Nintendo – Innovation Audit
This paper examines Nintendo Corporation, a Japanese multinational consumer electronics firm head quartered in Japan. The firm is considered as the largest video game company by revenue since it was founded approximately 125 years ago (1889). The name Nintendo can be roughly translated from Japanese to English as “leave luck to heaven” (Liao, 2010). It is important to mention that by the end of 2012 the company had sold 651.8m hardware units and 4.08 billion software units (Nintendo, Co. Ltd, 2013).
Particularly, this study examines the innovation strategy of the firm and it has historically responded to threats and opportunities; it explains which sources of innovation and linkages the company uses to enhance its strategy, and analyses the processes that the company uses to scan for innovative ideas. It mentions the organisational structure and how it has supported or inhibited innovation, and graphically explains how the firm demonstrates learning to what regards its innovation performance. In other words, the following analysis will be based on Tidd and Bessant’s innovation audit (Noke, 2013).
It is wise to explain what an innovation strategy is; before further mentioning the firm’s particular innovation strategy that has established and used. Innovation strategy is a plan made by an organisation to encourage advancements in technology or services usually by investing in Research and Development activities (Rothwell, 1992).
Nintendo used the ‘Red Ocean Strategy’ (ROS) at the beginning of its establishment. The ROS is a strategy that focuses on and competes in the existing market space, beats the competition, exploits existing demands, aligns the whole system of a firm’s activities with its strategic choice of differentiation or low cost and makes the value-cost trade-off (Kim & Mauborgne, 2012).
In other words, the ROS is a strategy used by a firm to focus on its existing market audience and tries to encourage its hardcore consumers even more. In the case of the video games industry, Nintendo’s competitors use such a strategy with the ultimate aim to beat the competition, to exploit even more the existing demand and to align the whole system of their activities.
The company dominated the market in the 1980s and 1990s with its new approach to designing better graphics and new games. However, following the launch of Sony PlayStation in the mid-1990s and Microsoft Xbox in the early 2000s, Nintendo lost market shares and fell on hard times (Liao, 2010). Therefore, the firm had to change strategy and make a radical break in comparison with the traditional way of video games.
The goal of Nintendo was to find a new strategy that would change the fundamentals and the rules of engagement in the video games industry. However, what differentiated the position of Nintendo in the market and made it to stand out from the crowd? Nintendo decided to focus on the unique needs of its target customers and maximise the value(s) for them (Nintendo, Co. Ltd, 2013). In order to thoroughly recognise and comprehend the needs of their customers, they conducted a segmentation analysis which used demographic indicators such as age, gender, location and profession.
Nonetheless, this time Nintendo introduced the Blue Ocean Strategy (BOS); which is a strategy that estimates the users of the products of the company which are outside the segment. In other words, it is a strategy that creates uncontested market space, recreates the competition and makes it irrelevant, creates and captures new demands, breaks the value-cost trade-off and aligns the system of the firm’s activities in pursuit of differentiation and low cost (Kim & Mauborgne, 2012).
Nintendo hit the peak and fulfilled its cause through the launch of the Nintendo Wii in 2006; it sold more than 51 million platforms in its first year of release. As a result, it accomplished having the fastest-selling console in the history of video games. It also broke the mesh between console innovation and ‘chip technology’ and converted gaming to more of a collective, social and family endeavour rather than the unique experience of individual gaming enthusiasts (Liao, 2010).
Hence, while conventional rivals focused on serving a unique target segment, Nintendo focused on serving a wide range of segments by emphasising commonalities rather than particularities (by following BOS). Also, it can be considered that innovation is about creating new values by making the right choice (Noke, 2013).
Therefore, by maximising values across segments, the values for a singular group are sacrificed. Of course, according to the testimonies of the company, the advanced and hardcore gamers sneered at Wii for its lack of ‘sophistication’. However, the company believes that this does not diminish the value it has created, which is a new meaning for the activity of gaming. It turned the traditional video game console into a powerful tool for fitness and physical therapy (Liao, 2010 & Nintendo, Co. Ltd, 2013).
Figure 1: Nintendo’s unit sales (except Wii), Games and Consoles, 2003-2008 (Liao, 2010)
Figure 2: Nintendo’s Wii Unit Sales, Games and Consoles, 2003-2008 (Liao, 2010)
Sources of Innovation (Linkages)
In order for Nintendo to implement the BOS at the best extent possible and attract audiences which are outside of the segment they had to conduct strong market research in order to draw sources of innovation that would better help them to advance.
They ascertained that a principal source or linkage for innovation is the consumer. The company relies on their product’s end-user and aspires to ameliorate its ‘status quo’ and thus upgrade its new console systems. Hence, it can be said that the ‘user-led innovation’ is a sub-strategy where the industry of games uses it as a source for its innovation strategies (Aoyama & Izushi, 2008).
Nevertheless, the particular emphasis on the consumer is not a distinct source of innovation that is exclusively used only by Nintendo; its competitor companies, Sony and Microsoft, implement similar methodologies (Liao, 2010). Therefore, since Nintendo had lost ground; it changed its usual methods of innovation with the arrival of its new CEO in 2002 and through the launch of Wii in 2006 and after (O’Gorman, 2008). The move from ROS to BOS had also helped in achieving the aforementioned. The BOS strategy helped the company to understand what the barriers were in order to attract more consumers from outside the segment, consumers that feared trying consoles designed for hardcore gamers.
Processes to scan for innovative ideas
The processes that the company uses to scan for innovative ideas fall under the umbrella of the ‘New Product Development’ (NPD) procedure. This lifecycle consists of the five stages outlined below. Through these stages, the moves that the firm makes to scan for innovative ideas are much better understood.
The first stage is the idea generation, which involves the opportunities that the firm has in order to exploit and generate ideas of new product concepts. The key sources for the generation of such opportunities are the exploited or unexploited technologies that already exist in the market, the potential patents, the consumers or even the products of the competitors (with an ultimate aim to create relevant products).
The second stage is the idea screening and scanning which it is processed when the firm has a new product concept in its possession. However, this is not enough to commercialise a successful product because this sub-process tends to be an evaluation procedure of possible ideas. At this point, the firm chooses which ideas have the potential to become successful products and which have to be dropped.
Therefore, at this stage, focus groups of 5-10 people are conducted which have been selected based on their common characteristics that are relative to the issues being discussed. These groups are led by a trained moderator that uses the group’s internal dynamics of environment to gain insight into why people feel the way they do about a particular issue.
The next stage of the NPD lifecycle is product development. This stage involves a combination of different features in order for the product to be evaluated much better. The prices are decided according to the features of the proposed product. In addition, the design and the packaging of the product are determined in this stage. Thereupon, the marketing testing stage takes place since the potential new product market capabilities are researched and tested.
The last stage is commercialisation and the arrival of the product to the market. At this point, the firm makes high investments for the production and the distribution of the new product on a large scale. However, some factors are taken into consideration by the company prior to its launching a new product (such as how and where the product will be launched, the timing etc).
The organisational structure and/or culture of the firm have been influenced by the managerial hierarchy since the 1950s. At that time, the CEO of Nintendo, Hiroshi Yamauchi, had focused on the innovation inside the company, because he realised that they could not go a step further without being an innovative organisation. Hence, Yamauchi constantly mentioned to his employees that the development of new ideas and the exploitation of novel products will help the firm to ultimately achieve the goal of its culture (Kim et al, 2011).
Therefore, by following these principles, the firm had demonstrated effort into creating more novel and different products than already existed. The protocol concerning the culture of the organisation, which regarded how the employees should behave, was simple and comprehensive. They had to concentrate on customer value, make quick decisions and avoid bureaucracy to what concerns the process of the innovation development. Also, according to the firm, the risk-taking culture proved vital because it would later induce an uncertain business environment and negatively affect the company’s competition with its rivals. Hence, all of these presupposed good Risk Management.
Also, it is worth mentioning that with the launch of Nintendo Wii U, the firm focused into future integration and combination of the console with Nintendo 3DS, with an eye on future earnings rather than short-term success. Therefore, it can be said that the company’s culture aims to maintain its competitiveness in a world of smartphones and tablets. Even though they had not fulfilled their expectations in 2013, it is too early to mention whether they have failed or not, since the Wii Fit U and the Pikmin 3 are yet to be released.
Learning regarding innovation performance
The learning that the firm is obtaining from its various innovative activities is divided into subcategories and can be presented through various methods. Indeed, the knowledge management of the successful companies that use innovation strategies to improve their products and sales is very important, since a demonstration of learning and innovation performance arises.
Nintendo is in a position to produce a core of strategic innovation capability through the knowledge integration process; which is composed of individual key concepts of management drivers, dynamic human networks, knowledge in architectural thinking, and leadership models (Mitsuru, 2011).
The following figure depicts the learning process that can be associated with two main parts, the integral knowledge and the external network. The first part concerns the strategy, the technology, the product invention and the leadership, while the second part helps the firm to learn from the market and consumers. Nintendo uses three main keys to manage innovation: the genus, the marketing and the communication skills (Brignoli, 2008).
Figure 3: The Knowledge Integration Model (Mitsuru, 2011)
Nintendo demonstrated the learning through new methodologies that were introduced by the new CEO in 2002, who managed to strongly influence the whole organisational structure.
Satoru Iwata led the organisation in a different way to the previous CEO. He asked the executives to consider which factors could produce positive outcome(s) for the company or which factors could bring the destruction of the company; and hence this was proven a good strategy through the years (Sasaki, 2006). Iwata pointed out that it is important to interact the internal staff with the external contributors of the company in order to increase the communication as well as to better substantiate the vision of the firm (Kim et al, 2011).
The frameworks that the firms had established in order to create their products (either if they are hardware devices or software packages) were indeed enviable and attractive. Nintendo had always been based on the creativity and the flexibility of a corporate culture.
For instance, the company articulated its corporate social responsibility policy until 2007; which stated that the individual staff including the software and hardware divisions, the sales management and the manufacturing division must work across divisional boundaries as well as the compulsory creation of strategic communities to share their knowledge. In parallel, both software and hardware divisions co-operate with each other; first in a hypothesis of testing, and then in an attempt to identify the challenges (see figure 4). Last, but not least, the firm generates its own ‘knowledge roadmap’ that assists with accumulating knowledge and continues to develop new knowledge (Mitsuru, 2011).
Figure 4: Realisation of Products, Services and Business Model (Mitsuru, 2011)
Recommendations for the future innovation strategy of the firm
Nintendo managed to achieve much with their 180-degree strategy manoeuvre. It managed to recover the lost ground and achieved its competitive advantage. The launch of the Nintendo Wii, which was a huge innovation in the video games industry, had significantly helped, which is why the present study gives much emphasis to this particular product.
Maintain competitive advantage
In order to maintain this competitive advantage, the company had to consider many possible courses of action. One way to compete is by broadening its video game genres beyond simple and family-friendly games. Competitive games focus on intricate fantasy for hardcore gamers. Even though Nintendo has got such games, it would be beneficial for them if they introduced a more varied selection. As a result, the company would be in a better position to pull consumers from Sony and Microsoft.
Continue developing innovative game technologies
The company has to persist in looking to the future of video gaming. An article on BBC News 18 months ago mentioned a recent introduction of Nintendo 3DS in Japan. The Nintendo 3DS is a handheld console that allows users to play games in 3D layout (Buerk, 2011). BBC continues by mentioning that the firm is a leader in handheld consoles and that this new console definitely helps Nintendo to maintain its competitive advantage in that particular field.
Therefore, it would be more interactive if the firm could develop a similar 3D capability for the Wii in order to revolutionise the gaming experience. Hence, if the company audits all existing projects or even initiatives to identify those that can continue, those that need to be put through the new central business process and those that need to be stopped then they would have a clearer picture of which technologies can pay profit and hit the peak of the market.
Expand its reach to social networking and mobile devices
According to Mike Snider, the popularity of games on Facebook and in smartphones has been increased dramatically. Zynga, an innovative social media game developer company increased its revenue to $9.3 billion. Moreover, Snider supports that more than one third of smartphone owners play games on their platforms (Snider, 2011). Therefore, it would be a good opportunity for Nintendo to consider tapping into this industry and designing simple games for social media (i.e. Facebook) and smartphones.
This would align with the company’s current focus on simple games for non-gamers and would open the brand to a new market. In addition, the company would be able to develop capabilities that could allow the users to play social networking games on the Wii console as well.
Continue being simple at the front but be sophisticated at behind
Nintendo wanted to differ from the game consoles of its rivals through the launch of the Wii. Hence, there was no emphasis given the quality of the audio, graphics and complexity of the video games that are played on the Wii. However, even though they managed to acquire non-hardcore gamers as customers; the hardcore gamers preferred to deal with the Sony PlayStation II and III and with the Microsoft Xbox 360, which are consoles with high performance and focus on the resolution of the image, as well as the graphics that constitute an outstanding video game. As a result, Nintendo lost lots customers, especially those who spend a lot of money in the video games industry.
The suggestion here would be not to entirely change strategy and return to ROS but try to improve the quality of its products (i.e. video games) to what concerns the audio, the analysis of the image as well as the graphics, in order to attract customers from the competitor companies that have experience in video games and ask for something special.
This can be achieved through agile methodologies that are appropriate for software development; to use the fundamentals of the Extreme Programming (XP) and of the Pair Programming and to improve the graphics through capable developer groups and designers in order to raise the level of the company and introduce a sense of sophistication. Nintendo has a big advantage which is the Nintendo Wii and its Wii remote which connects the screen action with the physical exercise. Why shouldn’t Nintendo enrich this activity by introducing better video games?
Nintendo must continue pressing forward with innovative technologies and game concepts. They acted correctly by changing strategy, which is by shifting from the ROS to the BOS. Moreover, it had been ascertained that through the years the company faced a great deal of competitions, but still has many options to help maintain its current competitive advantage.
Consecutively, if Nintendo pays even more attention to its current strategy and to the environment which it operates in (see figure 5) then this will lead towards an effective strategy to maintain its competitive advantage and ensure its success.
Figure 5: Nintendo’s Innovation Audit graph
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