Jun 29, 2009

Poloroid Redux - Gaming Industry Lock-In?

For some time, Polaroid's tragic response to arguably its most important growth and sustainability challenges has endured as a popular and fascinating case study of how a company and its leaders can let outdated beliefs ambush their future.
Polaroid was founded in 1937 by Edwin Land who went on to introduce the first instant camera in 1948. From that point forward the company's dominance of instant photography technology remained unsurpassed, and it was not surprising that the company moved aggressively into digital imaging long before its competitors. In 1991 its prototype of a high-resolution megapixel camera had a performance/price ratio far superior to most other products on the market. Yet in one of the most stunning illustrations of framing lock-in, Polaroid’s digital market entry was an utter failure, and the company exited the business within five years.

Four critical management beliefs created the framing lock-in that drove the company’s demise in digital imaging. First, Polaroid’s culture did not value market research as an input to product development; instead, it was believed with a passion that Polaroid’s technology and products would create markets. Second, there was a firmly held belief that customers valued physical instant prints. As a result, products such as video camcorders were not seen as competition. Third, there was an obsession with matching the quality of traditional 35 mm prints, driven by a belief that customers required ‘photographic’ quality.

Finally, and most importantly, there was a strong belief in the razor/blade business model pursued to-date. While Polaroid had initially made money on both camera hardware and film, a decision was eventually made to adopt a razor/blade pricing strategy. The firm dropped prices on cameras to stimulate adoption and demand for film. Film prices and margins were increased, and the strategy was extremely successful. Over time a fundamental belief developed: Polaroid could not make money on hardware, only software (i.e., film).

These deeply held management biases also meant that important areas were not invested in. To compete successfully in hardware using a business model different from the traditional razor/blade approach, Polaroid would have to have developed low-cost electronics manufacturing capability and rapid product development capability—two areas that remained weak. And the firm never invested in developing any sales or marketing capability specific to digital imaging or new distribution channels.

Polaroid’s fatal management decision-making limitations can be felt acutely when a then new Polaroid Digital Imaging hire from outside the company described top management’s struggles:

“The catch [to our product concept] was that you had to be in the hardware business to make money. ‘How could you say that? Where’s the film? There’s no film?’ So what we had was a constant fight with the senior executive management in Polaroid for five years … We constantly challenged the notion of the current business model, the core business, as being old, antiquated and unable to go forward … What was fascinating to me was that these guys used to turn their noses up at 38 percent margins … But that was their big argument, ‘Why 38 percent? I can get 70 percent on film. Why do I want to do this?’...”

Fast forward to mid-2009, and we're seeing signs of a potential shift in the gaming market as the products evolve from mostly "serious gamers" with sophisticated and expensive gaming hardware and software (and lots of time to play!), to a more mass-market opportunity with "casual gamers" who pursue spurts of gaming for 5-10 minutes on the iPhones, and to a lesser extent other smartphone devices.
So how are the leading game device and software players responding? Here are how executives at Nintendo and Sony indicate they are viewing the situation:
"At the end of the day you buy an iPhone to make calls, and the (Sony) PSP to play games" (June 29, 2009)
"No one can match (Nintendo's) years of experience in the hand held (gaming) market" (June 29, 2009)
How might the ghosts of the old management team at Polaroid counsel these firms?

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