Competitive Advantage and the Productivity Frontier, Or Why Dark Souls is the Ikea of Game Development

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.

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):

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.

Examples help. One of the classics is Southwest 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.

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:

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:

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.

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.

Justin Fischer is a studio founder (www.agencyprinciple.com) and production consultant. His game credits include the upcoming Ray's The Dead, The Occupant, and Disney Infinity. He earned his MBA from Northwestern University's Kellogg School of Management. His mission is to improve the day to day experience of making games through better processes. He writes about that at his personal blog here: http://www.breakingthewheel.com

Follow him on Twitter: @justin__fischer (two underscores!)

His LinkedIn profile can be found here

° 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.