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units to come together in ways that distinguish us and
provide competitive advantage looking to the year 2000.

We selected three areas, namely, the systems and
telecommunications area, and there we are trying to drive
beyond our strategy in design work with commercial clients
towards implementation activities. We are also looking at
exploiting some of the advanced technologies we see in our
Government work, for instance space technology in helping
commercial industries take advantage of those kinds of
thrusts. Then, in the emerging markets like China, India,
Korea, we feel that there is a project engineering need
and a management consulting need, and if we combine the
strengths of both units we will have a bigger impact in
those markets.

Lastly, in the development area I think there are two
challenges that really face us. We are starting to talk
about something we call "B2K" - "Beyond 200", and it is
really an issue for us in terms of positioning Booz Allen
in the next century. What really are we compared to our
competitors around the world, and I think it has to be
something around being a world leader in technology and
business, because those are the two great strengths of our
company and no other management consulting company at
least has the technology arm that we do. So it goes back
to this linkage idea and really making it work for us.

In a personal way I believe that the challenge we
face is our growth. We have almost doubled the size of our
company in the last four years and also the partnerships.
So we have gone from 140 partners to this year, after our
elections in October we will probably have 250/260
partners. Keeping the partnership together in a spirit of
co-operation - teamwork, governance, and moving together
and not competing internally is really a challenge. It was
a challenge that I faced in 1990 and I think that largely
the reason we are so successful today is that because we
have learned better how to work together as a partnership
worldwide, and certainly the challenge has more than
doubled over the last couple of years.

So that is really the agenda and some of the issues
facing Booz Allen these days. Before I close I thought
that since Ralph, our President in Washington, is here,
and Ralph had some fairly exciting happenings there, our
business is really booming, maybe you would like to take a
minute---

DR KISSINGER: Could I ask a question about your China business? When you say you aim at State run Chinese, obviously---

MR STASIOR: Right.

DR KISSINGER: ---enterprises, because they are trying to get rid of most of those?

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MR STASIOR: Yes, but our office in Hong Kong and our partners there were really talking with the large industrial companies and trying to stimulate business as they were privatised looking towards the long term.

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DR KISSINGER: And how does that work?

MR STASIOR: Well, everyone is willing to have conversations but that is about it, and so the long term started to look longer than we felt we might be able to sustain so we decided that in addition to that kind of long term marketing we would also begin to work with some of the multi-nationals that were trying to do business in China as a way of building the critical mass there. But basically the Chinese are not yet ready for the management consulting industry.

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DR KISSINGER: No, I would not have thought so, certainly not the State run enterprises.

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MR SHRADER: Thank you. The last few times I have been with the Board I have had a chance to talk about our business and many of the changes that we are making and as Bill pointed out I think all I would like to comment on this time is the fact that we can point to some success as being a full measure of how well we are doing in the restructuring that we have had.

Bill mentioned for you the $700 million win had at GSA, that is the largest single contract that we have ever signed.

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MR FREIDHEIM: Probably by a factor of five at least!

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MR SHRADER: An interesting sidelight to that is that the client officer who runs that business, it is a telecommunications based business, happened to be in Argentina when we got word from the Government that they were ready to sign. He tried his best to make it best to make it back to the States and he got run out of town, or kept out of town by the hurricane that was passing through that very day, and so the obligation fell to me to go sign it. One of the happy things that you get to do is every now and again a break comes your way, so I actually went down to pen the contract with GSA to make it happened. That is something we are very proud of and as Bill said the advantage to that is it gives us a foundation to do work across the entire Government at a very high level and a lot of perspective across all of the Government's telecommunications---

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DR KISSINGER: What exactly is it?

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MR SHRADER: It is called "The Transportation Systems Centre", but it is basically set up into zones across the entire United States as well as offshore and in each of those zones we are the contractor of choice to go in and actually do the telecommunications - design work, analysis

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work, and so forth, the systems engineering that goes with it.

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DR KISSINGER: For the whole Government?

MR SHRADER: Yes, under the GSA aegis, and in fact because GSA is an umbrella organisation we actually can do work for various agencies underneath that vehicle. So it basically is an overall contract that other people can access to allow us to do work in the same general arena, and it is a very powerful opportunity for us.

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DR KISSINGER: It sounds exciting.

MR SHRADER: It is a very exciting thing, and we have been working on a smaller version of that contract - when we say "smaller version", the previous contract topped out at about $150 million, and now we are on to the big brother of that, so it is very good for us.

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DR KISSINGER: And you are the only one doing that?

MR SHRADER: That is correct. It was a single award, not a multiple award contract.

MR DORMANN: There were competitors?

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MR SHRADER: Yes, it was a highly competitive opportunity for us. We actually had set the stage for it by the performance we had over the last three years on a predecessor contract. We began to change the nature of that contract. It was a contract, prior to our winning it three years ago, that had gone to what we call the low priced side where they were looking for the lowest cost as opposed to who was able to provide them the best service. We had an opportunity to perform and we were actually able to give them things they had never seen before, and so this time we wanted, even though we were not the lowest cost provider of services, but they have a lot more vision, a lot more perspective in their work rather than just the lowest cost provider.

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MR FREIDHEIM: How many years will this be?

MR SHRADER: Five years. The last time we had one it was a five year contract and we used up all the authority in the first three years, and so if that same thing holds true again, we will either have to up the ante on this or we will have to get a new contract sooner.

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LORD YOUNG: $3½ billion the next one.

MR SHRADER: Yes, we are moving up to big numbers. As I have told you our business has been segmented according to markets and the US Federal market is of course the core market that we serve, that is one of the biggest things that has happened on the non-defence side of that market. In addition to that we have won two other contracts, although they seem somewhat trivial now, $50 million each -

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one for the Food & Drug Administration in their Systems Analysis Centre, and another for the Federal Government in what they call the Systems Engineering Management arena, another $50 million contract. That is also an omnibus contract that allows us to do various pieces of work. For example, one of the things we are doing there with the Government is helping them in what they call the "Anti-drug Network". So a lot of the money that goes into drug enforcement or whatever is going through that programme. We are doing work in the systems and telecommunications arena to help set up the systems that are necessary to support that effort.

DR KISSINGER: Who is your biggest competitor in this area?

MR SHRADER: Generally the competitors that we see the most are SAIC, which is a contractor and Bill Perry [Secretary of Defence] was on their Board before he came back into the Government, and the other is BDM, both of which are within eyesight of my office. As I look out of my window I stare at the SAIC logo all day long on their building across the Park, and if I look through the trees I can see "BDM" over on the campus there in McLean. They are both close at hand. We can keep our eye on them, Henry. We cannot necessarily beat them all the time, but we certainly can watch them.

LORD YOUNG: And they can watch you!

MR SHRADER: And they can watch me, absolutely true. In the Defence side of the business, we have also seen success in terms of being able to integrate our capabilities, and we have won some very big contracts there, $180 million with the United States Army to do communications services, a smaller, $50 million contract with the Air Force at a Wright Paterson Airforce base to support them.

Since the last time I have seen you we have closed on the opportunity - we were working in Thailand where we are doing now a $30 million contract with the Thai military to build a command and control centre for Thailand, so that is an excursion for us offshore.

I guess the only other things I would mention are that we have focused a lot on our transportation business. We are winding down a major project here in the UK on the Docklands Light Rail, which we are about to bring to a successful conclusion. The railway is up and running, in fact running much better than we had ever proposed that it run, and we are very happy about that and we are looking to finish that project in the next couple of months. We are now seeing a lot of success in the United States in our work where we are doing a lot of work in the State of New Jersey, the State of New York and working with the Port Authority; also some recent work up in Massachusetts that complements our strong base of business that we have out in California, in the San Francisco area where we have a strong business base out there with the Bay Area rapid transit and such.

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We are doing a lot now in Latin America in our transportation work, in fact, the head of our transportation business is in Buenos Aires as we speak working on a major project for the Metro system down in Argentina. So we are beginning again to look at the opportunities that Bill talked about in terms of how we linked up our technology skills with our commercial skills, and our international skills and transportation is one of those transportable commodities that we are trying to use in exploiting that interface between the two businesses.

We have had a lot of success. We have seen some pay-off from the work that we have done in terms of getting our organisation straight and we are feeling real good. The business is on a very strong upward trajectory at this time.

DR KISSINGER: For example in Argentina you are advising the Argentine Government about what kind of system they should get?

MR SHRADER: We are actually working with them to help engineer the Metro system---

DR KISSINGER: They are building it themselves---

MR SHRADER: Yes.

DR KISSINGER: ---they are not doing it by privatising it?

MR SHRADER: To my knowledge, no. At this point we are working with the Government itself on the construction of the system. I do not know exactly what the contract or arrangement is in terms of where it is going from there, but we are under contract with the Government.

MR STASIOR: With Bob sitting here, are you not also doing something for St. Louis?

MR SHRADER: We have been working in St. Louis for a number of years now in the transportation area. We have an office in St. Louis, so we are going to be close at hand, but do not blame us if they do not run on time.

MR SHAPIRO: They are actually doing very well.

MR SHRADER: We will take the credit for that. It would not be on time but for our sterling work.

DR KISSINGER: Any other comments or questions?

MR OKAWARA: Only that you mentioned about the emerging market in Korea, China, India, but there is a big emerging market in Indonesia and Brazil, how about those areas?

MR STASIOR: Well, in Brazil we do have a very large office there.

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MR WALDENSTRÖM: I think the question was in Indonesia.

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MR STASIOR: And Brazil. I think we do have a large commercial management consulting based office there doing work for both the State owned enterprises and private companies in Brazil, and quite successfully, so I think, Cy, you helped start that 20 years ago?

MR FREIDHEIM: Early 70s.

DR KISSINGER: I agree with Okawara, I think Indonesia is an interesting Country and has made good progress.

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MR STASIOR: We have worked for the banks in Indonesia, Bank Negara, and Bank - I cannot think of the other one. I do not believe we have gone beyond the banking sector, and you feel there is---

MR OKAWARA: There is potential emerging over there, the is the mining---

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DR KISSINGER: There is huge mining - I am on the Board of a company that has a huge mine in New Guinea and the big Mobil project for Nitro-gas, ARCO is going to go there soon.

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MR PASTERNACK: Yes, on some of our commercial work with our clients are working in Indonesia, one of our big clients who is a member of our Advisory Board, John Prescott, he has sizeable coal, steel and copper mining in Indonesia and PNG and we are working with them trying to look at what I think is a very important issue for a multi-national corporation which is how do you distribute the kind of functions that you need to bring to the local people who are operating in those countries and not keep them in a corporate centre somewhere remote from the field and so we are looking at the business strategy and then how to organise to be successful in some of these emerging markets.

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MR STASIOR: I think the interesting thing is we do not have a permanent office in Indonesia. We have a representative office there, but not a staff like we do in Brazil, and like we do in other Countries, so I might want to consider that in terms of---

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MR FREIDHEIM: It might even be interesting at one of our near term future meetings to have that area of the world, South East Asia, Indonesia as our area of focus.

DR KISSINGER: Countries like Indonesia, Malaysia, Thailand--

MR FREIDHEIM: We have an office in Singapore and have for some period of time.

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MR PASTERNACK: We have a project office in Thailand, because we are working, as Ralph mentioned, both for the air system, and we are also working for two significant oil

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companies on either their retailing business, or their
upstream business in Thailand.

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MR SHRADER: Thai Airlines.

MR STASIOR: But again if we are treating them as project offices and as long as we have work there we have a presence, but we are not seeing it as a permanent presence and we might want to rethink that, because the volume of business in South East Asia is certainly growing.

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DR KISSINGER: Shall we go on to the next topic - "CEO and the Internet"? Bruce?

MR FREIDHEIM: This is at the urging of David Young that we have this topic on the Agenda, and it does turn out that we have done a considerable amount of work on it which Bruce will describe.

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DR KISSINGER: I am at least one member of this outfit who does not know how to use a computer, so do not take anything for granted.

MR PASTERNACK: We have been trying, we have sent people up there.

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DR KISSINGER: I am awestruck by what they can do, but they failed to get it into my head.

MR PASTERNACK: One of our young staff told Henry that he thought he could teach him in one day.

MR STASIOR: He tried the one day?

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MR PASTERNACK: He did, and it did not work! I am actually going to try and set up the three areas we are going to cover today that are business related---

DR KISSINGER: I must say he did a good job, he left a book for me. It is entirely my fault. I am from a different educational background

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MR PASTERNACK: We have another approach - my wife is actually teaching "Introduction to the Internet" in California, so if you come out to California, she runs a little seminar.

LORD YOUNG: I hope you took the course.

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MR PASTERNACK: I know better than that.

DR KISSINGER: The thing that happens to me is when I get frustrated I try to shut the thing off. But I did not know that you have to work on my way back.

MR WALDENSTRÖM: Even if you unplug it it goes on because it has batteries.

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people together which is really what builds advantage capabilities, and then what we have been calling "coherence" which is really something which says "All these things have to work together in a way that creates harmony instead of disharmony in our organisation", and it is that coherence which, I think, drives some companies to be more successful than others.

The last presentation we are going to have today is with one of the Professors of the London School, who has just joined them from Harvard Business School, Nittin Nohria. Nittin has just completed a very interesting study of Fortune 100 Companies since 1978 up until the present, and looking at not only how they have behaved, but how the way they have behaved is consistent with a new organisational model, a more networked, less hierarchical organisational model. His analysis, I think, will be interesting to a number of you as you hear not only conceptually what is going on but in fact it is happening in reality to a number of these companies.

So we have set up today to show you, and to get some advice from you in three areas - the knowledge area, the strategic alliances, and this whole new organisational model, and that is the business side of what we are going to talk about today.

With that as a brief background, I would like to introduce our partner, Chris Dallas-Feeney. Chris will talk to you about the CEO, the internet and anything else that comes to mind.

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DALLAS-FEENEY: Thank you. Thank you, David, for teeing this up, I appreciate that. This class of technology is something that occupies my attention pretty much every day. What I am hoping to do today, gentlemen, is to excite your business senses about this class of technology, and hopefully demonstrate that this technology is the enabler of a rather powerful shift in the balance of power, economically, potentially even militarily and politically. This is a non-trivial event we are experiencing.

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KISSINGER: From whom is the balance of power shifting to whom?

MR

DALLAS-FEENEY: It remains to be determined, Henry. I think that if you look at the economics, and I will share some stories about how some of the folks today who are making millions or billions of Dollars economically may not five years from now. Militarily I guess to some degree I would be shot if I knew it from my friends in the Government side, but even if you look at events such as Bosnia, or when the Berlin Wall came down, those things cannot be hidden from public view. I think to some degree with the network that binds us all together no longer can these things be hidden.

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DR KISSINGER: How does that trip the balance of power? I recognise it cannot be hidden?

MR DALLAS-FEENEY: To some degree where I feel most comfortable speaking about is shifting the balance of economic power. I think, for example, even a little tiny company like Netscape can create the fear of God in a big company like Microsoft. It is perhaps no secret that Bill Gates would love to see Netscape wiped out, and this is a company that is billions of Dollars in size, and yet Netscape is only $250 million and that company could potentially defeat or unseat Bill Gates.

MR SHAPIRO: Even more fundamentally, wholly apart from those kind of esoteric wars, in every business it involves a supplier at one end, and somebody who has something that somebody wants at one end, and the people who want it at another end. There are a lot of folks in the middle who are imperilled by connecting those two folks more directly and there is a lot of money tied up in that middle.

MR DALLAS-FEENEY: The intermediaries are at risk. As we will talk about a little bit this morning, it is not peculiar to one industry, it is not peculiar to one size of company. I think for the most part the intermediary, whether it is banks, or whether it is book publishers, disintermediation has happened and the internet is creating opportunities and threats.

I borrowed from a fellow, Walter Wriston, of whom most of you, I am sure, know. Walter had written a book three or four years ago "The Twilight of Sovereignty". I it he talked about the information revolution and how profoundly significant this would be. His quote suggests that this is not just an economic event, this is a political event and potentially bigger. I certainly agree with Mr Wriston. Certainly the one I have spent the most time with is the buyer/seller transaction.

To some degree the internet discussion topic can be trivialised as a collection of gadgets and really neat whiz-bang stuff. I think perhaps, David, in your own personal experience at Cable & Wireless, you know that this is a lot more than a communications transport medium. It is a lot more than the content that gets sold out there. It is a lot more than the delivery mechanisms that are used to let you or I interact with it. It is all that stuff wrapped up and compressed into essentially an electronic market place.

So, I believe, and certainly you are getting the perspective of, if you will, a line dog, somebody who lives out on the line everyday and 100% focused on client related matters and not studying this, if you will, for publishing. This is more or less the perspective from the field. Certainly I tend to agree with the significance of what is going on in terms of this phenomenon.

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For the most part - I know there is more to come but certainly in the recent past - we are much further alone in terms of these classes of technology at least operating at a level of standardisation that allows us to operate with each other. Even as recently as five or ten years ago the success of the web would have been in doubt only because we could not get supplies of technology products to agree how to pass data across a wire. So we are getting there - it is not done yet, but we are making substantial improvement.

So that this sense of being the central communication model I can select someone in Indonesia, I can select someone in New York from Philadelphia. Finally, the suppliers of the software products are not doing battle at a low level of standardisation. Netscape has built its entire philosophy of its software development around open standards. Microsoft took the exact opposite tack, and it is a somewhat unnerving thought that this little needling $250/500 million company is being so successful with the contrary philosophy to Microsoft.

For the most part the internet, the exciting part from a business standpoint, if not from a political and military standpoint is the inter-operability of people, humans. The communications potential, the ability to interact, it is for real. This is something that we do naturally now, either one on one or with a phone. Finally through this class of technology we can do it through computers.

For the most part the results are in. The large Fortune 500 companies are putting their money where their mouths are. There are lots of folks that expect to do substantial amounts of business, vis a vis the internet. It is not a secret, now how do I do it? That is the tougher part, that is what ahead. Web presence is admittedly a weak indicator of adoption, but nonetheless, whole bunches, 80% of the large Fortune 500 companies, have a web presence. It may be mundane, it may be simplistic, most of them are today, but the Fortune 500 companies are at least getting to the point where there is some sort of information.

DR KISSINGER: Am I going to get thrown out of this meeting if I ask exactly what a "web presence" is? I know Peter knows , but I do not

MR DALLAS-FEENEY: Essentially it is an electronic site.

DR KISSINGER: ~~Do~~ it? You buy that or what do you do?

MR DALLAS-FEENEY: You would craft it in the form that you would write software. Booz Allen has its own web site so someone could log on to the worldwide web, put in the proper resource level---

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DR KISSINGER: If I want to buy from you I dial up your web site and within that I will then learn what you have to offer?

MR DALLAS-FEENEY: We have a lot of material available for you there so you can learn - not enough yet, but a lot - and you can do transactions with us.

MR WALDENSTRÖM: What kind of transactions?

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MR DALLAS-FEENEY: You can actually do purchase and sale transactions if we actually have an existing credit relationship. We do not do the kind of things that you do via a credit card, many folks do issue a credit card, but you have to have a credit relationship with us.

DR KISSINGER: That is a phone book type thing which tells you how to dial up these Web sites?

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MR DALLAS-FEENEY: There is an address, if you know the address you go direct, or you do it through Netscape, another searcher.

LORD YOUNG: You can put the name down and you can get 500 companies in the same area.

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MR DALLAS-FEENEY: Henry, you are touching on something that I think is profoundly significant to adoption. You have to go out, you have to do the act of dialling up, writing this rather complicated string of characters to say "www.monsanto.com" and go to that location. That is an act that you have to perform right now.

DR KISSINGER: I cannot type.

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MR DALLAS-FEENEY: Bob's company has got to excite you enough to want to do that. In your case my guess is it would be easy. You have built relationships with customers that are a bit more mature than your standard consumer goods.

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MR SHAPIRO: The model that is going to get interest, there are already a number of them out there, but folks like IBM are trying to create the equivalent of a shopping mall around the internet where ease of access and visualisation become just what they would be if you were actually visiting a shopping mall, although it is a very large mall indeed. You can ask it a lot of questions. "I want to buy a gift for my daughter. She is 14 years old. She is interested in the following things. Direct me to some places that might have those sort of things".

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MR WALDENSTRÖM: And they will then show colour photographs and actual videos, showing how this product works?

MR SHAPIRO: It will allow you to change colour so you see how the colour looks and the size, and so on.

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MR PASTERNACK: People working in IT now have oral commands so you do not have to type. Accents could be a problem, but you do not have to type.

LORD YOUNG: Voice recognition will be two years away, if that.

DR KISSINGER: Two years only?

MR PASTERNACK: Yes, it is virtually there. Just one other point, just to give you a sense of size, because Chris has mentioned Netscape, Netscape is less than two years old.

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MR DALLAS-FEENEY: 1994.

MR PASTERNACK: As of two months ago, they had 38 million Netscape server applications out, people have accessed Netscape, 38 million of these exist today. Today (this is also about two months old) they are getting 70 million hits a day which means that the people are accessing Netscape 70 million times a day.

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MR DALLAS-FEENEY: It is now 100 million.

MR PASTERNACK: It is growing and growing. It is just unbelievable, so there is just the extent of the power, a company that is a couple of hundred million and has what, four billion in market revenue now, or is it five billion?

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MR DALLAS-FEENEY: Oh it is five billion, maybe 500 million in sales.

DR KISSINGER: And it was started when, four or five years ago?

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MR DALLAS-FEENEY: 1994.

MR SHAPIRO: Two years ago.

DR KISSINGER: How could they do it, and what is their competitive advantage?

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MR DALLAS-FEENEY: Henry, I think one of the things, just from getting the software the 38 million out there, what Netscape does is put the product out on their Web site and says "You want browser version 4.0, boom, boom, just download it". You can go to essentially that electronic window and say "send" and you will park it on your machine. That is the front door to their store.

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MR WALDENSTRÖM: It is the ultimate product, it goes through the wires.

MR SHAPIRO: When they started they gave it way. They gave it away free for the first 15 million copies or whatever, and created a market for it by saying "Now we are going to start to charge".

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MR DALLAS-FEENEY: Let us be clear, that was their come-on. That little $59 free piece of software, the thing that sits on your computer is just the first brick in this road. 80% of their revenue comes from what sits on the corporate servers, all the software that sits behind that little desktop.

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LORD YOUNG: It is also true to say that we are the South Sea bubble stage, Netscape has a 4 billion market cap. 300 million sales---

MR DALLAS-FEENEY: Going to 500 million.

LORD YOUNG: Profits?

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MR DALLAS-FEENEY: They have actually shown a profit the previous quarter. I did not see the last quarter.

LORD YOUNG: They have yet to show an annual profit. They have a 4 billion value, that is only because it has been hyped up and in that we have people coming to us, I have one company that has monthly revenues of $75,000 and they are talking about selling it to Netscape for $100 million. Now, it is all hype. That will crash, but use will not. In this whole internet field any company is worth a great deal of money until it makes a profit, and from that day it is finished. (Laughter)

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DR KISSINGER: Explain that to me, why is that?

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LORD YOUNG: Because once you can measure the profit on a "P" ratio then they relate it to other companies, and for some bizarre reason the---

MR PASTERNACK: There is an old theory we used when I was in Government, which is optimism times knowledge is a constant.

LORD YOUNG: Anyway, it is better to travel hopefully, I think.

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MR DALLAS-FEENEY: I mentioned at the beginning that the net is not a benign thing. It will give and it will take. Reed Elsevier - help me, Martin if I am butchering the last half of that, because I think it is a Dutch Company the Elsevier part - is a publisher of academic journals. Out of about 5½ billion in gross revenues 600 million-ish comes from these academic journals. They are being disintermediated today by providers, whether it is the ---

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DR KISSINGER: "Disintermediated" means what - they are no longer needed?

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MR DALLAS-FEENEY: They are being cut out of the picture. This was 40% return on sales business, roughly 225 million they got out of their 600 million Dollar business last year. Libraries are shutting down Reed Elsevier as the publisher and supplier of these because they are saying "I can go to the net. I can put, as a publisher, as a scientist in nuclear engineering" let us say "I can put my

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manuscript out on the net and get peer review by a Co-operative association of my colleagues, what do I need you for? Why do I have to spend $100,000 on these journals?"

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LORD YOUNG: And save two years.

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MR SHAPIRO: 3 million titles.

MR DALLAS-FEENEY: ---3 million titles accessible on loan.

DR KISSINGER: 3 million titles of books?

MR DALLAS-FEENEY: Yes, and they will get them to you in 48 hours.

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LORD YOUNG: Is there not a company that puts the first chapter of every book on the net?

MR DALLAS-FEENEY: Barnes & Noble and Borders are terrified. They are just thinking "Oh God, another little David coming up to the Goliath."

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DR KISSINGER: But how about authors?

MR STASIOR: You can sample any CD now on the thing.

DR KISSINGER: Do people still buy books, or do they get the whole thing on the internet?

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MR DALLAS-FEENEY: Amazon is simply a directory. It helps you figure out, "I want a book from Henry Kissinger, and I want it about Vietnam", well there is lots of stuff, so "Which one do you want?" and now the search engine takes over. So these are just some examples that this is not a benign event. This is a significant event.

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DR KISSINGER: You know one thing that happens for political typepeople as a result of this, you cannot let any comment go unanswered, no matter how trivial it is. No matter in what ragged journal it appears, if you do not get an answer into the computer it will develop a life of its own. Seriously, that is true.

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MR SHAPIRO: The corollary to that is now more and more people are finding access to that web and putting their material in. I do not know how you are going to be able to respond.

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DR KISSINGER: The diplomats are the ones who put their material in the political world.

MR SHAPIRO: The notion of hitting the ball back over the net I think gets harder and harder because of the size of the game.

DR KISSINGER: On the net I do not understand, but in newspapers I really think that any public person, or publicly aware person, if there is a comment about you in a newspaper you must answer it, because otherwise it gets taken out of context. But it has to be done.

MR DALLAS-FEENEY: You could essentially create a piece of software to crawl the web and say: "Are they talking about me today? What lies are they telling about me?" and essentially trap that and provide that response.

Just imagine though that everybody around the world wants to do that, think of the traffic---

DR KISSINGER: You can already get whatever they say about you every day.

MR DALLAS-FEENEY: Sure. I guess to your point earlier in terms of wanting to understand what is being said on the Web, the newspapers are a sort of well defined form. You can pick up the "Post, "The Times", and folks know where to look. You may not read the Irish "Echo" and pick the same thing up. I think in terms of the internet it is somewhat chaotic right now. It is not an organised forum in which to conduct debate.

DR KISSINGER: No, it is Lexus, or Nexus or whatever the thing is - is that part of the internet?

MR DALLAS-FEENEY: That is Reed Elsevier's product line. The point is that the forum, almost the Roberts' Rules of orders for conducting communications on the internet really is not well formed now.

DR KISSINGER: So you are saying that on top of what, say Lexus picks out that is already published, there is a whole universe of people who could step into the internet?

MR DALLAS-FEENEY: Oh yes, exactly. When I wanted to go use Lexus or Nexus I had to go to a librarian historically, and that is a waste of my time and effort because many times when I do a search I am not sure exactly what I am looking for and I want to do this inductively.

LORD YOUNG: Time shifting has changed, when that Comet hit Jupiter I picked up a Hubble photograph of it four hours later. It is absolutely amazing.

DR KISSINGER: When what hit?

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LORD YOUNG: When that Comet hit Jupiter two years ago, 18 months ago, a Hubble telescope photograph was on the net within four hours.

DR KISSINGER: And there is no control what anyone puts on the net, anyone can put anything up?

MR DALLAS-FEENEY: Who owns it, even if it is just mundane things like keeping this thing up and running in oil.

MR WALDENSTRÖM: You know the controversy around pornographic material, Henry.

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DR KISSINGER: Well organised Democrats could really do a lot of damage.

MR DALLAS-FEENEY: Henry, to that point I have very little visibility into Asia Pacific in terms of its treatment of the net. The little that I have picked up from the media is that Singapore is a far different environment than United States when it comes to what you can and cannot do on the net.

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MR WALDENSTRÖM: How can they control it? Anybody in Singapore can call up the net and see what they see.

MR DALLAS-FEENEY: To some degree it is the content providers who can actually be seen from within the four walls of Singapore.

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MR WALDENSTRÖM: How do they control it? If I am in Singapore I call up and log on to the net with my PC, and that is it.

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LORD YOUNG: No, no. The ISP internet providers are putting in some form of censor and preventing you from accessing from where ever you want to go.

MR WALDENSTRÖM: If I call up the United States - if you make a long distance call you get on the net in the States, they have no idea.

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MR DALLAS-FEENEY: But, Martin, to some degree that is going to dramatically diminish or narrow the population that can or would do that.

MR WALDENSTRÖM: It depends on the cost of calling up the United States, and if you are buying something and the seller provides a subsidised call that may encourage business.

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DR KISSINGER: I put my money on Le Kwan Yew.

MR SHAPIRO: The key, I suspect, will increasingly be not only the information component it will be the transactional component. One of the problems all jurisdictions are going to have is controlling the financial consequences of transactions down the Web, especially, and I do not know if you are going to get to this, Chris, but if encryption

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technology actually allows you to do large money transfers, then the peril to taxing authorities in being able to regulate what is going on, and anti-crime agencies to control flows of funds. It can now take place wholly outside the bank systems that are believed to be controlled.

DR KISSINGER: Is that not extremely dangerous?

MR SHAPIRO: Oh yes.

DR KISSINGER: If this character in Singapore could create $28 billion in a couple of days and that was without the internet.

MR DALLAS-FEENEY: It did not surprise me, but it confirmed, I think, what most of us said. Bruce and I had met with Jim Barksdale, who is the CEO of Netscape just a few months ago, and as Jim was talking through some topics he said "The number one issue that will get my time and attention, money and so on, is to demonstrate to the consuming public the relative security of the internet". Because he understands that if this is perceived as a chaotic, non-secure environment for conducting commerce, the adoption will fall off vociferously.

MR SHAPIRO: The last thing I will say on this, it seems to me to be a huge topic that is worth the attention of a lot of folks in this room---

DR KISSINGER: But can you tap it?

MR SHAPIRO: ---to the extent that he makes it a secure system, secure to users, he is threatening sovereign power, and it is not clear that Governments can allow him to make this as secure a system as users would want.

MR DALLAS-FEENEY: He is pushing, or behind a Bill - I forget which number it is - around the Encryption Standards, he wants the bigger data set. The more digits I have to encrypt something the harder it is to crack it, and that is something that is very controversial. It can be done, but the intelligence communities do not really get excited about getting a better encryption technique because it is going to take more computing power to crack it. So it is a controversial issue in my mind, and I am not sure how it is going to work its way out.

LORD YOUNG: But no American legislation can stop that spreading. It is one of the nonsenses, that you cannot buy a cheap bit of software in the United States and export it if it has got encryption, but everybody does and takes it home, and you can just introduce the encryption from Europe.

MR DALLAS-FEENEY: It seems to me, David, that the powers of commerce, and the opportunity to make a buck are---

DR KISSINGER: Unless you get a global agreement.

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LORD YOUNG: No, because it is not Government. The great thing about the Web is that it just grew. If it was left to Governments it would not exist, because this is an example that Governments only kill, and this by accident was created by individuals.

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MR DALLAS-FEENEY: Just quickly, because I know I am burning a lot of time, so forgive me, just a few other points to make. We had interviewed or surveyed a few of the senior executives within our client family back in the Summer. One of the things that was striking to us as we asked them "Is the internet really something that is important to you?" for the most part very few of them responded "Ah, it is a passing fad". That is amazing to me because of the billions of Dollars that we spent on technology and yet it has yielded largely an unsatisfied feeling from a lot of senior executives.

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I think for the most part, at least those who we spoke to, believe that this is a significant issue, and they believe that they had better get on the stick and deal with it. I found that at least comforting that this was something that---

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DR KISSINGER: According to your figures 42% do not really know what to do with it. If you add "I do not know, what does it do? It is just a passing fad", I gather that is 42%.

MR DALLAS-FEENEY: I think that is fair that there was confusion. I also believe that nobody believes that this is a benign event. I think that was the thing that was most significant.

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LORD YOUNG: This was the fifties age group, CEOs?

MR DALLAS-FEENEY: Yes.

LORD YOUNG: It is not the whole population.

MR DALLAS-FEENEY: Absolutely.

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DR KISSINGER: Do you think it is a benign event, David?

LORD YOUNG: No, that is why I wanted to raise it. I think it is an enormous threat to your clients. It is a great opportunity to---

DR KISSINGER: It is a great opportunity to what?

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LORD YOUNG: For start-up businesses, for the things I am doing today, but an enormous threat to many established businesses, from banks to retail to anywhere. It is just going to transform the landscape. I will get my bit in later.

MR DALLAS-FEENEY: The other issue is where to focus, where to start. Bob, you mentioned a second ago it is not just about knowledge, and that is absolutely true. I think to

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some extent though, if you want to cut your teeth some of
the areas to get started with tend to revolve around some
of the marketing areas, some of the customer service
areas, and not necessarily procurement, buying behaviour
and so forth.

We have seen our clients involved in all different
sorts, whether it is transaction oriented or knowledge
oriented. But I think to get yourself going, as you will
ultimately see, the intranet enabled applications to go
beyond the knowledge based stuff, you really cannot
conduct commerce in the old fashioned way, if you will -
buying and selling goods vis a vis the net.

This next slide is going to frighten you, so I will
not leave it up here that long, it is very gruesome. All I
want you to do is to get the idea that if you look across
the top these are some major companies in the world.
Going down the left side is all the different kinds of
things that they are doing with the internet and the
intranet. It is not just toying around. There are lots of
"Xs" in these boxes and in a lot of ways they are doing
some very profound things with this stuff.

I know in the case of Prudential they are bound and
determined to leap frog some of the competition vis a vis
this class of technology. It is not going to happen in
three weeks, it is going to take some time, but
nonetheless the Prue's, the Mobil's, the Shell's, these
are non-trivial companies that are making fairly
substantial commitments to this class of technology.

DR KISSINGER: I am so ignorant that I do not know why I should be frightened by this?

MR DALLAS-FEENEY: It is just that slide 101 you just never
torture your audience with a slide like that.

MR DORMANN: Please, what is the nature of the secure
transactions those companies are---

MR DALLAS-FEENEY: Well, in the case of an oil company, for
example, they may be doing procurement. So if I want to be
able to buy goods I want to make sure that in fact I have
authorised buyers buying reasonable goods that we have
some sort of a purchasing relationship with, and buying
from authorised venues. One of the challenges in the
procurement area, for example is, that we found in a major
oil company they had hundreds of thousands of suppliers
and it was a "Deal du Jour", so the secure transactions
is not just somebody trying to use your buying power, it
is just making sure it is authorised, so it is controlled.

DR KISSINGER: Why would Prudential leapfrog into competitors
this way?

MR DALLAS-FEENEY: Well, in the health insurance business,
for example, one of the most important things to do is to
provide information assets to the providers, help the

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Doctors manage disease so wellness is actually maintained and not always catching up with the disease after it has taken place. So US healthcare, ETNA has created an entire wing of their business to create these information assets.

DR KISSINGER: AIG for example is not doing that?

MR DALLAS-FEENEY: I do not know AIG *per se*, but I do know that ETNA is doing it, and they are basically gathering the provider network to them, because they are helping them do their job better.

MR FREIDHEIM: AIG is very much up to speed on this.

DR KISSINGER: What advantage, why do they then leapfrog competitors?

MR DALLAS-FEENEY: I think, Henry, to some degree, in the past they tried to differentiate themselves on a commodity, a network, an information exchange. Prue will, if they keep their security environment will always have information that is peculiar to their member base, and so the knowledge about the health of their members is what is particularly important to them. They will always keep that asset. It is not something that US Healthcare, or ETNA, or Columbia or anybody else should know about. So it must have penetrated from a security standpoint---

MR WALDENSTRÖM: The database is proprietary.

MR DALLAS-FEENEY: It is about their members, the health of their members.

MR WALDENSTRÖM: And there are advantages, how you can use the database in a different way.

DR KISSINGER: It gives Prudential better use of its database, which is it has always had but did not know how to use.

MR WALDENSTRÖM: In a way, yes. They can build the database in a better way. They can continue building new databases all the time that they use in a different way on the internet and by being ahead on the database they are then always ahead on the internet. That is basically the way they can create lasting advantage.

MR SHAPIRO: I am very interested in the point you are about to get to about micro-segmentation, in fact, mass marketing targeting individuals.

MR DALLAS-FEENEY: My personal experience has been both in the internet base and also interactive TV---

DR KISSINGER: What I am trying to understand is whether this is well-managed companies an additional leg up, or does it give mediocre companies a way of levelling the field?

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MR YOUNG: I believe it gives well managed companies an absolute threat.

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MR SHAPIRO: A powerful new element to the powerful element to the competitive armamentarium that is available, and people who are swift at using that and effective at using that will have advantages over those who are not.

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DR KISSINGER: Usually superior strategists are superior thinkers - that is what makes them superior.

LORD YOUNG: Let me give you an example. At 7.30 every morning on my computer at the office a commercial programme called "Point Cast" downloads on to my machine. What I want - the news from America, the weather in a whole lot of areas, stock prices and a number of things. I do not actually have to look at a paper. If I want to look up something about a company I just go on the net, the "Financial Times", I put the name in and I get every article for the last two or three years - as long as I want to go back - about that company. So there is no point in actually buying a paper which has got lots of information I do not want when I can get six hours later everything that I do.

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MR WALDENSTRÖM: David, you pay the "Financial Times" for that?

LORD YOUNG: No, I do not. I do not pay a penny to the "Financial Times".

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MR WALDENSTRÖM: Today it is free?

LORD YOUNG: Today it is free. Now, let us look at this. What is going to be in danger of being eliminated are newspapers. Associated Press, the information providers are still going to be very necessary. It is the method of getting that information from them to us, and it will not be free for ever. One day there will be a way in which you will charge, but at the moment nobody has quite worked it out.

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There is one of our clients that puts all sporting results on the net - Golf Championship, updates it every 15 seconds. IBM sponsors that and pays for it because there is an IBM advert. Another one, an insurance company pays for any tennis tournament while it is on - the Open Golf Championship, whatever, financial firms are sponsoring it because one quarter of the page is advertisement, the rest of it is information.

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But, what is a great threat, as one example only, and there are a whole lot of them, are newspapers, because if people buy newspapers for information there are better ways of getting it. Now, you still buy newspapers for things other than information, but it will change the character of newspapers just in the same way---

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DR KISSINGER: Analysis.

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LORD YOUNG: Yes, analysis. Just in the same way that you get the news from television, you get comment from newspapers. Comment may come weekly, not daily. I do not know. This is only one of a whole series of examples of where you will see Murdoch is changing already and will change totally in ten years, from earning money out of newspapers to earning money out of either satellite or on the net information.

I will tell you in three weeks' time British Telecom start opening sales kiosks in this City in which people can go and buy from kiosks.

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DR KISSINGER: Can buy what?

LORD YOUNG: Can buy from kiosks. They walk in, it is like an internet-type situation---

DR KISSINGER: They buy what?

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LORD YOUNG: Anything, goods, purchases.

DR KISSINGER: What, through the internet?

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LORD YOUNG: Through the internet. It is actually through the internet, but there is another one who are actually opening kiosks with cards which are going to be in offices and hotels, everywhere, which is actually down optic fibre. There are whole new methods of marketing which are cutting out existing retailers.

In Hong Kong, Hong Kong Telecom. are going to open a service at the end of this year in which working wives, before they leave in the morning will order their food and when they come home in the evening it will be sitting by the front door. They will not, in fact, need a supermarket. All these, I believe, are threats to the existing things, that is why I wanted it on the agenda.

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When I was at Cable & Wireless we saw the internet as an enormous threat because all the revenues from telephones around the world are from international calls. To give you an example, British Telecom makes £5 billion on international and loses £2 billion on domestic - it makes £3 billion net. Those international calls are under threat because the internet is unregulated.

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In my present life I see it as an enormous opportunity as all sorts of start-ups come to get funded, because they may be the people in the next few years. Now, what I will say as a result of this, I think it is every 25 years 40% of the top 100 companies change. I believe over the next 25 years we are going to see more than 40 of the top 100 as we start going. A lot of this which seems to be theoretical, knowledge based is translated now in very practical terms. So all the old barriers to entry, mail order, disappear entirely.

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DR KISSINGER: Mail order disappears?

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LORD YOUNG: Well, it costs an enormous amount of money to set up a new mail order business. The cost of the catalogue, the cost of all the distribution system. You will soon be able to get better quality on the internet, more available to people.

I am involved in another company that is now on the point of putting internet access into every Holiday Inn. So people staying at hotels will have it and there will be nothing more expensive than bored business men sitting in their rooms at night with nothing to do buying things, and it is going to be an enormous source of revenue to hotels, but an enormous source of loss to retail establishments. They are the sort of areas where no one has the answers, but I think CEOs should be very well aware of the threats and the trouble is that most CEOs are not of a generation to be totally aware of those things.

DR KISSINGER: In addition to the business, it would be interesting and important to study what this does to politics and to the kind of leaders that emerge in this environment.

LORD YOUNG: If satellite took down the wall, if in the end it was the fact that East Germans could see the living standards of the West Germans, because that was satellite, the internet will do far more than that. It will not be living standards, it will be ideas.

MR PASTERNACK: David, just to follow up on that point a little bit, there are a set of things which strike me as risks or opportunities for companies even of surviving, but there is another set of things which is how companies, who may not be threatened in terms of their survival, or may not have enormous opportunity because of these new technologies, have to retool themselves, as corporations in terms of the people - how you sell, how you buy, how you deal with folks around the world as a result of this. I think it would be really interesting to hear from you gentlemen about some of those issues.

MR SHAPIRO: Let me start by saying that this network computing in general, of which internet is the most visible part, but there are a lot of other parts to this. It seems to me as I guess it does to David, as a watershed. It is hard to avoid sounding silly, when you start talking about the implications of this, but they are clearly profound and the probabilities of their occurring seem to me to be virtually 100%.

It changes from a business perspective, not only the way we do business with customers, and suppliers along the supply chain, it changes the way we work internally. It changes the way you organise as a result of the ability to network large amounts of data transactions, people, and so on where place does not matter any more.

On the outside part of it, one place that was only briefly mentioned and is clearly going to have huge

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implications is in all financial transactions. The question of what role a bank plays becomes increasingly questionable because what happens is money flows can be managed directly through this process, between the person who has the money and the person who wants to borrow it, use it, or whatever, or invest it. The question "How do you get expert advice" into this process, how you make decisions and so on. It is complex but it is the transactional part of financial processing.

DR KISSINGER: Somebody who has the money puts himself on the net, because he is available to lend under given conditions?

MR SHAPIRO: Exactly, and it can be existing institutions that are in that business, or it can be other folks. That is why this encryption issue is so critical. The only way you can have secure transactions is if you have very strong encryption and the ability to identify the counterparty you are dealing with, make sure you are verifying that the counterparty has the ability to enter into this transaction and to fulfil it.

LORD YOUNG: It makes a nonsense of one State banking or two State banking, does it not?

MR SHAPIRO: It is going to be increasingly possible for me not to know who is the person on the other side, but to know that they are good for the money, that is all I need to know.

MR WALDENSTRÖM: Yes, I think the issue in a sense is not that banks will disappear, but that anybody can be a bank in a sense, and as advisers will not disappear, insurance companies will not disappear, but anybody can be it. I mean, the railway worker is not directly on his computer going to direct his pension funds into an open-ended mutual fund. Anybody who knows how to do that an enlist him as a customer and do it for him. So you would still have consumers out there who are not sophisticated enough to actually do the financial transactions themselves, but they can have zillions of intermediaries doing it for them.

MR SHAPIRO: We can spend all month on that one, but let me try a couple of others. One of them is on this slide which has to do with the ability to really understand the people you are doing business with in some depth. For example, there is already software available that enables me, when I get a hit on my Web site, to be able to know what other Web sites that person visited before coming to me. So I know something about what that person's interests are.

LORD YOUNG: I will be very careful before I ring you!
(Laughter)

MR SHAPIRO: I can tailor the response you are going to get on my Web site to certain categories of people. Then I can ask you directly for information if you are prepared to

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supply it. I can enter into a long term relationship with
you, knowing a great deal about your needs, and being able
to adapt my offerings to meet your needs.

Once you have gone into IBM's mall and said "I would
like to buy something for my daughter whose birthday is
next week. She is 13 years old and has the following
interests", next year two weeks before your daughter's
birthday, I may want to send you a message. I start to
know you in a way that only very good retailers can know.
That is another point - the ability to serve the specific
needs of individual customers.

Another part that is driving a lot of people crazy
right now is the issue of property protection. How this
is going to work - all I can say is I do not have a clue.

DR KISSINGER: Eventually we will be run by an oligarchy of experts.

LORD YOUNG: Except the internet is flattening the experts.
There are so many more---

MR SHAPIRO: It may be very democratising, I am not sure what
its implications ultimately are. Certainly, we have
started to say the world now gets divided into classes of
people who have access and facility with this kind of
system, and those who do not - "the haves" and "have nots"
- that may exacerbate class differences.

DR KISSINGER: I can understand individual transactions how
this works, but many events depend upon the relationship
and the interpretation of the relationship of events to
each other. When this becomes the premium form of
knowledge where is the knowledge for the relationship of
events, which has been the essence, at least, at the
highest level?

MR WALLENBERG: You can buy anything over this machine but at
the same price because the machine cannot differentiate on
price, whether it be a large customer or a small customer?

MR DALLAS-FEENEY: Yes, it can be made intelligent.

LORD YOUNG: Let us put it another way, accumulated knowledge
took off with the birth of printing. Henry, there is
another thing which this is doing, which is really going
to keep growth growing geometrically. It was only the
birth of printing, the invention of printing that allowed
accumulated knowledge to go. From that geometrically it
started to slow in the forties because people were
reinventing the whole time. There was no way of knowing
what had already been found out, and researchers all
around the world were finding they were wasting years on
doing something which somebody else had done, because The
British Library and others were years behind.

IBM invented the computer, the worldwide for which
was going to be 12, 7 in the United States, and that was

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not one of the best of forecasts. Today, knowledge spreads
within days, and scientists who are doing research - I am
Chairman of University College, London - we have one of
the largest research establishments in this Country, we do
global research. Every scientist everywhere around the
world talks to each other whatever the Government says.

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KISSINGER: I agree with you. This will change human
consciousness ♦ more even than the invention of printing ♦
even the printing of the world around before printing ♦
people learned by epic poetry ♦ they trained their memories ♦
and by reading ♦ Printing had one advantage over this that ♦
precisely because it could not encompass all the knowledge ♦
you had to think conceptually ♦ which meant that you had to
protect ♦ This thing gives you from thinking conceptually ♦
I do not know what it means ♦ (Computer's what You Know ♦ will

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WALDENSTRÖM: Henry, is not one way to think about it,
rather than try to speculate where it will go, to take the
other way round and say that ultimately it could
potentially be all information available to everybody, and
rather speculate where we will stop before it gets to that
stage. You talked about availability to everybody, Bob,
and I think that it is like the telephone. We are starting
up these centres of access and I can imagine just like
there is a telephone booth for a payphone in almost every
poor village across the world more or less, there is no
reason why there could not be a little terminal with a pay
slot in it in every village in the world.

DR

KISSINGER: I have no trouble with---

MR

WALDENSTRÖM: That would respond to the fact that---

DR

KISSINGER: ---Anything depends on knowledge.

MR

WALDENSTRÖM: Then the second question is what information
is on it? Then again, if it is not proprietary right, or
secret information, I do not see any reason why the rest
would be on it.

DR

KISSINGER: Yes, but the more information you have the
more crucial it becomes to understand what it means.

MR

SHAPIRO: One of the things that is fundamentally unclear
to me at least is whether this set of tools leads to a
greater ability to control or to an absolute abolition of
the ability to control.

LORD

YOUNG: I think the latter.

MR

SHAPIRO: My suspicion is the latter.

DR

KISSINGER: To control what? The flow of information?

MR

SHAPIRO: I think it is more than the flow of information.
There are power relationships that come as a result of ---

DR

KISSINGER: That is what I am concerned about.

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Let me explain. There are two examples I want to give you - one is very constructive. I think the other one is constructive. I think the other one is constructive but we disagree about it. The constructive one is this: on R&D projects today, because we have facilities in the United States, in Asia and in Europe, a problem will be worked on in our US lab during the hours that the people work in that lab. It will be all the data from that day's work will be on line and transmitted to the folks in Asia who continue to work on that problem when the folks in the US are going to sleep. When they go to sleep it is transmitted to people in Europe who continue to work on the same problem.

What you are doing is shortening the cycle time in product development. Now, it is still true that you are wasting your facilities during the time these people are sleeping, but in terms of that particular project you do not have to wait until the next morning to get into it.

The other example is aligned to the one that David describes. We went through an E-mail stage where people sent me messages, and everybody else messages and it is all very useful, but now with what is called "Groupware", we use a particular product from IBM called "Lotusnote", it is like the town square, people will go in and they will post the message. They will say "Something is going on here that I am worried about", or "here's an idea". Then other people will immediately start adding to it and saying "Well, I think that is stupid because..." or "Well, we had an experience that was similar to that in our place". People from all around the world. I will go into it in the course of a day, if I have some time in that day, and I will browse through whatever is happening. I will frequently find things where I can add something to the conversation, but I would not have known it was taking place before until it had simmered up in some form of revolution.

DR KISSINGER: Supposing somebody wants to spook you and puts things into that---

MR SHAPIRO: It is a concern.

DR KISSINGER: If it is done cleverly so that you do not spot it right away.

MR WALDENSTRÖM: They are all identified, are they not? They sign---

MR SHAPIRO: One of the advantages of this is that they do not have to sign.

MR WALDENSTRÖM: E mail has to be signed.

MR SHAPIRO: E mail does, yes. You get a very honest and sometimes manipulative or misleading information. It is very much like the village square, the same sorts of problems you have in the village square you have on this

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MR DALLAS-FEENEY: I am going to get off the dias here in two minutes because I know there are other things to talk about, but I am personally very pleased that this has created the storm that it has. It is good. There is money to be made here, and money to be lost.

On the other side, if you are thinking from the corporate IT executive, the CEO probably should get ready because senior systems executives are going to come with handout saying "We have got some major transformations to make within the four walls of our supply of information technology". You do not have to do it overnight, that is one of the nice things here, but to some degree you are going to have to change a whole bunch of stuff to be able to fully optimise this long term use. That is something I think quite honestly that can take five years, ten years to do. But for the most part it is not going to be without a price.

I think some of the very simplistic notions that I want to leave, the opportunity is now, this is not something that I think we can wait ten years to address. There are some opportunities in the intelligent application areas, the knowledge based applications.

Finally, in terms of the customer centric (?) stuff, because it is not clear what the demand profile is, the buying behaviours and so forth, be patient with that, but experiment with it. For the most part virtually every one of the clients I am dealing with right now are at least exploring the customer direct part of this, if not going in whole hog - it depends up on the risk appetite.

MR PASTERNACK: There are two other points here. Chris mentioned in that very busy chart there are a whole variety of applications that are, we term "enterprise-wide" applications, whether it is procurement, customer interface, innovation, things that not only cut across the enterprise that you are operating in, but also the companies with which you interact outside your own boundaries. The issue of boundaryless-ness which Jack Walsh talks about is in fact being enable in a lot of ways by this technology.

The second point as the CEO take away - and we have talked around this issue a little - is "What does it do to the business model, the Corporation?" What is at the centre, what gets distributed? Where does their distribution take place, and what do you really have to do as a Corporation versus do virtually - if you want to use that term. I think there are a couple of big CEO top management take-aways and it is the kind of thing we are going to be focusing on when we do this session in Davos this year.

DR KISSINGER: It ought to be a tremendous opportunity for Booz Allen & Company is going to need advice on how to handle this technology.

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MR SHAPIRO: Absolutely.

MR WALDENSTRÖM: It is, Henry, and partly because of what Ralph Shrader talked about before that we are a technology link where we, through our Government work and military work, have I think an understanding of the confidentiality aspects of information, the coding of information and the purely technical aspects, the networking which is second to none in the consulting business. So it really represents an area where we can marry our commercial and our technology competencies in a fairly unique way.

MR SHRADER: I think it is fairly interesting to note that we now have on our team in Washington Mike McConnell who was the Director of the United States National Security Agency. Mike is one of the foremost experts in this field. An interesting thing about Mike is that he is not necessarily just technologist, he is also someone who understands the business process. He has been challenged, if you will, to operate in the broader environment and so he has a very deep appreciation of where this technology is going.

DR KISSINGER: I am assuming Governments will try to intercept all of this stuff. Can they handle it? Is it possible to process that much information?

MR SHRADER: It is beyond the challenge right now for the Government to be able to try to deal with all of this, and it is well beyond the scope of---

MR FREIDHEIM: The debate we had last time about what the appropriate role of the Government is and how much encryption is possible, and Bob Rosenberg was making the point that there is a real conflict here between what his bank wanted to do and what the Government wants to do.

DR KISSINGER: Governments will try to break the secure communications too. That is what they would like to do.

MR FREIDHEIM: That is right, and that is why they are limited to the kind of encryption, the banks are, that they can do because there is a possibility of developing encryption that would take the Government for ever to break and make it impossible in terms of the economics. That is, of course, what the banks want.

LORD YOUNG: One of the real problems with the spread of mobile telephones, the GSM, the European standard, which is now becoming a global standard, is encrypted, and it is very, very difficult to break. One of the problems we have always had with Governments who want to listen to what is going on and you have to set up very difficult systems, and even then they cannot do it.

DR KISSINGER: Our Government actually made an effort, I forget what it was, to get some access to the encryption system.

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MR SHAPIRO: The NSA has taken a very strong view on the degree of encryption to be permitted. They are in direct conflict with most of industry on this.

MR WALDENSTRÖM: Again, how can they stop banks setting up an office in Liechtenstein with an encryption system and you could call in from the United States and use their banking service.

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DR KISSINGER: Yes, well they used to be able to break many of the encryptions but if they get very complicated---

MR SHRADER: Time and money. It depends on how much time they have and how much money.

LORD YOUNG: They can break any one, but when they get faced with 100,000 and they have got to scan them they cannot break every one.

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MR SHRADER: Change them every day.

DR KISSINGER: No, no.

MR WALDENSTRÖM: That is the issue.

DR KISSINGER: It is an issue.

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MR DALLAS-FEENEY: Thank you gentlemen.

MR FREIDHEIM: Thank you very much, that was an outstanding discussion.

DR KISSINGER: Very stimulating.

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MR FREIDHEIM: We are a little behind, let us take a shorter break than we had planned - about ten minutes - and get back and we will go into the next item on the agenda.

(Short break - 10.40 am - 11 am)

## STRATEGIC ALLIANCES

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MR FREIDHEIM: Before we introduce the next topic, I would like to introduce Ian Godden. Ian is head of our aerospace and other areas within our London office, and he is also the author of the book you received in your rooms, and if you would like to have a book signing a little later on, we would be glad to orchestrate that.

The next topic, like the first one, is what one of the fundamental changes in the way companies operate in the world today, and that is alliances.

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Not many years ago, alliances were rare - certainly in the United States. In Europe and in Asia they started earlier than in the United States. But as a legitimate form of business interaction alliances were very rare in the 70s.

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We have found that over time, and certainly now in the 90s, alliances as a way of dealing with among companies is roaring and exceeding anybody's expectations of even just a few years ago.

What we have done over the last year or so, year and a half, is put a considerable effort on studying what is happening in alliances, not just the facts, but in addition to the facts, the facts being how fast they are growing, who is doing it and why, getting behind it to find out what the real relationships are - what works, what does not and where it is going from here.

Peter Pekar, was a Professor at UCLA came together with us and we have had a kind of an alliance with Peter and he is spending more of his time now on Booz Allen than he is on his university role, and his reason for doing so was to really bore in on alliances, not just as an academic exercise, but to fully understand what is going on, why companies are doing it, and what we have both to learn as well as to contribute in the field of alliances.

So Peter has been heading up that effort for us together with one of our partners in the United States, John Harbison. They have conducted now two seminars with the Conference Board. I believe they have been the best attended seminars each year over the last two years, and very well received by the participants.

Peter is going to take us through, particularly focusing on global alliances about some of the data and some of the rationale and then I had indicated to a few of you that we would like to have you make comments about what is going on in your own companies, and have the round table discussion. So, Peter?

DR KISSINGER: Professor of what?

PROF PEKAR: Business Management.

DR KISSINGER: I was just hoping there would be a place for a diplomatic historian somewhere in this world.

MR FREIDHEIM: The previous speaker, Chris Dallas-Feeney, wants in his next life, which is when moves out of what he is doing, to become a political and military historian.

PROF PEKAR: I have 23 slides, and I am going to try to make this as interesting as I can for you. I want to give some introductory comments. One is that you have a booklet on your desk that has slides in it. You will notice there are 33 slides. Cyrus saw that and said you have got to cut it down to 25 because---

MR FREIDHEIM: I said 20.

PROF PEKAR: 20, right. Well, I tried, I got it to 23, so we are close. You also have a clause package which we use with clients, and you have a blue book that we wrote in

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16% of the revenue now comes from strategic alliances. We
see that right from our data.

That is fairly impressive until you look at that
compared to Europe. When you look at the United States the
average sale of strategic alliances in the US is about $75
million. The average sales of the European strategic
alliances is 250 million. The average investment in the
US is just a little bit under 50, whereas the average
investment in Europe is pushing 150 million.

MR SHAPIRO: Is it possible that the styles, using alliances are different enough so that in the US they would be more likely to be start up kinds of things rather than relationships with already mature businesses which might distort the size.

PROF PEKAR: Yes, I am going to ask that question a lot. I will give you an example. Hewlett Packard, for instance, they are a good example. They have 300 alliances. Out of the 300, 30 of those alliances, 10%, have about an $80 million investment in 30 alliances, per alliance, which is about $2½ billion. The other 270 have about $7 million per alliance. Now, when you total that up into the whole number Hewlett Packard has invested in alliances over $3 billion, close to $4 billion. Nynex has over $3 billion invested in alliances.

The numbers are beginning to grow. We are seeing
numbers now of companies who are using this technique,
taking bigger risks - NBC and Microsoft have come
together to do their 24 interactive cable station. That
is a $420 million investment by Microsoft, and about a
$250 million investment by NBC. Kodak has just done the
EPS, the advanced photo system, the new camera that comes
out. That is $1 billion investment with four Japanese
camera companies.

DR KISSINGER: What is your definition of an alliance? My definition from the world with which I am familiar is that two more or less sovereign units concert their objectives for a reasonable period of time, and both have the capacity of independent action if necessary. Now, if that is a correct definition of an alliance, how can one have six hundred alliances and keep the strategy clear in one's mind?

PROF PEKAR: That is a real problem that we are facing and I am going to come to that in a minute. Your first point of what an alliance is is correct. Two companies come together with a common strategy. But for a strategic alliance they basically cannot do it alone, and that is why they come together.

DR KISSINGER: They have the capacity for independent action but not for the objective they are trying to reach.

PROF PEKAR: Right, now the question is how you manage this?

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not have to invest in mine, and we can add value to the market place if we get a bigger bank for the buyer. That is what we are beginning to see.

That is true in every industry that we looked at and you have that in your chart. People are beginning to see because of that that the success rate is high; that the returns are high. Our survey work shows this. In 1990 Booz Allen did a study with the Wall Street Journal and with one of the Newspapers in Japan [Nihon Keizai Shimbun]. This was reported in the Wall Street Journal on alliances, and what we found was that only 17% of US executives saw alliances as successful in 1990.

Actually, I can tell you, I looked at that data, one-third thought they were downright dangerous. In five years, we have seen an enormous change, an enormous change of perception of alliances. US executives now mirror Asian and European Executives on the value and success of alliances. So there is a change going on in the boardroom, and I can tell you we do a lot of speaking at different companies, and we see this all the time.

A lot of people feel that alliances are just in certain industries. That is another myth. If you look at the 15,500 alliances from 1994 to September, 1995, they are in every industry. As I mentioned before to you, if you look at the electrical utilities industry which is an industry that is locally based, and regionally based generally who would have thought that since 1992 we are seeing a growth rate of alliances of 57%. I am working with one of Booz Allen's clients in the electrical utility industry, and it does not surprise them at all that that has happened.

But it is in every industry across the board worldwide, from financial services, the pharmaceutical to energy, the computer software. One of the drivers for that, and I thought I would throw this up because I was at a pharmaceutical company and we were talking about what is driving them in alliances and they have a huge number of alliances, is the cost of drug development. I put this up to 359 million, I was politely told it is now 500 million.

DR KISSINGER: In these pharmaceutical companies do they manage each alliance separately?

PROF PEKAR: They manage each alliance separately, and I will show you the difficulty that they are having doing that.

G MR SHAPIRO: You should know that 12 years is no longer true. Best practice in the industry is now seven years, because an awful lot of time has gone into trying to figure out how---

MR DORMANN: It is linked to the topic we had earlier.

DR KISSINGER: How long does it take to negotiate an alliance?

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find they get excited and they go down that road, and
later on they find out it did not fit the strategy, they
have the wrong partner, and the opportunity never happens.

Alliances work best when it fits the corporate
strategy. What we did is we took these eight boxes, and we
broke up sixty elements in those eight boxes, and we asked
executives to rate their strengths from very weak to
strong, and then we compared the best companies after they
raided that with the weak companies. Now, what is the best
company? It is done over nine alliances and it has got
over 25% return on investment. The weak companies have
only done one or two and they have got under 10% -
generally zero or negative. We looked to find out what
were the best practices for those companies, and I put
something in your document for that.

So what we have is we actually have 100 best
practices because once we got to 60 we went back to the
companies and they told us that we did not have all the
best practices, and we expanded that to 100. Now, it is
not 100 for every industry, it is 100 in total. So we are
able to go into a company, a random industry and we are
able to say "These are the best practices that work in
this industry, and this is the skill level you must have".
Why? To jump that learning curve.

I brought this along because I was here in the UK
and I looked at the people that were here and I think you
may find this interesting. We have done Europe, Asia and
Latin America in our survey work. We have asked Europeans,
Asians and Latin Americans, and actually I should not even
put in the Latin Americans here, because they are not very
strong. This is basically Europe and Asia. We asked
executives here in Europe and in Asia to rate their
strengths in eight boxes, and here is what they told us:
Europeans and Asians are much stronger than the Americans.
Those were the eight boxes there.

However, if you go into the database very thoroughly
and you look at the best practice, you will find out that
the US is here. So in general, the US executives like to
over-rate themselves.

DR KISSINGER: That is the self-assessment.

PROF PEKAR: Right, self-assessments.

DR KISSINGER: Do you have the difference between European companies?

PROF PEKAR: I will show you that.

DR KISSINGER: I mean within Europe?

PROF PEKAR: We can do that. We can actually do it between industry, between companies.

DR KISSINGER: And between nations?

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PROF PEKAR: And between nations. I do not have it with me.

MR WALDENSTRÖM: You can imagine the answer between Nations and Europe.

LORD YOUNG: Is the reason for the apparent better skill of European and Asians simply that mergers were not possible in those countries?

PROF PEKAR: Yes, and learning counts, the more you do the better you get at it.

DR KISSINGER: I would think the English are pretty good.

LORD YOUNG: You could not have a takeover in Germany or Japan.

PROF PEKAR: This is a very interesting chart. We know the Europeans and the Asians have more experience in this than the Americans, so we asked a little different question. We asked the Europeans and the Asians to rate their American partners, which is a little different question. Why? Because most of the American partners are the better American companies in alliances, and here is how they rated us: if you look at this very carefully it is very interesting.

They rated Americans better in leverage assessment, stake holder assessment and bargaining skills. That makes sense. We are a litigious society and we have quarter earnings reports and Wall Street, so we are going to focus on this real hard. Where they saw us falling down is getting it out of the door. Most American companies are still transactionally driven. Once the deal is done they go to the next deal. The Europeans and Asians know that is when the work starts, in making it happen.

When we work with American companies we say to them "When you are negotiating with European and Asian Companies they are going to see you this way, and vice versa. I cannot tell you how many negotiations I have been in working with clients and this comes out eventually, where the Europeans and Asians will say "We can make it happen".

Since you are CEOs and I am sorry to put this one in - it was late last night and I realised that I ought to put this one in for you because in fact I was asked a question and I anticipated it late last night. Because our database is so based on people like yourselves, we asked other questions where you had to write in. Here is what we heard: when we asked for concerns about alliances by CEOs, Presidents, and COs, and this is just the CEOs, if you look at it very carefully, you find that in US, US companies are still trying to figure out how to do an alliance - how do you make one happen. But when you are overseas, because of your experience with alliances, the question is how do you manage multiple alliances? How much strategic mapping do you do with your partners? How do you

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meet threats from alliances that are going to compete
against you, and how much strategic intent do you share?

These are much different issues than how to make one
work.

DR KISSINGER: How can you have a strategic alliance without sharing strategic intent?

PROF PEKAR: It is the level of sharing - how much do you want to share?

MR PASTERNACK: Peter, it is interesting that when we do our war games, our competitive simulations that we do with our clients these days, the issue of competing alliances comes up time and again, that companies when they are planning the war games they start thinking about who can combine and really beat us, no matter what we have. It is a real threat that companies who are smart about this are really thinking about it a lot.

PROF PEKAR: Well Fuji/Zerox is really interesting. Fuji and Zerox came together in the 60s under a distribution agreement and Zerox saw it that way - Fuji did not see it that way. Over a period of time Fuji, working with Zerox convinced Zerox that this ought to be a business. Today it is 10 billion in sales, 15,000 employees and it is called Fuji/Zerox. But the Chairman of Fuji/Zerox sits on the Zerox Board, and Fuji/Zerox competes against Zerox, and then Fuji/Zerox is in another alliance with Zerox in a third alliance. So it gets very confusing after a while about what is really happening here.

MR DORMANN: Where would you see a company like ABP and Nestlé being at home?

PROF PEKAR: Well, the consumer products companies like Nestlé, I will come to them in a few moments, all right?

MR DORMANN: Okay, that is no problem.

PROF PEKAR: How do you manage this incredible thing that is happening in companies, when 15% revenues of US companies coming from alliances. Here is what we see when we are working on it, and I just put it out for you to look at. Most companies it is ad hoc. What happens is that someone knocks on the door of the company, the company does an alliance. They reinvent the process every time. There is no knowledge capture, no best practices. Companies get very frustrated here after a while. Then they move up a level, they get the "Lone Ranger" we call it, or the "Gun Slinger". They hire a guru that comes in to manage the alliance process, maybe two or three gurus, and they run around every time there is an alliance happening. But they lose control of that very quickly. Again, there is no knowledge share. There is limited resources, and if the guru gets hit by a bus it is all gone.

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You see it with Kodak and four Japanese camera companies, people pulling together their capability to attack the market place. This is from the data. If you believe what I just said that globalisation and capabilities are the game that we are playing today, you see some very interesting thing when you look at best practices.

Let me just go through these four boxes for you - this is a summary of our work. If you are up in this box, call it footprint, which means geographical expansion, and industries here are like energy, automotives, industries where they are fairly stable - nothing is totally stable, but they are fairly stable. The game here is to get out to the market place, consumer products Nestlé would be an example, as Pepsi Co. would be an example here. To get to the global market place - what does that mean? I am probably going to align myself with a competitor - maybe not a competitor in my market, but a competitor somewhere else that could be a competitor in my market - Ford and Mazda, General Motors and Toyota.

What are the issues of best practices to make alliances work? One is I probably understand that competitor in many respects. I understand the dynamics of the industry. What I do not understand is because I am going into a new area, is the cross cultural differences, can I work with that competitor? Much time has to be on the risk assessment and the cross cultural - can I work? A good example of that is KLM and Northwest. That is a successful financial alliance, but it is not a successful cross-cultural alliance. They are having real difficulty.

DR KISSINGER: I know it, that is one I know well. It is a disaster from that point of view.

PROF PEKAR: If you are down here you are not worried about geographical expansion, you are worried about capability. The industry is in flux, financial services is an industry like that, healthcare, it is in flux. No one knows what the critical mass is going to be. So you are after capability here and we see Microsoft.

What are the issues? First, should you acquire it? Should you develop it, or should you ally? If it is such an important capability you may try to buy it, you just need it within your company. But if you cannot buy it maybe you ought to ally. What is the issue? Chances are you are going to have to align yourself with someone outside your industry to get that capability. So partner assessment becomes critical. It is not cultural now because you are not outside your geographical territory, you are trying to get critical mass within the territory you are playing in.

MR SHAPIRO: But it is cultural to some extent. When you cut across industries, especially when they are historical industries whose technology is being undercut by a different kind of interest, then the cultural differences are just as large as if you were going cross border.

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PROF PEKAR: Entertainment is in here, financial services is in here, healthcare is in here.

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DR KISSINGER: Is in here - what?

PROF PEKAR: They would be the industries that would be in this box.

DR KISSINGER: That what?

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PROF PEKAR: If you were looking for capability and you are not looking to expand geographically outside your Country because the industry you are in is in such a state of flux, it is changing so rapidly, people do not know what the critical mass is going to win - the chances are you are going to have to go outside your industry for that capability, because it does not exist within your industry. Entertainment, financial services, healthcare, those are the kind of industries that feel good.

What is the real issue? The issue is that when I go to a partner I have to understand their capability thoroughly because I do not know that industry, and if I do not understand that capability thoroughly I will have serious problems with the alliance. Or, as up here it is cross-cultural because I am going outside my national boundaries.

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DR KISSINGER: Also in the entertainment field, they tend to be run by such egomaniacs that they find it very hard ---

MR OKAWARA: Why do you call it "footprint"?

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PROF PEKAR: That is the geographical, that means I am putting a footprint outside my Country. I am selling outside my Country.

LORD YOUNG: Some alliances are defensive.

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PROF PEKAR: We will get to that. If you are in this box, you are going globally and capability at the exact same time. These are the most difficult. The computer industry is doing that, the telecom industry is doing that, AT&T is in here. These are difficult. You must have real flexibility as a management team to play in this box.

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If you are looking for transactional alliances, this is steel and paper, you are looking for leverage and economics - these are more transactionally driven. These are less strategic here. What you are seeing here has come from our best practices. This is not us thinking about it. This is us going in and looking at the alliances. It is seeing what are the best practices in each of these boxes, and laying it out to try to get an understanding of what companies face depending where they are in this box.

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couple of you a note to go through some of the experiences
you have all had. Jürgen, why do you not go first?

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DORMANN: Well, what causes those growing trends into partnerships? Is it becoming global? The changes taking place are so challenging that you cannot cope with all aspects so you have to make sure you set your priorities right, looking at your portfolio and analysing your capabilities. Do you feel you are in a position to get a footprint globally? If you are not in a position you have to make up your mind, there are different possibilities - looking for alliances, technical ones, regional ones, acquisitions you have mentioned. Probably one of the best options you can choose is to look at the value of your business. How will the value of your business develop over time if you do not do anything? Analyse your competitors - what is the value of your business to anyone else?

This globalisation, technology changes, probably having less but more capable and stronger competitors, not having sufficient resources to be a key player in all the areas you are in forces you to set your priorities. So it is very strategic and long term, based on a tough analysis of your own technological and other innovational capabilities to sort out that business. At least, in our industry, chemicals, pharmaceutical, it is one of the driving forces.

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FRIEDHEIM: How active has Hoerscht been in the alliance arena?

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DORMANN: We have increased the speed dramatically in the last five to ten years, and we are most active in those areas where we are not sufficiently prepared for the technological skills, from the resources, or because we decided let us look at ten divisions, for example, theoretically. Those three, having the highest priorities, here we go on our own. But for the others to keep or to increase in value we have to look for partners, either regional, technology and others.

How do we do it? The question arose earlier if you run a sizeable company, your management levels recruited by different nations, I do not know whether this US/European/Asian fragmentation really describes the picture of the pick up members, because our teams are formed in such a way that we offer for such a negotiation an international team, not a European team. That is helping to capture early enough the cultural and other differences.

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PEKAR: The really good companies in this see this alliance skill as a core capability, and some of the best companies will not allow you to benchmark against them.

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KISSINGER: Like who?

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PEKAR: Hewlett Packard will not let you in. We know them very well because we have helped them, but they will not

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allow you to benchmark their alliance best practices. I do not know if this is your experience, but what we are seeing is that companies who do this well, really do not want to align themselves with companies who do not because they have to teach them how to do it.

DR KISSINGER: What do you mean by "benchmark"? What does that mean?

PROF PEKAR: To go in and look at their best practices at Hewlett Packard, and benchmark it like against our study.

LORD YOUNG: Compare it.

PROF PEKAR: Compare it.

MR DORMANN: I would assist you - I could, even if I have not written down, immediately fill one piece of paper with potential partners, all having the same size, the same general capabilities, and another piece of paper having capabilities, but not having the capabilities to become partners. There is a good understanding within industry with whom you can form alliances.

MR FREIDHEIM: What are the distinguishing features between those that you feel can do well as partners, and those that cannot?

MR DORMANN: Strategy, profound analysis, multi-cultural experience, and the most important issue is people - people you can trust, the human element.

MR FREIDHEIM: So they may have the capabilities or the technology---

MR DORMANN: That is not enough.

MR FREIDHEIM: ---but if they do not have the people that you can feel comfortable with and work with---

MR DORMANN: It is extremely important. Or to put it in other words, those being strong today are not getting used, the partnerships might lose their strong positions because they do not use their existing resources to their full potential. But that is only one experience that I can contribute.

MR FREIDHEIM: Bob?

MR SHAPIRO: Let me start with the point Jürgen was making. Fundamentally alliances, or anything that is on that original chart of yours from transactional to strategic, and so on, are all sub-sets of a broader class of cult relationships. The rules that apply are the same general rules that apply to relationships. The ones that work tend to be the ones where you understand why you have chosen each other. You understand what it is you expect of each other and you define success in some way that is at least compatible, if not identical.

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going to play itself out. But that capability for us is
going to be critically important.

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DR KISSINGER: Do you think your practises are peculiar to your industry? or the general conclusion if you had to write a...

MR SHAPIRO: I would say issues like trust, issues like understanding your partner awfully well are so banal that they are probably common.

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DR KISSINGER: They tend to break up when they do because interests tend to diverge. Is that the case? Can that happen here too, or do interests remain constant?

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MR SHAPIRO: It certainly has happened in the past. When we enter into joint ventures historically, I do not know if we were conscious at the time, we suddenly became conscious, is that most of the joint ventures that we have entered into are transitional arrangements of one kind or another.

DR KISSINGER: Is that so understood by the other party?

MR SHAPIRO: Sometimes yes, sometimes no.

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DR KISSINGER: So understood by you?

MR SHAPIRO: What I think I am saying is that at the time we entered into many of these there was not a lot of thought given to the long term future and not enough imagination applied to how circumstances might change. They tended to be of the nature well, we have this product and this technology, we would like to get it into this market place, let us work together to do it, without really thinking about how the world was likely to change and what impact that would be on the respective interests of the parties. But we have had an awful lot of joint ventures that have been terminated, frequently by us backing out because our interest no longer fit. Japan has been a particular source of that for us. In pharmaceutical in particular we started relationships a long time ago that we then spent years trying to extricate ourselves from because the realities had changed at great cost and enormous effort.

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So, I think the diplomatic parallel applies. Whether it is going to apply to these marriages of capabilities is probable, but I do not exactly how that is going to play out.

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MR WALDENSTRÖM: My experience always is that trust is a very important ingredient, particularly in unstable structures. You are dependent on a goodwill structure to resolve all those things that can go wrong as you go along. In a 50:50 situation it is very acute and if you do not have a good trust base and understanding between the two management teams you quickly get into problems. My question is how do you institutionalise the trust because very often the

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initiators have a good understanding. For example, if you and Jürgen here decide on a joint venture you trust each other and you do it, but then you go on to other things, or you retire and these things can live for 20 years. How do you organise within your company that this trust gets institutionalised between two large companies?

MR SHAPIRO: You know I have seen it happen both ways. What sometimes happens is that parent companies themselves may or may not have a good relationship, but within the venture itself there is even more trust among the people who originally started Company A and Company B than there is with their parent companies themselves.

DR KISSINGER: It depends also on what you are asking of trust. I would think that if you and Jürgen formed an alliance, being both strong personalities, you cannot solve your problems by trust. Of course you would have to trust yourselves but you would have to define common objective.

MR SHAPIRO: I do not mean "trust" in a weak or sentimental way that is a warm feeling about somebody. Trust, I think, is based on realism.

DR KISSINGER: Once you have common objectives, I think then on a lower level it is important.

MR DORMANN: We have to develop, we have to create the climate in the company which regards an alliance - and I am exaggerating a little here - as a normal thing. Traditionally, if you have a narrow either (?) or geographical mind, you are extremely successful over years in running a business by this corresponding culture you are in danger of not becoming acceptable on a global basis. So what do we have to do?

The easy thing is to talk about what we try to do. German roots, more than 100 years, very traditional approach, more or less successful. We try to realise the changes and anticipate them and the teams are formed in a much broader sense. So if you look who is running the divisions and the businesses those are not Germans, one-third of them are German - there are Americans, Brazilians and Asians. So we create a culture which tends to be tolerant against other cultures, we do not give up good elements of traditional German culture, but we are much more flexible in learning to adapt to other cultures. You have to have this openness because if you have a rigid culture and the two top guys - I will shorten it by saying "have to trust their reliability on each other, it would not work, because the team having to make it happen is not used to it. So we have to come out of the rigid boxes that people are used to to develop such a climate so that those things can be arranged.

DR KISSINGER: But do you not think you need some definition of what you are trying to do? Because I know the case in which I was involved, advising and the two principals said, who announced

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that "We do not sue each other. We trust each other we are going to solve everything"

DR KISSINGER: ---and that is a disaster.

MR DORMANN: The point I wanted to make all the ideas that you have in raising this question, certainly there has to be a clear sense of what do we want to reach? How are we going to do it? Why are we doing it? What are you bringing to the party? What are we bringing to the party? If all this is there, then you will fail if you have on one side, you will certainly fail if you have it both sides, very rigid, narrow minded people knowing everything better than the others.

So all this theoretical, logical, set up has to be there. That is not enough. In addition, those cultural and human issues have to come in.

LORD YOUNG: I spent five years managing an alliance, nothing else, but it was unusual because it was 70 alliances, but it was horizontal, it was one industry only, which is telecommunications and it was standard PTT. The reason was very simple, that every nation, even the Caribbean Islands liked to control their own telephone system. So in the main it was minority interests - some were majority, but the main was minority. That is quite a difficult act to put together and to keep going. The answer to how we did it, is that we did it with great difficulty, and it was an enormous waste of time because you have to keep on bonding people, by getting them together three or four times a year, all round the world, talking for two or three days together about absolute nonsense, so they would have coffee together and then be on first name terms the whole time. It is this real thing.

The biggest problem we had was culture. This is one thing that has not come through as clearly as that. What is bog-standard American business practice is obscene in Europe and unknown in Japan, and that is hiring and firing. Practices which are absolutely standard in the States would cause a riot if they were done in Europe would never be tolerated.

When you start moving people round you have got to be tremendously careful with the people, that the do not go in and apply their own practices to different environments. Added to that you, particularly in Countries in the Far East you get very different practices and you get different attitudes. So, it is something in which personnel management, human resources, whatever you call it, is incredibly important.

Now, this is a very unusual case because there was not that much transfer of technology because it was almost the same technology everywhere, so it was not a joint venture that was out to make newfound technology or a new

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THE IMPACT ON BUSINESS OF CHANGES IN WORLD LEADERSHIP

A DR KISSINGER: I will make very few remarks, and then ask David Young and Yoshio to make some comments and stimulate others as well.

The question, what does one mean by "changes of world leadership"? We can have at least three meanings. One is the changes within each country and obviously major changes are going to be taking place in a number of countries. Maybe in Britain, sooner or later in China, and they are surely going to be analysed on a country by country basis where and the major significance of if there is a change in Party and above all else is a change in generation. I think the topic that we discussed this morning is extraordinarily relevant to this discussion.

I cannot assess what it means for business, but it seems to be the essence, at least in the United States, and maybe in other Western countries that I know, the essence of the generation that has grown up on the information technology we saw this morning idea major changes in the type of political leader. I do not attach a value to this but it is a fact.

In the United States when I started advising political leaders they asked me what to think. Now, when political leaders ask my opinion they ask me what to say. They do not really care very much about the long term consequences they have no time to think about.

I started out as an adviser to Nelson Rockefeller. He is an antediluvian by present standards. He spent three nights each week studying the subject matter and trying to educate himself on issues. No politician worth his salt would waste his time on such a futile enterprise today in the United States. They would go to focus groups, they would take public opinion polls, and they would then try to develop a position. But they would not really internalise it, so they are quite unpredictable.

The trouble with Clinton's campaign in America right now is that he really belongs to the Rockefeller generation, but he is forced to conduct a Clinton-type of campaign, with which he is extremely uncomfortable. But he does not have the courage or the strength to take conviction or whatever, on the management skills to take over and say "I will do this my way". So he just does not look genuine to the public, even though in my view he is more genuine than the other party because he at least has some relationship to the substance.

I think in Germany some of your younger people would be in my mind, and the Clinton-type of approach to politics. I do not know how I would assess

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what this does to their attitude to the business, because it makes them all extremely tactical, but also extremely volatile.

In my view in America Clinton and his people are very far left by conviction (if they have any convictions) but very centrist in what they actually do. But If given half a chance they would like to go Left but they just do not dare to do it in the present climate. So if we had big would be unemployment, and an economic crisis, I think they are capable of being quite radical. I think in Western societies, if the present style of politics continues, there will be the emergence of demagogic Left and demagogic Right. Existing Parties - not quickly but, say, over a five or ten year period, because there is the strange phenomenon that on the one hand politicians have never been more eager to please the public. They are abject in but, trying to please the public and never have they been more despised by the public. They do not gain popularity as a result of their frenzied efforts. I do not think, for example, that Clinton in the United States is very popular. You have the anomalous position that 56% of the people do not think they can believe what he says, but 53% say they are going to vote for him, and this is due to the fact that they cannot imagine Doyle as President. So he is the only one to vote for.

This creates (in those countries that I know) an extremely volatile situation. It is not true in Germany yet because Kohl, whatever one thinks of him, and I think very highly of him, he is a very dominating figure. His think the successors are more on the American side in either Party in Germany.

Japan, you will have to talk about. I do not think Japan can be assessed by European and American criteria. I personally believe that, after two or three elections, there will be a one Party system again in Japan.

MR OKAWARA: Two Parties after two more elections.

DR KISSINGER: No, I think there will be one dominant Party with a second Party. I just do not believe that our pluralistic democracy has been up to now the Japanese line. China is quite different. I do not think that Ding's death will affect the day's day operation of the Government at all. But it may free energies for leadership contests that cannot happen while he is there, and there may be some changes in leadership which I do not believe should not will make a huge difference in the operation of the Chinese government as we have seen it, but it will be more modern. I think they will be driven more by the abnormal changes that are taking place economically which will require a greater degree of constitutionalism, and a greater degree of predictability. The problem will be the next change of leadership. What is the mechanism by which they will continue changing leaders? When people ask me, I have to tell them this: I know the Chinese leaders. I see them more frequently than I do the American

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leaders. I know them, I know their families. I have meals with them every time I am there. I have been there 29 times, and yet if you asked me, which people are going to go into what room to make what decisions to determine the successors, by what procedure it is determined who has won and who has lost, I know no more than the British did. Ambassadors in Beijing in 1860, when an Emperor was poisoned and they had a gang of eight instead of a gang of four, and the gang of eight suddenly was replaced. So I have no clue.

Last year I was there at the height of a crisis with the United States over Taiwan, and I saw Li Pang and a number of others. They were not talking to our Government at the time. I wound up as the sort of intermediary, and with Li Pang. I could not get very far. They were, I think, listening politely. But then I had a business working at Sidig, and suddenly the door opened and Deng's daughter came in with an interpreter and made a statement about what she thought about that particular Taiwan revolution, and about some of the proposals I had put forward. Then suddenly it happened. They had not rejected that. So he Deng could do that much.

One thing the Chinese do better than any Government I know is strategic analysis of the world situation. Mao was outstanding, Chow was outstanding, Deng was outstanding. I mean one could have world class discussions of where in the world going? What is China trying to do? What do they want from the United States?

This April, right after the crisis, after the aircraft carriers were in the Taiwan Straits, I had the following experience. I was in China and I was invited to visit the Defence Academy on very short notice. When I arrived they had 17 Generals waiting for me to give me a briefing on the world situation as they saw it, which I must tell you was really interesting, outstandingly brilliant. We have not got one who could do what they did.

I have just been there on what they call the 21st Century Forum, where they had a number of World Leaders for discussion. It was a rather worrisome experience to me, both of these events, because the basic analysis they made was extremely hostile to Japan, extremely disdainful of the United States. So we do not benefit from their dislike of Japan, and it was based on the proposition that they were achieving a position of self-defence for which they did not need anybody. Although they were much too polite to say it, all my great theories about the balance

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of power in Asia and the United States is an essential component of it I have to say frankly in terms of their analysis was not true.

Then, what the Generals had said to me in a very excellent forum, really reappeared at that 21st Century World Forum. Takisheido was there for Japan, and made a totally incomprehensible speech that did not make any difference what he or anyone else said because the Chinese line was perfectly plain: namely, that Japan is a great menace to the security of Asia; that the Americans should leave and go home - militarily that would be very welcome to contribute to the economy and the Europeans had a contribution to make technological assistance, but that was the theme. There were only two Americans there, all the rest were Asian leaders. The theme to the Asians was that the Americans should leave really, and the Japanese should be contained. That was the basic theme.

FREIDHEIM: This is from more than just the Chinese, there are other Asians that felt the same way?

KISSINGER: Not actually the other Asians. Le Kwan Yew was there and he wants the Americans to stay, and the Indonesian President also wanted the Americans to stay. It was a sort of three concerned thing in the sense that the chap I do not want to be offensive but the South East Asians are not wild about the Japanese. Nobody wants the Japanese to extend their defence billet there, but nobody except the Chinese urged the United States to leave.

OKAWARA: Only China?

KISSINGER: Only China.

OKAWARA: Wanted the US to leave?

KISSINGER: Yes, only China wanted the United States to leave. I had frankly not paid any attention to it myself. When we extended the security treaty with Japan I was in favour of it but I paid no particular attention to it, but then it happened right after the dust up in the Taiwan Straits and we apparently changed the terms somewhat in the sense by saying that Japan now had a role to play in a much larger area, and that this threat against which we are co-operating is interpreted by the Chinese as being aimed at them. So that was one of the triggering mechanisms.

We are now in this position as I understand it, vis-à-vis China, the relations on a day to day basis are far better with the United States than they have been for a while because the Administration has (at least for the time being) caved all of its harassing proposals. But the long term relationship is problematic because I think we may be heading into a substantially nationalistic phase in China.

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to second rate status over a period of centuries, suspect the same thing is going to happen now.

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As

These are the changes that will occur in my judgment. I personally believe that being a member of the Western world, I would like to see America and Europe, as it were the Western Hemisphere, tie itself together more to brave some of these possible storms. But these are policy prescriptions that is not a prediction of what is going to happen.

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So I will define a change in leadership in two ways:

Leadership within each Country and leadership within the world, and as an American, the thing that borrowed me most is in the Cold War, the danger we faced was defeat in the present world, the danger we face is irrelevance. We have the technology but many of our perceptions are really not relevant to what people are trying to do.

C

Again, going back to China, if we want a deal with China on nuclear weapons, it is absolutely ridiculous to send Assistant Professors to lecture them about non-proliferation of nuclear weapons. If we want to deal with them on nuclear weapons, we have to talk to them about the danger they face, having nuclear powers at their borders, and, face the fact that if they help Pakistan they help Pakistan because they do not want to face the Indian nuclear power alone, and that, except for Pakistan, they really do not want nuclear weapons around their borders. Britishers of the 19th century would have no trouble coming to a quick deal on non-proliferation with the Chinese.

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get to

reaching

LORD YOUNG: Helped by a gun boat.

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DR KISSINGER: Yes, but if we can show those are deals that can be made, but if one looks as India develops, entirely new political situations arise. I know the Indonesians fairly well, and I have a little game I play with Suharto, which is every time I see him, I ask him to rank the dangers to him. It has always been "Japan, China and Russia" and somewhere else. Now, it is "Japan, China and India". Russia has been dropped from the list.

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We have just sent an Assistant Secretary of State to Indonesia to visit prisons in which Human Rights activists are held, and he shook hands with the prisoners there and we are going to be surprised if Indonesia does/strange things.

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So the problem of the American role is not to be a huge economic power and huge military power, but I do not know whether we have the message to which others can relate in the forthcoming period. I do not know whether this is what you had in mind, but these are some of my concerns.

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MR OKAWARA: Why do you say you are somewhat sceptical about the free trade in Asia?

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HAK OUTLY

the instinct

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DR KISSINGER: I believe that the instinct of these Asian Governments that I know, namely, India, Indonesia, Japan and China, is for a somewhat managed use of their economy and to try to manipulate it to the National benefit. It is not a crime - mercantilism was a respected economic theory for several centuries, and free trade is every sort of American idea.

LORD YOUNG: Adam Smith, please.

DR KISSINGER: It may not even be necessarily true, but when free trade was developed, Britain had a monopoly. Of course, free trade is desirable for monopolies. Every country that developed its industry, Germany, France, Japan, developed it under some kind of protection. Everybody beats up on Japan, and Japan, if only because of its culture, is a somewhat protected market. But the Chinese, the Indians, the Indonesians, anybody who knows these Countries, I cannot imagine any of them saying "unrestricted free trade, no matter what it does to our industry". Because after all, with the essence of free trade you can argue that it is to the benefit of everybody, but somebody wins and somebody loses. If the losers have a political system they can throw into the fight they will try to do it.

PROF PEKAR: That is why Adam Smith would not agree with you, Henry. He would have said everybody wins on free trade.

DR KISSINGER: Everybody wins on a statistical basis. It is not possible that everybody wins. If New England had a political unit, it would protect itself to some extent even before it was somewhat industrialised. Lord Riskin is neighbour of mine in Connecticut and he would go up in smoke. The Chicago school absolutely would disagree with this and I am not saying they are wrong. If it could work for 100 years, they may turn out to be absolutely right. I am saying, from what I know of the political system I think it cannot conceive that the Chinese, for example, will say "No matter what dislust to Kwan Chow we are going to have free trade and we are going to let our Country be flooded by Japanese goods". It just will not work that way. I could be wrong.

MR OKAWARA: If we follow your argument there is no qualification on China to become a member of WTO?

DR KISSINGER: I would actually be in favour of letting China into the WTO for political reasons. For one thing the United States has broken a promise to China by not letting them into the WTO. One of these IPR arguments we are making is that we promised them that if they settled it we would not oppose their entry to WTO.

I think it would be of some marginal advantage to have them in the WTO because we could try to apply WTO Rules.

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MR OKAWARA: Exactly, that is the Japanese argument that the United States are saying that there is no bargain price for membership. That is the argument by United States.

DR KISSINGER: Because we do domestic politics. I think strategically, no matter what I think about it, happens to free trade. I would try to pursue it as far as it goes, and it is therefore in my opinion desirable to have them in WTO. This is one of those both way arguments in which they are afraid of constitutionality in the United States, and you know the Taiwanese are very active.

B

Why do you not make a few observations, Yoshio?

MR OKAWARA: One thing when you mentioned about the Chinese attitude towards Japan, we are very much aware of the problem, but recently our situation has become much more ticklish. The Chinese are now blaming the Japanese on two accounts. One is (inaudible) by Prime Minister Hashimoto at the end of July, they claimed that this is an indication that the Japanese Prime Minister is not seriously concerned about the past, or the Japanese history with the neighbouring Countries.

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The second issue is a territorial question of Shikoku Islands. These are a group of, some would say a light Conservative element, put up a lighthouse on Shikoku Island. Chinese, Taiwanese both claim that Shikoku belongs to China therefore this action by the Japanese group of Conservatives should be strongly discouraged and reprimanded by the Japanese Government. So far the Japanese Government has not taken any strong stance on that matter. Therefore, this is a most unfriendly, some would say "hostile" attitude by Japan against China.

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DR KISSINGER: They also blame you increasingly for Taiwan - at least to us and to the other Asians.

MR OKAWARA: In the case of the Taiwan Strait tension, only Japan took a very clear stance in supporting US action. Other Asian nations were somewhat nervous in taking a specific stance. That might be one of the reasons why the Chinese are blaming Japan, but we have been explaining to the Chinese that we find the basic position to China remain unchanged in 1973, therefore on this question we should make an effort to continue dialogue so that both sides share the same interests, not cause a problem, in Asia. There is a patient effort on both sides, but the indication is that even though there is no demonstration and other isolated activity by China in Hong Kong the Chinese authorities seem to be trying to calm down the situation in the hope that the relationship with Japan would not deteriorate further.

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Were you aware of the observation that the connection with the Chinese Military Red Army, there is some story told by an American Expert that Chinese Red Army seemed to be a really strong group, and even Chinese leadership cannot contain their mood. Is that the reason why the

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Taiwan Strait situation was made worse as a result of military group pressure? I wonder whether you can clarify that matter?

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KISSINGER: I think the Chinese are going to use nationalism to keep the country unified rather than Communism, and the Army is one of the best organised units, and the one unit that has a command system that goes all over the country and is not so dependent on regional support, and for this reason also I believe that the Army has a very significant influence and perceives itself to be the challenge to the intellectual property rights that is being basically a Hollywood issue taken up done by the United States alone, without any support from the other countries. My recommendation was to make joint ventures with the PLA and let them then control the other half. I think that would have been a more effective way of settling the issue than making half-baked agreements that will not be observed and then have to be renegotiated every two years.
The matter is by

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OKAWARA: Sure. Henry mentioned about the change of generation. Certainly, in Japan a generation change is taking place. Prime Minister Hashimoto is to attend United Nations General Assembly meeting early next week, and it is very possible that on October 20, a General Election will be held. So far Mr Hashimoto seems to be somewhat hesitant, until he sees the situation of Okinawa Base Mission, the result of recent announcement or measure by the Japanese Government. We know that to help the situation in Okinawa the Governor of Okinawa has agreed to accommodate the Japanese Government position on solving the US Base Mission in Japan. Therefore Mr Hashimoto feels that now he can go to the Election, which is why October 20 has been suggested as a very possible date of election.

After the Election, what would happen is not clear at all, even for Japanese political experts because LDP is not so popular even today after, some say, the bad reputation of that Party which has dominated the situation for 35 long years, and they are still plagued by scandalous activity during that long period.

At the same time there is some internal problem between the older generation and the younger generation and therefore there is no clear consensus inside LDP. Another problem for LDP is that when they go to Election next month it is not likely that they can obtain a majority. In order to have a majority LDP has to get 256, but it is very likely that the maximum they could obtain will be just over 200. Therefore they have to go to some kind of coalition that they have been doing today, but who would be the right partner in that coalition is not clear at all, because recently Mr Hatoyama and Mr Kan have announced the formation of a new Party to which some of the Socialist members and some of the (inaudible) members

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might be joined and form the nucleus of the third Party.
But to what extent their effort will succeed is not clear
at all.

Some people say that they would obtain more than 100,
and would become the second Party after LDP and exceeding
the number of the New Progressive Party which is headed by
Ozawa (?).

The problem with the New Progressive Party is that
they are split inside the Party, one is Ozawa's Group and
another opposing group headed by Huda in between Hosoka
and Prime Minister, but Hosoka seems now to be joining
hands with Ozawa in the hope that he can come back to
(inaudible) after next Election. Therefore it is not clear
whether the New Progressive Party can obtain a sufficient
number of seats at next month's election. Inside LDP
there is animosity against Ozawa and his group, therefore
there is no possibility for LDP to form a coalition with
New Communist Party as long as Mr Hashimoto is in power in
the position of Leader of LDP.

But inside LDP there are some of the older generation
who are interested in joining up with Ozawa because they
feel policy-wise they are much closer to the Ozawa Group,
whereas the younger generation are much more liberal
therefore they really hate Ozawa's policy orientation.

At the same time with another result of the Election
the Social Democrats will lose substantially and they are
hugely interested in joining hands with the newly formed
Hotema (?) Group. However, some of the members of the
Hotema Group are hostile to accommodate socialist members
under one group because that will tarnish the image of the
new Party.

This is the situation, that even though after the
Election Mr Hashimoto will continue to be the Leader and
perhaps the Prime Minister of the coalition Government,
which Party will be the coalition partner of LDP is not
clear at all. That is the reason why I told you earlier
that Mr Hashimoto's position is not necessarily solid.

DR KISSINGER: Is it possible to create a Government without the LDP?

MR OKAWARA: I do not think so. Some people suggest that the new Party will be so popular among the majority of the younger generation they might exceed the number of LDP seats, but it is unlikely in my personal view.

DR KISSINGER: I was in Japan last year and a friend organised a meeting with 20 people. They were from another generation I knew best, much more outspoken, much more direct, much less polite - still very polite but not as exquisitely polite as the others, and does that mean there will be a more national orientation among groups like this?

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MR OKAWARA: Earlier I mentioned the change of generation. So far we have the leaders who participated directly in the post-War Japanese reconstruction and high gloss economy in the post-War period. But younger leaders, including Mr Hashimoto and Ozowa and Hutta and others, they have not such experience in participating in the Nation building effort during the past 30 year period. Therefore, those new generation have no personal experience with working with the United States in the Nation building effort. In that sense they feel much freer in their behaviour.

At the same time, even though they feel that Japan should stand on its own, a substantial number of people recognise the importance of alliance with the United States. Therefore, even though we may have a new Government after October, the basic policies stance of the Japanese Government as far as foreign policy is concerned will remain unchanged, however, occasionally you may sense some nationalistic activities by younger leaders.

From the business point of view many business people are very unhappy with the current coalition because this is a very unnatural marriage between Conservative and Socialist, and on many important issues Socialists simply will block the effort of the LDP which is supported by the business community, in order to help internal taxation and other matters.

Therefore, unless the coalition should take a new form not much improvement in Japanese policy matters can be expected. This is the Japanese business attitude. That is the reason why they hope that the new coalition should be based on policy co-ordination rather than simply marriage of convenience in order to stay in power.

DR KISSINGER: David?

LORD YOUNG: I would really like to look at three changes in Leadership, one which probably will not happen, one which almost certainly I believe will happen, and one which just has happened.

First, and as we are in London then I may as well speak from a British standpoint, many people here are increasingly concerned about the personal agenda of Chancellor Kohl and the drive towards federalisation of Europe and a single currency along criteria which at best will lead to stagnation and at worst will lead to fairly strong deflation, coupled with increasing and less productive environment, because there is no doubt about it Europe is now no longer competitive with regions of the world. I am not concerned about the manufacturing capability of either China or India. If that comes up so will come up 2 billion more consumers, and there is going to be an enormous demand generated in India and in China and we may have no future in manufactured goods, but we are going to have an enormous future in other ways of wealth creation which may come about.

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I do not quite know what is going to happen in Europe. I am pessimistic about the future because I think Helmut Kohl is going to be here well into the next century and he will probably drive through the changes and may, or may not include this Country. I do not believe it is for the good of Europe generally. I have spoken to him two or three times, and I think he is driven by fear of a united Germany because he wants Germany in Europe. I am not sure, I have another fear and that is that a Europe in decline leads to extremism.

The second change is one that we have not mentioned, and that is Russia. I am not sure how long, if at all, the President will survive, and who will follow him. But if it were to be Lebet, and it could easily be when we are looking towards a strongly nationalistic Russia, which might be better for the Russian citizen. It cannot be much worse than the present regime, but I suspect will pose the return of dangers on the international scale, and you are certainly going in to uncertain territory, and that is not easy. I do not know whether he will survive the operation, who will come after him, but certainly the experiment of democracy in Russia has not been an unqualified success. Therefore, I do not believe it will last. Democracy only lasts when it produces things, and I do not think it is producing anything in Russia.

The third one is a change that has taken place, and that is in Israel, and in Saudi where people are waiting very politely for the death of the King, and then, of course, the continuing tension with Saddam Hussain and the whole area which is quite fragile.

If you look at the Prime Minister of Israel, it is difficult to perceive that anybody could get off to a worse start than he does. He has managed to offend everybody in the world simultaneously so I suppose there is a balance of offence and I just hope he is a learner, but there are certainly going to be problems until we come to some sort of settlement. It seems that Syria is determined not to trade anything other than land for peace, and Israel is determined not to do that. So it is going to be a position of tension.

If you look at the two or three troublespots - Europe is not a troublespot, Europe is in economic difficulty - if you look at Russia, and the Middle East, they are two areas which I believe could be a source of considerable difficulty. As far as business is concerned a year ago, this time last year there was a prospect of 200 billion Dollars of infrastructure projects in the area of Egypt through to Syria, and as each month goes by those prospects were seen as less likely to come about.

It is a little known fact but the GDP of Israel is over $90 billion at the moment and I am told that the GDP of Egypt, Jordan, Palestine, Syria and the Lebanon together is just over $60 billion. There is an enormous disparity, and when you get $16,500 GDP per capita in

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Israel, $800 in Jordan, and Palestine is about $1,100 you get all the ingredients of an explosive situation.

I think there are areas where the United States will really have to assert considerable authority. It is a tinder box, and my belief is it is far more dangerous than the Far East, because nobody knows China as well as Henry does, but I have been there many times in my life, and I have also met the leadership many times, and nobody ever understood the basic principle by which a man rises to the top of that, and it is enormously complex. But the one thing you do know is that the Chinese are Chinese first and political second, and you see overseas Chinese are as loyal to China even when China was communist, even though they were capitalist, and if you look at them all, they all want to go back and reinvest in China and help China. So China will be Nationalist all the way through.

Also, historically China has always looked inwards rather than looking outwards. I suspect that is not the danger spot in the world. The danger spot is very much still the Middle East and Russia.

DR KISSINGER: I agree. What do you think about Saudi Arabia?

LORD YOUNG: The succession, they say, has taken place and they are waiting and it is going to happen. My main worry is that Iran is creating an enormous amount of difficulty there. As Saudi runs into financial difficulties, and unless they can curb the excess expenditure of many of the sons, I think there are again going to be tensions coming in there, and it seems very difficult--

DR KISSINGER: I do not think the West has a clue what to do if there is an upheaval there.

LORD YOUNG: If we had a clue we would not be attacking Saddam Hussain, because if we remove Saddam Hussain then there is a good chance that Iraq will become Fundamentalist, and already Sudan is Fundamentalist, and Egypt is very nervous about Fundamentalism and it is a very destructive force. I just do not understand for one second what on earth Clinton is doing, other than trying to win the Election he has already won, in all this posturing and firing off of missiles.

DR KISSINGER: I agree with you about Russia, and I think one of the test cases will be what happens in Ukraine. If Ukraine disintegrates, then we will be in an Imperial phase again.

LORD YOUNG: Quite true, not very cheerful, but that is the way I see it.

DR KISSINGER: I have never met a Russian who accepts the independence of Ukraine. They do not demarcate the border--

LORD YOUNG: Or Chechenia.

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DR KISSINGER: Chechenia is not technically part of their territory. But Ukraine is a country of 60 million, and is fundamentally considered illegitimate by Russians. We have the additional problem of central Asia. If India, China, Indonesia all industrialise, there will be pressure on the energy supplies. So the direction of the pipelines from central Asia should be of strategic concern. If they all go through Russia, it could create a very complicated situation in five to ten years from now.

LORD YOUNG: Up to now the chief route for energy oil has been Japan. Japan has been a great consumer of energy. India is now growing very fast, and is getting very hungry, as is China. But India certainly will be the first ones looking very much today for gas and looking for energy supplies.

DR KISSINGER: Central Asia will become an area---

MR OKAWARA: A major source of supply.

DR KISSINGER: Yes.

MR NOHRIA: If all these leadership changes take place at about the same time, as you describe these leadership changes, it seems like several of these Countries are ready for some kind of leadership change, not all of which we can predict or forecast. But they are happening in very close temporal space. Is there, in your experience, anything that happens when all of a sudden you have now eight or ten different leaders who have not had the history of having negotiated with each other through years---

DR KISSINGER: You have two different situations. One is the leadership changes in a stable environment; but these leadership changes are taking place in a fluid environment.

MR NOHRIA: Precisely.

DR KISSINGER: I do not think China will be aggressive militarily. It will want to be treated respectfully and therefore Bradley Island, that sort of issue, will have to be handled with some care. I do not think they are going to march into other countries, but they will have such a huge market that the other Asian countries will have to take them seriously.

India will conduct the policies that used to be conducted from Calcutta. New Delhi under the Viceroy's, then because they were conducted by Indian Civil Servants, which means it will try to play a dominant role between Singapore and aden, not all of which is bad for us because it will have to be against the Fundamentalists. All I am saying is to play a change in the environment. So on top of the leadership changes in the 10th Century, in Europe, there is no written exercise to stabilise growth. There is no stabilising power because we are behaving like

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missionaries, not like statesmen. We are lecturing
everybody about their domestic structure, and we really
have very little to say in relation to the evolving
geo-political changes. The real problem in Russia is to
see whether or not, for the first time in 400 years,
Russia will stay within the borders it now has. That is
important. All this playing around with elections in
Moscow is irrelevant. Yeltsin or somebody else is not
decisive. That is decisive. There is no force in the
world today that operates for stability geo-politically.

The United States is a disturbing influence in many
areas in the Middle East in South East Asia. We support
the forces that upset the equilibrium under the mistaken
notion that these are democratic forces that look to us.
The daughter of Gekano is not looking to the United States
for inspiration, in my view

MR FREIDHEIM: But she is looking there for political support for her own ends?

DR KISSINGER: Look, anybody who is not in power wants
democracy. (Laughter) The question is what will they do
in power. I cannot believe that the heiress of Gekano, the
people that are supporting her - anyway I do not know how
you govern an archipelago of 4,000 plus Islands with
different languages, by pluralistic, American democratic
methods. Even in China, I was in Changchun two weeks ago.
The Governor there said he does not understand the local
language, and he does not even understand the locals when
they speak Chinese because they have such a terrible
accent. He did not say that in relation to democracy, he
just stated the problem of Government.

But our pressures tend to dissolve stability,
unfortunately.

MR WALLENBERG: Is the problem not this, the very backbone of the present Chinese system is a centralised economy?

DR KISSINGER: I do not think so. I do not think China is a
communist country right now. The Government Party in China
is called communist. It is more like Pinochet or Franco's
 regime
at the end it is a one Party system. It is more
similar to Mexico before the changes. If you challenge the
party you are in deep trouble, but if you do not challenge
the Party you can do pretty much what you want. If the
economy goes down it will not be because of their planning
but because of rampant wild capitalism coupled with
nepotism. That is the State sector. At least think in
they know what they want to do with it. So, I do not
think the centralist Asian in China is the overwhelming
problem. When Nixon met Mao the first thing Nixon said to
Mao was "The Chairman's teachings have changed the
civilisation". Mao said "No, I have changed Beijing and a
few of its suburbs". That sounded ridiculous, but he had
a point. How to govern China? If you travel around in
China you go down the Yangtze, the only problem is you have to
ask yourself "How can the central Government possibly know

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what this mass of people, all of whom are super active, are doing?" They are so family oriented. I do not think that excessive centralisation is their problem. Flying apart is a more serious problem than excessive central control.

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WALLENBERG: Except in one area and that is the area of decision making and particularly in the area of economic decision making.

KISSINGER: If you go to realistic China, you go to Beijing and you talk to Shoranshi and he gives you an economic plan, and then you go to Shanghai and you ask him for their economic plan, there is no necessary relationship. Then you go down to Guangzhou and you get an economic plan and that has got no necessary relationship to either Shanghai or to Beijing. This is frankly what happens in the real world.

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LORD YOUNG: They tried to ignore Beijing.

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KISSINGER: They tried to ignore it, but I mean they accommodate it enough to keep it together. I was in Woohan where they now claim they have a 15% growth rate, and the official one is 10%, and that is not even a powerful province. So I said it is interesting. Well, do you have 15% when Shoranshi has just told me 9% is the target?" "Oh", he said, "They kept us back for ten years, we had only 5% over the next ten years. We are going 5% above". You operate in China. Do you not think that is the reality?

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SHAPIRO: I cannot figure out what the reality is. I do not know who you have to bring in in order to get something done.

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KISSINGER: Everybody.

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SHAPIRO: We keep working with everybody and sometimes something happens, but I cannot see any causal relationship between what we do and what occurs. I have no idea what is going on, but we will keep at it. Do we have time for another question? Is it your sense that what appears to be the ability of terrorist organisations to penetrate Europe and the United States, and Europe in particular, is going to be anything more than a serious annoyance, or is it likely in fact to be a pivotal event which changes the nature of Society and relationships?

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KISSINGER: I do not know, but I do not exclude it. Either you look at the rhetoric of the ethnic identities that are being developed in our country, you cannot exclude them, go to terrorism. Certainly, around the world they have not exploited their capabilities. We have not exploited our reaction either. We have to start going after the terrorists, and unless they are totally locally based, the ones that come out of the Middle East cannot operate without a country backing them, and I do not see why we leave the Sudan. I do not know what you think, David?

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LORD YOUNG: I think terrorism is endemic to the West. We have it in this Country, and we are going to have it for another 400 years and nothing is going to stop it because in the end it is two or three hundred people driven by a protection racket. Spain has got the Basques. You will find Germany will have them from tend to time. We have Animal Rights terrorists here, and so why should the United States not have any.

MR SHAPIRO: It is something more than a serious annoyance, but it is not something that changes the fundamental nature of the Society or relationship with the States that support terrorism.

LORD YOUNG: Only one thing will really get to the heart of it and that is if terrorists start using sound missiles on airlines, because that is almost impossible to stop and that would put a check on world travel. There are real problems coming up because technology is changing. If that last thing was done by a missile, then I do not know what the answer is. The rest of it is airport security, vigilancy.

DR KISSINGER: Our problem is that we do not address the painful issue when there is time to do something about it. I do not know what the answer is to terrorism.

MR STASIOR: What is the likelihood of nuclear terrorism? I mean shooting down aeroplanes with missiles is one thing, but State sponsored nuclear terrorism is another?

DR KISSINGER: I have no way of knowing.

LORD YOUNG: There are two Countries in the World who are looking for it, Iran and Libya, and if we let them get it then I would hate to think what Libya's height of irresponsibility in Iran because of fanaticism.

DR KISSINGER: But I think a point you made, David, is important to keep in mind. If one wants to keep the Middle East stable, you cannot attack both Iran and Iraq simultaneously, and there are some people, supported by Netunyahu who would like us to add Syria to the list, but then if we had Syria, Iran and Iraq they would get nobody. The trick is to separate the moderate Arabs from the more radical ones. Saudi Arabia in my view cannot stand alone. It needs some Arab backing. Do you agree with that?

LORD YOUNG: Absolutely. I mean I would make peace with Saddam Hussain tomorrow.

DR KISSINGER: That is impossible in the United States.

LORD YOUNG: Iran is the real danger, and if Iraq goes down--

DR KISSINGER: We should have overthrown him and put a secular regime but we did not have a chance to do it.

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LORD YOUNG: The problem is it may not be a secular regime.

DR KISSINGER: Now it will not be, or it may not be. Bob, do you agree, I do not think in the United States any President--- that

MR SHAPIRO: You certainly could not announce it as overt policy. (Laughter)

DR KISSINGER: No President would do it.

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MR SHAPIRO: You might divert attention from the area quietly and step back a little bit but I certainly cannot picture anybody standing up and saying "He's no longer a bad guy, he's a good guy".

MR PASTERNACK: We have a strategic alliance. (Laughter)

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DR KISSINGER: We had a strategic alliance with him against Iran.

MR SHAPIRO: We did.

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MR FREIDHEIM: I think all of the politicians in Washington would say, if you take a look at those two countries and say which one is the more dangerous to the United States and World stability? It is Iran by a wide margin.

DR KISSINGER: Our Congress is so chaotic right now that any pressure group can get a head of steam going and---

LORD YOUNG: Well, for better or for worse, the President has committed himself, so that policy is now fixed.

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DR KISSINGER: But so have the Republicans in fairness to him.

LORD YOUNG: Yes, both have.

DR KISSINGER: They are attacking him for not doing enough against Saddam Hussain.

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MR FREIDHEIM: Henry has got to go to dinner tonight with the "Kings of Italy", and so he is going to step out, but then we are going to continue with Nittin Nohria. Thank you, Henry.

DR KISSINGER: He means "Fiat".

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## TRANSFORMATION OF THE LARGE CORPORATION

MR PASTERNACK: We move on to our last formal agenda item today. Earlier this morning I mentioned that we were going to be joined by Nittin Nohria. I am not going to spend much time introducing Nittin except to say two things. One, he has reminded me that he is now jointly with Harvard Business School, and the London Business School - I guess that is keeping your options open or something, I do not know what it is called in economic terms, Nittin.

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