The rumor mill for the iPhone 4S began almost as soon as Apple released its iPhone 4. Better camera, faster processor, bigger screen, fire-proofing, cordless charging…leaps tall buildings in a single bound. The list goes on and on. We now know which of those predictions have come true. But instead of simply guessing, Apple’s competitors could have figured out not only what Apple was likely to do but how well they would be able to execute on it.

How? By looking at the strands of the company’s culture and history that limit and direct its behavior and translating what they found into a strategy map. Designed by Harvard Business School professors Robert Kaplan and David Norton, a strategy map is a relatively simple diagram. It describes how a company creates value by linking strategic objectives to its operations and it provides the key measures of success….

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Jill Totenberg
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• We ran a war game with an American firm which has a China subsidiary.  The American executives asked to have the game run in China regarding a new product line being launched in China.   They wanted to make sure their very successful Chinese subsidiary make no mistakes.  We had a difficult time getting everyone to agree on the game’s objectives, let alone uncover competitors’ strategic weaknesses.  By the end of the two days, we did achieve some success but I would have wanted more, more engagement, more “we are one team,” etc.  What was the problem, the challenge and what would you have recommended to the client  – if you could roll back the clock?
• A Japanese company wanted to learn from the best-of-the best in innovation from American firms. This case took place over 15 years ago, by the way.  We chose Intel at the time because in all measures it managed to grow while at the same continually innovating – shedding old products while introducing new, successful ones.   The client understood our selection but rejected our analysis.  Intel by all measures was America’s great innovator.  In the end the client asked us to research another firm, one whose innovative prowess did not match Intel’s.  What about Intel do you think the Japanese client rejected?  A hint: It had something to do with organization structure. 
• Finally, we delivered a monitoring program for a pharmaceutical firm with two internal clients who saw the world very differently.  The marketing executive was satisfied with knowing the rival’s strategic direction, while the R&D chief wanted specifics on clinical trial enrollment and other quantifiable success measures.   At the same time, we had to make this client – both clients – happy with a single and tightly bounded budget.  What would you recommend we do here? Culture was at the heart of this challenge.

Recent remarks attributed to GE’s CEO, Jeffrey Immelt, had him railing against China’s policy of taking technology from the West and making it its own, and “colonizing” Western companies in the process.  Whether or not Mr. Immelt actually used those words or meant them, the facts are on the ground.  China is growing at a very rapid rate and is at the same time moving far beyond its own borders, often overtaking Western corporate stalwarts in markets they once owned.

Our recent public war game, The Battle for China’s Smart Grid, confirmed the outcome that Mr. Immelt perhaps fears most. One key prediction: Western companies will need China (or a Chinese company) as a partner if they are to succeed in building out massive infrastructure projects such as the proposed smart grid in China. 

Does China have to play a bit fairer? No doubt.  It has appeared to have done some long-term corporate-relations damage with its policies despite the undeniable fact that it offers a large market opportunity for a Western firm, such as GE.  As the war game demonstrated, working with China could also help US and European companies mitigate political and financial risk abroad if let’s say a GE and a Chinese company partner in building out smart grids elsewhere in the world.  Just take a look at this clip from the war game regarding the team’s portrayal of Cisco’s China grid strategy that speaks volumes about the dynamics between Western companies and China and the choices they are about to make over the next few years.

Partnering can mean everything from a handshake and a contract to joint ownership.  What became clear in our strategy event is that joint ownership may likely be where some of these very large business opportunities are heading.  Can you imagine a portion of GE being sold to a Chinese entity?  What if a GE and ChinaCo jointly own such an entity?  These are the options that I am sure Jeffrey Immelt and his fellow energy industry CEOs have considered. 

I wish you a happy Independence Day this July 4.  Will companies be wishing each other a happy Interdepence Day in just four or five years from now?

Last year around this time we had just completed our public war game, The Battle for Healthcare Information.  The objective was to figure out where the emerging business of electronic medical records (EMR) was heading – along with the companies driving this fast-moving market.  One of the predictions was that Allscripts-Misys, among the leading players, would have to merge with another EMR company or a larger conglomerate such as IBM in order to capitalize on the growth opportunities.  Their sales force appeared too small to truly penetrate the more than 90% of the as-of-yet untouched market potential. 

Only two months after the game ended, Allscripts already began to reach out by forming an alliance with Cardinal Healthcare for assitance in sales and distribution.  Apparently that first “dance” did not develop into a something more permanent but it clearly began a process for Allscripts that lead to its just announced merger with Eclipsys.

Let’s see where this year’s game leads….The Battle for China’s Smart Grid.  I have already posted the conclusions from the US version of the game.  I intend to post our findings from the European-run version.  The conclusions and predictions differed somewhat.  More about this next week.

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.

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When it comes to building China’s smart grid, Western companies need to deal with multiple elephants in the room.

With 30-plus executives from energy and technology giants GE, IBM, Siemens, Hewlett-Packard and others looking on, four leading business schools yesterday participated in a war game to stress test the global strategies of these firms in competing for China’s $100 billion Smart Grid — only to encounter obstacles that had nothing to do with their companies’ technological prowess and everything to do with how they work with and within China. 
Through rapid-fire arguments, interrogation by an expert panel of judges, as well as questions from the corporate observers, “The Battle for China’s Smart Grid” War Game revealed many obstacles that many observers admitted that their companies must acknowledge and overcome if they are to win a piece of the $10 billion-per-year funding China has offered.   These predictions included:

• To fully take advantage of the emerging opportunities regarding the “smart grid” in China, Western companies, such as GE Energy, Siemens and Cisco, may have to sell a stake in their business.   Alliances and so-called loose partnerships are becoming less and less viable as tenable business positions in China.   The Chinese government is likely to want a piece of the intellectual property action for Chinese firms, and giving them a stake in publicly held Western companies would provide that stake.   At the same time, Western companies generally are uneasy about selling a piece of their business (or will have some difficulty pitching the sale to their domestic stockholders).  This poses some important strategic dilemmas and may necessitate a fundamental re-thinking of how foreign firms approach the Chinese market.
• Western companies need China to take on the world:  Western companies such as Siemens and GE have long believed that they can dictate the terms of expansion by their Chinese partners outside of China.  But a Chinese partner will likely become a necessary ingredient in any Western company’s global expansion plans by absorbing some of the financial and political risk among the diverse array of emerging opportunities across the globe.   The market in China is only the beginning for the Chinese government-run State Grid-approved corporations.  
• Standards setting and the capability to manage the buildout process represented by companies such as IBM may trump China-legacy firms such as GE and Siemens, selling technology and hardware into the Smart Grid.  As the IBM team (represented by the winning business school team, Kellogg) demonstrated, while IBM may have fewer years clocked in China than do GE or Siemens, it is offering an entirely different and high value sales proposition.  China wants and needs what IBM has to sell: skills in systems integration.  Aside from representing a true standards setter, IBM or companies like it can serve as the Smart Grid’s maestro, coordinating and vetting the other players in the Grid’s construction.  Cisco will need to participate in the standards setting process in order to preserve a place for itself against strong competition from Huawei, Cisco’s chief China rival.

The other elephants in this Smart Grid room identified by the judges and the teams playing out their roles included China’s concern about its own security in preventing others hacking the country’s system, as it hires Western firms who have the technological prowess to build out the Smart Grid.  Another elephant that Western companies have underestimated is capacity.  The grid needs to add enormous   transmission capacity at the breakneck pace China will demand.  China’s acceptance or nonparticipation in carbon pricing will also speed or slow down the expansion of the power grid.
“With a potential annual value of approximately US$20 billion over the next five years, the onset of the Smart Grid initiative in the PRC represents one of the largest, most strategically important global business opportunities for the coming decades,” commented Denis Simon, professor of International Affairs at the School of International Affairs, Penn State University and senior China advisor to Fuld & Company.  “Not only will the Smart Grid project define a potentially new, transformational economic trajectory for China in the energy field, but it also may serve as a catalyst for changing the rules of the road in terms of the way firms compete and cooperate across the global commercial landscape.”
All four teams worked hard to identify how the firms they represented in the War Game could add enough value to the Smart Grid initiative in China to earn profits for their companies.  They recognized the need to enter into strong partnerships with Chinese and potentially other Western firms in order to bring a successful package of products and/or services to the table. 
The Annual Strategy War Game National Championship, “The Battle for China’s Smart Grid,” was organized by Fuld & Company (http://www.fuld.com/).  IBM, Siemens, GE Energy and Cisco were represented by business students from Northwestern’s Kellogg Graduate School of Management, MIT Sloan School of Management, University of Pennsylvania’s Wharton School, and Yale School of Management.  Most of the students have worked in energy, technology and/or in China.  Last year, the War Game was on “The Battle for Healthcare Information”.  By the way, each of our public war games have made successful marketplace predictions each year.

Just this past week the New York Times (Academic Paper in China Sets Off Alarms in U.S., March 20) reported on an academic paper written by two researchers from China on the vulnerability of America’s power grid to computer attack.  This article resulted in misinterpreted accusations regarding China’s intentions to “take down” the US grid. When interviewed the researchers pointed out that this paper was theoretical and lacked the necessary depth to accomplish what their accusers claim.  Besides, they wanted to make it very clear that they used the US case because they were able find enough data in America and not enough on China’s grid to allow them to analyze their own system. 
The more substantial question is how extensively will US and European energy and technology companies invest in plant, infrastructure, and product development in China – seemingly a necessity if they are to build out China’s smart grid?  Recent concerns expressed by US firms about new PRC government policies that place heavy emphasis on only procuring products and equipment that contains “indigenous Chinese innovation” raise questions about how much of the market actually will be available to foreign companies.

If one just reads the ongoing press about Google’s exit and arguments with the Chinese government, then it is clear that concerns about the PRC business environment are growing.    At the same time, with far less noise other companies, such as Applied Materials, a prominent Silicon Valley technology firm is moving some of its technology R&D over to Xian, China (Austin-American Statesman, March 22, 2010). What exactly is the center of gravity regarding foreign business thinking about China?
Finally in response to US trade pressure on China, the China’s commerce minister, Chen Deming, warned against the U.S. beginning a trade war with China (Washington Post, March 22).  
So, as you can see the Battle for China’s Smart Grid is far more than just about the technology itself. It is about nations trying to gain competitive advantage.  It’s about where the R&D will be taking place. It’s about trust and about how to establish a growing business in a new market with lots of promise.