Posts Tagged ‘Nintendo’

Picking winners in tough times – part 2

December 27, 2008

As with books, it would seem that video games are also proving quite income inelastic. This report from the Economist notes that “Games sales in America in October totalled $697m, 35% more than a year earlier”. There is some logic there. Like books, games are experience goods that substitute well for more transitory, ephemeral experiences like the consumption of ‘nights out’, fine dining, or (as the article notes) vacations. As consumers count the pennies and become more frugal, a game that might be still providing entertainment in a month’s time does seem much more cost effective.

Interestingly, the article raises the prospect that any recessionary effect might be lagged. This is a rather strange argument. The example they give (EA) is just one firm in the industry, and one that has copped a lot of criticism in the past year for not delivering enough quality products to market, and for taking on higher and higher cost projects when other, more nimble competitors have been experimenting with cheaper formats (such as games for the Wii and the iPhone) or games with hardware tie-ins (like Rock Band). It would still seem that gaming is a recession-proof growth industry.

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Simply an issue of willingness to pay

December 24, 2008

A key issue for firms is ensuring they deliver a product consumers find attractive, i.e. something for which they are willing to pay. When we discuss the generic business strategy choices (i.e. differentiation, low-cost, focus), we are principally concerned with whether firms have the product features that best match with consumer preferences. To differentiate is to find those dimensions consumers will pay more for. To build a low cost advantage is to understand the minimum requirements consumers have and making sure you at least meet these.

wtp2Firms too often, in the face of lower sales growth and market maturity, try and add more bells and whistles in the hope of attracting upgrade purchases.

This feature inflation approach is fraught with danger, as any such adjustments are likely to be generating unnecessary costs, thus reducing margins or forcing a higher price. Indeed, with many goods, the new attributes may reducing the consumer experience.

This article argues that 2008 has seen the rise of the simpler product. It argues that consumers have chosen those goods that trimmed back a lot of the standard features and focused on what consumers most wanted. The two examples given are the Nintendo Wii (which I have discussed before) and the Flip video camera. The latter retails for around $130 in the US and is ludicrously simple to use (that’s it on the left).

This is a more subtle approach than some dichotomous low cost vs differentiated world. The firms involved here have calculated the willingness to pay along a variety of features and responded by removing the costly and underutilised. The streamlined products have become more attractive to a bigger audience. This is the approach being taken by netbook manufacturers (the nifty shrunk laptops) and Tata with their Nano car.

What’s next for simplification?

Too much Wii in this Blue Ocean?

December 17, 2008

I am certainly not alone in relishing my user experience with a Nintendo Wii. Nor am I the first person to think about the Wii strategy as clearly Blue Ocean.

For those of you who haven’t encountered this concept, Blue Ocean Strategy is the idea, as espoused by two INSEAD academics and consultants, that firms will reap much greater rewards from seeking out a competitive space where they encounter few or no competitors. Doing so requires firms to identify non-customers who are ignored by current competitors in the red-ocean market space (it is red because of the “blood in the water”), and then offering them new and unexpected sources of value.

The Wii strategy fits this definition on several fronts. It targeted non-gamers, such as females, families and all of us folks who sneered at hardcore gamers. The Nintendo president has described the firm as “swimming in a clear sea teeming with women, pensioners and repentant couch potatoes” . It broke the nexus between console innovation and chip technology. It made gaming more of a collective, social, family endeavour. It did not pursue the console as a loss leader (i.e. didn’t adopt the razor model – ‘charge a little for the handles but a lot for the blades’). The firm reportedly makes a nice profit on the consoles (unlike Sony and Microsoft who drop >$100 on each pricey console they sell but hope to make it back on games sales to their frequently purchasing customers).

This analysis highlights the extent to which Nintendo’s new value proposition is built around fun (and the elimination of costly elements that the new customer segments weren’t after anyway, such as the ability to play movies or experience hyper-real graphics). There is further discussion of the Blue Ocean arguments here.

Most of these discussions have ignored the other key (non-Blue Ocean) strategic advantage that Nintendo have – that they control a greater proportion of their Value Chain than their rivals. Nintendo do much of their game development in-house, and thus reap greater returns from the decision of consumers to choose the Nintendo format over others. As Forbes has noted, the biggest sellers for the Wii are Nintendo’s own products, and not having to pay license fees (plus the simpler technology involved) has kept game prices down (and thus sales up).

Of course, this also means Nintendo bear the risk of any new game failing. For example, there is considerable doubt in the market about the Wii Music offering. The general criticism is that it doesn’t match up to our typical expectations of a game – it is too educational, with no clear winner/loser. But isn’t that what Blue Oceans are all about?