Electronic Hot Cupcakes

One of the things that have been hammered over in the course of my undergraduate and my recently completed graduate studies is the importance of establishing a measure of progress before embarking on the long obstacle-ridden track towards business success. This, I’ve been told, is essential in order to know how good/bad/wonderful/horrific you are doing in your business venture. Some businesses choose unit sales per annum as their benchmark. Others might employ a bottom line definition of success that tries to keep everyone in the company as cost conscious as possible while trying to maximize revenues. There are countless other ways to measure a company’s standing, but regardless of which method is used, the potential for greater success should always be taken into consideration. This is a suitable spot for me to switch over from “babble” mode and get to the point.

I’m blogging from Tokyo in the wonderful Land of the Rising Sun. Tokyo is hands-down my favorite traveling destination and on this trip I jotted down somewhere on my list of things to-do “buy Nintendo DS Lite.” I wanted to purchase this freshened up version of Nintendo’s highly successful DS handheld gaming device purely for the aesthetic appeal. (This article highlights some of the changes implemented in the new device.) I own a functional unit of the DS Lite’s predecessor, but “good enough” seems to have taken a back seat to “even better.” To make a ridiculously long story acceptably long, I simply could not find a single unit of any color of the DS Lite anywhere in Tokyo! To make matters worse, even the original DS is completely sold out! I could quickly tell by reactions from anyone I asked regarding the availability of Nintendo’s “hot cupcakes” that even delivery of new stocks had dates that were TBA.

The Nintendo DS’s main rival, Sony’s PSP was available for anyone interested in buying one. You even get a choice of two colors, fingerprint-magnet black and a newly released ceramic white. At the face of things, it seems that Sony’s offering is in considerably lower demand than Nintendo’s, but is this situation favorable to Nintendo without exception? If Nintendo aims to be a leader in market share, they seem to have sold out of all they can produce (in Tokyo at least). We need to take a look at their cost structure to determine if they are leading in terms of profitability. Going back to the issue of establishing a measure of success, I couldn’t help but wonder how much Nintendo is losing in terms of lost potential sales as well as giving the competition a chance at diminishing any lead Nintendo might have established. In a bustling city with a population count well over 12 million, a solid lead can quickly turn for the worse if the competition is giving half a chance.

For now I’d rather wait until Nintendo straighten out their supply issues than replace my black PSP with a new white one. But the question is how long will I wait? Selling off all you can produce is better than having stocks of unsold goods, but when consumer demand by far overshoots supply (for a considerable stretch of time), the resulting shortage equates to a great loss in potential revenue that no company would like to experience.

Anonymous financial assistance

One sure shot way to gain competitive advantage is to come up with an original idea that nobody else has implemented yet. All that is required is that your brainchild is a product or service that adequately satisfies a need to the point that money is willingly spent on it. I came across a one-of-a-kind idea while going through the March 2006 issue of Business 2.0 (I swear I’m not affiliated with that magazine in any way!) An on-line version of the article is available here. The article details how a website called Fundable.org functions as a marketplace for an unusual “product”: personal funding. What makes Fundable.org unique is that pretty much anything can be funded through the site in addition to the fact that anyone can contribute whatever amount he/she feels is appropriate. Not so altruistic contributors can be tempted by promises to be compensated in return for their generosity by an optional predefined reward, such as having their names listed in the ending credits of the short film they funded. The web service is set up in a way that all pledges are cancelled if the amount to be raised is not met. Fundable.org’s revenues take the form of a 10% slice of the amount to be raised.

Going back to the issue of competitive advantage, let’s try to apply Barney’s VRIO framework to Fundable.org to see where the newcomer stands in the range of competitive advantage spectrum. The website is clearly valuable because it enables fundraisers and pledgers to come together, thereby creating an opportunity for Fundable.org to capitalize on its facilitation of such transactions. The website is also as rare as they get, since all my search attempts to find an alternative came up empty. The closest contender I could find was Zopa.com, a marketplace for lending and borrowing specific amounts of money. The main difference between Zopa.com and Fundable.org is that the latter is “funding project” oriented and pays in non-monetary “dividends” whereas Zopa.com directly lends out money for unspecified purposes at a certain interest rate. The main hurdle standing in between Fundable.org and the business strategy nirvana of sustained competitive advantage is imitability. As far as I can tell, there is nothing stopping anyone from setting up a Justasfundable.org website. Of course, I’m also assuming that the management of Fundable.org have organizational architecture and practices that support achieving such a state of competitive advantage.

In my humble opinion (with considerable influence from Jay Barney’s framework), I think that Fundable.org is at best in a state of temporary competitive advantage. If the website truly catches on, copy-cat websites will emerge left and right and the rareness of Fundable.org’s resource will diminish. This increase in number of alternatives will quickly demote Fundable.org to a state of competitive parity. One possible solution would be for the company to seek a patent on its service (if Amazon could patent One-Click, I don’t see why this can’t be patented.) If my advice is not sound enough, perhaps Fundable.org can employ this hopeful student in a few years time for some choice business advice.

Tags: barney VRIO p2p finance competitive advantage personal finance

Core Strategy in Japanese Gaming Industry

Business strategy centers around figuring out a way to stand out from the crowd and to establish a basis upon which potential customers will favor your product or service over that of the competition. In some cases, the distinction between one company’s winning strategy and its competition’s is so thin that, to the untrained eye, the two might seem to share a strategy. However, what I find fascinating is when impressive financial results occur due to one company’s blatantly obvious business strategy departure from the norm. The example I would like to discuss in this blog entry is Nintendo’s command of the console gaming industry in Japan. This Business 2.0 article comparing Nintendo and Sony’s entrants into the portable gaming sector, in addition to my self-admitted addiction to gaming, initially sparked my interest to post a blog entry on the topic. There is a clear difference between how Nintendo and its competitors define their product/market scope. At the heart of the issue is Nintendo’s insistence not to fall prey to gimmicks of marketing gurus. With all due appreciation and respect for the field of marketing, I would argue that consumers have been conditioned by marketers to associate technical superiority with the notion of “better” video game console platforms. Evidence of this is apparent in the prolific use of new “determinants du jour” in the gaming industry: processor speed, teraflops, and a whole host of memory types. All this attention to technology has made the gaming industry loose much of its defining years’ charm (I’m starting to show my age.) Enter Nintendo. Its business strategy is so simple, stripped down, and effective, that I cannot understand why none of the other gaming giants are competing with them directly on the same strategy. Nintendo’s focus is first and foremost about games. Instead of focusing on keeping up with the Joneses (or beating them to a pulp in this industry’s case), Nintendo have always maintained that quality gaming titles, not supercomputer-like consoles, are what gamers seek. The added frills of DVD playback, internet browsing capabilities, and a dual role of a game console/home entertainment hub are of little interest to Nintendo. Has this strategy paid off for Nintendo in Japan? The resounding answer is most definitely yes. PC Vs Console, a website dedicated to following and discussing issues relating to the gaming industry, keeps a regular count of weekly Japanese console sales (the latest results can be found here.) Microsoft’s Xbox 360, the only next generation console that is currently out on the market, is clearly not generating the sales that Microsoft must have been expecting. Only 3,990 units of Xbox 360 found their way to consumers’ hands from April 17th to April 23rd. Nintendo’s DS and DS Lite (a redesigned iteration of the same portable console) amounted to a mind boggling 176,860 units sold in the same week. This knock out defeat of Microsoft in the Land of the Rising Sun comes regardless of Microsoft’s massive investments to penetrate the all important Japanese market. Perhaps it is unfair to compare sales of a relatively cheap handheld unit with those of a more expensive home console, but Nintendo’s ace in the hole trounced Sony’s comparable PSP handheld by a five fold factor. Knowing the target audience and understanding what they value is key to a well defined product/market scope. This element of Hamel’s BCI framework goes hand in hand with the other two factors of his framework’s component of core strategy: business mission and basis for differentiation. Unlike the competition who try to push their ideas of what a console should be all about to the consumers, Nintendo’s approach is to simply give the consumers what they ask for. I believe marketers call it a market oriented approach rather than a product oriented approach. I guess we really can’t live without the marketing bunch after all!

There's More Than One Hunter in MBA 618

Besides the obvious Dr. Hunter, someone else in MBA 618 at AUS is worthy of the Hunter moniker. For the past few months, every Tuesday evening from 6pm to 9pm a hunter in disguise has been sitting in the seat closest to the door in room SBM 112. Yes, that’s right. As strange as it might seem, I’m a hunter. Allow me to dismantle any mental image that might be forming in your mind of me donning beige safari gear with a machete in one hand and a rifle in the other. The truth of the matter is that for the past seven years, I have consistently spent a solid few hours a day on my addiction pastime of playing MMORPGs. If the unwieldy acronym is unfamiliar, perhaps some elaboration is called for. MMORPG stands for Massively Multiplayer Online Role Playing Game, and it is the latest craze in the multi billion dollar computer gaming industry. There have been countless articles that have documented the success of this emerging genre and have examined business aspects of companies developing them (some samples are found online here, here, and here.) MMORPGs are fantasy worlds in which players create an online avatar and then compete with their peers by spending considerable time improving them by embarking on various quests in order to seek rewards in the form of virtual weapons, armor, currency, and/or improvements in faction standings with an assortment of non-player characters. One of the most successful MMORPGs is Blizzard Entertainment’s hugely popular World of Warcraft, a game where over six million players worldwide play their characters in a digitally created land called Azzeroth. Every day I pull off a Clark Kent when I sit at my computer and mild-mannered Qais Sedki becomes Baraal the hunter!

So what does all this have to do with business strategy? Well, I have sampled a few MMORPGs over the years, starting with Sony Online Entertainment’s genre-defining Everquest back in 1999, and to me, the MMORPG industry exemplifies the phenomenon of disparities in the financial results of firms, otherwise known as the heterogeneity of firm performance. All the companies that produce such games are operating within the same general industry, and yet some enjoy stellar financial success, while others provide lackluster results. MMORPGs are not a sure-shot recipe for success, and many seemingly promising titles have failed miserably and have long since shut down. This disparity in performance has to be attributed to something, and in trying to understand what that elusive something is, we start to see strategic strengths and weaknesses emerge.

Perhaps highlighting the differences between MMORPGs and regular computer games will help us understand the business strategy behind World of Warcraft’s success. MMORPGs operate on a different business model than run-of-the-mill computer games. Whereas the usual (and only) revenue stream of regular games comes from off the shelf sales, MMORPGs generate revenues from an additional, much more significant, source: subscription fees. Players are expected to shell out $40 to $50 on average to purchase the game initially, and have to pay an extra monthly subscription fee ranging from $10 to $20. World of Warcraft’s current subscription revenue has been estimated to be around $1 billion annually. The subscription fees are justified because MMORPGs are not as static as regular games. Much of the content is being continually updated by hundred of artists and programmers employed by Blizzard. New armor, weapons, beasts to slay, and dungeons to explore are regularly introduced to the game. Furthermore, the developers incur significant monthly costs because the game has to be hosted at large server farms where downtime is not tolerable at all. Another distinction is that MMORPGs are not linear in nature. Players do not have to go through level after level in a predefined path, but are given total freedom to focus on whatever aspect of the game they wish to invest their time in, be it leveling their characters, completing assigned quests, working on trade skills, or even simply exploring the vast virtual lands. The final element that is a major difference between MMORPGs and normal games is summarized by the “O” in the acronym: online. Players from anywhere with an internet connection play together and interact with avatars of real people instead of being limited to computer controlled characters. Because of this integration of social aspects, early MMORPGs were able to create an environment where competition between players runs rampant. In order to intensify the rivalry, the pioneers of the industry purposefully made the higher end items extremely difficult to obtain, thereby requiring anyone with the time, skill, and determination to acquire these objects of desire to play the game with ritualistic addiction.

Benefiting from hindsight, Blizzard Entertainment quickly realized that the critical factor that was holding back a vast number of potential subscribers was a two-fold factor of sizeable time commitment and a focus on a non-casual gaming audience. Therefore, Blizzard designed its flagship game with two audiences in mind. Much of the content can be completed without the assistance of other players, thereby greatly diminishing the boring, unproductive time it takes to otherwise form a group to accomplish a task. On the other extreme, there are various encounters in the game that necessitate a raid force in order to overcome. This two-pronged design has fared well for Blizzard and I can see elements of Hamel’s BCI framework being largely responsible for the success behind the design. For example, Blizzard’s focus on certain market scopes and a basis for differentiation can be immediately felt upon playing the game, as it adds an element that is sorely missing in other MMORPGs: humor. The are endless historical puns such as a Zeppelin airship operator named “Hin Denberg” as well as pop culture refences such as in-game innkeeper brothers “Norman” and “Bates”, an obvious ode to Hitchcock’s Psycho. An extensive yet amusing list of such references can be found here.

Blizzard has also capitalized on an asset that I regard as being clearly valuable, rare, and difficult to imitate under Barney’s VRIO framework. Customers of Blizzard Entertainment’s previous games might qualify as what Ken Blanchard and Sheldon Bowles call “raving fans” in their book of the same title. These customers are very loyal to the high quality visuals and the engaging game play that Blizzard has become synonymous with in the industry. These customers are also accustomed to the intricate fantasy lore of previous non-MMORPG games of the Warcraft brand which adds an element of familiarity that resulted in a virtual pilgrimage from older, more rigid play style MMORPGs to a game that sported a bright, vibrant look, with a very laid back gaming experience. The strategic focus of Blizzard Entertainment has resulted in a phenomenal number of players giving up their hard earned money. So large is that number that it would not surprise me at all if there were even more hunters in MBA 618 than Dr. Hunter and myself.

The Price of Social Responsibility

How does that Mastercard “Priceless” ad campaign catch phrase go? “There are some things money can’t buy… for everything else, there’s Mastercard.” It feels eerily strange that social responsibility seems to have been added to the list of things a piece of plastic can buy. The uncanny part is that this comes a mere few days after having argued to the best of my ability that Anita Roddick’s sincerity in her beliefs in social responsibility of firms constituted a valuable, rare, and difficult to imitate resource that propelled The Body Shop to the phenomenon that it became.

I tend to give anyone who comes across as being socially responsible the benefit of the doubt, but Roddick’s acceptance of 650 million pounds sterling to hand over the reigns of her beacon of morality to cosmetics giant L’Oreal amounts to little other than outright betrayal. Before you go poking around into my personal life to make a judgment as to how socially responsible I am in my purchasing discretion, let me beat you to the punch and set one thing straight. Although I think that it is highly commendable to be able to control ones buying behavior and to limit it to items that are produced in a way that is not harmful to the environment or to any individual, it is not by any means my guiding light of consumption. Using the Fair Trade coffee as an example, I personally purchase coffee for much more utilitarian reasons such as convenience, proximity, and mediocre taste. As harsh as that sounds, I simply do not have the resolve to go without a cup of coffee for the time it will take me to secure a cup that is stamped Fair Trade. My quandary with Roddick’s sale of her company is that she believed in it so strongly, but did not see to it that The Body Shop remains in socially responsible hands.

The ensuing tsunami of consumer resentment, and the ever increasing wails for boycotting The Body Shop that followed its sale are a painful reminder of the swift devastation that non-market environment issues can bring to a company. The strategic choice of The Body Shop to go on the auction block and L’Oreal decision to bid either largely ignored the effects of non-market environment issues or grossly miscalculated its extent as is evident from numerous articles such as this one. Consumer trust in the brand and the values it once stood for has floundered as various interest groups emerged such as organizations advocating protection of animals from testing in the cosmetics industry. It seems that an anticipatory strategy was not formed prior to the takeover and that L’Oreal might find itself having to defends its new acquisition by taking on a damage reduction strategy. The lesson for all you future business strategists out there is to make sure that business core values remain somewhat similar to watching your first-born baby’s first steps: truly priceless.

Rabbits in the wine cellar

Have you ever played an association game? All you have to do is say the first thing that pops in your mind when you hear a certain keyword. Although I’m not quite sure how anyone wins such a game, or if winning actually plays any part in this pastime, let’s have a go at it right here, right now.
“Rabbit!”
If you thought “Easter” “Bugs Bunny” or even “Volkswagen” for that matter, consider yourself normal. Well, somewhat normal at least. However, if the first thing that struck you was “wine” then you are likely to be a budding wine connoisseur who is familiar with New York based Metrokane’s product: the Rabbit. As far as I’m concerned, this quirky corkscrew takes the cake for product names that give absolutely no indication of their nature and/or purpose.
Being a Muslim by creed, I’m fully convinced that alcohol has no business running through my system, and hence do not generally follow developments in the business of booze. However, I came across this funny little item in an article in my favorite business publication Business 2.0 (article available here) and found it an interesting read.
I found issues of value and imitation to be prevalent both in catalysts for Metrokane’s success as well as in challenges the company faces in fending off competitors. These issues form two out of Barney’s four factors of his VRIO framework of gauging corporate strength based on its resources and capabilities.
It seems that Riki Kane, company founder, realized that it was within her reach to design, manufacture, and sell a product that would carry a lower price tag than its competition while giving off the impression of being a higher quality item. Another key element that would add value (in Barney’s terms) by exploiting an environmental opportunity is that the competing products were only made available through specialty stores, something that Kane hoped to counter with the Rabbit.
On the issue of patents and their effect on imitability, Metrokane ironically found itself on both sides of the court. Its first attempt, a product that carried an equally quirky moniker: the Faucet, resulted in a patent infringement lawsuit. The tables were turned when Kane realized that the patent cited in the proceedings would expire in two years time, prompting her to act quickly on redesigning, rebranding, and patenting the product which came to be the Rabbit. Because the patent specifically aimed to protect the design of the new corkscrew and not its functionality, Metrokane comically found itself having to deal with the repercussions of a patent not specific enough to guard the company’s interests: product imitation.
The article demonstrated to me that understanding how a company’s resources and capabilities can act as strengths can lead to a better realization of what needs to be done in order to gain and/or maintain competitive advantage. Although I’m not sure if Metrokane can consider itself having achieved sustainable competitive advantage, I believe that widespread adoption of its Rabbit product has added a certain degree of competitive advantage that would be costly to imitate due to a patent on the product’s design. The numbers are surely impressive, as Metrokane’s annual sales increased more than three-fold in the year following the introduction of the Rabbit. Profits soared even more and have quadrupled in the same time frame. It seems that money at Metrokane is multiplying, dare I say, just like rabbits.

LG: Electronics giant, savior of household crises

Well established industry giants seem to have it easy, don’t they? For one thing, they’ve been playing the game for a considerable time longer than new entrants and I don’t think it’s difficult to see the value of such field experience. They basically know, firsthand, what works and what doesn’t. Simply stick to what works, do it well, and maintain a safe distance from any business concepts or practices that have proven to be simply unworkable, and there’s a considerable chunk of the elusive business success formula out of the way. Add to that some other perks that new entrants can only dream about (such as government support, access to critical data on customers, and massively deep pockets), and it becomes tempting to believe that the very first statement of this blog entry is indeed true.
All jest aside, it is by no means a free ride for any company, big or small, new or well established in any industry. Companies all over the world are in a perpetual battle for consumer’s hard-earned (in most cases anyways) dirhams, dollars, euros, or whatever the local store of value may be. Competition is increasingly more fierce within an industry than across it. One article that I came across in the December 2005 issue of Business 2.0 (available online here) really highlighted the kind of innovations that companies find necessary to give them the edge over their competition. The article uses a plethora of examples of how South Korean electronics giant LG has catered to local lifestyles by adding features that enhance the perceived value of the product for users in specific locales. The Korean kimchi fridge, Middle-Eastern date fridge, and the Indian veggie fridge, to name a few, all seem to be the end result of considerable investments in research and development of an increasingly more market oriented LG.
It’s interesting to apply Hamel’s BCI model to this article because a lot of elements of the model seem to fit snuggly onto how LG is competing. For example, the core strategy elements at play seem to be a very well defined product/market scope that is tailored to tend to local tastes and a basis for differentiation that seems to be centered around including features that add value that competitor products do not offer. One of LG’s core competencies that can be inferred from the article is their ability to understand what benefits are being sought by locals and then finding creative ways to solve culture specific conundrums. This highlights another element of Hamel’s model: the information and insight facet of customer interface. The article mentions R&D facilities set up in various countries to study the environment in order to gather information on local requirements and I see this as a focal point for information and insight activity. And what about Hamel’s notion of customer benefits as a bridging component between core strategy and customer interface? That seems to be exactly what’s at the core of the LG article: satisfying customer derived definitions of basic needs and wants. I also believe that LG is being sufficiently distinctive in its approach to product development to qualify for Hamel’s uniqueness factor as an important underpinning to achieving success. There are other areas of Hamel’s extensive model that apply to the LG case, such as locking out the competition by way of preemption and strategic economies of focus.
All in all, I believe it is safe to say that the LG article adequately demonstrates that corporate big-shots are constantly having to improvise and find creative solutions to generating profits. The solutions that LG locale specific appliances offer seem to be obvious solutions to recurring quandaries, but the Iranian kebab microwave would not have seen the light of day if not for some creative spark on LG’s account. Of course I’m not too certain the Middle-Eastern $80,000 gold plated AV system is an innovation of any sort. I’d file that one firmly under corporate image antics. Maybe the day my prayers will be answered for an AC that filters out shisha (a.k.a. water pipe/hubble-bubble) smoke is closer than I previously imagined.

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