Integrated Solutions in the Medical Imaging Industry

Technology Strategy Integrated Solutions in the Medical Imaging Industry Table of Contents 1. 2. 3. 3.1 3.2 4. 4.1 4.2 4.3 4.4 5. 5.1 5.2 5.3 6. Introduction............................................................................ 1 Industry Characteristics ......................................................... 2 Value Chain Analysis ............................................................ 4 Analog Value Chain ........................................................... 4 Digital Value Chain ............................................................ 5 The Role of Standards ........................................................... 7 DICOM ............................................................................... 8 HL7..................................................................................... 9 IHE...................................................................................... 9 Integration and Soft Standards............................................ 9 Creating and Capturing Value with Integrated Solutions .... 11 Incumbent Players ............................................................ 11 New Entrants: IT Solutions Providers .............................. 12 New Entrants: Applications Providers.............................. 14 Conclusion ........................................................................... 15 1. Introduction Since the invention of x-ray technology by Wilhelm Röentgen and the introduction of the first x-ray systems, the medical imaging industry has been dominated by x-ray technology. Analog xray systems became the standard technology used for medical imaging systems and the industry was dominated by a few key hardware manufacturers, such as GE and Philips, and film manufacturers, such as Agfa and Kodak. The transition from analog to digital technology that affected many fields in the 1990s also had an effect on medical imaging technology, introducing drastically different technologies to capture images from the human body. Analog x-ray technology is in its maturity and performance is largely a matter of image resolution. Digital imaging is a disruptive technological change in the way medical imaging systems are designed and operated and many different applications of digital medical imaging have been introduced (e.g., MRI, digital X-rays, CT scans). With the shift to digital imaging, the focus of performance is on both image resolution and the integration of imaging into all aspects of the medical environment, as shown in Exhibit 1. Digital imaging technology expands the medical imaging industry to include additional hardware, such as display monitors and networks, as well as software for numerous tasks, such as storage, retrieval, diagnostics, and calibration. We see the integration of medical imaging occurring in two distinct stages. The first stage concerns the installation of integrated digital imaging systems within specific clinical areas, like radiology or cardiology, throughout large research hospitals, or even in smaller care delivery organizations. These systems, known as Picture Archiving and Communication Systems (PACS), support the exchange of digital images and the ability of multiple clinicians to view images at the same time, leading to increased efficiency and better diagnoses. Although many practitioners continue to use analog x-ray technology for simple medical examinations, we believe PACS systems are currently going through the takeoff stage of their S curve and are already gradually moving towards maturity. The penetration of PACS systems increased from 25% in 2000 to 51% in 2004, and Gartner predicts that 90% of care providers will have PACS systems by 2008.1 The second stage of medical imaging integration involves institutional and organizational changes within the healthcare industry that are driving providers towards digital medical records and the integration of digital clinical data at the point of care. In this stage, medical imaging systems will become part of larger integrated solutions that tie together all aspects of the medical environment into unified IT systems. This level of integration is still in the ferment stage of its S curve, as multiple firms are experimenting with alternative designs for various aspects of how medical imaging fits into the overall system and there is no integrated standard at this point in time. In this paper, we explore the progression towards integrated solutions in the medical imaging industry. We start by examining the characteristics of the medical imaging industry, to understand the important drivers of market structure in the industry. We then analyze the structure of the medical imaging value chain and how it has changed during the transition from analog to digital imaging. As integration has occurred, standards have come into play, so we also examine the standards initiatives in this area and the role they play in the medical imaging industry. Finally, we consider how both medical imaging incumbents and new entrants can create and capture value as imaging systems are integrated into larger IT solutions for healthcare. 2. Industry Characteristics The medical imaging industry is an attractive industry for incumbents and we can observe several structural characteristics that contribute to the industry’s attractiveness. Low supplier power, relatively limited buyer power, the absence of substitutes, significant barriers to entry, and mild rivalry all make this industry attractive for incumbent players. Supplier power is low as most of the product inputs are commodities and can be sourced from multiple suppliers (including international players). Buyer power is definitely present, but the level of buyer power differs significantly across customer segments: teaching hospitals and large hospital networks clearly have high buyer power. However, the major players in this industry can rely on their complementary assets, especially their distribution networks and strong relationships with customers, in order to minimize buyer power and create higher switching costs for customers. In other customer segments, such as small private practices and county hospitals, buying power is much less significant. The R&D capabilities, deep customer relationships, and strong distribution networks serve as a significant barrier to entry. These complementary assets have clearly become a part of the industry structure, but they still serve as a key competitive advantage versus new entrants. Finally, with only a few players dominating this industry (only three major players, creating an oligopoly) and competition based on services and customization rather than price, rivalry in this industry is not very high. 2 Demand Heterogeneity The medical imaging industry is characterized by high demand heterogeneity, which is advantageous to the major industry players. Large teaching and research hospitals have different needs from those of small community hospitals or physicians’ offices. While each of these segments is a potential buyer of a digital imaging system, large hospitals require more machines, a wider range of complementary products, and often demand faster innovation than other segments. In addition, the medical imaging equipment package that includes hardware, software, and services requires significant customization from one institution to the next, enhancing the benefit that can be extracted from demand heterogeneity. Demand heterogeneity also opens up the possibility for smaller players to develop components of an imaging solution, such as software, that is targeted at specific niche markets, like small clinics and individual doctor’s offices. Demand heterogeneity is not likely to disappear and we believe it will drive the industry towards further customization and integrated solutions, as well as influence the adoption rates of technological innovations across the different customer segments. Scope and Scale Economies of scope do exist in this industry, while economies of scale seem to be less important in the competitive landscape. With respect to economies of scope, large manufacturers such as GE may supply a hospital with the entire product line of equipment, from digital X-ray systems to MRIs to imaging information systems. Some parts of the product offerings, such as flat panel displays and storage, are more likely to become commoditized. However, each player in this industry offers a package to the hospital that includes products and services (hence the scope) and this is much harder to commoditize. Going forward, we feel that increasing the range of products and services offered will become even more important. The major players will therefore have to look at providing more integrated solutions, either by opting for partnerships or by starting to provide these additional services themselves. For example, GE is already providing IT consulting services and building its own software applications for the latest generation of digital imaging systems. Switching, Brand, and Network Externalities We also observe high switching costs, the importance of brand, and network externalities as helping to make this industry attractive for incumbents and hard for new entrants to break into. When a hospital purchases a digital imaging system from GE, it is likely to purchase other equipment as well. These items are expensive, durable goods that require training for the staff and, 3 therefore, a hospital cannot easily switch to a new set of systems. Brand name is also very important in this industry, because the critical nature of the work performed (diagnosing patients) demands reliable equipment, which gives a significant advantage to players who have a reputation for quality and innovation. For example, we see GE Healthcare investing heavily in maintaining its high quality image in the community, even going so far as to run brand enhancing campaigns on prime time TV. Network externalities will also play a role in maintaining the strong position of the existing players and in helping this industry to continue to be attractive. The increased focus on the inefficiencies of the healthcare industry from the federal government will help create a movement toward increasing the IT infrastructure throughout the medical environment as a way of improving productivity. Large players in medical imaging will likely benefit from a growing market that will make the industry even more attractive in upcoming years. 3. Value Chain Analysis In analyzing the value chain of the medical imaging industry, it is important to first understand the different players in analog imaging and how they used uniqueness and complementary assets to create and capture value. We can then examine the emergence of digital imaging and how it disrupted the value chain by eliminating the need for certain complementary products (e.g., film) and creating the need for other complementary products (e.g., displays, storage). 3.1 Analog Value Chain As analog x-ray systems developed into a standard technology used for medical imaging, the industry became gradually more and more dominated by a few key players: hardware manufacturers, such as GE, Siemens, and Philips, and film manufacturers, such as Agfa and Kodak. Uniqueness These large firms did not capture the industry’s value solely through the uniqueness of their developed technologies. The original patent protection of the x-ray system quickly became redundant as firms moved towards a common standard. Furthermore, key hardware manufacturers had to build up a significant portfolio of patented incremental innovations in order to protect themselves in this environment of continuous innovation. As a result, these manufacturers also built up R&D expertise in developing medical imaging devices, which became an important complementary asset in the transition towards digital imaging. 4 Complementary Assets While technological innovations played a role in value capture, a small number of hardware manufacturers managed to capture the lion’s share of the analog x-ray market due to a number of significant complementary assets: a strong distribution network, a seasoned sales force, significant marketing efforts, and reliable technical support and training. These complementary assets enabled key players such as GE and Philips to build relationships across the medical community, to establish their reputations as quality equipment providers, and to offer the medical industry a wide range of medical equipment that reached far beyond just imaging equipment. All these complementary assets allowed GE, Philips, and Siemens to compete successfully against small innovative imaging firms and capture most of the value in the analog x-ray industry. Complementary Products By providing complementary products to medical imaging systems (e.g., the film to capture the image, chemicals to process the firm), the film manufacturers, such as Kodak and Agfa, focused on a different part of the process and therefore had to rely on slightly different assets in order to capture value in this particular part of the medical imaging market. Uniqueness played a role in value capture, as only high-end film makers were able to match the required quality and resolution to serve this part of the film market. In addition, film manufacturers needed complementary assets like continuous R&D for chemical innovations and a substantial distribution network to provide an ongoing stream of products that have a fairly short shelf life. As consumables, these products provided a reliable revenue stream to the film manufacturers. 3.2 Digital Value Chain Most of the key hardware manufacturers have been able to successfully transition from analog to digital imaging equipment due to their complementary assets, including their sales and distribution networks, strong long-term relationships with customers, and R&D expertise. These players have been able to manage the disruption as many of their key complementary assets are still extremely useful in the digital environment. In addition, digital x-ray systems have eliminated the need for film and replaced it with digital capture systems developed by these same hardware manufacturers. Thus, the transition to digital imaging also reshaped the dynamics of the value chain further towards the hardware manufacturers, by eliminating the film makers from the chain. Film makers have struggled to make the transition to digital imaging, as they did not have the fundamental in-house expertise of making imaging equipment. The film makers’ strongest 5 complementary asset—R&D expertise in the area of chemicals—is not needed for the new technology, and thus cannot be leveraged in the new environment. The film makers have tried to develop digital imaging technology, often by acquiring smaller firms who innovated in this area, so that they can leverage other assets, such as their reputation for quality and their customer relationships, but this has been an uphill struggle. New Entrants On the other hand, the digital imaging environment supports new entrants to the industry, such as software vendors, display manufacturers, and network integrators, who benefit from offering unique solutions that are the current complementary products to digital medical imaging systems. These products are key components of Picture Archiving and Communication Systems (PACS) and their performance is critical in providing value to customers along the integration dimension. In what we characterize as the first wave of medical imaging integration, integrated PACS systems have been installed in particular clinical areas, like radiology and cardiology, and even throughout large research hospitals, thereby moving from the ferment stage to takeoff on their S curve (see Exhibit 1). During this process, a number of new players have been able to use different approaches to capturing value in this space. Niche Players Some entrants have focused specifically on providing particular components of a PACS system, like high-end flat panel displays or image archiving software. For example, Planar, a flat-panel display maker,2 has been able to find a niche in providing medical-grade displays, due to the need for high resolution and constant monitoring and calibration, even though the flat-panel display industry as a whole appears to be evolving into a fairly unattractive industry, as low-end displays become commodity products. Another example is Emageon, a software company that offers a highly scalable image archiving system for hospitals and other large healthcare environments.3 While quality and uniqueness play an important role in allowing these small players to capture value, in the longer term these players will have to defend their position in the medical imaging market by building up complementary assets, such as service and technical support, distribution networks, and strong partnerships with the key hardware manufacturers. 6 IT Vendors Large IT solutions providers, in particular companies such as IBM and Hewlett Packard, have also been able to enter the digital imaging space, due to their strength in working with such items as storage systems, data integration software, and network solutions. These items are essential components of an integrated PACS system, and a company like IBM that has strong capabilities as a systems integrator can work with a hospital to put together all of the IT-related pieces of a PACS system and tie them to the actual imaging hardware. What these players lack is the specialized software that glues the entire system together, but IBM has been successful in partnering with companies like Emageon that provide such software. As a result, an entrant like IBM has been able to capture value in medical imaging due to its strong brand name as a quality system integrator, its partnerships with specialized software companies, and its existing service, technical support, and distribution networks. Incumbents At the same time, the incumbent imaging hardware manufacturers have not been blind to the value being captured by these new entrants and they have been working to defend their market position and capture some of the value themselves. For example, GE provides IT consulting services to healthcare providers who are looking to install PACS systems, helping them to put together all the required IT components just like IBM. GE is also building its own software applications for the latest generation of digital imaging systems. These activities make sense for GE and the other hardware manufacturers, as they want to maintain their ability to provide a onestop shopping experience to hospitals and other healthcare providers. Furthermore, as the medical imaging industry moves toward the second stage of integration, where a medical imaging system will be just one part of a larger integrated IT solution within a healthcare organization, GE can hope to leverage its expertise in implementing PACS systems to be able to capture value in this larger arena. 4. The Role of Standards As the focus of performance for medical imaging has shifted to integration, standards have been critical to the ability of different players to put together the components of an integrated system. Healthcare customers are used to being able to buy medical imaging equipment from different vendors, and they are therefore leery of proprietary standards that would lock them to any 7 particular vendor. This situation has led to the development of public open standards. As this time, there are three standards organizations that have an impact on the integration of digital imaging into the overall medical environment. The primary standards organization, Digital Imaging and Communications in Medicine (DICOM), works “to create and maintain international standards for communication of biomedical diagnostic and therapeutic information in disciplines that use digital images and associated data.”4 Due to the need to integrate medical images with other medical information systems, DICOM has established relationships with two other standards initiatives: Health Level Seven (HL7) and Integrating the Healthcare Enterprise (IHE). 4.1 DICOM In 1983, the American College of Radiology (ACR) and the National Electrical Manufacturers Association (NEMA) formed a joint committee with the goal of creating standards for the transmission of medical images and their associated information. Although the committee released two versions of the standard in 1985 and 1988, it was not until the publication of Version 3 in 1993 that the DICOM standard began to deliver on its promise of standardized image communication. DICOM Version 3 supported the transfer of medical images in a multi-vendor environment, and it also facilitated the development of both picture archiving and communication systems (PACS) and broader interfaces with medical information systems. Members of the DICOM Standards Committee include all of the major vendors (GE, Siemens, Philips, IBM), as well as organizations that represent various user groups (American College of Radiology, American College of Cardiology, American Dental Association). From a technical perspective, DICOM specifies a network protocol for use over TCP/IP and defines messages, services, information objects, and a negotiation mechanism, with the goal of ensuring that any implementation of a compatible set of services and information objects can communicate effectively with any other such implementation. At the application level, DICOM addresses five main areas of functionality: the transmission and persistence of complete objects (e.g., images, documents), querying and retrieving such objects, performing specific actions (e.g., printing an image), managing workflow, and supporting the quality and consistency of image appearance both on computer displays and for printed output. DICOM also supports the integration of information produced by medical imaging systems with a patient’s electronic health record (EHR) by defining services that allow access to DICOM objects from EHR systems. 8 4.2 HL7 As part of these efforts, DICOM has developed a strong relationship with Health Level 7, an ANSI-accredited standards organization whose domain encompasses clinical and administrative healthcare data. The mission of HL7 is “to provide standards for the exchange, management and integration of data that support clinical patient care and the management, delivery and evaluation of healthcare services.”5 The current HL7 standards include Version 3.0 of a Messaging Standard for the exchange of healthcare data and an object-oriented Reference Information Model (RIM) that explicitly defines the data that is carried in fields of HL7 messages. DICOM works with HL7 through the Imaging Integration special interest group to ensure that the RIM includes the appropriate classes and attributes to support DICOM-oriented objects. 4.3 IHE Integrating the Healthcare Enterprise is an initiative “by healthcare professionals and industry to improve the way computer systems in healthcare share information.” IHE is basically a metastandards initiative, in that it promotes the coordinated use of other established standards, such as DICOM and HL7, to address specific clinical needs. The goal of IHE is to develop frameworks for information sharing that fill the gaps between standards and systems integration, thereby reducing or eliminating the need for expensive, site-specific integration work. IHE was created in 1997 by the Radiological Society of North America (RSNA) and the Healthcare Information and Management Systems Society (HIMSS), with the goal of promoting a higher level of interoperability between imaging systems and information systems. Thus, it isn’t surprising that IHE’s most successful technical framework is in the radiology space, although the process has since been adopted in other areas, including IT infrastructure, cardiology, and laboratory management. 4.4 Integration and Soft Standards The existence of these three distinct standards organizations and their overlapping roles provide a clear indication of the complexity of integration in the medical imaging environment. All of the major equipment vendors in this space support the various standards, as evidenced by the long lists of interoperability statements posted on all of their web sites. However, as the IHE initiative makes obvious, conformance with the various standards does not ensure interoperability between 9 systems from different vendors. In fact, even the DICOM standard, which has the narrowest scope and is currently the most robust of the standards, does not claim to guarantee multi-vendor interoperability: Even though the DICOM Standard has the potential to facilitate implementations of PACS solutions, use of the Standard alone does not guarantee that all the goals of a PACS will be met. This Standard facilitates interoperability of systems claiming conformance in a multi-vendor environment, but does not, by itself, guarantee interoperability.7 Moving beyond PACS integration to more complex integration problems, like linking imaging systems to EHR systems, it becomes even more obvious that interoperability is a huge issue. As a result, the medical imaging environment is particularly ripe for “soft standards” plays, where vendors develop products that are conformant with the various standards, but also go beyond those standards to provide additional interoperability among their own suite of products. This strategy allows a vendor to claim conformance, while at the same time touting features that give its products an advantage when used in a homogenous environment. Even though this strategy locks the buyer to a specific vendor, the buyer may actually gain more benefit from the increased interoperability than they lose due to being locked in. A soft standards strategy seems especially relevant in the medical environment because medical information standards seem to evolve particularly slowly, due to the numerous vendors, user groups, and government agencies that can be involved in their development. We can even see evidence that vendors are pursuing a soft standards approach by examining how they talk about integration in their conformance statements: The integration of any device into an overall system of interconnected devices goes beyond the scope of standards (DICOM V3.0), and of this introduction and associated DICOM Conformance Statements when interoperability with non-GE equipment is desired. The responsibility to analyze the applications requirements and to design a solution that integrates GE imaging equipment with non-GE systems is the user's responsibility and should not be underestimated. The user is strongly advised to ensure that such an integration analysis is correctly performed.8 As the various standards continue to mature, interoperability may become easier. But given the current complexity of the integration problem, healthcare customers have two main alternatives: 10 buy all the pieces of an integrated imaging solution from one vendor, such as GE, or work with a company that can integrate components from a variety of vendors, such as IBM. 5. Creating and Capturing Value with Integrated Solutions The medical imaging industry is now moving into the ferment stage of the next phase of integration (see Exhibit 1), where medical imaging systems are becoming part of larger integrated IT solutions within healthcare organizations. The three main players that have dominated the medical imaging industry for many years, GE, Philips, and Siemens, will continue to play a pivotal role in this integrated world. They will be accompanied by two types of new entrants: large IT solutions providers, such as IBM, and applications vendors, who will provide niche solutions to medical imaging customers. In this section, we analyze how the incumbents and new entrants will create and capture value with integrated solutions and how the value chain is likely to evolve over the next phase. For simplicity, we provide some examples of key players without suggesting that this is a complete representation of the competitive landscape. 5.1 Incumbent Players While three main players, GE, Philips, and Siemens, dominate the medical imaging industry, GE is certainly the largest player and it is the one company that can be said to “own” the relationship with hospitals. As a vertically integrated company, GE can provide anything and everything to its customers: “soup to nuts, light bulbs to monitors to radiology systems.”9 GE touches every piece of the imaging value chain, from hardware to software applications to integration, and it also covers every aspect of the hospital workflow in medical imaging and beyond. Although smaller, Philips and Siemens enjoy similar capabilities to GE. In an industry where relationships and distribution networks are extremely important, the incumbent players have a significant advantage, and we expect them to continue to compete effectively in this space. Existing Complementary Assets The incumbent players have successfully transitioned from analog x-rays to digital systems by relying heavily on their complementary assets. Strong relationships with hospitals, a deep understanding of the healthcare market, and full product lines are all still very relevant to the next generation of integrated solutions, and we think these players are very likely to succeed and 11 perhaps even continue their leadership role during the transition to integrated solutions. We also see the incumbents continuing to introduce incremental improvements to their existing products targeted at surgeons and radiologists, such as GE’s OEC FluoroTrak 9800 Plus, which combines mobile digital imaging with surgical navigation.10 New Complementary Assets The area where IT vendors have the biggest potential advantage over the incumbents is in IT infrastructure and systems integration. Although GE, Philips, and Siemens do have consulting and implementation divisions and are already providing full-blown solutions to their customers, they do not have the same depth of experience as IT providers. Thus, while these capabilities are not new to the incumbents, they will need to be strengthened since they are central to what customers care about in the integrated world. GE, Philips, and Siemens may decide to take different approaches to strengthening these complementary assets. As the second and third largest players in the imaging space, Siemens and Philips have demonstrated their intent to partner with large IT players. For example, Siemens announced a global partnership agreement with IBM to deliver medical imaging management systems for healthcare in July of 2004.11 In this partnership, Siemens provides the applications and IBM provides servers, storage, middleware, consulting and integration services. Philips also has a relationship with IBM, although it is not as extensive as the Siemens partnership. Both Siemens and Philips are taking advantage of relationships with large IT partners in order to defend their share and compete against GE. On the other hand, GE is looking to maintain its leadership position in this space, so they are building these capabilities in-house and through partnerships with smaller players, and we do not expect GE to partner with a large player like IBM. 5.2 New Entrants: IT Solutions Providers IBM has used medical imaging systems to make inroads into the healthcare environment, with a strategy that is focused on helping customers integrate information, including research, genetic tests, medical records, and medical images. Specifically in medical imaging, IBM offers a combined solution with business partners, called the Medical Archive Solution, to enable viewing, managing, and storing patient image data across the healthcare enterprise. After establishing itself with imaging systems, IBM is now interested in expanding its role in healthcare into the emerging 12 area of information-based medicine. IBM defines its vision for information-based medicine in the following way: Information-based medicine will offer the ability to integrate patient-specific information and targeted treatments into the best possible healthcare outcome— tailored for a specific patient. Advancements in clinical genomics and biomedical imaging are helping to make information-based medicine a reality…Biomedical imaging advances require supporting the interoperability of various medical imaging disciplines and the storage and incorporation of images into readily accessible databases allows for maximum utility of advanced medical imaging techniques.12 On February 19, 2004, IBM announced the investment of an estimated $250 million into its healthcare business over three years, for hiring healthcare specialists, developing new solutions, funding research and development projects, and collaborating with IBM business partners.13 Existing Complementary Assets In playing in the healthcare space, IBM can rely on a number of existing complementary assets. IBM has tremendous experience with systems integration in mission critical industries such as financial services. The company is well known for its capabilities in business intelligence and data integration, high performance computing, knowledge management, database/data management, web services, e-commerce, security, and storage. The key to success in the healthcare space will be found in how IBM applies its IT expertise to managing healthcare data and delivering services. New Complementary Assets IBM is currently building up its capabilities in healthcare services and establishing partnerships with application providers. While IBM has general expertise in the area of services, this area also poses a significant challenge because the services group is the one that must form relationships with the customer and sell an IBM solution over one from GE, which requires a deep understanding of the healthcare market. IBM seems to realize that it needs to improve its capabilities in this area, as evidenced by its recent acquisition of Healthlink, a healthcare consulting firm, which brings on board over 500 consultants, MDs, nurses, and other practitioners who have built relationships with hospitals for many years.14 This acquisition makes IBM the largest healthcare consulting firm in the country. 13 Partnerships are also critical, as IBM does not itself develop medical applications. Instead, the company has approached this market like other markets, working to create an ecosystem of partners and customers that have specific expertise in applications. One such partner is Siemens, the third largest player in hospital information systems. The company also recently created a partnership with the University of Pittsburgh Medical Center to spend at least $50 million over the next eight years to jointly develop innovative IT projects for use in health care, as part of a larger deal that has UPMC buying $352 million on computer hardware, software, and services from IBM.15 As a new player in the medical imaging industry, IBM faces substantial competition from other key players, like HP and Accenture. In the same week that IBM acquired Healthlink, Accenture acquired the healthcare consulting practice of Cap Gemini in a similar attempt to strengthen its relationships with customers.16 In addition, all of these IT companies must compete with the incumbents in this space, who have had relationships with healthcare organizations for decades. 5.3 New Entrants: Applications Providers Many small applications providers are entering the medical imaging space by providing niche applications for a number of purposes, including diagnostics, image processing, and surgical navigation. One such example is 3D-DOCTOR, an advanced 3D modeling, image processing, and measurement application.17 As integration becomes more important, these small players see the opportunity to partner with large players and provide niche solutions within an interoperable network of products. As we’ve seen, GE provides one-stop shopping, but some buyers may be nervous about the total lock-in that comes with buying everything from GE. As standards mature and as players like IBM rely on partners, niche application providers will be able to provide customers with the ability to “plug-and-play” their applications into larger integrated systems. In this way, a hospital can choose an integrator and then pick best-of-breed applications for medical imaging, surgical navigation, and other ancillary applications. Of course, some customers will continue to prefer buying the entire solution from GE or Philips. However, as standards mature in this space, small application providers will have the advantage of being able to quickly tap into specific unmet needs. 14 6. Conclusion Over the past decade, the medical imaging industry has essentially made the transition from the analog world to the digital world. The incumbent hardware manufacturers from the old world have survived this evolution and are thriving, while the film manufacturers are still struggling to find their place in the new world. As the medical imaging industry has embraced integration, changes in the value chain have opened up this space to new entrants, including IT vendors, applications providers, and display manufacturers. Advances in information technology are now driving the industry even further along the path towards information-based medicine. Areas such as medical imaging, molecular imaging, clinical information system, genomics, and proteomics all rely heavily on information technology, leading to an increasing need to be able to transform the data generated into useful decision support information. Further integration is needed to aggregate data from various sources, like laboratory tests, genetic tests, medical images, and patient medical records, so that it can be easily stored, integrated and analyzed. Information technology is the key enabler in making information-based medicine a reality.18 To achieve the transformation into a fully integrated world, standards will also need to mature significantly, so that customers can feel confident about being able to tie all the pieces together into an interoperable system.19 As the medical imaging industry is moving from integration in specific clinical areas to fully unified IT systems, all the industry players appear to be building up complementary assets that will position their companies as high on both integration capabilities as well as medical-specific knowledge (including both services and applications), as shown in Exhibit 2. While all players are moving in the same direction, they are using different approaches to do so. GE is going it alone, building up its core capabilities, enhancing its integration knowledge, and developing its own applications. This strategy will be very effective if applications generate a lot of the value in an integrated world, as GE will be able to capture more of this value through its vertically integrated approach. However, if lock-in concerns affect the buying decisions of hospital CIOs, IBM and its partner-network model may have an advantage. At the same time, some analysts believe that IBM 15 faces an uphill battle because the healthcare industry needs software applications, not the hardware-oriented technologies for which the company is generally known. 20 While Siemens and Philips are building up capabilities in-house, they are also relying on partnerships with IBM to compete effectively against GE. Finally, if the real value is in software applications, which are currently provided by companies like Cerner, Accelrys, and McKesson, those companies will be able to extract a lot of value from the value chain. Looking out ten years, it is difficult to predict which strategy will dominate, but in the end there is plenty of room for everyone to capture value, since the U.S. healthcare industry alone is currently a $2 trillion industry. 16 Exhibit 1: Medical Imaging Industry S Curves Image Resolution Digital Imaging curve Analog X-ray curve Transition from analog to digital Introduction of digital X-ray technology Invention of Analog X-Ray Present Imaging Integration 1895 Time Digital Imaging curve PACS systems Transition phase Medical imaging integrated in unified medical IT systems Analog X-ray curve Present Time 17 Low Application Providers Philips / Siemens GE High Integration Complementary Assets Exhibit 2: Competitive Mapping Accenture IBM Low High Medical Specific Complementary Assets 18