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One of the major figures of business academia is a man named Michael Porter. Porter, a professor at the Harvard Business School, is possibly most famous for his trademark “Five Forces Analysis”, but he is also the author of one of the definitive books on competition, Competitive Strategy.
Porter argues that efficiency, while important, is not enough to create a true competitive advantage. Even if a firm is using the most cutting-edge technology and best practices of an industry, to the utmost level of efficiency (what Porter refers to as “the productivity frontier”), all a competitor needs to steal the lead is to find a new best practice, technique, or technology and become just that much more efficient. In simpler terms, being the most cost-effective company only puts you in the lead until someone else figures out how to be more cost-effective (Porter calls this “expanding the productivity frontier”). Further, Porter argues that a firm can either iterate (do things better) or it can innovate (do better things), but it can’t do both at once: a new technology or product will, by definition not have an established best practice, so iterations must occur before that relevant productivity frontier can be found.
Porter argues that efficiency, while important, is not enough to create a true competitive advantage.
So what is a true competitive advantage? In Porter’s mind, strategy is not just about product or process, but structure. To quote the man himself (emphasis his):
Strategy is the creation of a unique and valuable position, involving a different set of activities. Strategic position emerges from three distinct sources:
serving few needs of many customers (Jiffy Lube provides only auto lubricants)
serving broad needs of few customers (Bessemer Trust targets only very high-wealth clients)
serving broad needs of many customers in a narrow market (Carmike Cinemas operates only in cities with a population under 200,000)
Strategy requires you to make trade-offs in competing-to choose what not to do. Some competitive activities are incompatible; thus, gains in one can be achieved only at the expense of another area…
Strategy involves creating “fit” among a company’s activities.Fit has to do with the ways a company’s activities interact and reinforce one another…°
What does all that mean? In order to have a true competitive advantage, you cannot be all things to all people. You either need to be all things to few people, or few things to all people. You need to make trade-offs that your competitors will be unwilling to take. And you need to refine your processes into a network of sympathetic processes that reinforce and resonate with each other.
Strategy requires you to make trade-offs in competing-to choose what not to do.
Examples help. One of the classics is Southwest Airlines†:
- Southwest is all things to a few people: it is a full service airline targeting price sensitive customers traveling between regional airports who don’t care about things like first class cabins or frequent flier miles.
- Southwest makes trade-offs that United and American Airlines won’t: Southwest focuses on regional airports and avoids highly competitive, “hub & spoke” routes that characterize larger airlines. It doesn’t have mileage program, which reduces its appeal to frequent travelers. It only uses Boeing 737 jets, so it can’t use larger jets to serve busier routes. And it does not deal with baggage transfers.
- Southwest has an outstanding business fit: Here’s where the trade-off’s from part 2 provide an advantage. The regional routes have fewer supporting airlines, so Southwest has less competition. The lack of a frequent flier program means that ticket purchasing is more streamlined, reducing overhead. The use of a single model of jet means that crews only need to support one kind of apparatus, so they need less training and only have to carry parts for that model. No baggage transfers, the lack of first class or assigned seating, and the ease of maintenance mean that Southwest can regularly turn around jets in 15 minutes, rather than the typical 30 minutes of other airlines.
What does all that all that mean? Southwest is faster, cheaper, and more efficient than its competitors. But, to reinforce Porter’s point, Southwest isn’t faster, cheaper, and more efficient because it has some special sauce, and it isn’t a universally better airline than its competitors (if you want to fly to Beijing, Southwest is a useless airline). It’s fast, cheaper, and more efficient for a specific customer base, because it makes trade-offs designed to maximize value for that specific customer base, and then refines it’s activities to reinforce those trade-offs and optimize efficiencies. If it tried to make those trade-offs, but serve everyone, or served its customer base but used the same business model as a United or an American, Southwest would be brown bread.
But the opposite is also true: Continental tried to compete with Southwest by developing its own regional, low-fair model, Continental Lite. But it wasn’t willing to make the same trade-offs: it wasn’t willing to eschew its frequent flier program or first class seating, or eliminate baggage transfers. The attempt was a massive failure, and resulted in the sacking of the CEO.
If Southwest Airlines tried to make those trade-offs, but serve everyone, or served its customer base but used the same business model as a United or an American, it would be brown bread.
Continental, one of the world’s most powerful airlines, went head-to-head with Southwest, and got its ass kicked. That’s the power of strategic positioning. Unless a firm is willing to make all of the trade-offs of the strategically positioned firm, it won’t be able to compete head-to-head effectively. As Sun-Tzu once said, “If you know your enemy and know yourself, in a hundred battles you will never be in peril.”
Ikea is another great example. Like Southwest, it is all things to few people. Ikea sells furniture, but it focuses on a relatively narrow market: young people with rigid schedules and budgets that make them more price sensitive and less quality sensitive. And it makes a lot of trade-offs to serve that market at the expense of others:
- It locates it stores in suburban areas where it can build big warehouses and huge parking lots.
- It provides child care facilities for parents.
- It provides food courts so customers can come directly from work.
- It does not allow you to customize the furniture; this streamlines inventory at the expense of attracting more affluent, quality sensitive customers.
- Customers need to assemble the furniture themselves; this also streamlines manufacturing, allows each store to stock more product, and deliver more furniture per truck load (it’s much easier to stack cardboard boxes than assembled furniture); the same goes for putting product in the car you left in that big parking lot.
- It does not have representatives to attend to each customer and follow them around – you go to Ikea, you walk yourself around the floor with all the show model WYSIWYG furniture; again, this turns off more affluent customers who might need a rep to guide them through upholstery and delivery options, but it drastically cuts down on overhead.
To beat a dead horse, these trade-off’s serve the target market better, and are complementary and reinforcing, and make it harder for competitors to go head to head with Ikea.
Winding my way back to the headline of the article, how does Dark Souls fit into this line of reasoning? How, as the headline states, is it the Ikea of video games?
Well, think about it. Dark Souls (and Demon’s Souls before it) is not a game that tries to be all things to all people. It has targeted a very specific audience: hardcore gamers who want a hardcore experience. Let’s walk through some of the trade-off’s that allow From Software to be efficient and highly competitive. While you read, think of how many other publishers and developers would – or would not – be willing to make these same choices:
- One difficulty level targeted at elite gamers: From Software only needs to test and balance for one type of experience, which is drastically more simple than having selectable difficulty levels.
- No real tutorial to speak of, because Dark Soul’s core audience doesn’t need and, to a certain extent, probably doesn’t want one: to the core audience, discovering the in’s and out’s of the game, individually and as a community, is part of the experience. As a developer, I can tell you that tutorials are expensive, error-prone rat’s nests of edge cases.
- No heavy narrative experience, providing a sense of mystery and discovery: having few cinematics and sparse dialog saves money and logistical overhead – while cinematics and dialog are straightforward to create, they are highly inflexible. Changing those types of assets after they are created carries a significant cost.
- Focused multiplayer that is tailored to the Dark Souls experience: no CTF, or territories, or team deathmatch. There is one kind of multiplayer setup, love it or hate it.
- One type of game: Dark Souls can trace its lineage all the way back to King’s Field. In other words, From Software has been making action-RPG’s for a long time. Knowing the kind of game you’re making, and its particular nuances and pitfalls, is a learning curve that money can’t buy. From Software isn’t chasing market trends, it’s making the games it knows how to make.
- Consistent engine, even if it isn’t top of the line: they know it inside and out, and known tech is predictable tech..mostly.
- Sparse music adds to Dark Soul’s lonely, oppressive atmosphere: it also saves money. This is a quintessential trade-off in my mind – a sacrifice that most companies would be unwilling to make is an asset for a game like Dark Souls.
The absence of music is a quintessential trade-off – a sacrifice that most companies would be unwilling to make is an asset for a game like Dark Souls.
So what? How does any of this matter. Well, here’s the kicker: Dark Souls sold 2 million units and was considered a success: the trade-offs From Software made to suit a narrow fan base allowed it to maintain a budget low enough to make that fan base profitable. That’s a competitive advantage. Contrast that with Resident Evil 6, which attempted to be all things to all people (almost literally) and was considered an abysmal failure because it didn’t sell 7 million copies (that's A LOT of copies). Capcom was unwilling to make trade-offs, spent like it was entitled to a windfall, and fell flat on its face.
Here the moral of my story: the video games industry, like many others, has a problem with priorities. Namely, growth is a higher priority than profitability. To a certain extent, this is understandable: shareholders want growth and tend to jettison the c-suite when they don’t get it. But, growth is hard, particularly when you’re already a big, publicly traded company. And when growth stalls, and trade-offs seem inhibitive, it can be easy to kick them to curb.
Resident Evil 6 attempted to be all things to all people and was considered an abysmal failure because it didn’t sell 7 million copies. Capcom was unwilling to make trade-offs and fell flat on its face.
But growth and profit are not the same thing. It is entirely possible to have profit without growth. Profit should be the priority, and the point of growth should be to capture more profit from an existing market. From Software should choose growth only if it knows that a market demand exists for its products that it cannot currently satisfy. For instance, if it knows (or suspects) that it’s target audience will only buy 2 million copies per game, but is willing to buy that many copies of two more games per year, then it should grow enough to supply two more games.
Too often, the modus operandi in the video game industry is the reverse: grow and then figure out how to sell enough games to make the new, larger corporation profitable. The growth-first approach has a homogenizing affect on product. If you can’t make trade-offs to tailor your product to a specific market, and be efficient enough to make that market profitable, then the path forward is to hedge your bets in order to serve the broadest possible base with the lowest common denominator product: sequels and predictable genres.
And, until we have more publishers and developers focused on finding true competitive strategies, get ready for more.
° Porter, “What Is Strategy?”, Harvard Business Review, November-December, 1996
† This is the “classic” analysis of Southwest that is described in various business school case studies. It may be out of date relative to the airline’s current best practices, but my point is to provide an example of trade-offs and fit, not describe current events.
Justin is a video game producer, consultant, and earned his MBA from Northwestern University's Kellogg School of Management. He is currently laying the groundwork to start his own studio. His mission is to leverage my degree to improve the day to day experience of making games through better processes. He write about that at his full blog here: http://breakingthewheel.com
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