What Can We Learn from Nintendo?

Back in 2006 and 2007, my colleague Scott Anthony argued that Nintendos Wii would be a disruptive innovation that could catch Sony and Microsoft off-guard. The core of the argument was that Nintendos strategy of competing against nonconsumption would allow it to fly under the radar of Microsoft and Sony, which were engaging in an arms race to provide ever better-looking games to their most[1]demanding consumers at premium prices. And that is exactly what happened. Wii sales soared. In 2008 and 2009, Nintendo sold more consoles in North America than Microsoft and Sony combined. But now that Nintendos innovation appears to have passed the peak of its life cycle and the media is turning its attention to the next generation of consoles, what comes next? Nintendos recipe for short- to mid-term success might actually play out in a way that also helps its competitors.

Nintendo made the use of consoles and interaction with video games simple and intuitive. That enabled millions of individuals worldwide to overcome a key barrier to consumption, thus dramatically broadening the market. But the Wiis high[1]profile success made Nintendos strategy impossible to ignore, and Microsoft and Sony responded by replicating some of its key elements, such as the intuitive motion-sensing game controller (Microsoft Kinect, Sony PlayStation Move). Legions of Nintendo consumers, having overcome the skill-based barrier to consumption, are now conceivably in the market for products with even more intuitive controls, improved graphics, better online experience, and so on. Leaving brand effects aside, the next generation of consoles from all three companies might thus be much better substitutes for one another than the current generation is. So, while Nintendo has made a fortune with its disruptive innovation, it also essentially did significant market development work that all players could profit from in the future. What can Nintendo do to navigate this market development trap? Principal options include moving up the sustaining curve to fight more fiercely against Sony and Microsoft or continuing to compete against non-consumption. For a successful march up-market, Nintendo would need to improve the performance of its next-generation offering along the performance dimensions it introduced: intuitive control and equally intuitive gameplay. That might not be enough to combat Microsoft and Sony. Microsoft, for instance, has established an exclusive partnership with Netflix to boost the attractiveness of its current offering that it will likely carry on to its next-generation console, since it already helps.

keeping Xbox 360 sales numbers up. Without systemic changes to the traditional business model of the industry by the disruptor, there is considerable room for its high-end competitors to attack. Continuing to compete against non-consumption, on the other hand, could be a very attractive strategy for Nintendo. The company already has brought simple gaming to new contexts in the developed world with its DS handset (which is following its own improvement trajectory, adding on 3-D functionality and other advantages). Addressing non-consumers with simpler solutions creates a competitive advantage that can be sustainable for a considerable period. The Wii had caught its competitors by surprise: It took three full years in the fast-paced world of consumer electronics for Microsoft and Sony to adapt their game controllers to make their games more intuitive, something which had at first glance seemed straightforward. Whats more, targeting non-consumers typically expands the market base. By continuing to democratize the video gaming market, Nintendo might be able to repeatedly create new growth markets. Wii Fit was already a good follow-up move to attract young women (historically video-gaming non-consumers). Where could Nintendo look next? How about the billions of people worldwide who cannot afford a Wii, its games, or TV sets, or do not have access to a continuous electric power supply? Framed in the right way, that is, by continuing to make distinct cost/performance tradeoffs and rethinking interactivity both capabilities that Nintendo has already shown it can master there could be a lot of growth opportunity here.

Three insights we can use from Nintendos story: 1. Simplicity can be a powerful means of disruption when targeting non[1]consumers. Its typically unattractive for market incumbents to lower the performance of their offering along traditional dimensions to compete for noncommuters right away because this would not meet the demands of existing consumers. So, it can take a while for the incumbents to realize and incorporate the newly introduced performance dimensions in a way that does not alienate their core consumer base. In the meantime, the disruptive innovation can outsell its competition. 2. Its crucial to keep thinking about what comes next. The best disruptors are also the best sustainers. Imagine what would have happened if Apple, for instance, had stopped with its first-generation iPod. Companies that disrupt sustaining players by overcoming skill-based barriers to consumption need to recognize that the converted consumers will be amenable to sustaining oferings by competitors in the future the market development trap. If a disruptor is not able to induce incumbents to exit the market, it will need to explore its ability to either engage head-on in a sustaining competition or disrupt the market anew since its impressive returns will attract competition. Its crucial to keep thinking about what the source of sustainable competitive advantage is that will allow the disruptor to fend off the inevitable competitive counterattack. 3. The market development trap is an opportunity not a threat. Competing against non-consumption can become a self-renewing cycle that a company can commit itself to over the long term. The trick is master the challenges of continually improving and expanding the disruptive base while also tackling new circumstances of non-consumption.

Nobody said that being a disruptor would be easy. Nintendo shows how a disruptive strategy can pay off handsomely, but also illustrates that in highly competitive markets, competitive advantage is transient. Tim Huse is a Senior Associate with Insight. He has worked with Fortune 500 companies in the healthcare industry and the consumer-packaged goods industry on a broad range of topics including technology assessment, building organizational innovation capabilities, and developing disruptive ventures in Western Europe and South Asia.

QUESTIONS

1. Read What We Can Learn From Nintendo

2. In addition to the three insights provided in the case, what are 3 lessons learned you can add?