The Console Wars
E3 (Electronic Entertainment Expo) 2005, the sixth generation console war was coming to a close with a clear winner. Sony’s PS2 out sold its competitors (Nintendo’s Game cube and Microsoft’s Xbox) almost by 6 units to 1[1]. Whenever a console war ended and a new one began, the newer consoles always had better technical specifications than the older consoles. Companies were now presenting their next generation systems for the upcoming war. Everybody was expecting “bigger and badder” machines after seeing the sixth generation consoles offered. Sony and Microsoft did not disappoint. Nintendo, on the other hand, had mixed reactions at best.
Sony announced the Cell processor to power its PS3 which was clocked at 3.2 GHz[2]. They also equipped the PS3 with a BluRay disk drive. Sony also partnered with N-vidia to help create the graphics card for the PS3[3]. Microsoft by the same token impressed the crowds with its Xenon processor from its Xbox 360 clocked at 3.2 GHz as well[4]. Microsoft also partnered with ATI to create its graphics unit[5]. Microsoft also had plans to have an HD-DVD add-on for its console. Even by looking at the controller (the input device used) of the console said much about the console. The controller of PS3 and Xbox 360 had 1 digital directional pad, 2 analogs sticks 4 face buttons, and 4 shoulder buttons. This controller complexity has been known to turn off new gamers as the learning curve is usually steep. The games available for these two consoles clearly targeted the hard core gamers, with its mature themes and high level of complexity.
Nintendo went a totally different direction. Nintendo’s Wii was only equipped with the Broadway processor clocked at 729 MHz[6]. Instead of using newer optical disk drives it used the existing technology (DVD). People felt that the Wii was more of an upgraded Gamecube instead of a new console. Even the controller of the Wii was far more different than its competitors. It had 1 digital directional pad, 1 huge button and 1 shoulder button, and it was held like a remote control. In addition to this, Nintendo was known to create games targeted towards the younger generation.
Today the Wii is so popular that retailers are literally saying that customers are buying it as soon as we put them on stock. Nintendo has already commented on the shortages that were due to the fact that even at full capacity their plants cannot keep up with the demand. The Wii has sold over 29.62 million units worldwide, while the Xbox 360 has sold 19 million units and PS3 has sold 14 million units[7]. Some analysts have already declared the Wii as the winner of the seventh generation console war. The success of Nintendo was largely attributed to the marketing strategy called the Blue Ocean strategy.
The Colors of the Ocean
The red ocean is the market as we know it. Companies compete with each other for a share of the market. It can be likened armies fighting over a piece of land. As each army establishes his territory there will be less and less land to fight over. By the same token as companies fight over market share and establish their positions, there will be less and less disposable incomes to fight over[8].
The blue ocean, however, is the unknown market space. It is likened to sailing the big blue ocean to find land instead of fighting over the existing land. Just like the pursuit of discovering new land, the rewards and the risks are substantial. The blue ocean is not really a new concept. Known market spaces today were unknown years ago[9].
Blue ocean strategy is essentially, creating new uncontested market spaces. In this space, competition is irrelevant. The company creates and captures new demand. This results in large profits and / or speedy growth[10].
How Nintendo drowned its competition
One can say that Microsoft had chosen to directly compete with Sony. It is not sure who used who as the benchmark, but the fact remains that both consoles ended up with very similar technical specifications. They assumed that faster machines could produce higher quality graphics, and which would result to best selling games. They added more and more features trying to outdo the other which in turn jacked up their costs. Both of them were in fact selling their console at a loss. They were hoping that they would earn the revenue from the games. Microsoft and Sony have clearly chosen to divide the red ocean.
While the industry was expecting for technological innovations for the new consoles, Nintendo used existing technology. The Wii’s controller, called the Wiimote (since it looks like a remote control), may look like it contains a lot of new technologies built in. The accelerometers and gyroscopes in the device have already existed for quite some time (mostly used in planes). The innovation present was the fact that these two was used in games to detect motion and thus provided gamers a different experience. This displayed the first characteristic of the strategy. Blue oceans are seldom created through technological innovations[11]. It is created by innovations with the use of existing technology.
Nintendo understood that people (gamers and non-gamers) played videogames to have fun. They knew that a console was defined by its games (and not its processing power and other technical stuff). They also knew that people rated games based on its fun-factor. For this reason, Nintendo did what they did best. They created fun games to support their console. This showed the second characteristic of the strategy. Blue oceans are created within the red oceans and not beyond[12]. This means it is created by the use of the company’s core competency.
It was clearly visible that Nintendo was not competing with Sony and Microsoft. While they were researching for ways to increase the processor power, Nintendo again used existing technology. While their controllers were becoming more and more complicated, Nintendo simplified things with the Wiimote. This showed the third characteristic of the strategy. Do not use the competitors as benchmarks[13].
Sony and Microsoft were differentiating themselves by putting new technological features on their consoles (BluRay, HD-DVD, etc). This adds to their costs and supposedly adds to the value of the console. Nintendo, on the other hand, is using existing low cost technologies. They are actually getting a gross profit of about $100 for every Wii sold. Despite the fact of using low costs, they have added value to their system. They have forever changed the gaming industry by changing the whole experience of playing a game. This shows the fourth characteristic of the strategy (and probably the most important one). Blue oceans break the value / cost trade-off. Adding value doesn’t necessarily mean adding costs[14].
Creating your own Blue Ocean
Creating blue oceans is all about breaking the rules. The first rule that you have to break is the “value / cost trade off” rule. Additional costs do not necessarily translate to additional value to your customers, and additional value to your customers does not necessarily translate to additional costs. Who says there should be a trade off anyway? The second rule to break is the confines of your market. Do not view the market as defined by others. Create your own market. Not even the sky should be the limit. The next rule to break is “using the competition as the benchmark” rule. You do not have to keep up with your competition. You are on own market now. The competition is irrelevant. What you need to do is to understand your customers and to understand yourself. Ask yourself: What is my core competence? What does my market want? How can I provide my core competence to my market? When answering these questions, you must break the last rule, which is “technological innovation is the key” rule. It is never about technological innovation. Use existing technologies. You will be surprised by the combination of existing technologies seem like giant leaps of innovation.
Blue oceans have always existed. Their discovery was usually accidental. Understanding the blue ocean, and knowing how to create one will almost always drive up your profitability. So let your competitors divide the red ocean. Let them have the bigger slice of the pie. You will be on the blue ocean, eating your whole pie.
[1] http://en.wikipedia.org/wiki/Console_wars#Worldwide_sales_figures_5
[2] http://en.wikipedia.org/wiki/Cell_(microprocessor)#Console_video_games
[3] http://www.gamespot.com/news/6129001.html?tag=result;title;1
[4] http://en.wikipedia.org/wiki/Xenon_(processor)
[5] http://en.wikipedia.org/wiki/Xenos
[6] http://en.wikipedia.org/wiki/Wii#Technical_specifications
[7] http://en.wikipedia.org/wiki/Console_wars#Worldwide_sales_figures_6
[8] Kim, W. Chan and Mauborgne, Renee. Blue Ocean Strategy. (Harvard Business Review, Oct. 2004) 4
[9] Kim and Mauborgne 3.
[10] Kim and Mauborgne. 1.
[11] Kim and Mauborgne. 4-6.
[12] Kim and Mauborgne. 6.
[13] Kim and Mauborgne. 6.
[14] Kim and Mauborgne. 7.
E3 (Electronic Entertainment Expo) 2005, the sixth generation console war was coming to a close with a clear winner. Sony’s PS2 out sold its competitors (Nintendo’s Game cube and Microsoft’s Xbox) almost by 6 units to 1[1]. Whenever a console war ended and a new one began, the newer consoles always had better technical specifications than the older consoles. Companies were now presenting their next generation systems for the upcoming war. Everybody was expecting “bigger and badder” machines after seeing the sixth generation consoles offered. Sony and Microsoft did not disappoint. Nintendo, on the other hand, had mixed reactions at best.
Sony announced the Cell processor to power its PS3 which was clocked at 3.2 GHz[2]. They also equipped the PS3 with a BluRay disk drive. Sony also partnered with N-vidia to help create the graphics card for the PS3[3]. Microsoft by the same token impressed the crowds with its Xenon processor from its Xbox 360 clocked at 3.2 GHz as well[4]. Microsoft also partnered with ATI to create its graphics unit[5]. Microsoft also had plans to have an HD-DVD add-on for its console. Even by looking at the controller (the input device used) of the console said much about the console. The controller of PS3 and Xbox 360 had 1 digital directional pad, 2 analogs sticks 4 face buttons, and 4 shoulder buttons. This controller complexity has been known to turn off new gamers as the learning curve is usually steep. The games available for these two consoles clearly targeted the hard core gamers, with its mature themes and high level of complexity.
Nintendo went a totally different direction. Nintendo’s Wii was only equipped with the Broadway processor clocked at 729 MHz[6]. Instead of using newer optical disk drives it used the existing technology (DVD). People felt that the Wii was more of an upgraded Gamecube instead of a new console. Even the controller of the Wii was far more different than its competitors. It had 1 digital directional pad, 1 huge button and 1 shoulder button, and it was held like a remote control. In addition to this, Nintendo was known to create games targeted towards the younger generation.
Today the Wii is so popular that retailers are literally saying that customers are buying it as soon as we put them on stock. Nintendo has already commented on the shortages that were due to the fact that even at full capacity their plants cannot keep up with the demand. The Wii has sold over 29.62 million units worldwide, while the Xbox 360 has sold 19 million units and PS3 has sold 14 million units[7]. Some analysts have already declared the Wii as the winner of the seventh generation console war. The success of Nintendo was largely attributed to the marketing strategy called the Blue Ocean strategy.
The Colors of the Ocean
The red ocean is the market as we know it. Companies compete with each other for a share of the market. It can be likened armies fighting over a piece of land. As each army establishes his territory there will be less and less land to fight over. By the same token as companies fight over market share and establish their positions, there will be less and less disposable incomes to fight over[8].
The blue ocean, however, is the unknown market space. It is likened to sailing the big blue ocean to find land instead of fighting over the existing land. Just like the pursuit of discovering new land, the rewards and the risks are substantial. The blue ocean is not really a new concept. Known market spaces today were unknown years ago[9].
Blue ocean strategy is essentially, creating new uncontested market spaces. In this space, competition is irrelevant. The company creates and captures new demand. This results in large profits and / or speedy growth[10].
How Nintendo drowned its competition
One can say that Microsoft had chosen to directly compete with Sony. It is not sure who used who as the benchmark, but the fact remains that both consoles ended up with very similar technical specifications. They assumed that faster machines could produce higher quality graphics, and which would result to best selling games. They added more and more features trying to outdo the other which in turn jacked up their costs. Both of them were in fact selling their console at a loss. They were hoping that they would earn the revenue from the games. Microsoft and Sony have clearly chosen to divide the red ocean.
While the industry was expecting for technological innovations for the new consoles, Nintendo used existing technology. The Wii’s controller, called the Wiimote (since it looks like a remote control), may look like it contains a lot of new technologies built in. The accelerometers and gyroscopes in the device have already existed for quite some time (mostly used in planes). The innovation present was the fact that these two was used in games to detect motion and thus provided gamers a different experience. This displayed the first characteristic of the strategy. Blue oceans are seldom created through technological innovations[11]. It is created by innovations with the use of existing technology.
Nintendo understood that people (gamers and non-gamers) played videogames to have fun. They knew that a console was defined by its games (and not its processing power and other technical stuff). They also knew that people rated games based on its fun-factor. For this reason, Nintendo did what they did best. They created fun games to support their console. This showed the second characteristic of the strategy. Blue oceans are created within the red oceans and not beyond[12]. This means it is created by the use of the company’s core competency.
It was clearly visible that Nintendo was not competing with Sony and Microsoft. While they were researching for ways to increase the processor power, Nintendo again used existing technology. While their controllers were becoming more and more complicated, Nintendo simplified things with the Wiimote. This showed the third characteristic of the strategy. Do not use the competitors as benchmarks[13].
Sony and Microsoft were differentiating themselves by putting new technological features on their consoles (BluRay, HD-DVD, etc). This adds to their costs and supposedly adds to the value of the console. Nintendo, on the other hand, is using existing low cost technologies. They are actually getting a gross profit of about $100 for every Wii sold. Despite the fact of using low costs, they have added value to their system. They have forever changed the gaming industry by changing the whole experience of playing a game. This shows the fourth characteristic of the strategy (and probably the most important one). Blue oceans break the value / cost trade-off. Adding value doesn’t necessarily mean adding costs[14].
Creating your own Blue Ocean
Creating blue oceans is all about breaking the rules. The first rule that you have to break is the “value / cost trade off” rule. Additional costs do not necessarily translate to additional value to your customers, and additional value to your customers does not necessarily translate to additional costs. Who says there should be a trade off anyway? The second rule to break is the confines of your market. Do not view the market as defined by others. Create your own market. Not even the sky should be the limit. The next rule to break is “using the competition as the benchmark” rule. You do not have to keep up with your competition. You are on own market now. The competition is irrelevant. What you need to do is to understand your customers and to understand yourself. Ask yourself: What is my core competence? What does my market want? How can I provide my core competence to my market? When answering these questions, you must break the last rule, which is “technological innovation is the key” rule. It is never about technological innovation. Use existing technologies. You will be surprised by the combination of existing technologies seem like giant leaps of innovation.
Blue oceans have always existed. Their discovery was usually accidental. Understanding the blue ocean, and knowing how to create one will almost always drive up your profitability. So let your competitors divide the red ocean. Let them have the bigger slice of the pie. You will be on the blue ocean, eating your whole pie.
[1] http://en.wikipedia.org/wiki/Console_wars#Worldwide_sales_figures_5
[2] http://en.wikipedia.org/wiki/Cell_(microprocessor)#Console_video_games
[3] http://www.gamespot.com/news/6129001.html?tag=result;title;1
[4] http://en.wikipedia.org/wiki/Xenon_(processor)
[5] http://en.wikipedia.org/wiki/Xenos
[6] http://en.wikipedia.org/wiki/Wii#Technical_specifications
[7] http://en.wikipedia.org/wiki/Console_wars#Worldwide_sales_figures_6
[8] Kim, W. Chan and Mauborgne, Renee. Blue Ocean Strategy. (Harvard Business Review, Oct. 2004) 4
[9] Kim and Mauborgne 3.
[10] Kim and Mauborgne. 1.
[11] Kim and Mauborgne. 4-6.
[12] Kim and Mauborgne. 6.
[13] Kim and Mauborgne. 6.
[14] Kim and Mauborgne. 7.
