The Big Idea

Video games generate billions of dollars a year. The industry has been dominated in recent years by three major players: Sony, Microsoft and Nintendo. But the field is growing ever more crowded: Google (and, rumor has it, Amazon) are developing game streaming services. Smartphone games continue to inhale consumer money and attention. In such a high-stakes competitive environment, how does a 130 year-old company like Nintendo survive?

The Scenario

Founded in 1889 as the first Western-style playing card manufacturer in Japan, Nintendo has been a player in the games and entertainment industry for well over a century. In the early 1990s, the Nintendo Entertainment System (NES) ushered in the modern console-gaming era and legitimized video gaming as an industry, rather than a 1980s fad.

Sony launched PlayStation in 1994, and Microsoft unveiled Xbox in 2001. Since then, those companies have pursued an arms-race approach to technology and graphics — better, faster, flashier. Today’s PS4 and Xbox One consoles are supercomputers, sold for less than the cost to build. The companies use slick advertising to sell elaborate, often violent game worlds to teens and older gamers, generating profits through royalties.

In comparison, Nintendo has pursued “blue ocean” innovation — looking for open space to innovate apart from its competitors. It has cultivated a softer brand image based on long-running, family-friendly flagship characters such as Mario, Zelda and Pokemon, and intuitive, easy-to-use devices that are more affordable than competitors’. In each new hardware generation, Nintendo has rethought its device design, often deviating substantially from predecessor offerings. Some risks have been home runs (GameBoy, Wii) while others have flopped (Virtual Boy, Wii U).

In 2017, Nintendo produced Switch — a hybrid console/portable system that could be used at home with a TV or as a tablet on the go. It had exclusive content, enough graphics to keep all but hardcore users happy and a competitive price point. Would it be enough?

The Resolution

In fact, Switch has been a home run, outselling Xbox One and PS4. Nintendo again achieved blue-ocean innovation, perhaps appealing (in part) to parents’ desire for portable entertainment for their children without monthly smartphone bills. However, there’s no time for Nintendo to rest on its laurels. Recent softening sales reinforce the ever-shortening lifecycle for electronics.

The industry also seems poised for a shift: In a teaser video for Stadia, a forthcoming cloud-based streaming service, Google proclaimed, “The future of gaming is not a box. It’s a place.” Amazon, firmly ensconced in millions of kitchens and living rooms with Alexa and Prime video, is also reportedly developing a subscription-based streaming service.

The Lesson

Maybe long-term success comes not from trying to “win” at your competitor’s game, but from creating the terms for your own. Nintendo’s consistency with values (family friendly, accessible and affordable) coupled with its riskier “blue ocean” approach to innovation may remain the right mix for the future. After all, for the company to survive another 130 years, it has to keep its soul while exploring new virtual frontiers.

Michael Lenox authored the case Switching Things Up at Nintendo (Darden Business Publishing) with alumnus Mathew Reiss (MBA ’18).

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About the Expert

Michael Lenox

Senior Associate Dean and Chief Strategy Officer; Tayloe Murphy Professor of Business Administration

Lenox’s expertise is in the domain of technology strategy and policy. He studies the role of innovation in helping a business succeed. In particular, he explores the sourcing of external knowledge by firms and this practice’s impact on a company’s innovation strategy. Lenox has a longstanding interest in the interface between business strategy and public policy as it relates to the natural environment; his work explores firm strategies and nontraditional public policies that have the potential to drive green innovation and entrepreneurship.

In 2013, Lenox co-authored The Strategist’s Toolkit with Darden Professor Jared Harris. His latest book, Can Business Save the Earth? Innovating Our Way to Sustainability, examines how innovation and action from multiple stakeholders may address the environmental crisis.

B.S., M.S., University of Virginia; Ph.D., Massachusetts Institute of Technology