Inside Fortress Europe and the ‘1992 Process’

15th March 2019

Outside Fortress Europe Excerpts
This Global Business Strategy Blog post is based upon unabridged excerpts from Chapter One, Ten Years That Shook the Capitalist World: 1988-1998, in Outside Fortress Europe: Strategies for the Global Market.

Additional commentary reflecting current ‘hot topics’ and global strategic management challenges is presented in the Context and Analysis sections.

Context

Egan, C. E., & McKiernan, P. (1993). Inside Fortress Europe: Strategies for the Single Market. London: Addison-Wesley/Economist Intelligence Unit.

In 1992 this book was commissioned by the Economist Intelligence Unit (EIU)/Addison-Wesley as the then twelve European Community member states prepared for the European Single Market which came into effect on January 1st, 1993.

The text examined the principles of global business strategy alongside a discussion of the political and economic processes involved in the creation of the European Single Market. It also presented case studies demonstrating how American and Japanese companies were proactively preparing for the new market environments they were facing. With few exceptions, notably German companies (and especially smaller Mittelstand firms), European companies were cumbersome, excessively parochial and wasted way too much organizational energy on seeking market protection (hence the ‘fortress’ title) rather than competing aggressively.

 


Outside Fortress Europe Excerpt

With China evolving, Japan wilting and the US nursing its debt hangover, twelve European economies were planning the final stages of the biggest Euro-project since the Treaty of Rome was originally crafted in 1957 and, even earlier, the 1951 Treaty of Paris between France, West Germany, Italy and the three Benelux countries (Belgium, Netherlands and Luxemburg) which established the European Coal and Steel Community and laid down the foundations for the European Union (EU). For years it had become common parlance to discuss the ‘1992 Process’ but, as with many things European, events didn’t quite tally: the formal creation of the European Single Market was January 1st, 1993.

(It should be acknowledged that the Maastricht Treaty, also known as the Treaty on European Union, TEU, was signed by the twelve member states of the European Community on February 7th, 1992).

The first-of-the-first-in-the-year is typical for the commencement of major European projects. For example, the then-controversial single currency, the Euro, was officially introduced as an accounting medium of exchange to global financial markets on 1/1/1999, i.e., in the first instance it existed exclusively as a technical concept with only electronic exchange and transfers being possible. The cash – notes and coins – didn’t arrive until 1/1/2002. Unofficially, the governments of France, Belgium and the Netherlands put huge pressure on retailers to postpone their January sales until the new currency had ‘bedded-in’, this for fear of the ATMs being empty when consumers traditionally let in the New Year with their annual retail therapy. This Euro trivia may well be Euro-trash, but it was a serious political detail: the same-day launch of a multi-country single currency, in the absence of any semblance of fiscal harmonisation, had never been done before and there was wide and deep scepticism that it would work. As behavioural scientists inform us, it is the consumers’ perception which matters most, and the widespread misunderstanding relating to the new Euro currency dominated the European integration discussion then in much the same state of confusion that Brexit is playing out amongst the general public in the UK throughout 2018. In practice, all Eurozone countries operated a dual-currency transition phase, most until at least May 2002.

At this juncture, it is worth emphasising a key point relating to the philosophy, nature and scope of Outside Fortress Europe: Strategies for the Global Market. It is not a text of record; rather, it focuses on the relationship between companies and the business environments they operate in and how within this complex nexus they design and implement competitive global business strategies over time.

However, just this once, and for the record, the twelve European Community countries who became signatories to the Single European Act of 1986 (ratified and effective July 1st, 1987) with the aim of formalising a European Single Market by the end of 1992 were: Belgium; Denmark; France; Germany; Greece; Ireland; Italy; Luxemburg; Netherlands; Portugal; Spain; United Kingdom. At the time of writing there are now twenty-eight member-states within the European Union with one about to leave (the UK) and others patiently queuing to join in the fun (e.g. Serbia, Turkey, ‘North Macedonia’).

For a concise yet authoritative overview of the origins, treaties and historical dramas which shaped the European Union that we know and love today, we strongly recommend The European Union: A Very Short Introduction by Pinder and Usherwood (2018). For a brief perspective on Grexit, Brexit, Italexist, Frexit and the rest see 1998-2018: A Brief Overview and Brexit later in this Chapter and also commentary in the Epilogue of the book.  Otherwise, observe the daily news to discover who knows what happens next!

As discussed above, one of the factors Harvard Business School professor Michael Porter identified in explaining the competitiveness of nations was the extent to which national industries were themselves characterised by intense rivalry. In the run-up to the European Single Market the characteristic attitude of large national firms from France, UK, Netherlands and, to a lesser extent, Germany (see below), was exactly that: nationalistic; or, perhaps more accurately, country-parochial; or, and worse, xenophobic. Rather than competing or consolidating, national firms spent energy and resources extensively lobbying their respective governments to protect their privileged positions.

The case of Germany in this context is worthy of special note. On a GDP per capita basis Germany was then the world’s largest exporter of manufactured goods and it remains so to this day (Economist, 2017, July 8th). Underpinning this powerhouse performance are not only the usual suspects: VW, Bosch, Daimler, BMW, Siemens, Henkel, Bayer and so on. The driving force of German export success are the Mittelstand, ‘no-name’ small and medium-sized engineering companies who dominate global high-end business-to-business niches, typically employing less than 500 people and mostly family-owned. Perhaps the most remarkable factor of German export success during the 1992 process was that the country was the highest unit labour cost producer in Europe and was exporting ‘against’ the strongest currency (the Deutschmark) in the pre-Euro era (a strong currency makes exported goods more expensive when sold in foreign markets).

In his well-received and influential book, The Borderless World, Kenichi Ohmae (1990) drew attention to the purchasing power of the Triad trading blocs – Japan, North America and Europe – and urged companies to globalize their operations within these sectors and to manage as if international borders did not exist. In practice, however, there was a growing fear that the emerging trade blocks were more likely to operate as ‘Fortress America’, ‘Fortress Japan’ and ’Fortress Europe’ than as a spur to driving growth in the world economy.

In its 1990 annual paper on the World Economy, Japan’s Economic Planning Agency highlighted this danger and, pointing to the proposed North American Free Trade Agreement (which embraces Canada in the north and Mexico in the south) and the European Single Market it predicted a potential shrinkage in world trade: “The possibility of raising barriers against countries outside the union cannot be denied. We must be vigilant against such a tendency.” Japanese concern was not surprising although the constraint shown in the politeness of the report perhaps was. Their response to the trading bloc mentality was in stark contrast to the vitriolic nature of the attacks on the Japanese at the time by the former French Prime Minister, Edith Cresson, a highly divisive figure in European politics throughout the 1990s:

The Japanese have a strategy of world conquest. They have finished their job in the US, now they are about to devour Europe

The French position does need to be put in perspective, however. Britain certainly didn’t follow the same hard-line, a point which critics could argue reflects the fact that the Japanese had placed 40% of their EU investment in the UK (noteworthy examples being the car giants Toyota, Nissan and Honda), a proportion which has remained broadly similar to the present day.

(See the GBS Blog post: Inside Fortress Europe: (Japanese) strategies for the European Single Market and the Trojan Horse pretence, for insights into late 1980s Japanese FDI into the UK).

Perhaps more illuminating as 1993 approached (and daunting for some European, Japanese and American companies) was the German stance against protectionist measures at the time: it was fervently against them. This position rested primarily on the basis of their conviction that, by any measure of customer value, German companies could take on and beat their Japanese and other global rivals. The evidence was with them rather than those advocating protectionism, and that is how it played out. In The Competitive Advantage of Nations Professor Michael Porter convincingly demonstrated that the intense rivalry of competing firms in an industry is highly likely to lead to continuous product and process innovation and competitive success. As he also noted in a rare author-named guest essay in The Economist, ‘Europe’s Companies after 1992: Don’t collaborate, compete’, the tendency of European firms to collaborate or clamour for protection during the approach to what was the inevitability of the European Single Market rather than take on the business environment challenges it presented them with would fail, and his message was simple: “the secret of competitive advantage is to compete” (Porter, 1990b).

As the inevitability of the UK’s 2019 exit from the European Single Market rapidly approaches some twenty-five years on, Porter’s advice should be well-heeded. The principles are the same, just more: (i) intense; (ii) immediate; (iii) impactful.

(See Chapter Eight, Implementing Global Business Strategy, for an exclusive methodology and business process on how this ‘Triple-Force Challenge’ can be observed, utilised and pro-actively managed for global business strategy success).

 

Outside Fortress Europe Excerpt References

Economist. (2017, July 8th). The German Economy: Vorsprung durch Angst. The Economist, 16-18.
Egan, C. E., & McKiernan, P. (1993). Inside Fortress Europe: Strategies for the Single Market. London: Addison-Wesley/Economist Intelligence Unit.
Ohmae, K. (1990). The Borderless World. New York: Harper Collins.
Pinder, J., & Usherwood, S. (2018). The European Union: A Very Short Introduction (4 ed.). Oxford: Oxford University Press.
Porter, M. E. (1990a). The Competitive Advantage of Nations. New York: Free Press.
Porter, M. E. (1990b, June 9th). Europe’s Companies after 1992: Don’t collaborate, compete. The Economist.

 


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All content © Colin Edward Egan, 2019