Fuld & Company's Competitive Intelligence Blog

Regulations seem to sneak up, surprising us. “Where did it come from?” we ask. Probably over half the research and analysis assignments my firm receives are the result of regulatory surprises..

Sometimes surprises can come in small packages. Once upon a time, I was told by someone who knows the car recycling (aka, junk) business in Massachusetts that you could install replacement windshields made from recycled glass, glass taken from old cars found in junkyards. An entire regional industry had thrived in the state, supplying installers with recycled windshields. Following the passage of this law, an entire micro-industry was wiped out overnight.

Hey, it’s very human to deny, but denial can come at a high price for companies and their shareholders. As I outlined in my book, The Secret Language of Competitive Intelligence, Kodak’s failure to recognize the rise of the digital camera was almost totally the product of nearly two decades of denial. Kodak’s mentality restricted it to thinking only about chemical and optical rivals, not considering entrants from the electronics sector, such as HP, Canon, Epson, and Casio. This denial has seriously diminished Kodak’s power and dominance in the consumer photography world.

Nearly every war game my firm runs around the world requires a disruptive scenario, one that is plausible, one that will shake up current strategy among the teams participating. More often than not, one of the scenarios we place before the group is one of regulatory change. Nearly every time we throw out this tsunami-like event, no one laughs and all teams dig further into their strategies. In the safe confines of a classroom, all will admit the government shift can happen (and was likely discussed in the company’s hallways for many years prior to the game).

There are regulations all around the globe that, were they passed, could change an industry overnight. What if the U.S. government decided that accounting and other consulting firms could enter the “lawyering” business? All of a sudden law firms would find a new set of clever rivals chipping away at their markets, “stealing” customers. The new Federal Aviation Administration ruling, preventing passengers from carrying liquids onto airplanes, closed numerous Duty Free shops at airports around the world overnight (but the terrorist threats have slowly but surely been squeezing carry-ons since 2001). So-called Green Laws may require comprehensive battery recycling, thereby slowing down the evolution of hybrid cars or full electric vehicles. The built-in future recycling costs for producing them could skyrocket, pushing the retail prices way beyond what consumers could afford. Threats, real or imagined, could cause governments to change the rules of the game but the fears or concerns that caused them were bubbling under the surface for years. The list of potential regulatory-inspired change is nearly endless.

In the Google v. Microsoft “Battle for Clicks” war game (also described in detail in The Secret Language of Competitive Intelligence) we ran a couple of years ago between MIT and Harvard’s business schools, the disruption was that of government regulation of the Internet through taxation. Taxing the Internet has been long spoken about but likely not well planned for by the Internet’s leading players, such as Google. Why is this? Perhaps because Google’s team is moving at lightning speed in an industry that demands so much here-and-now attention. I am not quite sure why this is the case, but I do know now that inattention to regulatory change that creeps along ever so slowly for so long can – once it does occur – cause strategic whiplash. I have seen it. Too many executives are shocked when a law changes.

“Oops,” may be something you blurt out when you drop a glass on the floor, but it should not be your response to a disruptive, long-anticipated government regulation.

How far into the future do pharmaceutical or biotechnology companies really plan? The pharmaceutical industry says it tries to look far into the future. After all, it has to. It invests for the long term, perhaps developing one compound or molecule for nearly a decade before deciding to move on into clinical trials, then into the marketplace.

I recently read a piece in BusinessWeek on the growing power of private equity funds that prompted me to reconsider the above question. The article, Private Equity’s Next Targets, forced me to change my question from “how far” to “in which direction.”

The article was a Q&A with David Rubenstein, a co-founder of the nearly mythical private equity fund, Carlyle Group. Most of the questions centered on Rubenstein’s predictions for private equity in 2007. Can private equity maintain its rapid purchase of companies, moving them from publicly traded companies to private corporations? Will the government begin to clamp down with regulations requiring more accountability, even for companies going private? Finally – and this is the question that made me sit up – will all the rich private equity offers draw some of the best and brightest away from highly-scrutinized publicly-traded firms into private-equity managed companies, as we have begun to see?

Rubenstein’s answer included this: “And the business school graduates who in the old days were going to Procter & Gamble and McKinsey now see their friends making so much money that the best ones are going to private equity and hedge funds. There is this brain drain of people going to med school and law school. I always say I would hate to be operated on by someone in the next 10 years.”

If I am a pharmaceutical firm, a hospital, even a healthcare think tank, I would ask myself this question over and over again. Will my organization be able to attract the best and brightest in the near future? A talent shortage may be a far greater long-term threat to an entire industry than immediate concerns over clinical trials or a pricing issue over a particular drug. Ironically, that threat may not come from the long-believed pay squeeze doctors and researchers are experiencing through managed care pressures, pushing doctors away. Rather, the healthcare brain drain of the future may be the pull (not the push) from high-paying, thrilling private equity and other Wall Street jobs.

In short, the critical, long-term questions healthcare must begin asking itself is who will run our companies, not necessarily which regulatory hurdle we must surmount or what molecule we should develop?

Steve Jobs stood on the podium a few days ago at MacWorld and announced a new iPhone, as well as an Apple TV. Another bravura performance, according to the media that lapped up Apple’s announcement. Apple is a company that can only do”right,” at least that is the way it has appeared for the last half-dozen years. MacIntosh, iPod, iTunes. Apple seems to understand the market and is smart enough to actually anticipate the market. How long can this continue? Not forever, if Apple TV is any indication.

Why am I bringing this up now? After all this is not a technology column. The answer lies in a public war game Fuld & Company ran last year between Harvard Business School and MIT’s Sloan School students. That game stress-tested Apple’s strategy and clearly illustrated how an Apple home entertainment system is a must-NOT-need. The MIT team representing Apple argued very weakly for a new entertainment system in the home. Nothing about it appeared very revolutionary, especially in comparison to all the entries already out there. The iPod was a different animal. It remained a hot property throughout the game; but iTV, as the war game team called it, appeared to be a dud.No one could find an argument for Apple then, in the simulation, and I can’t find an argument now. The iPhone is indeed cool. The same cannot be said for the Apple TV product. The war game team, representing Apple, could not convince the audience, the observers, or the judges, that consumers who have invested heavily in their existing home entertainment systems would throw out their recently-bought technology or add more gadgets to their living room. It would be a difficult sell, according to everyone who participated in the game that day.
Stay tuned for another war game this year among the business schools. From the mouths of babes come profound thoughts. None of these students participating in the war game were experts in the industries we portray, but when they stress test their strategies, both strengths and weaknesses become glaringly obvious. Wall Street, take note! Sometimes a game is really not a game. I recommend Steve Jobs play a few games himself.