In the last six months, the context in which discussions of the global economy take place has shifted dramatically. We are going to see radical new structures and we are likely, in 20 years, to look back on this particular moment in time as a flex point in the structures of the international system. We are seeing shifts in financial markets. It is not just the dollar crisis. The rise of sovereign wealth funds suggests the emergence of new players.

We are beyond "the end of history." We are seeing authoritarian capitalist economies (e.g. Russia), "capitalist socialists," and other different political structures (not all of which are even proto-democratic) operating in the marketplaces. What with the effect, too, of consequences and adaptations to climate change, we are going to see a recasting of the various structures of international governance.

But the problem of growth remains. The classic policy objective, for all governments, continues to be that of sustaining the growth of employment and productivity to ensure expanding real incomes for citizens. The very logic of creating value in the economy has changed. As a result, policy strategies have to be reconceived.

The 20th century passed through several phases. The emergence of mass production and mass markets (an American innovation) was followed, after World War II, by an era of new forms of organization, production, and competition (lean production, diversified quality production, and trade conflict), during which there was a great deal of Japanese and European innovation. Then, just as everyone had written off the United States, it made a comeback which was characterized by modularization and supply chains, and involved the entry of the Asian third tier. It was centered on new consumer electronics: the transition from electro-mechanical to digital goods. This can be represented by the displacement of the Sony Walkman by the iPod. The iPod rests on different technical skills and different kinds of competencies.

This digital era can be described as an era of Wintelism. Competition is now component-driven and modular-driven. Product branding does not simply take place at the end: value starts to accrue at the level of the constituent elements. Modularity of value facilitated outsourcing, which led to cross-national production networks and supply chains.

What does globalization mean? There is a sequence of national stories, and not the end of nations. The word "globalization" arose with the rise of Japan. Previously, "international" had meant the focus on U.S.-European relations. As Japan began to become a more significant player in the global economy, the Trilateral Commission began to displace the Bilderberg meeting as the focal point of international discussion. The word "global" came to stand for the world in which Asia had reappeared as a major constituent of the global economy.

The big changes in the logic of value creation are twofold. Decomposition stands for the modularization of research and development, production, and distribution. Modularization began to create price pressure for all standard components and products. Since the pressure on value creation was intense, what commenced was the search for "sweet spots" of advantage and profit ("the shifting levers of advantage"). We are now seeing some enormously elaborate value networks: some are enduring, and some are only temporary.

What is a commodity today is a value-added domain tomorrow. Internal functions in companies have become products. In other words, a company can buy manufacturing, or buy research and development. Differentiated assets, such as the IBM Research Group, often become commodities that another firm can buy in the marketplace. As a result, new strategies and capacities alter the value chain.

Along with the decomposition that has dispersed and diffused production around the world, and the creation of value networks that reassemble all these different activities, comes the story of the transformation of services.

What does the services transformation mean for companies and for policy? The issue is not the growth of the value of the activities categorized as the service economy; rather, the issue is the algorithmic revolution, a services transformation driven by the application of rule-based information technology tools. These tools change the ways in which many services can be organized and fundamentally change the evolution of business models.

The fact that information can be handled in a digital form changes everything from nursing to banking to port management. An example is sensor-based monitoring systems that allow for intervention in a moment of crisis rather than a continuous human presence.

The algorithmic transformation is the fourth services transformation. The first can be put down to an "accounting" error: changes in corporate organization (outsourcing, in particular) changed the way in which manufacturing and services were subject to accounting. The second transformation was connected to some changes in consumption patterns. The third stemmed from the large-scale entry of women into the workplace. Consequently, a whole array of household services had to be brought to the marketplace.

The previous three transformations were not as significant as this algorithmic transformation. Aspects of service activities with defined rules can be converted into formalizable, codifiable, computable processes. These IT tools, when applied to services, change business processes. They enable sensor networks, they alter consumer goods, and they a new kind of service; pure information services.

What are the consequences of this fourth transformation? It is creating enduring advantage. Automating the routine does not create enduring advantage, but rather it is created by the re-conception and re-configuration of services. In other words, if a business just automates the routine, its competitors will quickly imitate, so the question becomes: what can you do imaginatively with the new services?

The way this change in the business model has played itself out can be captured by looking at business strategy models in two eras. In the "clarity era" circa 1980, there were definable sectors, and clearly mapped targets for advantage and value. In 2007, we are in the "ambiguity era," with sweet spots, "spaces," and domains. As the dot.com boom happened, we began to hear that people were not in industries, they were in "spaces." To escape the "commodity trap" requires bold, innovative strategies. We are seeing new business models throughout the economy. There is a transformation of existing offerings, the creation of new businesses, the blurring of the service/product line, and a change in product offerings.

Service strategy options evolve as ICT tools and platforms change. This is partly a story of the changing data network structures and partly a story about the service tools stack. The data network stack is an applications layer, with the control layer in the middle, and then the physical infrastructure. Much of what became the U.S. communications revolution was that the control layer was freed. Digitalization permitted control of how the networks were configured to be separated from the application provided by the infrastructure.

The structure of networks and the rules around how the build-out of networks takes place are clearly a national policy choice. There are different consequences related to how countries approach that problem over time. One of the variables that should be focused on is how the approach affects the kinds of innovations that could take place in business model.

For more than a generation, a cycle of network innovation and business experimentation has been going on: automating the codifiable (process and transaction); experimenting and creating; reorganization; innovation, and re-regulation; and back to automating the codifiable. As each level of technical innovation takes place, it opens a new round of this cycle.

What is distinctive about the services story? Firstly, services stories are always about rules and roles. Services are always embedded in social and political institutions. In most countries, therefore, transforming services is a political fight: it is re-regulation. France is a prime example of a country undergoing just such a process today.

Over recent years, the real sources of value creation and growth in productivity in the U.S. economy have come out of the reorganization of activity in the services sector. The increasing capacity to manipulate and manage information meant that in many service activities, reorganization of activities could genuinely increase productivity.

Radical change in the organization of society is required in order to capture the value that is implicit in the new ways of advancement of the services economy. Regulation and re-regulation are beginning to become growth policies.

On the subject of national innovation in global markets, domestic markets can provide the environment for innovation and experimentation that create the basis for advantage in global markets (as can be seen with the Toyota story). But too great a focus on domestic markets can also be a trap.

Does a national services strategy actually trap a country? The story of the cell phone market in Japan, a story about standard-setting, is an example. If the strategy in the domestic market cannot be the basis for a launch abroad, it becomes a trap. The basis of what it takes to move from a domestic market to an international market has become radically different.

The reorganization of the services sector is the source of value creation in Western economies. The possibility of new business models in the coming years is going to get Western economies out of this trap.

A continuous question has to be the link between the domestic marketplace strategies and the global strategies. That begins to be a story about standards, and the rise of China and India. It is clear that this cannot be settled by one country's own choices: it is going to be a much more complex story about international standard setting.

In response to all these changes, places, as well as companies, have to adapt. For public policy, the traditional targets dissolve. The firm disperses and the boundaries of the sector dissolve. What remains are diverse competencies: product design, production know-how, component innovation, branding, systems integration, and venture expertise. The question becomes: how can those competencies be developed, deployed, and redeployed?

The most valuable assets are those that are the most mobile, so how can a positive balance of trade in mobile assets be achieved? A country wants to be a place in which mobile assets are accumulated and orchestrated, but that entails being open to some of your own assets moving abroad.

As an example, the U.S. has for two or three generations been a technology hub, attracting science and engineering talent from around the world. That hinged on the openness of the U.S. system. Looking at the consequences of the current restrictions on U.S. universities to bring in more foreign students, the question is in what ways do those restrictions undermine U.S. capacity to be the node at which these valuable mobile assets are captured inside the country?

There are two ways of seeing this global world. One is that the global economy is fluid and can overwhelm you. But what is critical is the response to that. The other way of seeing this global world is to look at the enormous diversity that has emerged in the global marketplace and has created multiple viable strategic growth options.

What is clear is that there is no magic formula. Instead, there are a variety of answers. Looking at the cases of Denmark, Finland, Israel, Taiwan, Monterrey in Mexico, and Bangalore, governments have played a part in success stories in a variety of ways. If successful strategies vary, then role and policies are likely to vary. The objective is to be a valued-added focal point in a fluid global economy. The tactical question is, how should policy responses be configured to meet the strategic objectives?

Policy-makers have to build on existing resources and community competencies (e.g. Swiss micro-mechanical skills). But equally important is how to imagine the future. What radical reformulations are required, and how do you expand the competencies and the infrastructural capacities? For example, San Diego imagined that by building a world-class research university it could take its place on the global stage, and then achieved that goal in a single generation.

The three main points of this presentation are that value added in the services sector comes from the imagination of the business models, that domestic markets, though crucial, can become traps, and that the real question is how to build on competencies to try to imagine the future, building on the resources of the past.