Fuld’s Competitive Musings

Today’s Wall Street Journal article headline said it all: Foreigners Vie to Upgrade China Grid.  Written from China’s viewpoint, it sees Western firms eyeing an infrastructure gold rush.  The reality is that the state-sponsored smart grid initiative is one of the largest infrastructure projects ever conceived with China spending up to $100 billion dollars over the next 10 years.

The article also underscores the conclusions from our war game and cited one of its primary assessments: “To ease Chinese concerns,” the article states, “Western companies that want to win big jobs may have to sell a stake in themselves to a Chinese state-owned company, according to a study by Fuld & Company, a Boston-based consultancy.”

In a recent trip to China I informally polled business executives and others who work in the energy industry there about the game’s conclusions.  While I raised a few eyebrows concerning the game’s predictions, no one told me “Impossible!” or said we were way out of touch with reality.  No, in fact those I spoke with stated that the game was an important platform upon which to stress test this market.

What will happen next with the smart grid in China?  What lessons will both Chinese and Western companies learn from this great energy petri dish China has set in place? What can the West learn from this experiment on how it can grow a market in China?  More important, what can both China and Western companies take away from the experiment they can then apply to the rest of the world in the decade to come?

Stay tuned in this space for more updates as we watch the war game’s predictions unfold.

On April 3, 2009, dozens of experts from leading healthcare institutions and technology companies assembled to watch a war game unfold on The Battle for Healthcare Information. Some of the brightest business students from Columbia, MIT, Kellogg, and Wharton represented healthcare giants, Microsoft, McKesson and Kaiser Permanente. Their purpose: To stress test technology’s future role in rewriting America’s healthcare map. Tens and perhaps hundreds of billions of dollars are on the table for the company that can figure out the strategic solution.

We held this year’s event in New York City. It is the fifth national war game championship organized and run by Fuld & Company.

Teams assumed the identity of four major healthcare icons, simulating and ‘stress testing’ their anticipated strategies to determine who will profit from the adoption of Electronic Medical Records (EMRs). The Obama administration’s injecting $19 billion to kick-start this nascent electronic medical records industry just gets the players moving. It is no guarantee you will see universal adoption of electronic records in healthcare anytime soon.”

Among the predictions during this fast-paced business school war game event are:

• Entrenched interests will continue to resist EMRs for some time to come. Healthcare system change, engendered by EMR, means some interests will win dollars while other traditional players will lose - and no one wants to lose.
Physician, hospital and patient/consumer markets—are going to be major challenges for all companies in the field, the teams acknowledged. Hospitals and doctors actually can make money through these current inefficiencies and will likely resist change. Smaller medical practices may continue to resist installing such EMR systems, not wanting to invest in long-term promises while sinking lots of money into new and complicated electronic medical records systems. Emerging pay-for-performance requirements, and reimbursement incentives, may sway the thinking.

• A shortage of technical manpower will slow down the implementation of electronic medical records, no matter how much money is thrown against the challenge.

• Allscripts (and other similar pure plays, such as Epic Systems) will seek to leverage its unusually close proximity to the medical community to bring EMRs to smaller medical practices than had been reached before. In order to penetrate the small medical practice market where most of the EMR potential user base exists, it will have to form an  alliance or merge with a larger player that has a far more extensive sales force.

• The market that is driving efficiencies, such as EMRs and other scalable solutions, will act as a catalyst to force small medical practices to band together or merge in the next few years, allowing doctors to spread the cost – and the risk – of EMR implementation.

• Kaiser-Permanente seeks to lower healthcare costs by “undocking” healthcare information within its system, vastly increasing the access and portability of patient data. As a major healthcare provider, Kaiser is well positioned to set industry best-practices and influence adoption of EMR systems, rather than provide the ‘killer app’ platform itself. Kaiser will become the nexus of important alliances between government and industry to craft standards in healthcare IT—e.g., to afford interoperability of data-related tools and technologies—that have been nonexistent.

• McKesson will be working to vastly expand its healthcare IT niche through its dominance in logistics and understanding of the health value chain, data creation and data utility—with an emphasis on physician, payor and healthcare delivery applications. The company will be looking to generate synergies among all these different points of the healthcare delivery chain through information technology. MIT’s team, simulating the McKesson strategies, won the war game competition based on four criteria: the team’s strategic insight, accuracy in presenting McKesson’s strategy, creative ways it expressed McKesson’s culture and goals, and finally, its ability to project their strategic vision into the future. Last year’s war game on “The Battle for the Wireless Internet”, won by the Kellogg MBA team, successfully predicted a number of industry alliances.

When I opened my outer screen door this morning to pick up the newspapers, it sailed right over them.  Only seven or eight years ago – even in a recessionary climate – the papers would have been too thick with advertising pages to have fit underneath.

What does this have to do with electronic medical records, the subject of next week’s public war game we are running among the nation’s leading business schools? Everything.  The ever thinning newspapers declare the inevitable march of information from the paper world to the virtual world.  That is the same direction the medical establishment much take – perhaps kicking and screaming – over the next decade. The UK’s National Health Service has already embraced electronic medical records. The U.S., with a push from the President and agreement by Congress, will move in the same direction.

Inevitable does not mean painless or thoughtless.

Aside from needing to agree on both technical and medical standards- daunting enough…just look at the companies we are representing in the war game: Google, Kaiser, McKesson, AllScripts – all concerned parties must ask themselves how will government and commercial interests handle privacy and identify theft? 

Just this morning, the Boston Globe reported that an administrator at the Massachusetts General Hospital lost 66 records on a commuter train on the way to work.  This is just paper, you say. If these were electronic records, you can always retrieve them. Yes, but…

The bigger the system the greater the potential information loss. In 2007, someone from the Veterans’ Administration lost a hard drive that contained over one million health records.  One million could easily become tens of millions of records as storage technology improves. Around that same time period, thieves stole credit card identification from over 40 million consumers who shopped over time at the TJX retail chain. 

What is my point? We cannot hide from the inevitable. Technology is driving all information – not just healthcare information – into cyberspace.  One of the greatest challenges the war game teams will encounter next week is to demonstrate that their technology does more than just work. It must also work smartly and be able to secure the information that hospitals and patients put into it.

Amidst this week’s market turmoil, T-Mobile and Google announced the first Google phone based on Google’s Android platform.  All the articles this past week, including The Wall Street Journal and The New York Times (An iPhone Rival Open to Whims) missed a very important point.
Most of the press is looking at the Android platform and sees a challenge mostly to the other platforms, such as Symbian and Microsoft’s Window’s Mobile platform, both of which run on most phones worldwide. Only the iPhone has broken through and it only accounts for 2.8 percent of the market.
From the war game we ran this past March (The Battle for the Wireless Internet) with teams representing the carriers, chip/handset companies, and investment groups, Android will certainly threaten the other platform companies, such as Microsoft and Symbian.  That’s clear. 
The other, more subtle threat – and the one the press seemed to miss, the one that the war game clarified – is the larger one handset companies and carriers alike will face. It’s the threat Cloud Computing presents to the handset companies.  Cloud computing, as represented by Google, can mimic the complicated and high-priced features embedded in phone hardware (for which consumers pay a premium) and moves those features to the Cloud. Calendars - email, video applications, mapping technology, and so on.  Instead of a Nokia or an Apple building complex phones with chipsets that support a multitude of complicated programs resident on a sophisticated miniature computer, known as a smart phone, Google wants the Android platform to become that gateway to the Cloud where all these services will exist, mostly for free (supported by search advertising).  This is where Android will prove its greatest threat.
T-Mobile is near the bottom of the phone carrier heap in the US market which is likely why T-Mobile welcomed joining forces with Google. You won’t see other carriers, such as AT&T (Apple’s iPhone partner anyway) or Verizon connecting with Android anytime soon unless they are forced to do so, kicking and screaming.
Right now Android is a novelty but if it does gain momentum by working with various wireless carriers as it has with T-Mobile, it can devalue smart phones, such as those produced by Palm, Apple, Samsung, and Nokia, as well as the platforms they currently use.
 

Before I left work for the ballgame yesterday afternoon, I read an article about the July 11 release of the new iPhone.  The reviewer was impressed with Apple’s hardware improvements, such as the move to 3G technology, but was more impressed with the fact that Apple has opened its doors wide to applications developers. This got me thinking about what I call “second markets.”

As we left Fenway Park after the game (a victory march, following the Sox clubbing of Minnesota, 18-5), a sign outside the Cask ‘n Flagon, a bar located immediately outside the ballpark, caught my attention.  It read, “Ranked #2 Baseball Bar in the Nation by ESPN.”

The signed begged the question: Who is number one?  So I asked one of the bar’s employee’s, sitting outside.  “The Mickey Mantle’s Restaurant in New York City,” he answered grudgingly.  It was a typo, he chuckled.

Here I am, living in Boston, a city with one of the world’s great sports rivalries always on people’s minds: Yankees v. Red Sox.   In business terms, this is the primary market, the first market; these teams are giants in the sports world (the baseball world, anyway).

The Cask ‘n Flagon and Mickey Mantle’s Restaurant are duking it out in a parallel arena. Their fame is secondary.  Their fight for market attention (The Cask ‘n Flagon may host as many as 5,000 patrons on game day) very much rests on fan interest in the teams themselves.  If baseball succeeds, so might they. Should interest in the sport wane, these restaurants likely will suffer a similar decline.

After the short conversation with the Cask’s staffer, my thoughts wandered back to the cell phone arena. As in sports, leaders shape a “first market.”  The first market leaders in phones include Apple and its iPhone, Nokia (the leader in number of handsets sold), Samsung, LG, and others.

At the same time, there are scores of companies in a second market.  These are primarily the software developers, those that create the platforms and applications that make the phones powerful tools, taking them way beyond the dumb, wired phones of our past.

We do lots of research for and on companies in second markets. While these entities may remain hidden in the long shadows cast by the market creators (the first market players), they are potent forces themselves. Second market players in the pharmaceutical business may be billion-dollar companies.  The same argument applies to technology companies. EMC is thought of as a leader in storage, often considered secondary to computing leaders, such as IBM.  Nevertheless, EMC commands sales of over $13 billion. Storage, a second market, has mushroomed with companies such as EMC overtaking many of these first market leaders.

Stephen Jobs has encouraged developers to create applications for his phone with over 500 applications soon to be available.  Microsoft claims over 18,000 applications written for its Windows Mobile operating system. Palm claims it has 30,000 developers writing applications for its phone platforms.

These applications range from the serious, to the convenient, to the frivolous.  Ways to use your phone as a GPS device, ways to increase your productivity on Ebay, and ways to receive your favorite baseball teams scores.

Microsoft’s Mobile Windows platform and Apple’s iPhone have spawned another second market of mobile platform applications, a market with fierce competition.  Watch this second market.  Giants may emerge.

They’re in, they’re out!  Just last month, Sprint and Clearwire attempted another deal to launch a disruptive telecom service based on WiMax. This time the ill-fated deal was with Time Warner and Comcast.  This deal unraveled this week.

Is it over? No not by a long shot.

Fuld & Company ran a war game on March 4 to stress test the strategic positions of the cable companies, the telcos, the investment houses, and even Google, all of whom jumped into the FCC auction that concluded in the same month.

Once we introduced this little disruption, all the teams began to talk to each other, no one wanted to be left at the alter. The deal announced a wireless (based on the new WiMax spectrum made available from the FCC auction) mega-deal.

If there is an intelligence lesson here, it’s in two parts: (1) Deals happen, to paraphrase a bumper sticker. In any active, high risk markets certain players will always jump into the waters early. The press often follows closely behind, stirring up interest. While we are all reading the press, such as “Comcast Time Warner discuss nationwide WiMax Plan,” on March 25, Associated Press wire service, it seems that more deals will come.  Then, (2) we see the deal falling apart no even one month later.  The second lesson lies with the fact that even good intelligence, as teased out of a war game event, may be true but may also foretell bad decision making on the part of others.

In fact, the war game also foretold other quieter changes: That Google will do a “little evil” and start forming alliances with various telecom carriers to carry its mobile search engine. Nokia and other handset makers may start dealing with Intel – because they will have little choice. The carriers’ so-called walled gardens, where consumers can only buy phones locked into one network or another, are soon to become history – whether or not the phone carriers like it.

These quieter events – not nearly so dramatic – are the ones you need to look for. They are also intelligence products from the same war game. Yes, the dramatic, the mega deals will happen, but they may not be as powerful as the powerfully (but quietly) game changing activities moving around in the background as we speak.

I promised you the findings on our most recent public war game, and here they are:

Four top business schools predicted in the March 4th war game (”The Battle for the Wireless Internet”) that the FCC 700MHz wireless spectrum auction will produce deal-making with lots of cash changing hands but only small near-term tech advances as far as the consumer is concerned.  This first-of-its kind war game championship among the USA’s leading business schools, organized by Fuld & Company and taking place in Cambridge, Massachusetts, featured students from the Chicago Graduate School of Business, Harvard Business School, MIT’s Sloan School of Management, and Northwestern’s Kellogg School of Management.

The business school teams assumed the identify of four companies in the much heralded wireless Internet space, catalyzed by the FCC auction expected to end within a week. AT&T Mobility (Harvard), Google (Chicago), Intel (Kellogg), and Vulcan Capital (MIT), a venture capital fund with cable TV interests run by Microsoft co-founder Paul Allen.

All teams worked to predict the company strategies that may follow the FCC auction. The B-school teams showed much initiative and innovative thinking but proved to themselves that the companies they represented may all have a difficult time rolling out a true wireless Internet offering within the next two years.

Even if all the auction-participating companies represented in the game – that includes AT&T, Google, and Vulcan – won 700MHz licenses at auction, the companies themselves may be hard pressed to build out the infrastructure fully within the next two to three years. 

During the course of the game, each team “stress-tested” opponents’ strategies. By the game’s conclusion both judges and student teams served up a number of predictions for the upcoming year, post-auction:

• Intel, nearly a non-participant in the mobile phone market, will likely enter the mobile phone space through the PC backdoor by helping PC makers – a market Intel dominates – get into the handset business. Rather than try to push an equivalent Intel Inside® theme to the handset companies – an action that will likely be resisted because of the “chip tax” these companies would absorb, Intel will work their way into the WiMax space through the PC world.  This seemed appealing to the Intel team particularly as it began to see the worlds of the PC and handheld mobile devices converging.

• Google will do “a little evil” and partner with AT&T (or possibly one of the other one of the phone carriers not represented in the game; Verizon is a second likely choice) by forming an exclusive but time-limited agreement, similar to the AT&T-iPhone deal.  For the period of that agreement, AT&T will open its network to other handheld devices and applications, at least for the time being breaking down the “walled garden” that the major carriers currently have in place. In exchange, the student team suggested that Google will share 20% of its advertising revenue with the carrier. 

• Adult content may become the “killer app” for launching the wireless Internet.  As suggested by one of the judges in response to team discussions on applications, adult content is already a significant presence on the Internet and will likely have the same effect on the wireless Internet when launched. 

• Google’s roll-out of Android will run into stiff resistance on the part of mobile phone manufacturers because Google and handset producers have opposing views of the wireless future. Traditional handset manufacturers, led by companies such as Nokia and chip companies, such as Intel, will resist Google’s cloud computing march towards open-source and open development based on its Android platform.  Intel and mobile phone manufactures believe that they can only make money by selling a feature rich, memory rich set of phones.  Simple phones are commodities. Google’s Android and its cloud computing concept moves data and operating software away from the devices and into the network (closer, of course, to Google’s ad-serving machine).

Following an initial round, Fuld introduced a disruptive scenario. The future scenario, dated May 6, 2008 post-auction,  involved Sprint Nextel teaming up with DirectTV owner and former cable TV wheeler and dealer, John Malone, WiMax company Clearwire, and the newly minted Microsoft-Yahoo! to form the first truly wireless Internet joint venture. The pressure of imminent competition from this fictional scenario forced all four teams to grapple with both their limitations and the reality of their vision for the future.

Kellogg’s team, representing Intel, won the war game contest based on four criteria:  its strategic insight, accuracy in presenting Intel’s strategy, creative ways it expressed Intel’s vision in the wireless Internet space, and, finally, its ability to project its strategic vision into the future.

What kinds of executives are best equipped to handle the emerging virtual communities increasingly dominating the Internet?

I ask that question because I recently had the experience of discussing the topic of the ever-growing virtual communities on the Internet (MySpace, YouTube, Facebook) with two very different types of students–those seeking an MBA, and those completing a Masters program in product design.

Both groups found the topic enthralling. That is where commonality ended. I’m not sure which type school has the better approach to making a market for this new concept; I only know that they are different. My fear is that industry does not recognize these differences, acknowledging the left-brain, MBA analyst type over the right-brain, so-called artiste, the designer.

The very best MBAs the ones who think ahead and plan ahead for their companies, always will be in demand. Are these the only kinds of talents industry needs? MBAs are taught to see intelligence through spreadsheets, business cases, often measuring future success based on past experience.

Designers represent a very different breed of thinker, one that business can use but rarely places in the forefront of company leadership. It seems to me that designers are taught to build on past experience but also to sometimes throw it out the window in favor of new ideas and different concepts, when called for.

Just compare Kevin Rollins, former Chief Executive of Dell, with Steven Jobs, head of Apple. Rollins is a business school graduate and alum of the global consulting firm, Bain & Company. He was selected by Michael Dell, company founder, to run his company. Dell encountered market share losses for 18 months, finally forcing Dell to fire Rollins. Rollins had a solid track record, but when market conditions changed he appeared unable to move outside the system Dell needed to change. While Dell is in a commodity type business, with ever lowering prices, it too must innovate in order to stay in sync with its market.

Contrast Rollins with Steven Jobs, head of Apple. Not a business-type in the traditional sense, Jobs has gravitated to the design side. He offers magic, thinks about products that the market had not yet called for but where he has identified gaps. The MP3 player, for instance, was around long before the iPod was born. Jobs just wanted to give the world both better hardware and the technology to make the hardware work. He built a new entertainment ecosystem, called iTunes. While Apple’s market share is relatively small in the technology world, Jobs has made Apple an innovation leader and a very profitable one at that.

MBAs of the world, you are not industry’s only future. Intelligence is about seeing ahead, shaping change through discreet marketplace knowledge. Spreadsheets and business cases are about reviewing the past. Yet sometimes industry may be better off when the Designers take control.