Disruptive Technology

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Nintendo adopted a disruptive technology (Christensen, 2009) approach with the Wii, targeting a market that had not yet been tapped-the non gamer. Tacticians, especially Sun Tzu, would consider taking Sony and Microsoft on in a direct attack suicidal. Harvard Business Professor Clayton M. Christensen stated: “To remain at the top of their industries, managers must first be able to spot disruptive technologies. To pursue these technologies, managers must protect them from the processes and incentives that are geared to serving mainstream customers. And the only way to do that is to create organizations that are completely independent of the mainstream business.

The market forces that normally come to play in the home video market are the software itself, the platforms that they play on, the distribution channels, seasonal sales cycles, distribution chain (SCM) and the marketing strategies that the manufacturers traditionally employ are faster technology (Moore’s Law), more game titles, and deeper story lines or more player roles. (Eg Halo has a deep story) In a head to head battle, differentiation was based on retail, price point, economies of scale, and quality of software (Better Graphics, Better story line) and development of new hardware to accommodate (not replace) legacy hardware, and licensed content (EA Sports). Key was to diversify between different game publishers and development studios (Risk Management). The key to success was the ability (or luck) of creating the right game at the right time. In the 1990’s the top five publishers alone generated 75% of all third party video game software sales.

While Nintendo has not abandoned traditional market strategy, it has made a market (blue ocean) with the Wii. The target market for Sony PS3 and X-Box has been the 10-17 year-olds ; Nintendo disrupted their market dominance by marketing the interactive Wii to entire households with interactive play revolving around traditional games and sports. There even became a category of injuries revolving around Wii Sports.

“Satoru Iwata, president of Nintendo, believed that the video game industry had been focusing far too much on existing gamers and completely neglecting non-gamers.” (Farmhooman, 2009) The development of the Wii centered on a market that had not yet been explored, incorporating a Blue Ocean Strategy (Kim, Mauborgne, 2005) and follows the Tzu strategy of win all without fighting. Instead of attempting to compete head to head with giants Sony and Microsoft, Nintendo captured market share and in 2007 rose to be Japan’s most valuable company, after Toyota.

Iwata had a vastly different strategy from the rest of the industry. Traditionally Sony, Microsoft, and Nintendo would go into a new cycle or a new battle every five to six years based on a new technology, new platform, or new software and in 2000, Sony’s PS2 became the clear leader. The focus of the industry was technological advancement of console hardware in the form of faster processors, higher definition video graphics, and increasing game complexity. For Nintendo to fight this battle would be to fight the direct war that Tzu warns against. (McNeilly, 1996) Iwata saw the potential threats facing the industry. He observed that the video game market in Japan was shrinking. While market penetration in Japan was the highest (consoles in most houses), the market share (revenue) was deteriorating. Based on market trends and data, the key cause for this reduction appeared to be the increasing complexity of video games, which required a significant amount of time to learn and play these games on increasingly complicated controllers. The time necessary for novices and professionals to learn these games was a major deterrent in their sales. Iwata realized that the video game industry had largely ignored non-gamers while focusing on an ever-shrinking market segment. The other corporate heads were former gamers and suffered from that myopia. Iwata...
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