I would not change much of this today. Certain concepts and approaches-strategic degrees of freedom, say, or key factors for success-are of great help in preparing the way for the strategist's creativity. Fact-based analyses of markets and customers and products are, if anything, more important than ever in a world grown more complicated and treacherous. But they are like daubs of color on a palette. They are only the raw material on which "the mind of the strategist" draws.

All textbooks aside, this is still for me the essential, unchanging fact about the hands-on work of building real strategies in real companies. Earlier, however, I argued that good strategies had to comprehend-and strike the right balance among-the three key points of what I called the "strategic triangle" of customers, competitors, and company (an organization's distinctive strengths and weaknesses). Today, as a genuinely interlinked economy emerges, two more Cs have to be added to the list: "country," by which I mean the various government-created environments in which global organizations must operate, and "currency," by which I mean the exposure of such organizations to fluctuations in foreign exchange rates.

So important have these last two Cs become that no responsible company can operate in a borderless environment without paying real attention to them. They are no longer the background against which the findings of a "strategic triangle" analysis get tested. Instead, they belong on the original palette with which strategic minds do their work. When a sudden fluctuation in trade policy or exchange rates can turn an otherwise brilliant strategy into a seemingly irreparable hemorrhage of cash, making arrangements to deal with such fluctuations must lie at the very heart of strategy, not be an afterthought to a strategy defined by other considerations.

*Kenichi Ohmae, The Mind of the Strategist (New York, McGraw Hill, 1982),

You have read enough about "global" products to realize that few of them exist. But there are emerging global market segments; most of them are centered in specific countries. For example, the market for off-road vehicles is centered in the United States, with incremental sales elsewhere. What is important to understand is the power of these customers vis-a-vis manufacturers. Part of that power comes from their lack of allegiances.

Economic nationalism flourishes during election campaigns and infects what legislatures do and what particular interest groups ask for. But when individuals vote with their pocketbooks-when they walk into a store or showroom anywhere in Europe, the United States, or Japan-they leave behind the rhetoric and mudslinging.

Do you write with a Waterman or a Mt. Blanc pen or travel with a Vuitton suitcase out of nationalist sentiments? Probably not. You buy these things because they represent the kind of value that you're looking for. At the cash register, you don't care about country of origin or country of residence. You don't think about employment figures or trade deficits.

You don't worry about where the product was made. It does not matter to you that a "British" sneaker by Reebok (now an American-owned company) was made in Korea, a German sneaker by Adidas in Taiwan, or a French ski by Rossignol in Spain. What you care about most is the product's quality, price, design, value, and appeal to you as a consumer. My observations over the past decade seem to indicate that the young people of the advanced countries are becoming increasingly nationalityless and more like "Californians" all over the Triad countries-the United States, Europe, and Japan-that form the Interlinked Economy (ILE). But this applies to more than just a small segment of consumer products. It is just as true, for example, for industrial customers. The market for IBM computers or Toshiba laptops is not defined by geographic borders but by their appeal to users, regardless of where plants and factories are.

Chip makers buy Nikon steppers because they are the best, not because they are made by a Japanese company. Manufacturers buy Tralfa industrial robots for the same reason, not because they happen to be Norwegian. The same goes for robots made by DeVilbiss in the United States. Companies around the world use IBM's Materials Resource Planning (MRP) and Computer Integrated Manufacturing (CIM) systems to shorten production times and cut work-in-process. Because of the demands of contemporary production, they use Fujitsu Fanuc's control systems and Mazak machine tools made by Yamazaki. In fact, Fujitsu Fanuc dominates the numerically controlled (NC) machine-tool market worldwide: Its market share in Japan is 70 percent; around the globe, 50 percent. This is neither accident nor fashion. These NC machines deliver value through productivity improvement, and everyone knows it.

Governments can still arbitrage information or otherwise protect their markets by forcing citizens to buy high-priced beef (as is the case in Japan) or poor-quality automobiles (the case in India and Brazil), but product labels are spreading all over the world and news of product performance is harder to suppress. Information has empowered consumers. At the same time the position of companies and competitors has been weakened. All this has made the key objective a company's ability to create new value for customers (product strategy), not to erect barriers to competitors.

Today's products rely on so many different critical technologies that most companies can no longer maintain a lead in all of them. The business software that made IBM Personal Computers such an instant hit was not an IBM product. It was the creation of Lotus Development Corporation. Most of the components in the IBM PC itself were outsourced as well. IBM could not have developed the machine in anywhere near the time and cost it did if it had tried to keep it 100 percent proprietary. The heart of IBM's accomplishment with the PC lay in its decision and ability to approach the development effort as a process of managing multiple external vendors. Lotus provided applications software, and Microsoft wrote the operating system on an Intel microprocessor.

Of course, Lotus, Microsoft, and Intel don't want to sell only to IBM. They want to reach as wide a range of customers as possible. Just as IBM needs to rely on an army of external vendors, so each vendor needs to sell to a broad array of customers. The inevitable result is the rapid dispersion of technology. No one company can do it all simultaneously. No one company can keep all the relevant technologies in-house, as General Motors did during the 1930s and 1940s. And that means no company can keep all critical technologies out of the hands of competitors around the globe. Even original equipment manufacturers with captive technology are not immune to this dispersion. NEC may develop a state of-the-art memory chip for its own mainframes, but it can sell five times the volume to other computer makers. This generates cash, lowers unit costs, and builds up the experience needed to push the technology further. It also gets the developing company better information about its new products: External customers provide tougher feedback than do internal divisions. To be a world-class producer, NEC must provide the best new technology to global customers, some of them competitors. Because new technologies become generally available more quickly, time has become even more of a critical element in strategy. Nothing stays proprietary for long. And no one player can master everything. Thus operating globally means operating with partners-and that in turn means a further spread of technology.

To compete in global markets, companies have to incur-and somehow find a way to defray-immense fixed costs. They can't play a variable-cost game any more. They need partners who can help them amortize their fixed costs, and with them they need to define strategies that allow them to maximize contribution to fixed costs.

As automation has driven the variable cost of labor out of production, manufacturing has increasingly become a fixed-cost activity. And because the cost of developing breakthrough ideas and turning them into marketable products has skyrocketed, research and development (R&D) has become a fixed cost too. In pharmaceuticals, for instance, when it takes $50 million or more to come up with an effective new drug, R&D is no longer a variable-cost game. Moreover, most companies can't even count on being able to license a new drug-a variable cost-from other companies not operating in their primary markets unless they have their own proprietary drug to offer in return. With globalization, all major players in an industry are-or may becomedirect competitors. You can't be sure in advance that they (or you) will want to share a particular piece of technology. You need partners, certainly, but you need your own people and your own labels too. That's fixed cost.

In much the same way, building and maintaining a brand name is a fixed cost. For many products, a brand name has no value if brand recognition falls below certain levels. When a company decides to buy a paper copier, for example, it usually calls two or three producers in the order of their brand familiarity. If your copier is not among them, you don't even get a chance to sell your product. You have to be there to enjoy a high level of awareness among customers. And that means you have to pay for the privilege.

Trying to save money on brand promotion makes no sense if what you're selling is a consumer "pull" product: You spend a little money but not enough to realize any "pull" benefits. A half-supported brand is worse than no brand at all. With some products, you can better use the same money to enhance commissions (a variable-cost game) so that the sales force will push them. In branded competition, if you want to play, you have to ante up the fixed costs of doing so.

The past decade has seen a comparable movement toward fixed costs in sales and distribution networks. You can try to play the variable-cost game by going through distributors, but your sales force still has to provide the support, the training, and the manuals. All of these are fixed costs.

You can also try to make some of these costs variable on your own. You can chase low-cost labor, for example, by moving production to developing countries, but that won't get you very far. In the past, you could make the cost of your computers and information management systems variable by time-sharing, but experience has shown that you can't use time-sharing if you want a system that's dedicated to your own needs and capable of providing competitive advantage. So, today, information technology is mostly a fixed cost. Over the long term, all these fixed costs become variable through adjustments in investment (capital expenditure) levels. But for the short term, they remain fixed. And so does the need to bolster contribution to them.

This is a fundamental change from fifteen or even ten years ago. In a variable-cost environment, the primary focus for managers is on boosting profits by reducing the cost of materials, wages, and labor hours. In a fixed-cost environment, the focus switches to maximizing marginal contribution to fixed coststhat is, to boosting sales. This new logic forces managers to amortize their fixed costs over a much larger market base and this drives them toward globalization.

Two new Cs or forces now must be considered when formulating strategy. The first is currency. Current exchange rates are much more volatile than they were a decade ago. The yen/dollar rate, for example, has fluctuated between 240 and 120 in the last several years. International companies have tried to neutralize the impact of currency by essentially matching costs to revenue (insiderization) and by becoming strong in all regions of the Triad, so that if one is negative, the others are positive. Companies have taken these steps in addition to traditional measures of moving into low-cost countries, polishing their techniques of international finance (for example, hedging, netting, options), and automation. By doing all of these, most leading-edge companies have succeeded in becoming virtually "currency neutral."

It's not possible to get to a currency-neutral position unless that objective is considered up front when you think about plant utilization, necessary break-even capacity, likely sales by country, and so on. It has to be an objective for international companies as long as currency exchange rates remain volatile. And they will remain volatile as long as government bureaucrats intervene in currency markets armed only with the delusion that changes in the exchange rates can effect companies' export strategies.

The second new C is country. Most companies have to move more deeply into the countries where they seek to neutralize the impact of currency as well as the possibilities of protectionism. Moreover, to serve them well, they have to be closer to their customers, at least in the key markets. The commonalities and differences of serving these markets are key ingredients of strategy. Only truly global companies can achieve "global localization," that is, be as much of an insider as a local company but still accomplish the benefits of world-scale operations.

The country variable was important to multinationals in the 1960s and 1970s, but then it was basically a matter of assessing a country's political risk and attractiveness in terms of market size/growth and local competition. The main purpose of choosing the country then was to find fertile ground to replicate and clone models of the parent company's products/services. In that sense, multinational enterprises (MNEs) were no different from the Roman Catholic Church's approach to globalization. They pushed their headquarters dogma through the system.

Contemporary global corporations are fundamentally different. They have to serve the needs of customer segments. Instead of educating the "barbarians" to drink Coke or eat cornflakes, they have to discover the basic drinking and eating needs of people and serve these needs. Sometimes they come up with entirely new products and services that headquarters never dreamed of. Coca-Cola's success in Japan was due to the establishment of its route sales forces, but also to its rapid introduction of products unique to Japan. In Japan Mr. Donut's changed everything about its product/service, except for the logo.

The shift in power and changes in these Cs have pushed companies to spread across borders in a new way. The changes have been so rapid that they have outrun the ability of managers to make needed institutional adjustments-companies have been slow to break up nearsighted headquarters and spread their staff more broadly. More important, changes have far outrun companies' ability to make more difficult, because less visible, adjustments in underlying assumptions and points of view. Most companies are still nationalistic down deep and see only local customers' needs as well as they need to.

But sooner than most people think, our belief in the "nationality" of most corporations will seem quaint. It is already out of date.

Is IBM Japan an American or a Japanese company? Its work force of 20,000 is Japanese, but its equity holders are American. Even so, over the past decade IBM Japan has provided, on average, three times more tax revenue to the Japanese government than has Fujitsu. What is its nationality? Or what about Honda's operation in Ohio? Or Texas Instruments' memory-chip activities in Japan? Are they "American" products? If so, what about the cellular phones sold in Tokyo that contain components made in the United States by American workers who are employed by the U.S. division of a Japanese company? Sony has facilities in Dotham, Alabama, from which it sends audiotapes and videotapes to Europe. What is the nationality of these products or of the operation that makes them?

These are no longer anomalous situations. They have become commonplace and they will become even more so. As Harvard professor Robert Reich has noted, "The very idea of 'American' products made by 'American' firms is becoming obsolete. Lee Iacocca warns of the Japanese invasion of America, but American-made parts now constitute a smaller portion of the top models of the Big Three than they do of Honda's top-of-the-line cars."

Most companies in the Triad are still financed by local debt and equity and serve local markets with locally made goods produced by local workers. For them, nationality still has meaning. But for a growing population of firms that serve global markets or face global competition, nationality will disappear.

""Members Only," The New Republic, June 26, 1989.

There is another aspect of the country variable, and that is the role of government, which must change and is changing. Not that long ago, in the "preconsumer" era, "country" was synonymous with a sovereign, isolated island within which its government determined what made most sense to the people who lived there. A government's role was to represent its people's interest, serve their purposes, and protect them from threat of foreigners and foreign corporations. When a country's commercial interests spread outside of its sovereignty, the military was there to back them up. British military forces guarded British interests in the Seven Seas when its plantations were spread all over the world. American forces were fully behind their corporations in the Banana Republic and in the rest of the world to back up the 1960s' and 1970s' multinationalization process. As with the Roman Catholic church, country and doctrine were synonymous, and corporations used overseas countries to provide resources and/or markets to absorb/accept their one-sided, dogmatic, homegrown monolithic products. This is no longer the case. People have become more informed and clever, as a real consequence of living in a truly global information era. And now governments have become the major obstacle for people to have the best and the cheapest from anywhere in the world.

What the energy crisis has taught us is that for a short term the "have" nations can create a supply shortage if they gang up. However, over a longer period of time, alternative supplies develop and the economic principles of supply and demand prevail. If you look at the prosperous nations today-Switzerland, Singapore, Taiwan, South Korea, and Japan-they are characterized by small land mass, no resources, and well-educated hardworking people who all have the ambition to participate in the global economy.

Having an abundance of resources has truly slowed down a country's development, because bureaucrats there still think that money could solve all problems. In a truly interlinked, global economy, the key success factor shifts from resources to the marketplace, in which you have to participate in order to prosper. It also means people are the only true means to create wealth.

As for companies, the prosperity of countries depends on their ability to create value through their people, and not by husbanding resources and technologies. While developing countries in particular must learn this lesson, so too must old bureaucrats in the United States, Japan, and the European Community (EC).

In a truly interlinked economy, a country can't fail singlehandedly, nor can it win alone. Winning becomes increasingly expensive, as currency and wages are rapidly adjusted and an incremental gain costs dearly in terms of competitiveness. That is the stage Japan and West Germany have entered. Even if a country is outside of the Triad, or the Organization for Economic Cooperation and Development (OECD), or the EC, as long as it can link its economy freely with the rest of the world, it can take advantage of the global economy. Singapore and Hong Kong are doing exactly that. Because neither country has farmers, each has virtually no tariffs on agricultural products. That means people there can buy the best products at the lowest price. The fact that food costs are cheaper in Singapore than in Japan because Singapore doesn't produce domestically is a good example of what I am talking about. Even in the isolationist, resource-based economy of Australia, entrepreneurs such as Rupert Murdock and John Elliot (of Elders IXL) can flourish by reaching out to the ILE. Thus the prosperity of the ILE is not only for its residents but for anyone ambitious enough to interlink.

The government's role, then, is to ensure that its people have a good life by ensuring stable access to the best and the cheapest goods and services from anywhere in the world-not to protect certain industries and certain clusters of people. Contemporary governments must become transparent to their people with respect to the rest of the world. Every time governments try to protect resources, markets, industries, and jobs, they cost taxpayers dearly. Only two decades ago when multinational companies had a colonial attitude, they took advantage of the privileges and licenses allotted to them by governments. They were exploitative. But consumers in today's world are much better informed, and the surviving global corporations are there to serve their needs. If they don't, they will be eliminated by the customers, not by the host governments.

Unfortunately, old-style governments still license and regulate foreign corporations to come in and operate. Once they are inside, corporations take advantage of their special position. So we see cars in developing countries whose doors do not shut when slammed, a model that is at least a decade old introduced as a new model, components and spare parts not available, and so on; none of this happens in a truly open market, where competitors eliminate poor performers. Government officials exercise power by regulating and deregulating the market, but their new role is to assume a backseat, not the driver's position, and to make sure that their country is benefiting fully from the best-performing corporations and producers in the world, at the lowest possible cost to their people on a long-term basis.

Under Cold War assumptions, government officials fall back on arguments that countries have to be prepared for emergencies that is, war. Inefficient industries are subsidized in the name of national security. Even with the Cold War subsiding, government and special-interest groups are still trying to build their cases on these old assumptions. Japan is producing rice, just in case the what if happens. But it is costing its people dearly, in terms of subsidies to farmers and the nation's limited flat land that could be used for housing and pleasure.

Meanwhile, Singapore and Hong Kong don't worry about what ifs. In theory, Singapore can't exist because it has no insurance, either in the form of military forces or strategic (read protected) industries. Yet it enjoys current prosperity. I believe the Singaporean solution is the right one, because in the global economy, economic interlinkage increases security. Nixon's soybean embargo against Japan is often cited as evidence of America's possible clout and Japan's excessive dependence on imported agricultural products. But here again, buyers and markets have the upper hand today. The embargo lasted only a few weeks. Commodity producers need markets, just as developed markets need products. Interlinked and secure supply-demand relationships will have inherent checks and balances. For most commodity suppliers, there are short-term and longer-term alternatives. Soybeans, cotton seeds, and palm oil could all end up being salad oil and detergent. Right-wing politicians in Japan need to recognize this too when they threaten to cut off the supply of advanced chips to the United States. They are ignorant of the fact that more than half of semiconductor production machinery and software to design complicated chips are American made. Moreover, the supply-demand relationships in this industry are much more complex than the right-wingers realize. They know nothing about rare gases, photo resists, and other materials necessary for production-most of which are American controlled. Where there is a market, there will be a producer, and no boycott will last long.

We tend to think that a country's economy consists of primary,

secondary, and tertiary industries. Yet we should now think of

the interlinked part of the world as having that spectrum of

industries collectively instead of individually. This viewpoint really

forces the interlinkage into our economic interdependence, and

thus there will be no black sheep among us. In this way the people of developing nations can have the products of the developed world at the same price as in the United States, and the developed countries can liberate their taxpayers from having to carry their old industries forever.

A modern government's concern is jobs. One of the key reasons for governments' protectionism against foreign products and capital is job security. But what we have observed over the past decade is that this conventional wisdom is wrong. During Reagan's eight years when American imports soared, the United States created more jobs than ever in its history. Japan, forced by its fellow OECD members, has opened one market after another. Unemployment in Japan didn't soar. On the contrary, today the labor shortage is so acute that some people are organizing to import gastarbeiter, or foreign workers, from Asian neighbors. Other rapidly growing economies have had the same experience. As markets are liberalized, wage rates go up. The consuming habit caves in, and the economy rapidly shifts to the service sector. The service sector occupies more and more of the total employment. In the United States 70 percent of the work force works in the service sector; in Japan, 60 percent; and in Taiwan, 50 percent. These are not necessarily busboys and live-in maids. They are earning as much as manufacturing workers, and often more. In an interlinked global economy, the fact that primary (agricultural, forestry, fishery) industries slip out of a country and even secondary (manufacturing) industries go overseas is not the end of the world from an employment point of view.

Most governments want foreign producers to come in and build factories. Government officials frequently ask me to help them attract Japanese manufacturers. What they don't realize is that the cost of manufacturing today is typically 25 percent of the end-user price. Production per se adds very little value in the eyes of the customer. It is usually just labor that creates no more value than it costs. Furthermore, the leading-edge producers have all but eliminated simple labor and work from production, and steelcollar workers (robots) do most of the jobs. The "production" such firms have attracted typically consists of watching the robots, quality checks, shipments, and factory maintenance. Countries will gain a lot more important and profitable parts of businesses if they can attract R&D, engineering, financing, and marketing functions. But no government official has ever asked me to bring in those functions.

Governments around the world have tried to protect their markets, industries, and jobs and have failed to do so, because they don't understand the value-added chain in globally interlinked economies. The most value added is in the marketplace today. By opening the market for the most competitive products from anywhere in the world, a country can take advantage of the most opportunities for job creation. Such functions as distribution, warehousing, financing, retail marketing, systems integration, and services are all legitimate parts of the business system and can create as many, and often more, jobs than simply manufacturing operations. Preoccupation with production typically forces governments to hang onto old, incompatible industries and hence do disservice to their taxpayers and consumers (often the same people). Each job thus maintained from the old times discourages the dynamic growth of new industries.

There is no need to worry about Tokyo, New York, and Los Angeles becoming service based tertiary economies, nor to worry about a country becoming a Tokyo or New York. In the interlinked global economy, the producing nation must accept whatever money Tokyoites and New Yorkers use to buy "real" products. That means that the money will come back to buy something from New York or Tokyo, perhaps software, design, technology, real estate, or a brand name. It's no different from a person from California buying a high-rise office building in Manhattan. We are all part of the same interlinked economy.

From: Kenichi Ohame, The Borderless World: Power and Strategy in the Interlinked Economy. Harper: New York, 1991.