I'm going to define two phrases for you -- the "current video game industry" and the "other video game industry".
Current Video Game Industry - the current video game industry grew from the idea that better technology leads to better games. The current video game industry anticipates the next-generation because it promises bigger environments full of better and flashier graphics. The current video game industry gives the award for "Game of the Show" at the Electronic Entertainment Expo to technical or video demonstrations rather than playable software.
Other Video Game Industry - the other video game industry is growing from the idea that good technology, good interactivity, good variety, and good access ultimately breeds better games for more people. The other video game industry acknowledges that a variety of games within a selection of genres CAN appeal to everyone. The other video game industry recognizes that, at the end of the day, games are about interactive entertainment.
Sony and Microsoft are pursuing the current video game industry. And there's absolutely nothing wrong with that. The current video game industry, although perhaps not entirely healthy, has nevertheless proven itself to be profitable and highly lucrative. Many fortunes have been made and will continue to be made from this market.
Nintendo, however, has identified the other video game industry. Nintendo has nothing to gain from copying the competition and pursuing their current video game environment. Besides, Sony and Microsoft already adequately satisfy that segment. The reasoning behind Nintendo's new pursuit is especially apparent when you consider the fact that the current industry has shown over and over again that there is only room for one or two profitable console manufacturers.
In 1996, Michael Porter wrote an article for the Harvard Business Review asking the question, "What is Strategy?" That's a great question and relevant to our discussion. Is strategy achieved by copying competition?
"A company can outperform rivals only if it can establish a difference that it can preserve," notes Porter. "It must deliver greater value to customers or create comparable value at a lower cost, or do both."
These 'differences' are ultimately born from the hundreds of activities performed in the creation, sale, and delivery of a product or service. Costs result from performing activities. For example, the cost of acquiring materials or the cost of employing workers. Meanwhile, a 'cost advantage' results when one of these activities is performed better or more efficiently than competitors. For example, acquiring cheaper materials or employing workers from overseas. According to Porter, activities are therefore the basic units of 'competitive advantage'.
Before improvements in activities:
An item costs $4 to manufacture and is sold for $5. You receive $1 in profit.
After improvements in activities:
An item costs $3 to manufacture and is sold for $5. You receive $2 in profit.
Makes sense right? The more efficient the activities in your operations are, the more likely you are to generate a greater profit. The video game industry is built upon this premise. It begins when a manufacturer sells a technologically advanced console at a price less than it costs to create. The manufacturer ultimately hopes to earn a profit by making the activities that produce the hardware (or acquire its technical components) more efficient and also by launching software which is built from an engine that is then efficiently re-used to release a sequel. This series of steps is conducted and repeated by multiple console manufacturers. By the conclusion of a console cycle, there is usually at least one manufacturer who successfully improves the efficiency of its activities to gain an enormous profit. As a result, they also reinforce the allure of this flawed model.
This management practice -- called operational effectiveness -- is not sustainable nor is it a strategy. "Constant improvement in operational effectiveness is necessary to achieve superior profitability," says Porter. "However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day."
Competition assures that it's only a matter of time before your activities are mimicked and your competition acquires similar operational efficiencies. Porter describes this as follows: "The more benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficient third parties, often the same ones, the more generic those activities become. As rivals imitate one another's improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win. Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition."
Is it any surprise then that the entire video game industry is consolidating? Merger after merger from Sega Sammy, to Square Enix, to Namco Bandai. As long as the current video game industry continues down the path it is on now, this consolidation has no hope of ending.
The Nintendo Strategy
On the other hand, there is strategic positioning. This superior and legitimate strategy is accomplished by performing different activities or even similar activities but in different ways. "Competitive strategy is about being different," says Porter. "It means deliberately choosing a different set of activities to deliver a unique mix of value."
Strategic positioning is ultimately a unique set of sustainable activities that use your company's valuable, rare and inimitable resources to change the rules of the game. As a result, Nintendo's unique set of chosen activities are bound to cause controversy among the "current video game industry" -- you know who I'm referring to, that audience who is content playing sequels with updated graphics and using the same input method (i.e. controller) multiple generations in a row on several consoles that are, for all intents and purposes, the same.
Strategic positioning is about being different. Nintendo has therefore decided to uniquely devote its resources to expanding the game playing audience through two keys things: "strong community" and "immersive games". You can see these goals mirrored in, for example, the restructuring of Nintendo's development divisions, the Nintendo Wi-Fi Connection, and the makeover of Nintendo Power -- these aren't coincidences. They are a chosen part of Nintendo actively piecing together its activities to fulfill its strategic position to expand the game playing audience.
"A company can outperform rivals only if it can establish a difference that it can preserve," says Porter. The difference Nintendo is establishing with the Revolution is a low-cost device with an accessible interface. The accessible interface will largely come in the form of its revolutionary controller, but also in the simple, yet elegant, design of the console. In addition, Nintendo will not only have low-cost hardware, but also low-cost software and a free online community. Nintendo is also changing things up with its virtual library of NES, SNES, and N64 games. This is a new and unique distribution model that has the potential for great success. Low cost hardware and software, a new intuitive gameplay input, and original game genres are a unique set of sustainable activities that, when combined, form Nintendo's strategic position.
"But why can't Nintendo have high-definition graphics?" exclaim current gamers! Don't worry, I hear ya and I'll explain exactly why they can't. There is an absolute need for trade-offs. When there are no trade-offs, you encounter a situation that Microsoft is currently in -- billions of dollars in losses within its Xbox division. This shouldn't come as a surprise, but trade-offs are an intimate part of our daily lives. We make trade-offs with our time (do I spend it studying or playing Zelda), trade-offs with our money (do I buy school books or buy Barbie dolls), trade-offs with what we watch on television (Oprah or Jenny Jones), etc.
This is why the "Nintendo Difference" is seen much more clearly today than it was during the GameCube generation. The GameCube was the tragedy of not recognizing that trade-offs are needed. Nintendo wanted to offer an accessible low-cost box with a handle, yet it also wanted to directly compete with Sony and Microsoft in the current video game industry. Nintendo wanted to create small pick-up and play software that appealed to casual gamers, yet it had graphics and a controller intended for the current video game industry. Conflicting activities, contradicting goals, and lack of trade-offs -- from the very beginning, the GameCube and Nintendo's strategy were doomed to take second place to Sony and Microsoft.
Ultimately, Sony and Microsoft could also sell their consoles for cheap, create a new controller and develop new game genres. They could without a doubt try to cater to Nintendo's other video game industry. However, just like GameCube proved to us, they are doomed to fail if they refuse to make trade-offs. "Attempts to compete in several ways at once create confusion and undermine organizational motivation and focus," notes Porter. This is exactly why high-definition graphics don't mesh with Nintendo's strategy. A company simply cannot be anything and everything. A dollar can only be stretched so much, advertisements directed only so far, and resources allocated only so deep. Nintendo has learned that it cannot be Sony nor Microsoft. And without drastically altering their business, Sony and Microsoft will likewise never be able to replicate the structure of Nintendo's development studios, the low cost of producing Revolution hardware, the unique interface in the Revolution controller, or the virtual catalog of NES, SNES and other retro titles. Nintendo's trade-offs are therefore as much part of its strategy as are the chosen activities just mentioned.
Apple's set of activities formed a strategy that revolutionized the music industry. I've mentioned before that a 'revolution' is the sum of its parts. If Nintendo successfully molds its already unique set of activities (Nintendo, please don't forget innovative marketing -- I'm looking at you Reggie) to fit into a single cohesive strategy...the other video game industry is theirs for the taking. "It is harder for a rival to match an array of interlocked activities than it is to merely imitate a particular sales-force approach, match a process technology, or replicate a set of product features," says Porter.
As we'll soon see in 2006, Nintendo's strategic position will be hard, perhaps even impossible, to match. Best of luck to the imitators.
Current Video Game Industry - the current video game industry grew from the idea that better technology leads to better games. The current video game industry anticipates the next-generation because it promises bigger environments full of better and flashier graphics. The current video game industry gives the award for "Game of the Show" at the Electronic Entertainment Expo to technical or video demonstrations rather than playable software.
Other Video Game Industry - the other video game industry is growing from the idea that good technology, good interactivity, good variety, and good access ultimately breeds better games for more people. The other video game industry acknowledges that a variety of games within a selection of genres CAN appeal to everyone. The other video game industry recognizes that, at the end of the day, games are about interactive entertainment.
Sony and Microsoft are pursuing the current video game industry. And there's absolutely nothing wrong with that. The current video game industry, although perhaps not entirely healthy, has nevertheless proven itself to be profitable and highly lucrative. Many fortunes have been made and will continue to be made from this market.
Nintendo, however, has identified the other video game industry. Nintendo has nothing to gain from copying the competition and pursuing their current video game environment. Besides, Sony and Microsoft already adequately satisfy that segment. The reasoning behind Nintendo's new pursuit is especially apparent when you consider the fact that the current industry has shown over and over again that there is only room for one or two profitable console manufacturers.
In 1996, Michael Porter wrote an article for the Harvard Business Review asking the question, "What is Strategy?" That's a great question and relevant to our discussion. Is strategy achieved by copying competition?
"A company can outperform rivals only if it can establish a difference that it can preserve," notes Porter. "It must deliver greater value to customers or create comparable value at a lower cost, or do both."
These 'differences' are ultimately born from the hundreds of activities performed in the creation, sale, and delivery of a product or service. Costs result from performing activities. For example, the cost of acquiring materials or the cost of employing workers. Meanwhile, a 'cost advantage' results when one of these activities is performed better or more efficiently than competitors. For example, acquiring cheaper materials or employing workers from overseas. According to Porter, activities are therefore the basic units of 'competitive advantage'.
Before improvements in activities:
An item costs $4 to manufacture and is sold for $5. You receive $1 in profit.
After improvements in activities:
An item costs $3 to manufacture and is sold for $5. You receive $2 in profit.
Makes sense right? The more efficient the activities in your operations are, the more likely you are to generate a greater profit. The video game industry is built upon this premise. It begins when a manufacturer sells a technologically advanced console at a price less than it costs to create. The manufacturer ultimately hopes to earn a profit by making the activities that produce the hardware (or acquire its technical components) more efficient and also by launching software which is built from an engine that is then efficiently re-used to release a sequel. This series of steps is conducted and repeated by multiple console manufacturers. By the conclusion of a console cycle, there is usually at least one manufacturer who successfully improves the efficiency of its activities to gain an enormous profit. As a result, they also reinforce the allure of this flawed model.
This management practice -- called operational effectiveness -- is not sustainable nor is it a strategy. "Constant improvement in operational effectiveness is necessary to achieve superior profitability," says Porter. "However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day."
Competition assures that it's only a matter of time before your activities are mimicked and your competition acquires similar operational efficiencies. Porter describes this as follows: "The more benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficient third parties, often the same ones, the more generic those activities become. As rivals imitate one another's improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win. Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition."
Is it any surprise then that the entire video game industry is consolidating? Merger after merger from Sega Sammy, to Square Enix, to Namco Bandai. As long as the current video game industry continues down the path it is on now, this consolidation has no hope of ending.
The Nintendo Strategy
On the other hand, there is strategic positioning. This superior and legitimate strategy is accomplished by performing different activities or even similar activities but in different ways. "Competitive strategy is about being different," says Porter. "It means deliberately choosing a different set of activities to deliver a unique mix of value."
Strategic positioning is ultimately a unique set of sustainable activities that use your company's valuable, rare and inimitable resources to change the rules of the game. As a result, Nintendo's unique set of chosen activities are bound to cause controversy among the "current video game industry" -- you know who I'm referring to, that audience who is content playing sequels with updated graphics and using the same input method (i.e. controller) multiple generations in a row on several consoles that are, for all intents and purposes, the same.
Strategic positioning is about being different. Nintendo has therefore decided to uniquely devote its resources to expanding the game playing audience through two keys things: "strong community" and "immersive games". You can see these goals mirrored in, for example, the restructuring of Nintendo's development divisions, the Nintendo Wi-Fi Connection, and the makeover of Nintendo Power -- these aren't coincidences. They are a chosen part of Nintendo actively piecing together its activities to fulfill its strategic position to expand the game playing audience.
"A company can outperform rivals only if it can establish a difference that it can preserve," says Porter. The difference Nintendo is establishing with the Revolution is a low-cost device with an accessible interface. The accessible interface will largely come in the form of its revolutionary controller, but also in the simple, yet elegant, design of the console. In addition, Nintendo will not only have low-cost hardware, but also low-cost software and a free online community. Nintendo is also changing things up with its virtual library of NES, SNES, and N64 games. This is a new and unique distribution model that has the potential for great success. Low cost hardware and software, a new intuitive gameplay input, and original game genres are a unique set of sustainable activities that, when combined, form Nintendo's strategic position.
"But why can't Nintendo have high-definition graphics?" exclaim current gamers! Don't worry, I hear ya and I'll explain exactly why they can't. There is an absolute need for trade-offs. When there are no trade-offs, you encounter a situation that Microsoft is currently in -- billions of dollars in losses within its Xbox division. This shouldn't come as a surprise, but trade-offs are an intimate part of our daily lives. We make trade-offs with our time (do I spend it studying or playing Zelda), trade-offs with our money (do I buy school books or buy Barbie dolls), trade-offs with what we watch on television (Oprah or Jenny Jones), etc.
This is why the "Nintendo Difference" is seen much more clearly today than it was during the GameCube generation. The GameCube was the tragedy of not recognizing that trade-offs are needed. Nintendo wanted to offer an accessible low-cost box with a handle, yet it also wanted to directly compete with Sony and Microsoft in the current video game industry. Nintendo wanted to create small pick-up and play software that appealed to casual gamers, yet it had graphics and a controller intended for the current video game industry. Conflicting activities, contradicting goals, and lack of trade-offs -- from the very beginning, the GameCube and Nintendo's strategy were doomed to take second place to Sony and Microsoft.
Ultimately, Sony and Microsoft could also sell their consoles for cheap, create a new controller and develop new game genres. They could without a doubt try to cater to Nintendo's other video game industry. However, just like GameCube proved to us, they are doomed to fail if they refuse to make trade-offs. "Attempts to compete in several ways at once create confusion and undermine organizational motivation and focus," notes Porter. This is exactly why high-definition graphics don't mesh with Nintendo's strategy. A company simply cannot be anything and everything. A dollar can only be stretched so much, advertisements directed only so far, and resources allocated only so deep. Nintendo has learned that it cannot be Sony nor Microsoft. And without drastically altering their business, Sony and Microsoft will likewise never be able to replicate the structure of Nintendo's development studios, the low cost of producing Revolution hardware, the unique interface in the Revolution controller, or the virtual catalog of NES, SNES and other retro titles. Nintendo's trade-offs are therefore as much part of its strategy as are the chosen activities just mentioned.
Apple's set of activities formed a strategy that revolutionized the music industry. I've mentioned before that a 'revolution' is the sum of its parts. If Nintendo successfully molds its already unique set of activities (Nintendo, please don't forget innovative marketing -- I'm looking at you Reggie) to fit into a single cohesive strategy...the other video game industry is theirs for the taking. "It is harder for a rival to match an array of interlocked activities than it is to merely imitate a particular sales-force approach, match a process technology, or replicate a set of product features," says Porter.
As we'll soon see in 2006, Nintendo's strategic position will be hard, perhaps even impossible, to match. Best of luck to the imitators.