[OKIMOTO ] Fruitful and thought-provoking discussion, and we are now in the last lap of this long-distance run. Thank you for staying. In the United States, the last session is often only half filled, with people leaving from the conference, but I think it is an indication of the interest that you've shown, that you are all still here.

The topic of this session is the impact of the Internet on global management. It is, I think, a very important timely and relevant topic. It is a topic that Stanford professors are well positioned to discuss. Stanford is, as you know, in the cradle of innovation in Silicon Valley, right in the middle of it, and indeed several of my colleagues here on this panel have been very active in the world of the Internet, in the world of high technology, entrepreneurship, and innovation.

The Internet, I think, is especially interesting because it is the main instrument of the information revolution and of globalization. As we heard earlier, it is also the leading edge of change in the basic approaches to business in our concepts of the business model. And as Rob Glaser said yesterday, the impact of the Internet has been revolutionary, comparable in significance to the radio, to the television, and other such important innovations. He pointed out that the Internet had a revolutionary impact on the speed, the scope of information, and its low cost and mass availability. It shrinks distance, it changes the nature of the relationship between producers, businesses, and consumers.

Today what we would like to do is discuss first the concept of marketing and how the Internet has altered marketing strategies by corporations. For this subject I will call on Ward Hanson. Then secondly, we will look at the impact of the Internet on corporations, on corporate organization, corporate strategy, human resources, strategic alliances, and other such subjects. On this subject I will call upon Bill Miller. And then finally, the issue of the impact of the Internet on the legal, administrative and financial and tax structures and the role of the state in the economy. These are subjects that will be discussed by Tom Heller.

Following their presentations, which will be strictly limited to 15 minutes each, we will have time for some discussion of their comments. Since this is the last session, I would like to leave as much time as possible for questions from the floor. And I would like to also, if we have time, focus on some of the central issues and questions, some of the themes that have emerged in the course of this conference.

So with that, let's start with Ward Hanson, the impact of the Internet on marketing.

[HANSON] I am pleased an honored to be here to talk to you about the Internet's impact on global marketing.

Over the past two days, we have seen many ways that technology is changing global business, and no technology is doing that more than the Internet and no area of business is being changed more than marketing. I've had and still do have the good fortune of teaching Internet marketing at the center of this revolution -- Silicon Valley in general, Stanford Graduate School of Business in particular. When I first created the Internet marketing class in 1996, I knew that it would be big, but I am amazed at the level of worldwide interest and development that we have seen by so many of the speakers and discussed through the last two days.

One recent week dramatized for me many of the issues that companies are facing globally. Two very different companies came to me and asked for advice on how they could use the Internet. And the comparison and the contrast of those two companies shows the range and some of the issues that are affecting marketing worldwide.

Example One is really a leader in the world of Internet commerce, asking how they could be faster and better, and not being satisfied at present. And the first company that came to me and asked about doing better with their Internet marketing and the use of the Internet was a good friend of Stanford, Charles Schwab, a very successful brokerage, financial company, located in San Francisco. And by some measures they are the largest e-commerce site in the world when measured by the dollar volume that they trade, over $2 billion each week in trades using the Internet. But even the market leader, even being the number one, they are very concerned, and the graph that you can see illustrates why.

The top of graph shows that Schwab has the largest share of trades, 35 percent, of all of online brokerages in the U.S., Fidelity having 22 percent and the other companies listed there as measured in 1998. So by that measure, Schwab is very successful, and over 70 percent of all of their stock market trades are conducted online using the Internet. And I see in this issue of the Nikkei Weekly that you are, just now as of October 1st, allowing online trades and online brokerage in Japan.

But what is worrisome for Schwab is the graph below. What that shows is that investors have many more outlets of information. That graph, that chart down there, is not the number of trades, but a measure of a number of page views of web screens of information collected online, and it is a measure of which companies dominate that. And there, it is very different. America Online with 33 percent; a company called Quicken that does financial software, 14 percent; Yahoo! 11 percent. Schwab has only 6 percent of the online information. And that is of concern to them because they are very worried that if you have the contact with a customer, and the information and trust to provide the information, that eventually may lead to trades. So they were very concerned about improving personalization, continuing to build their number-one web site, and making it even stronger.

That very same week, a very different problem was brought to me, and that was: Could Russian defense enterprises use the Internet to help them convert from defense production to civilian production? To convert from the war economy to the peace economy. And I'm participating on a book in discussions with both Russian and American scholars and analysts on how they might do that. And I was asked to provide comments on how the Internet might help that very difficult subject.

There are some ways it could help. The Internet provides all companies worldwide a potential for a very low cost distribution channel. Perhaps more importantly for Russian enterprises, it provides a way for getting market feedback and direct connection to customers. It provides a way to establish business-to-business trading relations where they don't exist yet. It has the potential to establish a global marketing presence with very little money. And for them it has a way of connecting workers with skills to hopefully better uses. While the Internet may be less important than many of the basic changes that have to happened in Russia, it is a powerful ray of hope for these struggling enterprises looking to create new opportunities and to join the world economy. But really, every company, every company worldwide is finding that the Internet is altering and changing their marketing tools.

Marketing has led the way in many countries and companies in commercializing the Internet. They manage many of the Internet operations and the use by the marketing department is an important indication of how the entire company organization will have to change.

First of all, it is changing the tools of marketing. In English we, as marketing professors, often summarize these as the four p's of pricing, product, promotion, and place. And each of those are being changed by the Internet. One of the most important is pricing. All companies are now facing much better-informed customers. What we sometimes call the ignorance premium is declining, where you can get a higher price because customers don't know what else is available. And at the same time, it allows global sourcing of business to business, which opens up the competition much more.

New product development. Product. Much more rapid collaboration and shorter lead time. The Internet is speeding up. We have a phrase in Silicon Valley, living on the Internet time. And much of it is the ability to introduce and collaborate and bring new products to the market much faster.

Promotion, advertising is changing not just in the spending patterns, but also a move from information push, where companies send messages to customers, to information pull, where customers request information of the kind that they want when they want it. And it is much harder to plan, much harder to predict, and yet the whole campaign has to be coordinated.

And in the U.S., the place is coming to be the most important question I get asked at seminars and consulting; the intense problems with channel conflict. Because there is a very strong push to use the Internet to go direct to customers, but that tends to run into problems with the indirect distribution and the existing relationships.

But one theme that has happened throughout these two days that I want to reinforce is maybe the deepest impact on marketing, which is a move from a product focus to a customer focus. And that is a phrase that has been used by several speakers, but what it means is that marketing departments are being pushed to reorganize and to move away from brand and product managers to organizing around portfolios of customers. And this shows up in a number of ways. There was discussion about companies like Amazon.com and others not making money. Much of that is because many of the efforts that they are undergoing right now are on new customer acquisition, so that you tend to describe much of the activities, a brand creation, and new customers and new industry-building as ways of acquiring new customers.

At the same time, one of the most active areas of development is personalization, building of online communities of both consumer and business to business, using ways of information collection and gathering information from many different sources to expand the relationship that companies have with customers. And then, finally, many companies are realizing that building customer loyalty can be done online by having in-depth, elaborate, sophisticated customer support sites, and a blend of online information with call centers, and deciding that much of what is put online enhances the product and makes it work much better and trains the users and supports the users, and you don't necessarily charge for that. You capture that with expanded sales and with loyalty over time. And much of that is driven by the long-term lifetime customer value.

The Internet forces companies to think about portfolios of customers, not portfolios of products. And in a global marketplace this leads to many changes in customer relationships and business organizations. And this is obviously a very difficult and dynamic and complicated subject.

In my classes, research and writing, I rely on an understanding of what is fundamentally different about the Internet and how it draws on three main areas: existing in new marketing techniques; realizing and building on what the technology is good at and also what it is not good at, what it is bad at; and the economics of it to make sure that you reflect the core structure of the Internet and that you also can make money eventually. When you summarize that, and we can perhaps get there with questions, it revolves around fundamental forces of what it means to be digital, what it means to be networked, and what it means to be on an individual basis. We are only at the beginning of the Internet's impact on global management.

If I may be so bold as to recommend in my opinion and a humble opinion, a good book of my own, which was just published last month called Principles of Internet Marketing, it goes into more of these details about how these fundamental forces of Internet marketing force you to think about reorganizing your marketing department, building alliances, and taking advantage of these fundamental forces in almost any company and almost any industry.

And I look forward to your questions. And thank you again very much.

[OKIMOTO ] Thank you, Ward. You set a good example by staying within the 15 minutes.

Our next speaker is Bill Miller.

[MILLER] Okay, Dan. Thank you very much.

I'd like to say that I come to Japan very often and I've been doing this for maybe 25 years, and I'm very optimistic about Japan in spite of the fact that Professor Lehmann laid out some things that maybe one should be a little pessimistic about. I see enormous change taking place. And I was especially impressed with the report of the Economic Council. Mr. Higuchi's report this morning, I just had a chance to begin to look through that and some of the changes that he is calling for, the council was calling for, I think, are things that about which we should all feel optimistic.

Now we are to talk about the Internet and its impact on the economy and on organizations. I'd like to start with a quote, because you hear a lot of discussion about the new economy. And here is a quote from one of my colleagues, a Paul Romer, who says it is really that we have a new economy. But we have a new understanding of the importance of the technology in the economy. And I think that's what the Internet's all about. We need to understand it in those terms. Now what is this new technology doing in the economy? How is it affecting our organizations and so forth in the economy? And one of the observations we can make is that we're seeing this massive, almost unprecedented shift -- and we've spoken about this before throughout this conference -- to the new communications and distribution medium. It is a new distribution channel. And new channels change a lot of things. They change not only the way you distribute. They also change the products, and they also change the revenue models. So all of these changes come about when you get this kind of new distribution channel. And we don't really fully recognize or even understand what are the real long-term implications of this shift.

But one thing we do understand, that we see this massive shift to the consumer. The consumer is getting more and more control, and we heard this from our colleague, Ward Hanson. We see that there is a lot of disintermediation, we see there is a lot of reintermediation, and there is a lot of new intermediation all going on at the same time. Companies disaggregating from being more vertically integrated to being more horizontal. I think we see a lot of consolidation going along.

Now what that consolidation will bring may not be so clear, I believe, for example, in the banking area. I thought of this when Travelers and Citicorp joined to form the Citigroup that there was a lot of talk about one-stop banking. Well, there will be one-stop banking, but it will be a web site that will pick off the best from all different places, from the Bank of America, from Wells Fargo, from Citicorp, whatever. So there is going to be consolidation of organizations, but there may be some disintermediation of services going on all at the same time.

Now what is driving this? Why is this happening? Well, I'd like to remind you of things you all know about, but just go through them very quickly. There are three things one should keep in mind. What we commonly refer to as More's law, which is creating a rapid decrease in the cost of computer hardware, and Metcalf's law, which I will take a moment to explain, which talks about the increasing value of connectivity, of being connected. And then I want to talk a little bit about Coase's nature of the firm and the diminishing value of vertical integration, because this is happening as a consequence of the first two of More's law and Metcalf's law.

Now most of these next slides you have seen, so I'll go through them very quickly, but this just shows you the cost per million instructions for chips, and the decline of these costs over time -- you see the very rapid declining cost of chips. And what this means of course is that computers are getting very cheap for us, so everybody can afford a computer. I have a little one like this, and it does far more than the ones I first worked with that occupied space about one third of this room. So computers are getting very cheap. And not only are computers getting very cheap, but communication costs are getting cheap. The ability to get connected is getting very cheap. Those costs are declining also in a similar way even as rapidly as computer costs.

And bandwidth is going up because there are many alternative sources of bandwidth. We have cable, we have DSLs, ADSLs, we have fiber, we are going into wireless. So there is a lot of band width becoming available to deal with all this connectivity that's going on. These are the consequences of More's law.

Now let me talk a little bit about Metcalf's law. Most of you are familiar, but some may not be. Metcalf's law is about the value of a network to an individual and the value of networks to a company that owns a network. And all it says is that as you add subscribers to a network, each of the previous subscribers gains value. In fact, if the last subscriber added as much as the first one, it would be a straight line, but because the last subscriber doesn't add as much as the first one did, it sort of tapers off, as we show on this particular curve. It tapers off in that direction.

Now this is the value to each individual. If you add those all up for a network, such as AOL or Cable and Wireless, you'll see that the curve would look something like this. We don't know the exact shape, but the general shape would be like this. And what companies are doing, as Ward has pointed out, when companies are investing a lot to add subscribers, they are trying to gain value for their network. And this is what Cable and Wireless is doing when they were investing very heavily to get more subscribers to add value to their network. So as you add more subscribers, you get more value to the network.

Now in most instances, in Internet businesses, we're still down here at the very beginning. So there is a lot of opportunity for this curve to grow upward. We don't know its exact shape, but we know its general shape. It may be a little flatter than this, it may even be a little steeper than this, but it has this general shape.

Now let's talk about the firm, the nature of the firm. Ronald Coase, who won the Nobel Prize for his work on the nature of the firm, basically said, the firms are organized to reduce transaction cost, transaction cost between all sorts of different functions, and here are a number of them: the search cost, bargaining cost in dealing with other companies, policing cost. A number of these costs. And you organize the company, the firm, because you can do these things internally more efficiently, at lower cost, than they can be done externally. But now, along comes the Internet. An opportunity to externalize these things much more economically. So if you can do these outside the firm, if the market itself can do these transactions at a lower cost, or maybe even at less cost than they can be done inside the firm, you don't have a reason to be vertically integrated. So the consequence of this, and one of the consequences of the Internet, is that you see companies less and less vertically integrating. All this discussion of core competencies, this is all about the issue of doing those things which you can do in the firm best and not doing those things in the firm that can be done just as economically outside the firm that the market can do just as well for you.

Now one of the things that we have seen with some discussions early on about the fate of manufacturing, and one of the things that we see is that we have on the Internet agents doing things that are shifting wholesale and resale transactions toward a commodity-level kind of business and pricing by converting these transactions into a kind of auction. They are not strictly auctions, but they are something like an auction; comparing prices in a way, that people drive these prices down to almost being a commodity business. And one of the consequence of this is that with large-scale manufacturing and production of products, this is going to become a commodity business. So it is going to be the information business and the content business where the highest value will be added. Software and content is where the high value added will be in the future.

So one conclusion is, taking off from Paul Romer is that technology is no longer just a tool to implement a strategy. We used to think of it as a tool to implement a strategy, and many times a strategy is oriented toward cost-cutting and not toward giving strategic advantage. But today what we find out is that technology is the platform on which a company can launch its business. It becomes the platform for launching the business.

Now what are some of the management consequences of this? Just to be brief: one, this disintermediation, this breakup of vertical organization and a more horizontal organization, provides an opportunity for formation of a lot of new companies, a lot of new company opportunity comes out of that. So what do we need to do that? In order to do that successfully, we need the kind of entrepreneurship that has been spoken about throughout this conference. And in order to have that entrepreneurship we have to create the most favorable habitat, the most favorable set of business environments so entrepreneurship of this kind can thrive.

Now what does it mean for the internal management? In this Internet world, things move very rapidly. Product lifetimes are very short. We've seen the product lifetime of most of these products go from a few years to a few months. Now it is two, three, or four months for product lifetime. This means things move very quickly. So the executives have to have the ability to move quickly. The CEOs of these companies have to really understand their business today. They cannot afford to go out and have too many big studies done. If you find a CEO who is relying on somebody else to tell him what to do, this person is not going to be making decisions fast enough to compete in this Internet world. So everything has to be geared for speed in this Internet world.

How do you motivate workers under this circumstance? One of the important things that we see, and I think you see increasing trends of this around the world, is workers working for equity and not just for salary. We can come back to that in the questioning period if you'd like. And companies have to organize to capture innovation from throughout their internal business web. We have heard a lot about networks and the value of networks. Innovation does not occur in one place. Innovation today occurs throughout a web of associations or throughout the network, and businesses have to learn how to capture that innovation from this inter-business web in order to succeed today.

So these are some of the important implications. I'll leave you with one last one, which is related to this very rapid-growth of added-value to networks. It is more important today for a company to have control over its markets than it is to have control over its company. Controlling the market is the key thing. And there are a lot of implications as people often worry about how they can control their company. They need to think: How do they control, how do they influence their market?

Thank you.

[OKIMOTO ] Thank you very much, Bill. Thank you also for adhering to the 15-minute time limit.

Tom Heller, you have 15 minutes.

[HELLER] Thank you. Business people speak very succinctly. Lawyers, as Kanda-san said yesterday, sometimes take more time. But I will try and be relatively brief.

I am not going to talk to you about very concrete issues related to the Internet. People want to know, if there are Internet sales, which jurisdiction will get to tax them; issues about privacy of data are discussed very often. There is a new masters program at Stanford Law School in the law of high technology, and I think in that probably my colleagues can do a better job than I answering many of those questions. But what I want to suggest to you is that the issues that are posed by the Internet for taxation, let us say, are really only a smaller part of the issues that are posed by new information technology for the way we govern ourselves more generally. And so what I would like to talk to you about is the relationship between changes in technology and the institutions of governance, including law, that we find in those countries which are experiencing the information revolution.

And what I would like to do is ask the question this way. Many people suggest that globalization is causing systems of economic governance including the law in advanced industrial countries to converge to become alike. And I want to ask the question: Is that true? Are they converging? Are systems of law and governance becoming alike? And if so, why? And finally, I would like to ask the question: If this is happening, is it Americanization? And having only 15 minutes, which I'm sure my colleague, Professor Okimoto, will enforce, let me follow Kobayashi-san's lead and first give you the main points that I would like to make in response to this question.

First, the divergence of systems of economic governance is a relatively modern phenomenon, associated with advanced industrialization. And it is caused in part, I would argue, by the differences in the relative price of governing ourselves through markets rather than through political mechanisms that have been found in different advanced industrial countries. I will talk about the United States, about Germany or Europe, and about Japan in just a moment to illustrate what I mean. But just to say a word about this notion of governing through markets as opposed to governing through politics, take the example people used yesterday: Do we govern a corporation principally through holding shareholders' meetings and having votes on how the corporation ought to go forward? Or do we govern the corporation through markets by saying to people, "Look, if you don't like what this company is doing, sell your shares and go somewhere else." Or another example I might use from this morning, from my own field of law, it was interesting that one of the speakers describing the reforms in Japan this morning said, Well, we now have 750 new lawyers each year. In the past we had 500. I think we should have 2,000. In the United States, we have more than 50,000 every year; it goes up and down. But nobody asked the question: How many lawyers should we have? You have as many lawyers as want to go to law school and can pass these 50 different examinations, that are pretty easy anyway, after they have finished law school. One is governing by leaving things to markets; the other is governing more through politics. And it is that distinction that I want to explore.

So my first conclusion, the first point I want to make, is that there are different styles of governance of the economy in modern society, and they have a lot to do with the history of whether you use politics or markets. I will come back to that in a moment.

My second point is, it is a very variable question whether we are seeing convergence. We do see convergence in certain areas, but it differs very much by the sector of the economy, by the size of the firms that are involved, and by the area of law that we are talking about. So it is a mixed picture, and I hope I have a little time to talk to fill that out a little bit.

And the third, and perhaps the most important, point I want to make is that the explanation of globalization as Americanization is interesting, but I think it is misleading. The way I would talk about the problems is that openness of economies, which have increased in the past decades, and information technology are creating a situation where the relative price of governing through markets is declining compared to the price of governing through politics. And as a result of this change in relative price, all systems -- the United States, Europe, Japan -- are experiencing a movement toward more use of markets starting in different places. But they are moving in the same direction. And the reason it seems like Americanization is because for historical reasons the United States has always explored markets more in its past than it did politics. So it looks like things are becoming Americanized. In fact, though, all systems are moving along the same vector, in the same direction.

A few words about these different points. Let me just tell you some very brief and necessarily too abstract stories about the United States and about Europe. People often say, especially here in Asia, there is the West, and it is different from Asia. Or people in Europe often think the United States is just some kind of a little child that grew after it split off from Europe, and it is really a part of the same thing. I want to suggest that it is a different form of modern life. And the reason I suggest that it is a different form of governance in the United States has to do with two major factors. If you think about it, the United States was a very strange place when it formed its institutions of governance. It was pretty empty, had a very small population, lots of land, lots of resources. And secondly, it had experienced 150 years or so as a colony, and it had the relationship to the state that most colonies have; they think of the state as being something that basically interferes with local life. And as a consequence of these factors of having lots of room and having a history of the state as seen as oppressive, the United States evolved a series of institutions that had particular characteristics. In general, if people didn't like what was happening in the allocation of resources, they could go somewhere else, form their own community, and people could move as they chose to these different alternatives. In other words, exit, rather than politics, became a strong form of government, and the government that we have is largely much more local than in other countries and it is relatively weaker as an administration.

The second point I would make. The United States has had a very tough history with banks. If the state was going to be limited, the next likely source of monopoly power were the banks, and the history of the United States has been a history of limiting banks at both the national and the state level. We can go into that more if people like.

Third, at the level of corporate governance two points become important. One, there was no government to go to to try and seek protection or to seek types of monopoly rents, so corporations concentrated on competing often through innovation. Secondly, corporations had to raise public equity funds; most money was not available through a developed banking system and we developed a very strong system of regulating public markets or developing public markets in which stock price was essential to a company's growth because it was really the measure of the resources available, either to acquire other companies or foreign internal capital.

Fourth, our labor system was highly unempowered; we did not have a strong labor movement, nor did we have a strong welfare system that often reflects what happens to people outside the job market.

Fifth, we had a very strong competition law which reflects again this opposition to monopoly power. And most importantly, the competition law was not so much enforced by the government but through private actors who were able to bring law suits and hire lawyers, who only make money by winning those law suits, to sue people on competitive grounds. In other words, it is a system of private monitoring.

And finally, there was very little product standardization in the United States through regulation, again because of the weakness of the government.

Now I would suggest, I would ask you to compare, in your minds at least, Japan or Europe to this model. And I will just say something about Europe. In Europe, there was not so much room for separation, for using exit, and the state which had a preexistence to modernity, which was around and could be used and adapted, always had a much stronger role in life. Politics was much more strongly a part of European life. The state used the banks. Finance, national banking systems, became extremely important in creating some sort of control by the state over the economy.

Third, corporations were in their governance, stakeholder's governance, involving in many cases -- in Germany, two-tiered boards with representatives of labor or representatives of different interests -- became much more important in corporate life. Public shareholders were much less important and had much less recourse.

Fourth, labor was obviously much more powerful, given the stronger political system, and developed various types of welfare systems that now create some difficulties fiscally in Europe. Competition law was basically nonexistent, because you could monitor the behavior of corporations directly through either the banks or through state ministries. Now you can make the same comparison in Japan, but I would suggest to you for different historical reasons that Japan may in some ways be closer to the European model that has a greater emphasis on politics than to the American model on markets.

Now because of time, I'm going to skip over this question of convergence, except to make one point. The law in those areas where convergence has been stronger, and it has generally been stronger in corporate governance and finance than it has in competition law, and that is still stronger than the convergence in labor law. We have a descending order of where convergence has occurred, but generally it has been driven by private action before the law. So, for example, in many cases it is more important that companies listed themselves -- German companies and Japanese companies -- on the New York Stock Exchange or went public through NASDAQ, that this really created a change in the type of corporate governance required by the New York Stock Exchange or NASDAQ. And the law has followed, rather than led, in most cases.

The other point I would make, its indirect effects. It is much more important for large companies to deregulate the financial structure away from bank dominance than it is to worry so much about particular parts of the company law. And for small companies it is much more important to deregulate the service sector -- this comes back to the point that Bill was making -- than it is to develop very particular types of legislation.

Final points. How does all this affect governance? Well, I would say that there are four ways in which we see governance changing at the present time, and let me just list them and we can come back. But my suggestion is that openness and information technology are making it more feasible to govern through market alternatives than through politics, and this lies beneath these changes.

What are the changes? First, we see much less public production. This is true both in social services, like medical services which in Europe are being decentralized to some degree, are becoming more competitive. It is certainly true in the infrastructure fields like telecom or energy. Just before I left Stanford, I noticed a new e-company that came onto the market which allowed me to choose my electricity provider from more than 300 on a monthly basis. The idea of an old monopoly like Tepco is gone; at least in California it is going elsewhere. So one, public production is declining.

Second point, much less use of regulation where government does act, much more use of economic instruments and independent authorities, whether they're monetary authorities or whether we're talking about economic incentives rather than direct regulation.

Three, the point that Bill Miller made is enormously important. Industrial organization is changing along the lines that he described through the Coase analysis. It is becoming much cheaper to do things by getting more information about your potential transaction partners, and companies, instead of including all services. Jack Welch talked about businesses. Now much more, it is even becoming projects that companies will pull together all kinds of different services, lawyers, accountants, compensation firms, labor service firms, and create a customized company. What is the implication of that for governance? First, it is much more difficult to run the type of system where a bureaucracy monitors the behavior of a limited number of competitors when you have companies forming and closing on a very rapid basis. So the capacity to use administration is going to decline. Second, I don't think I'd worry so much about competition laws as many people do, even with networks effects and the like in the Microsoft case or the telephone cases that are going on in the United States. I would worry much more about how much competition do you have effectively?

Now let me make my final point. I think that what we will see in the coming years is a case in which even law, which of course is itself a kind of a collective good the government provides, I think even law will be declining. Because I think that people will work more and more by using thick networks of information to make better and better predictions about their partners, and how likely their partners are to deliver given their reputation in particular deals. Now in many ways that sounds like keiretsu style organization, because people have always said Japan doesn't need law because there are relationships, because there is trust.

The difference is, with the Internet you're going to be able to select your partners and study their reputations on a global basis rather than on a fixed relationship basis. So I think for all these reasons even the law will decline in coming years, and I will be happy to supply to those of you who may be interested in written work that goes through this long argument in much more detail. Thank you very much.

[OKIMOTO ] Thank you, Tom. You ran over time, but it was so interesting that I allowed you to continue.

I have a question for each of the panelists, and then I would like to open it up to the floor and general questions.

First, to Ward Hanson. Ward, the implication of your presentation is that there is a tendency for the empowerment of customers through the impact of the Internet, and this is seen is two areas in particular. The range of choices that are available, the capacity, in other words, of the customer to select between options. And second, the availability of exit options for the customer. I wonder if you think, if we were to apply this to Japan, for example, where it is commonly thought that the producers dominate consumers, that this will have a revolutionary impact on the empowerment of consumers. Is that inevitable?

[HANSON] Let me answer that a couple of ways. The first is that what is the initial impact of empowered consumers that have lots of knowledge about alternatives? The first impact of that is to reward high-quality products and companies. So the very first thing is it allows consumers to find who's got the best product, who's got the best value, the trade-off between quality and price. So that is something to be looked forward to if you produce a good product or service. Now where it then moves much more away from the producer-oriented to the consumer-oriented is that it really highlights what value distributors and the distribution network have and what value has just been traditionally there because of location, because of some sort of monopoly power. And it is that distribution channel where you will see huge impacts and you will see many battles, because of the Internet world show you are paying for. You may still end up buying a whole bundle of products and services, but you don't have to. And once that becomes clear, and one of the things that the Internet is very good at is training customers to know what is being paid for and what components of it are valuable. So in that sense, yes. I mean, it really has been through the distribution channel and through educated consumers about what they are really paying for.

[OKIMOTO ] Good. Thank you.

Bill Miller, you mentioned Metcalf's law and the importance of adding subscribers to the network. And this suggests that there is a winning dominant value to being first on the market, being a first mover. And yet, you also talked about the lowering of transaction cost and disintermediation that is the horizontal fragmentation of vertical corporate organizations. And this is really the essence of Silicon Valley, isn't it. Horizontal fragmentation, specialization of our division of labor, specialization of work. And this area where you have small companies specialized in the niche markets and particular products suggests that there are low barriers to entry. So what I want to know, is there is a little tension between Metcalf's law about building volume customers and having a strong powerful base, and at the same time -- well, maybe you're talking about different areas here, but at the same time having low barriers to entry and horizontal fragmentation.

[MILLER] Well, there is indeed a tension there, because you do have both of those effects. You do have relatively low barriers to entry and at the same time there is value to adding customers, and so whoever can add customers fast are the ones who are winning in that competition. So this puts enormous pressure on the companies in their marketing area to find ways to bring people through their networks. This is what has led to giving away products. People at Netscape started this by giving away their browser to drive people to their network, and it took a lot of financing to be able to do that. So it puts enormous pressure and enormous emphasis on having adequate financial resources to be able to go out and buy those customers, if you like, or acquire those customers. And this is one of the reasons you see these companies often going to the capital markets fairly quickly to get the capital to continue to build up this customer base. The fast-followers, however, can get along there rather rapidly. So indeed, the competitors are nipping on your heels because the barriers to entry are not very high. The technical barriers aren't very high. The financial barriers can become very high.

[OKIMOTO ] Thank you.

Tom, since you talked longer than the other two, I have two questions for you. The first question is that you seem to be assuming, or positioning that the growing importance of the market model, governance through the market, is the winning strategy or is the historic trend. And I'd like you to explain why that is the case. I mean, you said because of the relative decline in pricing, and you thought that it was a winning trend. But I would like to ask you if there are -- and obviously competition is intensified in this kind of environment, and there is presumably a greater efficiency, or the elimination of inefficiency, but are there any negative externalities? That is one of the questions I wanted to ask you. I mean, are there things that could halt this trend towards governance through the market? And if there are not, my second question to you is, what is going to happen to the Japanese and French governments which have ruled primarily through industrial policy, administrative guidance, heavy regulation of the financial sector? I mean, you're implying that that kind of government policy, that whole approach is anachronistic; it won't work; it comes at a high cost. So you're suggesting a rather dramatic transformation of the structure of government.

[HELLER] Well, the first thing is, what I'm suggesting is that in a number of different advanced industrial economies -- the United States, various European economies, Japan -- because of historically specific factors, they reached a certain balance of governance through politics and governance through the market. They differed. They had reached a kind of an equilibrium in each instance. And that the styles of governance reflected these different equilibria.

Now the only point that I want to make is that as the relative price of solving things by getting better information and having the possibility of competitive choice becomes lower, that wherever these countries were, there is pressure to move because of the changing price in the direction of more market. Now that doesn't say that any particular balance will emerge, only that given the historical position where they are starting, the change in price will encourage them to move toward relatively more market than they had in the past, and that is much of what we mean by globalization.

Now having said that, it is clearly true that governance by politics is still very important for a lot of reasons that we all know having to do with collective good like environment or other types of things where the market is necessarily going to undersupply. We see this, for example, in China right now where there are two economies: one which is highly political and not changing very much in the state sector, and another which is market-driven at the small level of township and village enterprises and various types of municipal companies, but is entirely dirty and has no labor regulations. So there will still have to be balance, but the balance will have shifted.

Now with respect to France and, I wouldn't say anything about Japan, there are too many people in the room who know far better than I and can take the ideas I've talked about and perhaps decide for themselves. But with regard to France, which has been in many ways a wonderful example of a well-governed state, although there has certainly been a lot of trouble with corruption and other issues recently. But France is changing very rapidly, largely driven by the fact of Europe. And what has happened in Europe over the past 20 years, at the very least, is that more and more governance has been shifted to Brussels. And as this has happened, various companies, whether they are French companies or German companies, find that they have a series of choices so that, for example, the capacity to get financing in Europe is now very much changed by the rise of the European Monetary Union and a single currency. A French company is not consigned to French banks and, thereby, to the Treasury as they once were. And just last week, the European Court of Justice ruled that a European company can incorporate in any country it likes. It may be based in Paris, but if it wants to incorporate in Sweden under Swedish law, it can. And what this does is it enhances the possibilities for exit, and I suspect will cause the French government to take two strategies. One, they will try and influence what happens in Brussels. But secondly, they will have to recognize that their capacity to impose very specific policies that they may feel strongly about is declining, and declining relatively rapidly in modern Europe.

[OKIMOTO ] Bill, you wanted to add something?

[MILLER] Well, I just wanted to add a little bit to what Tom is saying, because I will comment about Japan since you decided not to, because I follow the various venture laws. I spent a lot of time looking at what is happening in changes, and they have been changing quite rapidly in Japan as they have been in other countries. And in fact, if you look at the report that Mr. Higuchi talked about this morning and the directions that are indicated in that report, I think they are moving exactly in the direction that Tom was talking about. Regulation, much more by disclosure, if you like, and the information systems permit disclosure to be more effective, as opposed to governing by direct regulation.

[OKIMOTO ] Okay. Let me ask the panel one more question before I open it to the floor. We've been talking about Japan, and throughout this conference we've talked about the future of Japan. I would like to make a distinction between economic growth rates of 2 or 3 percent and what it takes to get to that level. And competitiveness in areas of high-tech and the services. I want to make that distinction, because if Japan, for example, resolves its bad debt problem, bad loans, if the consumer begins to regain confidence and spend again, if corporations begin to reinvest, particularly in new areas, I could see that the Japanese economy and its growth rates could recover. That does not, however, address the question that we have been looking at through most of this conference, which is: In the long term, can Japan shift upwards into the higher value-added segments of high technology and services by incorporating and adapting to the impact of globalization and the information revolution? Those are two interconnected but separable issues. And the question that I would like to ask anybody on the panel is the question: To what extent do you think, given the current institutions, given the current situation, Japan will be able to do the latter? That is, adapt to the Internet, adapt to the information revolution, shift up in high value-added areas of high technology and the services. Bill?

[MILLER] I'll take a crack at that. I guess I'll just start by saying that Japan can and will and is moving in that direction. I see it moving in that direction. I've met with more than 300 young software entrepreneurs in Japan, and they are moving very much in that direction to these very high value-added areas. No you don't notice the impact on the economy yet. But I'd like to point out that Silicon Valley had almost no impact on the U.S. economy until the last 15 years. Silicon Valley is a fairly old place. It has been around for more than 100 years. And in the early days there were small companies. Hewlett-Packard was a tiny company, it still is not a huge company. And so the economic impact, as it would show up in the GDP, was rather insignificant. So I think a lot of these small companies will not show up in the GDP for some time, but they are there and they are struggling. And these legal changes that I mentioned, they are very important to permit them to do more than struggle to succeed. But I see this happening, and this effort to move up the higher value-added chain is there.

[OKIMOTO ] Ward?

[HANSON] Sure. Let me jump in. On the business process level, in some ways Japan may be positioned to achieve major breakthroughs. Let me explain why.

One of the systems of technology adoption that we often see is, first of all, the technology like the Internet is used to just archive and record and to store the information that is used. Then the Internet substitutes for pieces of business process, like discussing customer support or maybe showing technical documentation. But the really effective uses of technology and the Internet are when the business processes are designed to take advantage of what the Internet is really good at. Most companies, we are finding, are willing to stop at that step two, where they just substitute the Internet where it saves them money or improves quality a little. But when it really hurts, when it forces reorganization, unless they have the fear of failure, they don't do it. So that in some ways if you're clear-eyed and see serious trouble without changing, that can put you in a position to achieve the ultimate best use of it, so that if you reorganize around a digital process and network process, then you ultimately are in a very strong and competitive position.

[OKIMOTO ] Good. Tom?

[MILLER] Yes. At least for the sake of arguing with my colleagues for which Americans are famous, I think I would be a little bit less optimistic about whether what is being experienced in Japan now is the natural pendulum of the business cycle within any given structure as opposed to a change in structure. And for me the greatest difficulties that I see in looking at Japan have to do largely with the very high cost of start-up in two senses. In one sense it has to do with the actual public costs of getting licenses of various types and interactions with the bureaucracy. I experienced this only in helping to launch the Stanford Japan Center a number of years ago, and I had a lot of lessons in just how many permits and how much time you had to spend trying to do something that had no good model in the Japanese administrative world.

The second thing that strikes me is the private cost. My son has a start-up company in San Francisco, and they make some kind of software and they are about to become an Internet company, so I see things a little through his eyes. And it is really interesting that, you know, these three kids who started this company knew a fair amount about technology, about programming, and not a whole lot else. And they had to get all kinds of services to help them, to figure out how to compensate their employees, to figure out a personnel policy, to get lawyers to help them, to get accounting services to do their taxes, to get market consultants to help them figure out whether they were going to take this company public, to get all kinds of specialized financial services which they ended up getting in Taiwan, I should say, not in San Francisco. They did a lot of their programming in India because they decided that was a better way to do the basic programming than to hire more people in Silicon Valley. And this whole process involved outsourcing, all kinds of expertise that they didn't have available to them internally. It would have been very expensive to go and try and get this internally and to build it into the company. It is precisely that tremendous web of services that they could call on, competitors offering them this wide variety of services that I think has let them flourish and be at a point now where they appear to be doing extremely well at the present time.

But my experience in Japan has been that it would have been much harder to find that web of complementary services than it was with this kind of global system that they ended up using with their base in Silicon Valley. And at least I have not seen yet in my limited experience in Japan a comparable deregulation and freeing up of the service sector, which I think is so important to the growth of these new companies.

[OKIMOTO ] Bill?

[MILLER] Well, I can agree with Tom and disagree at the same time. I guess that is also American. Now I think you're quite right that if you look at it now, as we would see it now, there are great difficulties getting companies started and keeping them going. But I also think that this will change, and I think there are a lot of pressures for that change and there are things that still have to be done. But I think those pressures are very substantial and you all see the change. One of my favorite ones which I would like to see is a change for the sake of Japan is related to the equity laws in starting up, because a founder in Japan, there is no such thing as what we call sweat equity. Cheap stock for the founders and the early joiners of the company. That is an enormous motivation for the founders of a company in the U.S., and that is not possible here. But that is a legal change; the securities law, which is being discussed. I don't know what the outcome will be. The only way I differ from Tom is that I believe those changes are going to come about.

[OKIMOTO ] Let me finally side with Tom, since it is two against one, by saying that even though Glen Fukushima and others this morning pointed out that historically Japan has adapted to external crises, and there have been many over the past 150 years, the oil crisis for one example. I think the difference here today with respect to the Internet and the functional requisites of the Internet is that it goes against deeply embedded institutions and practices, like lifetime employment, and more importantly it goes against important social values like stability, security, harmony, and, most of all, equity. And whatever else you say about the so-called Internet model, you cannot describe them as spinning out security, stability, equity, and harmony, and I'm not sure whether the changes that need to be made will be easily made and quickly made. The ones that you described, public policies ones, for example government changes in laws, I could see, I think, those coming into being. But the other ones that are more institutional like lifetime employment or the concept of equity may not be quite as easy to shape, at least not quickly.

Anyway, let's open it up to the floor and welcome any questions, not only on this subject but any subject that came up in the course of the conference. Yes, sir.

[QUESTION] I'm Ken Sugata, CEO and marketer of Inter-trust Management. I'm curious about cons of Internet marketing. Through my experience, there are many pros and cons of various Internet marketing. And through this seminar, only the pros are emphasized here. So many of the management here go back to the company and say to the CEO, "We've got to use the Internet right now." But I think it is very dangerous. Could you please share the cons of Internet marketing, Mr. Hanson?

[HANSON] The question as I understood it is that of the pros and cons, what are the negative aspects of Internet marketing?

Most of the existing marketing structure has gone up around the way you reached your customer. You reached a broad segment of customers and you relied upon an indirect distribution. In business-to-business marketing in the U.S., only about 12 percent of the companies went direct to their customers. All of the other 88 percent use some form of indirect distribution. The biggest threat is that your dealers will revolt against you as you go to try to sell directly.

We have learned from probably two main big trends. One, that e-commerce is easier to accomplish than we thought, which means it is less of a competitive advantage, because others can copy it. But treating individuals one-to-one, personalization is much harder. And it can expose weaknesses. Some companies, Compaq and Hewlett-Packard for example, are great companies, but they simply cannot ship a single computer cost effectively. They ship pallets of computers. Using the Internet to do e-commerce makes that obvious, that they can't ship very effectively. So you can show the weaknesses of your organization in handling individual customers.

And the last thing is that it forces you to make explicit what you rely on and use the machine to do. And many of those were implicit. It is very hard to teach computers to be polite, to be intuitive, to understand what is really being asked, so that you can be abusive or rude to your customers. And if you are not careful, the systems just won't work as well. So when you replace humans by machines, you have to be very careful about how you do that.

[OKIMOTO ] Bill, did you have anything to add? Okay. Next question? Yes, sir.

[QUESTION] I'm Keizo Hirayama. I work for Du Pont, Japan.

Well, in your assumption it seems that the Internet and IT are far advanced in the U.S. I understand that that is a correct assumption. But in manufacturing, after the war and in the 1980s, at one time Japan overtook the U.S. So maybe in IT or Internet, ten years from now, Japan may catch up and overtake the U.S., well, based on the historical experience and so forth. Do you think it is likely that Japan can catch up and overtake the U.S.? It seems that so much emphasis is placed on the U.S. being far ahead of Japan in Internet and IT. So I'd just like to know if it is likely or possible.

[HELLER] Certainly possible. I mean, ten years ago, when we founded the Stanford Japan Center in Kyoto it was because we were entirely persuaded that we were here to learn how to do things from Japan. There is still a lot to learn, but ten years is a long time, and it is quite possible. I do think, I agree with what Professor Okimoto said earlier, which is that it will take some institutional changes for Japan to be able to use all of its technological abilities to catch up, and those institutional changes I think will be difficult -- not impossible, but difficult. And one of the things, I only started to come to Japan about 15 years ago, so I'm not expert. but what always struck me about Japan was Japan changed so much and so quickly because in some ways it changed so little. That is to say, Japan did not rip its society apart over centuries the way it happened more in the West. It built on many features of Japanese society that were deeply ingrained. And, in part, because it has changed so much by changing so little, it may be difficult to make some of the kinds of far-reaching changes that are implied. On the other hand, I certainly have many Japanese students, most of them women, who are studying with me in Palo Alto and if those people are allowed to use their talents both institutionally and technologically, there is nothing that can't be done here.

[OKIMOTO ] Let me ask the panel another question, which is a question of whether or not there is a single dominant winning model of global management. I mean, we've talked about agility, adaptability, risk-taking, and undoubtedly those are very important qualities in this new highly competitive high-speed market. But achieving those qualities, agility and adaptability, can take, I would think, differential organizational forms. And if you look at others, at certain sectors like, let's say, automobile manufacturing, I would be surprised if Toyota didn't become more agile, more adaptable in the process of their evolution. And I don't know whether that will require a major transformation of their management system, their whole approach to corporate organization and corporate culture. But perhaps in the financial sector and in the service sector you will have to be in a different mode of organization, but it may not be a single mode. There may not be a single mode of organization that is the winning form of corporate organization and corporate strategy globally. That is just a question. I would be curious as to what the panelists think. Ward?

[HANSON] I won't try to answer quite so comprehensive a question, but I guess between the lines I will say no; there won't be one solution, because I think, going back to marketing, one of the main impacts of the Internet and e-commerce is to make traditional retailing more entertaining and enjoyable for consumers so that there will be a set of products that consumers will just want to shop for and buy in a traditional high personal-touch setting, so that not everything will be purchased on the net. Now, business-to-business is driven very much more by efficiency. Business-to-consumer can be driven by efficiency, but it can also be driven by culture, entertainment, and other issues like that. Consumers can just choose what they want.

[OKIMOTO ] Good. Bill?

[MILLER] Well, I think there will be different modes. I always shudder a little bit when I hear people talk about models for governance, because I think that there are no models, frankly. When people talk about the Silicon Valley model, I don't think we have a model in Silicon Valley. We more or less have to do whatever we have to do to make things work. Even within companies, two comparable companies will have quite different modes of governments within those same two companies. So I think they will be different. There may be some fundamental things which will be similar. This shift to consumer power, I think, is fundamental. That can occur under a lot of different kinds of systems. I think that disintermediation can occur under a lot of different kinds of systems, so there'll be certain things which will, I think, be common to the different modes of governance around the world, but there'll be a lot of things that are different.

[OKIMOTO ] One or two more questions from the floor? Yes, sir.

[QUESTION] Thank you. There has been much talk about information technology, but also toward the 21st century there has been a discussion of limits of growth in a global sense, because the resources are finite and, on the other hand, the population is exploding. And then there comes the question of: How are the resources going to be allocated? How are these finite resources going to be allocated? However, listening to your discussions, those who enjoy the benefit of information technology can conduct an appropriate allocation of the resource, but I think there are those areas where they would not be benefiting from this information and technology, geographical areas. Then what kind of allocation could be possible? What kind of answers are possible there?

[OKIMOTO ] Tom Heller?

[HELLER] These are very hard questions, obviously. I spend 80 percent of my time working on problems of climate change and issues of fairness in terms of environmental limitations of the types that you described.

In some ways I find that some of the problems of limitation are made easier by the types of changes that we are describing. The new systems of energy which will be less polluting are built much more on decentralized and information-intensive models than used to be the case. In China, perhaps, we can make advances by introducing these technologies more quickly.

There has been, as many people know, much discussion over the past 25 to 30 years that information technology would allow the countries of the developing world to skip over various stages that we in the richer countries have gone through that have often been socially or environmentally destructive. I can not tell you that in my work I have seen good examples of how Indian villages are seriously transformed by computers or information technology. So I think there is a certain inevitability to this process continuing, but unless we are attentive to the various gaps that can only be exacerbated within countries and across countries, then I think that the 21st century will remain very difficult. I do not think that information technology by itself is any sort of a panacea or automatic solution to the problems of social and environmental justice to which you allude.

[OKIMOTO ] Last question. Yes, sir.

[QUESTION] Thank you. IT's impact I think is strongest in the service industry. But in the case of manufacturing industry, I think the situation is slightly different. That is because, for example, in case of Boeing, sales are declining but profit is increasing. As I myself instruct managements, I feel that at the very end comes the feeling in the mind, or I think there is this emotional aspect. I think there is a different impact of the Internet on the manufacturing industry and the service industry. Don't you think so?

[MILLER] Well, certainly the Internet has a different impact on each industry. There are some industries where it will affect them much later, but manufactured products have to be distributed. And if you think of it as a distribution channel, it is also a communication channel. But you could think of it in both ways. And for many things, many products having a new distribution channel, it gives the opportunity to wrap services around the product, and I think this is something that Mr. Welch was alluding to earlier. I didn't hear his talk, but I think I heard that he had alluded to this, how to move from manufacturing to services.

The Internet provides a great opportunity in the manufacturing area to add additional services to the product and, therefore, enhance the profitability of the company.

[OKIMOTO ] Well, you have been a very patient and stimulating audience. In closing, I just want to mention the point that Mr. Kobayashi raised in his lecture. That is, after we have talked about all of these very arcane issues about administrative structure and the legal structure, Internet, and so forth, I think a lot does come down to people, and I agree with him in that sense. Having high-quality very good people who are adaptable, who are energetic, who have a learning capacity, I really do feel that that, in the last analysis, makes a profound difference. The question is whether or not the system will allow the people to have the incentive and opportunity to exercise their full potential. In that sense, I think it will be very interesting to watch over the next several years.

Let me on behalf of my colleagues from Stanford and on behalf of Stanford University again thank Nikkei Shimbun for this marvelous conference. And we feel honored to have participated as a co-sponsor. And let me again thank Mr. Arai in particular for his leadership in making this conference possible.