Japanese certainly do not think this way. Japanese society is built like a family in conscious competition with the rest of the world.

It has very unique institutions, is very competitive, and is quite capable of adjusting to reality but not on the basis of some abstract consideration like responsibility. The reality in Asia is that China, Japan, Russia, the United States, and soon Korea will be in interplay with each other. The Japanese understand that. If the United States fails to include China in its kind of Asian policy, it gives the Japanese greater standing and unbalances the situation in the Pacific. We must deal with China as a nation and as a power, not as a foundation. I am not defending the Chinese human rights record; I am saying that we need them as a player to counter the Japanese and Russian influence in Southeast Asia. We need to have contact with China for that purpose.

only--no more, no less--on the basis of mutual benefit.

I believe that the most constructive thing going on now in American foreign policy is the North American Free Trade Agreement with Mexico and Canada. The big revolution is not in Russia but in Mexico, Argentina and Chile. This is where democracy and the free market are really taking hold, and if we build a trading group with them, we will be able to enter international negotiations as a regional player, not just as a single nation up against regional blocs.

Although the United States faces many challenges, I would not trade these for anyone else's. The problems I have described are all manageable; they are mostly conceptual difficulties. However, the nation that has had a terrific victory in the Cold War now has no experience in dealing with the results of this victory. I would have to say, though, that trying to figure out how to manage victory is a lot better than having to salvage something from defeat. I have described here a new situation in which we are all starting from scratch, and the United States really has a huge advantage.

CYJ

HAK:

This is from the June conference that
Booz Allen got you into. Publication
of your remarks was *never* raised before!

I am told they have edited it themselves
for "style and space". If you agree to
let them publish it, you or Jerry should
read it through to make sure they haven't
altered the substance.

OK to print; let Jerry see first ✓

Do not agree to publication ____

SSM

The Conference Board

DEC 28 1992

December 23, 1992

Dear Dr. Kissinger:

enclosure

This went on until the mid-1970s when the Soviet Union gained more or
less nuclear equality with the United States, and Germany and Japan
captured a larger and larger share of world GNP. Then the Soviet Union
started to decline in the 1980s. Even in a two-power world, however, the
mobilization of resources is more important than an understanding of
historical trends.

In the 1930s, Winston Churchill wrote about British foreign policy,
explaining that for 400 years British policy was based on supporting the
weaker against the stronger in Europe. He lists all the people that
Britain opposed over the centuries, noting that who Britain supported
had nothing to do with likes or dislikes or qualities of the rulers. He
said not to accuse him of being pro-French and anti-German; if
circumstances were reversed, he would be pro-German and anti-French.
Through this type of foreign policy, Britain aided in maintaining the
balance of power and preserving liberty in Europe.

[L.C.]

a hope for peace in the area." Then, of course, when it wins the war, why should we cut off aid to this moderate country? It had not done anything yet, so the United States has to wait until Iraq does something, like invade Kuwait. This is typical American foreign policy. Once Iraq got as strong or stronger than Iran, American policy should have been to cut off support or even to tilt our support over to the other side a bit.

Americans believe in conversion. We see it today in the Soviet Union. We say that we have to save democracy in the Soviet Union and give them aid so that they remain democratic. Never mind that there is no historical example of democracy in Russia or the various republics. In Russia the current political system is more conducive for doing business than the past totalitarian system, but it is a combination of chaos, autocracy and anarchy. It certainly is not democracy.

With the $24 billion a year that has been proposed to aid Russia, we believe we can save democracy. West Germany has spent $220 billion in the last 2 years on eastern Germany. The western German civil service and western German entrepreneurs have also stepped in, but eastern Germany still has 20 percent unemployment. I think the reunified Germany is going to be a roaring success, so I do not worry about it. My point is that if you transpose the scale of the German effort onto the Soviet territory, $1.5 trillion a year for an indefinite period of time would be needed to make a fundamental breakthrough.

[Lc]

six major players--the United States, Japan, Europe, China, something on
Russian territory, maybe India--is the big challenge of our period.

Before we can establish ourselves in this new world order, we will need
some concept of our national interest, something we are doing because it
serves a specific purpose. Yet over the decades, American presidents
have proudly boasted that the United States has no national interests.

President Bush kept saying that the reason we are leading the Gulf War
is that everybody understands the disinterested nature of our effort;
all we are doing is defending international law and international
principles. This kind of statement scares other countries to death
because if you have no interests, you are totally unpredictable and
become incalculable; you are capable of doing anything. Nobody expects
disinterested foreign policy from a country or a business. They expect
something that they can calculate and compare with their own interests.
This is what we will be facing.

[L.C.]

ex-Soviet Union.

One of the major problems with communism is that it corrupts the meaning of money. Perquisites rather than money become the economic base. Anyone who has done business in ex-communist countries--with the possible exception of China--knows how difficult it is to get any perception of cost accounting or taxation. Recently, the Russian Republic passed a law that every company that does business in the Soviet Union should pay 60 percent of its global earnings in taxes to the Russian Republic. An absolute absurdity! This shows that they have absolutely no grasp of economic reality.

Another problem that the West absolutely refuses to face is that a territory four times as large as Europe is broken up into 15 independent states, extending from the Polish border to Vladivostok, from the Arctic Circle to the Middle East. The political organization of that territory will determine the degree of political stability or turbulence that will exist in the world. What happens in Western Russia will affect Europe; what happens in Central Asia will affect the Middle East. If the Soviets reoccupy the Ukraine and the Baltic states, Europe will revert to its traditional posture of fear and armament toward Russia. What happens in Central Asia will depend on the interaction of Iran, Turkey, Russia, and the United States. But nobody wants to think about this. The current political thinking of the western world is, "Let's keep it quiet now, then there will be an election and maybe someone else will have to deal with it or maybe something will happen."

[L]

I make the following propositions: First, most anti-Communists in the former Soviet Union are not democrats. Second, not every democrat is anti-imperialist. In fact, almost every democrat I know in the former Soviet Union is an imperialist in the sense that they do not accept the breakup of the Soviet Union as a political entity. There is no true Commonwealth there; Russia claims to have some sort of control over all the other states, who want to get as free as they can from the Commonwealth.

Note the following absurd situation: The European Security Conference and other institutions to which the Soviet Union belonged have admitted as its members each of the 15 republics. What is Uspakistan doing in the European Security Conference? If Uspakistan is really an independent state, what right does it have to be there? In what way is Uspakistan, or any of these other Central Asian republics, European. They are there because in the back of everyone's mind these republics belong to the Soviet Union.

[L]

complaining. There will be turmoil in that region and paralysis in the outside world. In my view, we should be telling Yelsin that he gets economic help only if he gets his army inside his borders; he should send ambassadors to the 15 sister republics. But everything the West is doing seems to be an obsessive attempt to reconstruct the Soviet Union. It cannot be in our interest to create a ruble zone, to link all the republics when they do not want to be together. We can only hope that the ruble stabilization fund does not work.

A Quick Overview of the Pacific Rim and the NAFTA

The U.S. approach to policy is built on the ideal that everyone should take some responsibility for the problems which arise around the world. How much responsibility a country should carry depends on its ability to pay. The Japanese certainly do not think this way. Japanese society is built like a family in conscious competition with the rest of the world; it has very unique institutions, is very competitive, and is quite capable of adjusting to reality but not on the basis of some abstract consideration like responsibility. The reality in Asia is that China, Japan, Russia, the United States, and soon Korea will be in interplay with each other. The Japanese understand that. If the United States fails to include China in any kind of Asian policy, it gives the Japanese greater standing and unbalances the situation in the Pacific. We must deal with China as a nation and as a power, not a foundation. I am not defending the Chinese human rights record; I am saying that we need them as a player to counter the Japanese and Russian influence in Southeast Asia. We need to have contact with China for that purpose

Although the United States faces many challenges, I would not trade these for anyone else's. The problems I have described are all manageable; they are mostly conceptual difficulties. However, the nation that has had a terrific victory in the Cold War now has no experience in dealing with the results of this victory. I would have to say, though, that trying to figure out how to manage victory is a lot better than how to salvage something from defeat. I have described only a new situation in which we are all starting from scratch, and the United States really has a huge advantage.