Transcript Deployment Tactics in the US Video Game Industry

Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 13
CRAFTING A DEPLOYMENT
STRATEGY
Deployment Tactics in the U.S. Video Game Industry
• 1972, Nolan Bushnell founded Atari and introduced the game Pong
(http://www.xnet.se/javaTest/jPong/jPong.html) that was played on a
TV set with an Atari console. Pong earned $1million revenue in its first
year
• By 1984, video game console and game sales reached $3 billion in the
US alone. Console makers did not provide strict security and
unauthorized games of poor quality flooded the market. Sales dropped
dramatically and by 1985 the video game industry was declared dead.
• Much to everyone’s surprise, Nintendo and Sega entered the market
with 8-bit systems. They spent $15 million on advertising. Nintendo
had a near monopoly from 1985-1989.
– Nintendo made games in-house and through 3rd part developers with strict
licensing policies
• Limited number of titles a licensee could produce
• Developer had to pre-order a minimum number of cartridges
• Developer could not make similar games for other consoles
– Very profitable policies but they were sanctioned by the FTC and alienated
distributors and developers
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Deployment Tactics in the U.S. Video Game Industry
• In 1989, Sega was able to overthrow Nintendo’s dominance by
introducing the 16-bit Genesis system 1½ years before Nintendo.
– Backward compatible to their 8-bit games
– Nintendo introduced its 16-bit system in 1991 but Sega had too much of a
jump on them and was the market leader
• Nintendo did not make it backward compatible
• In 1995, Sony was able to break into the video game industry by
introducing a 32-bit system, investing heavily in game development,
and leveraging its massive clout with distributors.
– By 1996, Sony’s installed base was 2.9 million units vs Sega’s 1.2 million
units
• In late 2001, Microsoft entered the video game industry with a 128-bit
system. It had an advanced machine, and spent a lot on marketing and
games, but Playstation2 (also 128-bit) already had an installed base of
20 million.
– On the first weekend of PS2 sales (March 4, 2000), 1 million units were
sold. The website had more than 100,000 hits in one minute and had to
temporarily shut down
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Deployment Tactics in the U.S. Video Game Industry
• In late 2005, Microsoft introduces the Xbox 360, beating the
Playstation3 to market.
• The figures as of 5/4/2008 (http://vgchartz.com/) are in the chart
below – the game never ends and has now extended into the handheld market as well.
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Overview
• Only part of the value of any technological innovation
is determined by what the technology can do.
• A large part is determined by the degree to which
people understand it, access it and integrate it with
their lives.
• An effective deployment strategy is thus a key element
in a technological innovation strategy.
– It is not just a way for the firm to earn revenues but is a core
part of the innovation process itself
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Overview
– Deployment strategies can
• influence the receptivity of customers, distributors and
complementary goods providers
• Reduce uncertainty about the product, lower resistance to
switching from competitors and accelerate adoption
– 3DO and Phillips introduced the first two 32-bit systems but they
failed because they were priced too high and had few games
– Sega’s 32-bit system was priced right but weak distribution
hobbled its deployment
– Sony, on the other hand, used intense marketing, low prices,
strong game availability and aggressive distribution to ensure a
very successful launch of the Playstation
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Launch Timing
•
The timing of a market launch can be an important
deployment strategy
–
•
Nintendo held back on releasing its 16-bit system for fear of
cannibalizing their 8-bit system even though Sega had released
Genesis
Strategic Launch Timing
– Firms can use the timing of product launch to take advantage of
business cycle or seasonal effects
• e.g., video game consoles are always launched just before Christmas.
– Timing also signals customers about the generation of technology
the product represents.
• e.g., if a next generation console is launched too soon after a previous
generation console, the market may not want to spend money on a
new console after having just purchased a previous generation console.
– Xbox next generation but launched too close to PS2s launch
– Timing must be coordinated with production capacity and
complements availability, or launch could be weak.
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Launch Timing
– Optimizing Cash Flow versus Embracing
Cannibalization
• Traditionally firms managed product lifecycles to optimize cash flow
and return on investment
– would not introduce new generation while old generation selling
well.
• However, in industries with increasing returns this is risky
– Competitors can gain a substantial lead that will be difficult to
overcome
• Often better for firm to invest in continuous innovation and willingly
cannibalize its own products to make it difficult for competitors to
gain a technological lead.
– Cannibalization: when a firm’s sales of one product (or at one
location) diminish its sales of another (or another location).
– In the late 1980s, Nintendo did not want to cannibalize their 8-bit
system despite Sega’s launch of a 16-bit system and thus lost market
share
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Licensing and Compatibility
• Protecting a technology too little can result in low quality
complements and clones, a fragmented market and little revenue
for the developer
• Protecting too much may impede development of complements.
• Firm must carefully decide:
– How compatible to be with products of others
• If firm is dominant, generally prefers incompatibility with others’ platforms but
may use controlled licensing for complements.
• If firm is at installed base disadvantage, generally prefers some compatibility
with others and aggressive licensing for complements.
– Whether to make product backward compatible
• If installed base and complements are important, backward compatibility usually
best – leverages installed base and complements of previous generation, and
links generations together. Can be combined with incentives to upgrade.
– Sony did this with PS2 which gave incentive to current customer base to upgrade and
not forfeit existing games they own from previous generation of console
– Microsoft does this with Windows; backward compatible with major s/w applications
developed for previous generations
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Pricing
• Price simultaneously influences product positioning, rate of
adoption, and cash flow.
– In order to determine a pricing strategy, a firm has to decide on its
objectives
• Industry has intense price competition and/or overcapacity objective
short-run strategy may be simply survival
– Cover variable and some fixed costs
• In the long-run the firm will want to create additional with a strategy
of maximizing current profits
– Firm estimates costs and demand and then sets the price to maximize cash
flow or rate of return on investment
• For new technological innovations, firms often emphasize maximum
market skimming or maximum market share
– Market skimming strategy (high initial prices)
• Signals market that innovation is significant
• Recoup development expenses (assuming there’s demand)
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• Attracts competitors, may slow adoption
Pricing
– When seeking high volume, firms will emphasize maximum
market share objective
– Penetration Pricing is used to achieve this goal (very low price
or free)
• Accelerates adoption, driving up volume, build installed
base, attract developers of complementary goods
• Requires large production capacity be established early
• Risky; may lose money on each unit in short run
• Common strategy when competing for dominant design
• Honda priced the hybrid car Insight below cost because
believed it would be profitable in the long run and
presented Honda as a “green” car company
• Video console developers have sold their consoles at or
below cost but profit from game sales and licensing
royalties
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Pricing
– Can manipulate customer’s perception of price
• Free initial trial or introductory pricing enables consumer to
overcome uncertainty about the new technology, become
familiar with the technology and appreciate the benefits
• Initial product free but pay for monthly service
• Cable television model
• Firms also use introductory pricing for a stipulated amount
of time to test the market’s response without committing
to a long-term pricing structure
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Distribution
• Selling Direct versus Using Intermediaries
– Selling direct
– Gives firm great control over selling process, price and service
– Firm can capture more information about customers and can facilitate
the customization of products
– Can be expensive and/or impractical
– Intermediaries may include:
• Manufacturers’ representatives: independent agents that may
promote and sell the product lines of one or a few manufacturers.
– Useful for direct selling when its impractical for manufacturer to have
own direct sales force for all markets.
• Wholesalers: firms that buy manufacturer’s products in bulk then
resell them (typically in smaller, more diverse bundles)
– Provide bulk breaking and carry inventory.
– Handles transactions with retailers and provides transportation.
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Distribution
• Retailers: firms that sell goods to public
– Provide convenience for customers
– Enable on-site examination and service
• Original equipment manufacturers (OEMs):
– A company that buys products (or components) from other
manufacturers and assembles them or customizes them and sells
under its own brand name. E.g., Dell Computer
– Aggregates components from multiple manufacturers
– Provides single point-of-contact and service for customer
– Also called Value Added Resellers (VARs)
– In some industries, information technology has enabled
disintermediation or reconfiguration of intermediaries.
– Digital product may be delivered directly to the consumer over the
Internet
– E.g., online investing enables customers to bypass brokers; online
bookselling requires retailer to provide delivery services, online
grocery shopping shifts “the last mile” from the consumer to
grocer
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Distribution
•
These factors help determine whether and what types of
intermediaries the firm should use:
1. How does the new product fit with the distribution
requirements of firm’s existing product lines?
a. Is there is an existing distribution channel and does the new
product fit into it?
2. How numerous and dispersed are customers, and how much
product education or service will they require? Is installation or
customization required?
a. Customers dispersed but require little training use mail order or
online ordering
b. Customers dispersed and require moderate training or service
use intermediaries
c. Customers not dispersed but require extensive training or
service may need to provide this directly
3. How are competing products or substitutes sold? The sales
channel can influence the customer’s perception of the product13-15
Distribution
• Strategies for Accelerating Distribution
– Alliances with distributors
• Providing distributor with stake in product’s success or exclusivity
contract can motivate them to promote more.
– Sega had limited distribution for its Saturn launch, Nintendo
had unlimited distribution for Nintendo-64 and Sony had
unlimited distribution and extensive experience negotiating
with retailing giants such as Wal-Mart
– Bundling relationships
• Sell in tandem with product already in wide use.
– MS Windows on almost all PCs, MS IE via AOL
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Distribution
– Contracts and sponsorship
• Provide price discounts, special service contracts or advertising
assistance to distributors, complementary goods providers or large
and influential end users.
– New medical technology is donated or lent to large teaching
hospitals so that the benefits can be seen first hand by
doctors and administrators which increases future purchases
– Guarantees and consignment
• When there is uncertainty about a product, distributors can be
given guarantees to take back unsold stock thereby reducing the
risk to intermediaries and complements providers.
– Distributors were reluctant to carry Nintendo’s NES after
crash of video-game market in the 1980s. Nintendo agreed to
accept payment for sold consoles rather than require up front
payment
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Marketing
• Major marketing methods include advertising, promotions,
and publicity/public relations.
– Advertising
• Requires effective message
• Requires media that conveys message to appropriate target market
– Varies in match to audience, richness, reach, and cost.
• Must strike appropriate balance between entertainment or
aesthetics (to make memorable) versus information content (to
make useful)
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Marketing
• Advantages and Disadvantages of Advertising Media
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Marketing
– Promotions
• Temporary selling tactics that include:
–
–
–
–
–
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Samples or free trial
Cash rebates after purchase
Including an additional product (a “premium”) with purchase
Incentives for repeat purchase
Sales bonuses to distributor or retailer sales representatives
Cross promotions between two or more non-competing products to
increase pulling power
– Point-of-purchase displays to demonstrate the product’s features
– Publicity and Public Relations
• Attempt to generate free publicity and word-of-mouth (e.g.,
mention in articles, television programs, etc.)
• Produce own internally generated publications
• Sponsor special events
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Theory In Action
Generating Awareness for Domosedan
– Farmos wanted to build awareness of its new innovation in
animal painkillers.
– Asked university professors and advanced practitioners to
help with testing process for drug – acted as premarketing
tool.
– Drug was featured in conferences, articles, dissertations.
– Farmos also hosted a large dinner party for all practicing
veterinarians at the drug’s launch.
– Domosedan was adopted rapidly around the world and
became a commercial success.
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Marketing
• Tailoring the Marketing Plan to Intended Adopters
• Innovators and Early Adopters respond to marketing that offers
significant technical content and emphasizes leading-edge nature of
product.
– Need media with high content and selective reach
• Early Majority responds to marketing emphasizing product’s
completeness, ease o fuse, consistency with customer’s life, and
legitimacy.
– Need media with high reach and high credibility
• Late Majority and Laggards respond to marketing emphasizing
reliability, simplicity, and cost-effectiveness.
– Need media with high reach, high credibility, but low cost.
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Marketing
• Often hard to transition from selling to early adopters to
early majority, resulting in “chasm.”
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Marketing
• Using Marketing to Shape Perceptions and
Expectations
–Perceptions and expectations of value can be as
important as actual value. To influence, can use:
• Preannouncements and press releases
– Can build “mind share” in advance of actual market share
– Can forestall purchases of competitors’ products
• Reputation
– Provides signal to market of likelihood of success
• Credible commitments
– Substantial irreversible investments can convince market of
firm’s confidence and determination
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Research Brief
Creating an Information Epidemic
– Gladwell notes that some individuals have a
disproportionate impact on marketplace behavior:
1. Connectors
– Have exceptionally large and diverse circle of acquaintances
– Knack for remembering names and important dates
2. Mavens
– Driven to obtain and disseminate knowledge about one or more
of their interests
– Will track prices, tend to be consumer activists
– Take great pleasure in helping other consumers
3. Salespersons
– Naturally talented persuaders
– Acute ability to send and respond to nonverbal cues; can infect
others with their mood!
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Discussion Questions
1. Can you identify one or more circumstances when a
company might wish to delay introducing its product?
2. What factors will (or should) influence a firm’s pricing
strategy?
3. Pick a product you feel you know well. What intermediaries
do you think are used in bringing this product to market?
What valuable services do you think these intermediaries
provide?
4. What marketing strategies are used by the producers of the
product you identified for question 3? What are the
advantages and disadvantages of these marketing
strategies?
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