Nintendos category innovation

2-dimensional approach needed in competing in matured markets; do not let others copy you

By Ken Kusunoki

Commoditization is the enemy many companies fear most. Commoditization refers to the state in which customers do not think there are any differences in the products or services of competing companies in a given product category aside from price. The company offering the lowest price controls the market in categories where commoditization has occurred and the focal point of intense competition is restricted to reducing costs.

If one can win this competition and achieve the lowest cost structure, one can create a differential in costs from competitors, increase share, and increase the profit margin. Typical examples would be Dell and Samsung, which sustained profits in the PC and DRAM industries through cost leadership.

In a particular industry, however, only a few, or usually a single company can achieve such sustainable cost advantage. For others, profit margins often are whittled down to almost nothing.

When considering innovation in the context of de-commoditization, there are two valuable perspectives with which to classify types of innovation. One is the locus of the value dimension that is key to purchasing decisions of customers, depending on whether the value lies in the internal attributes of the product or where it lies in the context of use and circumstances surrounding the product.

A new opportunity for innovation will be revealed if the key value dimension is shifted from attributes to context of use, even if the product overshoots the level demanded by customers in terms of existing attributes.

The other axis is the visibility of the value dimensions that are key to customer purchasing decisions. If there is a visible dimension to the value being pursued by innovation, many companies will concentrate their efforts at innovation in that dimension. This invites overshooting and accelerates commoditization.

If we think of such highly visible value dimensions as the very source of commoditization, we can posit the argument that it will be possible to escape from commoditization by disrupting the visibility of value dimension itself, and achieving differentiation in the invisible dimension.

The diagram below classifies the types of innovation based on the form the value dimension takes, be it visible or invisible, and through attributes or context of use. Let’s assume that a new drug is commercialized that most doctors and patients are able to perceive as “superior” to existing products in the value dimension of “effectiveness”, which can be objectively captured by certain technical measures. This is an example of “functional innovation.” Here the effectiveness has been the core attribute of the drug, and the effectiveness is a visible value dimension with objective measures.

Emotional innovation

In contrast to this, the development of mobile phones for the elderly users can be regarded as an example of the emotional innovation located in the upper left corner. Rather than pursuing a functional progress of a mobile phone which had been the dominant attribute, Japanese mobile phone manufactures recently introduced many models for the “silver” market, which concentrated on the two basic functions, calling and e-mailing.

The strategy was to stress the cognitive aspects of being “simple and easy” by offering senior-friendly designs as well as a display to show bigger characters while eliminating functions like camera, internet-browsing, and so forth. We can also assert that arguments emphasizing the importance of design in innovation also focus on emotional innovation.

An example of usage innovation would be Kao’s Healthya green tea. The success of this product derived from the fact that it broke ground on a new use for green tea by switching the existing context of green tea use from “quenching thirst” to “losing weight.”

Viewed from the perspective of the horizontal axis, Healthya green tea is in line with the focus on a relatively visible value dimension; namely, the quality and quantity of catechin, which is effective for weight loss. This case is therefore positioned in the lower right corner of the diagram.

Sony, Nintendo on different axes

In the video game industry, Sony seemed to adopt a strategy to build differentiation in a relatively visible dimension. Sony advanced further along this path with its next generation device, the PS3, attaining image processing capabilities equivalent to a super computer by using a multi-core processor called the Cell.

On the other hand, Nintendo’s strategy to compete against Sony was different. Nintendo aimed for differentiation in invisible dimensions rather than to go ahead of Sony in the existing functional dimensions of a game machine.

Having decided that “customers are satisfied with the functions of current gaming devices,” Nintendo decided to forego launching a new model to succeed the Game Cube in 2004. Their strategy was to differentiate themselves in the invisible dimension of “fun” by concentrating on “games with breadth and depth that many users can play easily with a totally new way of enjoying games.”

Nintendo’s Wii was a perfect example of category innovation for two reasons. First, the product intended to offer new values focusing on the fun of having off-line, real interaction among players (family or friends), which had been not included in the conventional attributes of video game machines. In this sense, Wii captured a new context of using (or playing) a game machine.

Secondly, the concept of Wii aimed at totally new experience of playing video games, not at improving values along visible dimensions. In other words, the new experience with Wii was an innovation in a rather invisible dimension.

Category innovation

The strategy of category innovation is superior from the viewpoint of sustainable differentiation. The essential advantage of category innovation in the invisible value dimension is that it is difficult for customers to compare products. When an innovation is based on a visible value, the differentiation can be damaged if another competitor overtakes it in the same visible dimension. It is easy to achieve long-term differentiation, however, if one successfully creates a new category, because the invisible nature of category innovation could escape from a direct comparison with competing products.

In order to successfully profiting from a matured market, we must first reset our current mindset of pursuing innovations in visible value dimensions. The perspective of category innovation should enable companies to view a different landscape of competitive differentiation.

Ken Kusunoki is a professor at Graduate School of International Corporate Strategy, Hitotsubashi University. He has written many books including “Competitive Strategy as a Narrative Story” (2010).