Nintendo Innovation Audit

Introduction
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 Bessants innovation audit (Noke, 2013).

Innovation strategy
It is wise to explain what an innovation strategy is; before further mentioning the firms
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 firms 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, Nintendos 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 firms 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:
Nintendos unit sales (except Wii), Games and Consoles, 2003-2008 (Liao, 2010)

Figure 2: Nintendos 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 products 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 (OGorman, 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 groups 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).

Organisational structure/culture
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 companys 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 companys 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
subcategories and can be presented through
management of the successful companies that
products and sales is very important, since a
performance arises.
various innovative activities is divided into
various methods. Indeed, the knowledge
use innovation strategies to improve their
demonstration of learning and innovation

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 companys 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 shouldnt Nintendo enrich this activity by introducing
better video games?

Conclusions
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: Nintendos Innovation Audit graph

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