Big vs. small : how can a small startup in the videogame industry enter the field, survive and become a successful company : a case study of a small video game developer trying to make an impression in the market

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Big vs. Small: How can a small startup in the videogame

industry enter the field, survive and become a successful

company

A case study of a small video game developer trying to make an impression

in the market.

Jordy Velasquez Amsterdam Business School

Student Number 10853146 September 14th₂₀₁₅

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Acknowledgements

I would like to take the chance to acknowledge my friends and family for all their support during the time it took to write this paper. I would also like to thank my classmate Christopher Jambor, whom I conducted research in the same company with. And finally I would like to thank my supervisor Professor Jeroen Kraaijenbrink, who guided me through this entire process and inspired me to constantly aspire for greater results.

Thanks to you all.

Jordy Velasquez

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Executive Summary

A common theme in any industry is competition between the larger, more established and financially secure companies and the smaller less well known and more financially struggling companies. An industry that greatly reflects this struggle is the video game industry.

This research looks at struggle between large firms and small ones. The study focuses on how small firms can use competitive strategy theory, Innovation, lean startup theory and adaptability to help them compete with larger players in their industry. To find data on this I explore the video game industry and through informal observations and formal interviews come to my conclusions.

I make a series of recommendations based on my observations, interviews and overall research on how small companies can use the business theories mentioned above to exploit their larger opponents and play their best hand at competing with them with a global audience.

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I. Introduction

Big vs. Small” is a competitive aspect of the business world that is constantly occurring. Since there are always large and small firms joining the fray. The competition between these two groups is ongoing and fierce at times as the large corporations fight to maintain their position and the small ones battle to break out of the small category and become established firm in their own right. This constant struggle between these two groups is the “David and Goliath” angle of business. “Large size has been seen as giving a firm such advantages as economic scale, experience, brand recognition and market power (Hambrick et al., 1982; Woo & Cooper. 1981, 1982), Conversely, smallness has been credited with increasing flexibility in production (Fiegenbaum & Karnani, 1991) and price (MacMillan et al, 1982; Tellis, 1989) and with enhancing speed (Katz, 1970) and risk seeking behavior (Hitt, Hoskisson, & Harrison, 1991; Woo, 1987” (Chen & Hambrick, 1995, p. 455). In recent years, this particular struggle has become more pronounced with the startup culture gaining more and more popularity. “A report issued last week by Babson and Baruch Colleges point to an existing trend in the U.S. economy. The percentage of adults involved in startup in 2012 hit 13% of adults —a record high since Babson began tracking entrepreneurship rates in 1999” (Profeldt, 2013). “The National Venture Capital Association records 1250 startup incubators in the U.S., and estimates 7000 of them exist worldwide (2012 figures)” (Weiblen and Chesbrough, 2015, p. 67) There has been an explosion of “little guys” that are stepping up to take on the corporate behemoths. Technology development has catapulted many firms to prominence. Companies like Facebook and Uber started as startups. These companies saw a need in their communities and started a small business that grew at a fast pace. Neither company could have been created and succeeded without the newer technologies that allowed for their websites and the apps on the smart phones. They went from small startups to industry giants in a fairly short period of time. These companies can be said to have changed the world where we all live through innovation, creativity and technology.

An industry where these three factors, innovation, creativity and technology are quite pertinent is the videogame industry. This industry has grown dramatically since its early

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beginning in 1962. “In 1962, MIT engineering graduate student Steve Russell programmed Space war on the students adapted the programming language and began to grasp the entertainment and commercial possibilities behind electronic gaming (Poole 2000).” (Williams, The History and Structure of the Video Game Industry – Beginnings, Boom & Bust - Part 1, 2014). The industry itself is continually changing and the change has been brought about by a continuous flow of new startups jumping into the fray bringing with them new innovations, technologies, creativity and improvements over the status quo and this is precisely why this industry is so interesting. “In addition, this industry is also of potential interest to scholars because it presents a dynamic and intensely competitive environment for firms. It has already experienced several stages of industry revolutions and changes of market standard in a relatively short time period.” (Gallagher and Park, 2002, p. 67). Its revolutionary growth rate and constant innovation make it particularly challenging for any company to enter the market. In my research study of “Big vs. Small”, where the focus is to determine how a small company starting out can compete, survive and succeed in a market that is filled with large established firms; this industry provides an enormous wealth of resources from which to draw for my study. It has large industry players like Electronic Arts (EA), Activision/Blizzard and Ubisoft among others. Like in any other industry, these corporations still have to face the competition, not only among themselves, but also with the young entrepreneurs that are currently competing with them. In some cases, these small companies have been able to compete quite handedly and thrive within the industry. As an example, we can use game developer Markus Persson who created Minecraft. “Less than two years after its release, Minecraft has been purchased by more than 1 million people around the world.” (Parker, 2011). Understanding the rapid growth, creativity, and innovation aspects about this industry will aid in this study as it endows perspective into the work. I plan to examine what tools and strategies can aid a new small company enter this field. Furthermore, how the founders can prepare to meet its particular challenges, survive and emerge as a serious contender in this business sector. The video game company that I will use for my case study is a startup company called KeokeN Interactive.

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II

Framing: Useful Theories and Tools Utilized by both

Large and Small Companies in Competitive Settings

In order to examine the question of “Big vs., Small” and assist KeokeN Interactive in its pursuit of entering the videogame market and succeeding, I will utilize business theories and tools as they are pertinent to this inquiry. I will focus on Competitive Strategy Theory, Innovation including specific aspects of Blue Ocean Theory and the Disruptive Innovation Theory, Lean Startup Philosophy, Theory of Adaptability and the stages small companies experience on their way to become successful established corporations. I have chosen these theories and tools because they address the areas where KeokeN will need to be prepared in order to succeed. It will give it insight into how the business world works and show its founders what to expect and how to get ready for what happens when they launch their new game.

II.A Competitive Strategy Theory

The Competitive Strategy as outlined by Michael E. Porter describes the competitive business world as one of move and countermove. “In most industries a central characteristic of competition is that firms are mutually dependent: firms feel the effects of each other’s moves and are prone to react to them. In this situation, which economists call an oligopoly, the outcome of a competitive move by one firm depends at least to some extent on the reactions of its rivals”.” (Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1998, p. 88). An example of this theory would be that if a company raises prices, his competitor must react. He can choose to also raise prices, which would help the whole industry or go on to create a price war. When determining whether to enter the market place or not, Porter indicates that they should consider the “Barriers to Entry” they might encounter. These include: Economies of Scale, Product Differentiation, Capital Requirements, Cost Disadvantage Independent of Scale, Expected Retaliation and Entry Deterring Price. “Economies of scale refer to declines in unit cost of a product (or operation or function that goes into producing a product) as the absolute volume per period increases. Economies of scale deter entry by forcing the entrant to come in at large scale and risk strong reactions from existing firms or come in at small scale and accept a cost disadvantage” (Porter, Competitive Strategy: Techniques for

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Analyzing Industries and Competitors, 1998, p. 7/original). Product differentiation basically means that the new entrant will have to compete with well-established firms with name recognition, entrenched products, and loyal customer base among others. The small newcomer into the industry will have to spend a great deal of time and effort to break through this particular barrier. Capital requirements refer to the large amount of capital that the company will have to invest not only on startup costs but also, in competing through advertising, R&D and customer development. Cost disadvantages independent of scale, means that established firms have a cost advantage due to patents, raw materials at lower cost, government assistance, and experience with the product, quality and salability. Expected retaliation basically means that established companies can be expected to compete fiercely and make the entry of the new company as difficult as possible. If they want they will try to put the small competitor out of business. The final deterrence is Entry deterring price. This means that the startup must carefully weight if the rewards that can be gained by entering the market outweighs the costs (Porter, Competitive Strategy: Techniques for Analyzing Industries and competitors, 1998). Table I gives an outline of how the deterrence’s apply to both big and small companies. It is clear that small companies are greatly disadvantaged by the deterrence’s. Furthermore, it is easy to see why many small business fail if they don't closely study and strategize to meet all the deterrents that they might encounter and pay close attention to their competitor’s moves. However, other studies of the strategies have shown that small companies have different moves. Table II showcases how these competitive moves work for both big and small firms “Competitive moves small firms initiate often resemble guerrilla attacks in their rapidity of execution and their tendency to prevent wars of attrition, which require substantial resources and a prolonged period of confrontation. (Harrighan, 1985; MacMillan, 1980)” (Chen & Hambrick, 1995, p. 459). Small companies are also capable of competing with quiet, subtle moves that are not noted by the larger competitor. In comparison, the larger firms are more up front and open in their competitive moves. However, once a competitive move has been made the large companies are more likely to respond. The larger firms have more to lose if they don’t respond quickly. “…large firms may have less propensity for action but more propensity for response than small firms. Slack and inertia dampen the large firm’ proactive

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actions, but the same slack and more important, the need to protect reputation, increases the likelihood—and, as argued below, the announcement speed—of response.” (Chen & Hambrick, 1995, p. 461). Large competitors usually respond quickly because a strong and fast response to an attack shows their forcefulness, and hold of the market. They also use it as a deterrent to further attacks. The smaller companies in contrast are more careful in their responses since they have a weaker position and less capital to mount a response. However, when they choose to response, it is usually quicker than their large competitors due to the fact that their size endows them with tremendous flexibility. However, the response needs to be measured “Strategically, the small firms also need to remain low-key or even secretive in counterattacking, even more than when attacking, because of their original objective of maximizing guerrilla effects” (Chen & Hambrick, 1995, p. 462).

One last competitive aspect regards standard based industries where networks need to be formed in order for the company to function successfully. In other words, these industries work together for the benefit of both companies. An example of this type of industry is a cable television channel that develops a partnership with a studio to create the actual television series. “The U.S. home video game market is an important example of a standard base industry because customers purchase or rent software to use with their consoles. The complementarity between software and hardware in this industry thus creates a need for an industry standard to lower transaction cost and increase buyer-switching cost” (Gallagher and Park, 2002, p. 67) It has been indicated that these types of companies compete a little differently than companies in other markets. The video game industry is unusual since every 5 or 6 years they have undergone a total industry change or cycles. These cycles are partially brought about by innovation and change of leadership in the industry. “Therefore, firms in the home video game industry fought what could be viewed as full-blown standards war about every five years” (Gallagher and Park, 2002, p. 68) It is therefore understandable that these companies must have some different strategies to help them compete above and beyond the strategies indicated above. Gallagher and Park study used a historical review of the industry to determine how these industries compete. They particularly concentrated on three issues that affected the individual companies as follows:

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2. Early mover advantages (and switching costs);

3. Competition in standard-base industries, especially the role of complementary products and installed base.

(Gallagher and Park, 2002, p. 80).

Gallagher and Park show that in order to become the leader of this industry the console creators not only had to be innovative but also create a substantial group of game developers that would be their allies in the competition. The innovation together with the games had to create enough interest to the players to consider switching consoles, even when it meant an investment in a new console. While a company planning to enter this field as a video game developer must be able to decide with which console to align themselves. Because if they align themselves with one of the current leaders there is no guarantee that this company will be an industry leader in the next cycle. While this aspect of competition refers mainly to the console manufacturers the game developers are an important part of the competitive process. This is a fierce competitive environment and large establish firms can actually lose their market position as it happened to Nintendo when Sony Play Station entered the market. Small firms that ally themselves with the losing company can also lose their market position. In this videogame industry the relationship of the large console companies with the small developer is symbiotic. Conversely, this competitive environment does not affect the competition between the large and small game developers. That particular competition remains in place and follows the other more standard competitive strategies.

It is obvious that small companies face severe deterrents when entering the market and that their competition techniques must be carefully gauged within the confines of their market if they are to succeed. Within the boundaries of the videogame industry, the large companies have to be always aware of what the other large companies are developing and making sure that they have a large network of game developers backing them. Because of the nature of the industry, large established companies must also be ready to attack any new comers into the fray because video game players are always willing to accept a disruptive innovative product. Nintendo and Sony definitively lost large market share when Microsoft entered the field. Large video game developers like EA are well established and

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with deep associations with the large console manufacturers. This gives them a competitive edge. Small independent developers must determine if associating with a manufacture will be beneficial and help them compete with the larger developers. Otherwise, they will have to break the deterrence barriers by finding ways to reach their customers directly without creating so much attention to trigger a competitive strike from the larger companies.

DETERRENCE BIG SMALL

Economic Scale

Lower Unit Cost Lower Supplier Costs Established Distribution Faster Production Time

Higher Per Unit Cost

Product Differentiation

Well Established Entrenched in the market

Name Recognition Well Known Products Loyal Customers

Company Is New To The Market Unknown Product

No Customer Base

Capital Requirement

Well Capitalized

Promotional and Advertising Budgets

R&D Departments Dedicated Sales Force

Lower Financial Resources Lower Budget for Promotion and Advertising

No R& D Department Entrepreneur Is Creative Force

Small Sales Force Let by Entrepreneur

Cost Disadvantage Independent of Scale

Lower Costs

Government Assistance

Experience with Product Quality and Salability

Higher Costs Government Grants

Inexperienced – New Product , Quality and Salability

Expected Retaliation

Fierce Competition to Maintain Market Position

Small but Powerful Competitive Moves

Entry Deterring Price Already Established Prospective profits vs. Costs

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MOVES BIG SMALL

Properties of Reaction Up Front and Open Fast, Covert, Quiet Moves

Reaction to Competitive Strike

Faster Response to

Competitive Moves Due to Protection of Reputation – More to Lose Than Small Competitors

Once Decided to Move – Response is Swift Due to Greater Flexibility

Strength of Move

Forceful Response to Maintain Market Position and Deter Further Attacks

Slower, Measured Response Due to Weaker Position in Market and Less Capital for Long Term Competition

II.B Innovation

Innovation plays a huge role in every single industry and it is also highly competitive since an innovative move requires a response from the other player in the market. Large companies strive to remain competitive through their use of their vast R&D departments. However smaller competitors with vision and talent can innovate industries and stake a claim in the market. Innovation drives the markets forward and creating evolution. Schumpeter’s “evolutionary economics started from his theory of stationary and routine-based system in which evolution has come to a halt. To this he added the theory of a type of economic evolution that is driven by innovative entrepreneurs, and furthermore, he generalized the theory to cover the evolutionary processes in each society and the evolution between these sectors”. (Andersen, 2013, p. 14). Consequently, it is easy to note that Schumpeter believed that innovation was the catalyst that moved the economies forward.

Innovation is an invaluable tool for all companies but it is usually acted upon differently by large vs. small companies. Stephan Lindegaard has identified seven key differences between these two groups as follows:

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 Speed of decision-making  Attitude toward risk  Allocation of resources

 Who understands the business model and who manages it  Processes or lack thereof

 Following rules versus breaking rules  Differing definitions of innovation

(Lindegaard, 2012)

Table III gives a detailed outline of how each of the properties applies to both large and small corporations. What follows is a more in depth review of these properties.

Speed of decision-making relates to the speed by which companies make decisions. Large corporations with complex bureaucracies usually take a long time to complete their analysis before they implement any new innovative option. In contrast, the smaller firms are able to see an idea and implement it quickly. Attitude about risk taking is his second area of differentiation. Large companies in many cases are invested in the status quo and are averse to taking risks that could change it, while the small firms are usually ready, willing and able to embrace the risk. After all, their whole business is a high stake gamble in most cases. The third difference is the allocation of resources. Here the large company is really able and more willing than the smaller company to spend their resources toward new ideas or products. The smaller company usually does not have the capital to invest in costly R&D projects, but if they find an opportunity they will promptly capitalize on it. The fourth category is who understands the business model and who manages it. In small company that is comprised of a few individual, everyone understands the model and how it all combines to create and deliver a product to the market place. In a large company, innovation is usually created by the R&D department but it really can only be driven by senior management. The next difference is Processes or lack thereof. This is an instance where the small companies may lack the organization in place to bring an innovation to fruition, while the large company, with its well establish processes, can bring an innovation to market in a more systematic manner. Although, large companies prefer small, manageable innovations instead of radical innovation that is disruptive. Next comes

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following the rules versus the rules. It is almost obvious that large corporations will like to follow the rules while small business in their formative stages are still making the rules. Lastly, differing definitions of innovation. Large companies consider innovation a product or service that will fit within the confines of their business. However a small company innovation is part and parcel of their existence.” (Lindegaard, 2012).

While the above may be true, we cannot discount big companies when it comes to innovation. In Kelly Edminston’s article, “The Role of Small and Large Businesses in Economic Development”, Edminston confronts this perception. She writes “Small businesses are largely thought to be more innovative than larger firms for three reasons: a lack of entrenched bureaucracy, more competitive markets, and stronger incentives (such as personal rewards). Small businesses are indeed crucial innovators in today’s economy and are the technological leaders of many industries. But the conventional wisdom— that small businesses are the cornerstone of innovative activity and that large firms are too big and bureaucratic to make significant innovations— is false. Both small and large firms make significant innovations, and both types of firms are critical to the success of today’s economy” (Edminston, 2007, p. 87). In the videogame industry where innovation is really the only way to survive, a small startup has to realize the nature of the business and effectively be constantly on the lookout for any technological advances that need to be incorporated into their games. A large company conversely due to their size would be able to survive one or two technological changes but they would be playing catch up if they ignore the new trends.

Two theories that relate to innovation are the Blue Ocean Theory and the Disruptive Innovation Theory. Large corporations and small startups have used both theories in the videogame industry, as well as other industries.

“Blue Oceans, in contrast (to red oceans), are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing boundaries, most are created from within red oceans by expanding industry boundaries. In blue-ocean competition is irrelevant because the rules of the game are waiting to be set. The term ‘blue ocean’ is an analogy to describe the wider

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potential of market space that is vast, deep and not yet explored” (Kim & Mauborgne, 2005, p. 106). Basically a blue ocean is the concept of making a new market and not competing in a market that is already saturated. Please see the blue ocean portion of Table III to see its application in a nutshell by large and small firms. In the videogame industry that is so deeply saturated breaking away from the pack and creating a new type of game experience is the key to long lasting success. An example of this is the way Nintendo introduced their new controllers together with their new console Wii. The new controllers attached to the players arms and as the player moved his movements were reflected in the game (History of Video Games, 2013). Innovation garneted a lot of interest in the marketplace as players love to try any new development and for a while Nintendo was the most sought after console around. Furthermore in the introduction of Wii, Nintendo also ignored the interests of their customer base by releasing games that were geared toward the casual player. “One of the reasons why the Wii console is viewed by industry insiders as a breakthrough is its appeal to those who have never played video games or play games only casually. It is widely acknowledged that Nintendo’s Wii and DS, coupled with games taking advantage of their functions, have widened the industry’s market base to non-gamers and casual gamers, rejecting ‘the conventional wisdom that video games are the domain of testosterone-driven gadget freaks who zone out for hours while conquering computer-generated foes.’ (International Herald Tribune, 2007).” (Aoyama & Izushi, 2008, p.11). Nintendo had basically used the blue ocean to open two sections of untapped market; the player that wanted to be part of the game and the new players and casual players. Prior to releasing the Wii Nintendo had gotten the large game manufacturers on board so that the games would be available. It was really easier for the large developers to bring back the title from the past specially since creating the large epic games take time to develop and are costly. For the game developers the innovation was to go back to appeal to new players entering the game arena with games that were tried and true. The smaller game developers have continued to push the boundaries creating some serious games that also appeal to new audiences that are looking for something new and different. As an example of the use of the Blue Ocean theory by small developer we can discuss the entry into the market of “Minecraft” a game that managed to gain the attention of both the dedicated gamers as well

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as the more mainstream market. Consequently, it opened a new market for the independent developers through the use of the Blue Ocean theory.

Disruptive innovation is the idea that a new product or service created at the within or outside of the market can be extremely revolutionary and shake up the market in a particular industry. “Disruptive innovation creates an entirely new market through the introduction of a new kind of product or service, one that’s actually worse, initially, as judged by the performance metrics that mainstream customers value.”(Christensen & Overdorf, 2000, p. 6). Once again, Table III gives you an idea of how this works for both big and small companies.

Disruptive innovation has been a driving force in the videogame industry. It has been a cyclical force. “Since the first emergence of a dominant design based on a cartridge system in 1976 [20], there have been at least five stages of technological innovations based on video graphics capabilities.” (Gallagher and Park, 2002, p. 67) Right now we are in the eighth cycle. Each new console driven by innovation and by breaking new ground rendering obsoletes the previous offering. Case in point the entry into the market of Sony’s PlayStation. In 1995 “We believe that the PlayStation was the second dominant design to appear in the industry. Like the IM and Saturn, it utilized CD’s for its games. However, Sony went beyond these platforms by offering optional memory cards that let players save their game progress. We believe these two features, CDs that allowed dramatic complexity of games and the new memory capability, distinguished the PlayStation in consumers’ minds sufficiently and helped it become a dominant design.” (Gallagher and Park, 2002, p.74). It is important to note that the same process has happened again and again in this industry. Disruptive innovation is the way that the large companies in this industry compete. Meantime, large developers as part of the console networks must come up with the games that take into consideration the new technological advances. While disruptive innovation is really less prevalent in the game development sector it does show its hand now and again. For example due to the technological advances 3D have begun to appear in the market. At present few small developers have the capability to create a 3D game, so some games are still in 2D. But the trend is a given on the AAA games. “Games like Golden

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fighting games before them. 3D became the main focus in this era as well as a slow decline of cartridges in favor of CDs, which allowed much greater storage capacity than was previously possible.” (History of Video Games, 2013)). The difficulty for the smaller developers does not mean that they are not innovating “As a result, new firms, sometimes from outside the industry, become the innovators and they strive to enter new markets. Many of these companies are behind the renaissance in casual gaming. Some revived older gaming styles, while others have introduced radically new ways of playing games” (Wesley and Barczak, p. 178). Consequently, the smaller developers have to use their creativity in the usage of the technology to create new types of game “…Chen was lead developer for an experimental game called Cloud, which used atmospheric modeling to tell the story of a seriously ill child whose only escape is to travel among the clouds. Cloud combined serene orchestral music with lush hand painted visuals to create what could best described as interactive art.” (Wesley and Barczak, p. 185)

Another example of the use of disruptive innovation was the use of mobile phones for video game playing. Once introduced, the player did not need to be tied down to a console or a computer but could take the game with him or her wherever they went. At the beginning, in 1977 when “Snake” first hit the market there were problems with this new platform, “Mobile phone games early on were limited by the modest size of the phone screens that were all monochrome and the very limited amount of memory and processing power on the phones, as well as the drain on the battery.” (History of Video Games, 2013). Today, everyone has an app on their phones that allows them to download and play anywhere.

Innovation in any form or shape is an intrinsic part of how the videogame industry developed. In the big versus small arena, the large players continue to hold the keys. Console manufacturers through their disruptive innovation or the use of Blue Ocean continue to expand and grow the market. The large game developers as part of the console manufacturers network have better funding and assistance from the console producers to adopt new technologies like CD’s and 3D function. Smaller developers have to find funding to get access to the game engines and in that sense are at a disadvantage. However, through the use of innovative ideas, they are able to compete with the larger producers and make their mark on the industry.

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PROPERTIES BIG SMALL

Speed of Decision Making

Slow Fast

Attitude Toward Risk

Averse Willing to Take Risk

Allocation of Resources

Large Resources Low Resources

Who Understands the Business Model and Who Manages It

Top Executives Entrepreneur and all Employees

Process or Lack There of

Business Process in Place – Experienced

No Process in Place – Being Organized as They Go Along

Following the Rules vs. Breaking the Rules

Follows the Rules – Not Flexible

Willing to Break the Rules

Innovation

Small Advances to Further business

Working Premise

Blue Ocean

Established Firm Creates New Customer Market by Introducing Innovation

Firms Creates Innovation That Brings New Market to the Industry

Disruptive Innovation Established Firm Creates Revolutionary Change in the Industry Through Innovation

Small Firm Creates

Innovation That Changes the Industry

II.C Lean Startup Philosophy for Independent Developers

The Lean startup philosophy has been chosen for this project because it gives small new companies a blueprint on how to enter the marketplace and bring their innovative ideas with them. At the same time, we have noted that this philosophy is being adopted by large Table III. Innovation.

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companies in a way to bring innovation to their companies with a few changes on its implementation in some cases. Since it applies to both, big and small, it is a resource worth examining in deeper detail. Table IV shows how both large and small corporations apply this philosophy. The next paragraphs give a more detailed analyses of the application of the philosophy by both.

“The Lean Startup asks people to start measuring their productivity differently. Because startups often accidentally build something nobody wants, it doesn’t matter much if they do it on time and on budget. The goal of a startup is to figure out the right thing to build— the thing customers want and will pay for—as quickly as possible. In other words, the Lean Startup is a new way of looking at the development of innovative new products that emphasizes fast integration and customer insight, a huge vision, and great ambition, all at the same time” (Ries, 2011, p. 19). Ries advocates that companies considering a new product should efficiently and extensively use market research and product testing before they move forward to the production stage. Ries sums up how a startup runs when he said “In real life, a startup is a portfolio of activities. A lot is happening simultaneously: the engine is running, acquiring new customers and serving existing ones; we are tuning, trying to improve our product, marketing, and operations; and we are steering, deciding if and when to pivot. The challenge of entrepreneurship is to balance all these activities.” (Ries, 2011, p. 23). In order to help the Startup companies, Ries has designed a methodology that will help the entrepreneur get started with minimal investment. Once the Entrepreneur has an idea he should really ask himself “’Should this product be built?’ and ‘Can we build a sustainable business around this set of products or services” (Ries, The Lean Startup Methodology, n.d.). At the center of the methodology is a loop process idea » build » measure » learn. He exhorts his followers to built a rudimentary model of his product and engage his potential customers gaining their feedback. The product in this process is called the MVP or minimal viable product. As the process continues the entrepreneur is able to learn what his customer really wants and needs and refine the product. If after he has gone through the process a few times and the product is not acceptable to the customer, then is time to cut his loses and pivot to another idea. The whole process should be quite quick and not require years. This methodology saves the entrepreneur enormous amount of time

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spent in business plans, R&D and getting a final feedback from the customer on a perfect product that the consumer may not want (Ries, The Lean Startup Methodology, n.d.). Of course the creation of new products and/or services means that this philosophy is really helping to accelerate innovation in the marketplace.

While this theory is most helpful to the new companies starting out, its principles are attracting the interest of the larger companies. Since his book appeared in 2011, and became a best seller, Reis has been contacted over and over by large companies asking for his advice. Among the companies working with Ries is G.E. This mammoth company had decided that in the current world market the Lean Startup is the best way to create innovation within the company. “The company’s top executives – of which there are thousands—were briefed on the Lean Startup project and convinced to get on board. No small feat. Initially, Ries trained 100 employees on the Lean Startup method, coaching them on implementing such techniques in small research and development sections of the organization. When that went well, 100 turned to 500 and then to 1,000.” (DeAmicis, 2013). Needless to say the full management of G.E. from the CEO Jeff Immelt to the lowest employee had to be on board and support the idea and small groups called “Fast Works” programs had to be established. G.E. claimed that 100 products were currently in development using the Lean Startup philosophy. One product is currently in the market an all-metal refrigerator with no plastic parts. (DeAmicis, 2013). The G.E. story has not been completed yet but their interest in innovation has made them look in this direction. Innovation is certainly the main interest of large companies that decide to invest in this type of process. However, many large companies have found that it is very hard to adopt this entrepreneurial philosophy within the confine of their companies. They have opted to go different routes through which they reap the benefits of the innovation without disrupting their whole organization. “Corporate incubators provide the nascent venture with funding, co-location, expertise, and contacts. (17) The intention is to provide the funding team with a startup-like environment in which radical innovation can grow better than in the slow and bureaucratic parent organization. If successful, the grown-up spin-off will be able to conquer new markets independently or be reintegrated as a separate division.” (Weiblen and Chesbrough, 2015, p.70) An example of this trajectory is Bosh

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that began its startup platform in 2014. It was formed, as a way to fund ideas that had come forward through their own company, but that did not fit their company model. They provided their platform with a separate location giving them independence from the company yet providing access to company resources and support. “The incubator intends to facilitate early market exposure and pivoting for the startup and shield it from corporate complexity” (Weiblen and Chesbrough, 2015, p.71). So this incubator is in essence using the lean startup philosophy in a different way. Consequently, a philosophy that was basically made for the startup small company has ended up being used by large companies to create innovation either within the company as in the case of G.E. or externally or through a separate unit like Bosh.

In the video game industry, this means that manufacturers of consoles should talk to their customers to find out what new features they would like to see available. It will save time and effort rather than adding features that may be innovative but the customers don’t really want. For the small video game developers this means that before they create a game, they should really use a small pool of players and pitch the game idea to see if it is worth actually creating a game. Furthermore they should use different pools of players along the way of the game development. At a certain stage game playing will become a must. The startup philosophy helps the video game developer concentrate their efforts on viable games instead of creating a game without feedback only to find out that the game is a failure. The large developers don’t need to be as careful as the independent startups since they can survive a game failure and also their console backers will help them promote a game. Their promotional machines build interest in games even if the games are mediocre. Consequently, in the big vs. small inquiry of this paper Lean Startup is being used by both as a way to streamline and accelerate the process of bringing innovation to the market.

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IMPLEMENTATION PROCESS

BIG SMALL

First Step All Parties at Company from Top to Bottom Must Agree to Innovate

Come Up with Innovative Idea

Second Step Must Create A separate Space and Framework for Innovation Team

Produce Rudimentary Prototype

Step Three These Innovative Teams Must Have Support from Parent but Free to Act on Different Business Model

Show and Allow Customer to Test Product

Step Four Innovative Team Must Be

Allowed to Meet with Prospective Customers

Learn What Customers’ Want

Step Five Test Product and Get Feedback from Customers

Repeat Process until Customers Are Satisfied

Step Six Product is implemented into Parent Company or Spin Off

If Idea cannot be worked out, Pivot and Start Again

II.D Theory of Adaptability

In today’s world, where innovation is happening more often and changes in technology seem to be almost constant, the ability to adapt is paramount. This motto applies not only to the large corporations but also to the small firms, as it is the ones that adapt the fastest that will succeed. “The learning school, as opposed to the planning school, suggests organizations learn what to do next by minimizing the use of predictive rationality, and instead experimenting and moving quickly to capture new opportunities (Mosakowski, Table IV. Lean Startup Philosophy.

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1997). By being flexible and adaptive to situations as they develop, organizations successfully out-maneuver competitors who also struggle to deal with the challenge of an uncertain future (Fredrickson and Mitchell, 1984; Nutt, 1976). Purely adaptive approaches avoid defining future event spaces, and instead position the firm for quick responses to uncertain and unpredictable events as they emerge.” (Wiltbank, Dew, Read, & Saravathy, 2006). There has also been extensive research that has shown how the more adaptive a company is the more successful they tend to be. “Empirical support for adaptive approaches to strategy making in uncertain situations is also significant. In two studies, Fredrickson and Mitchell (1984) and Fredrickson and Iaquinto (1989) looked at the consequences of comprehensive strategy making using a decision scenario survey with managers from firms in two industries, differing in the extent of instability. In both cross-sectional and longitudinal evaluations, they found comprehensive planning efforts were negatively related to performance in unstable environments. Miller (1993), through interviews with 53 firms, found that more successful firms were significantly more adaptive.” (Wiltbank, Dew, Read, Saravathy, 2006, p. 985). It is clear that in today’s rapidly changing markets companies both large and small must be ready, willing and able to adapt quickly to new market conditions. Before anything an adaptable business is a business with a forward-looking mentality. The ability to anticipate developments, opportunities and threats in your area, the market and the world will enable you to plan for changes and wield them to your advantage. This unavoidably necessitates a certain amount of flexibility, and readiness to adapt your strategy and change course, sometimes very quickly and on short notice. Please see Table V where the attitude toward adaptability is delineated for both and small companies.

Even though, large companies are notorious for their slow responses, it can be said that in order not to become obsolete, they will have to be prepared to change. An example of a large company changing and adapting and surviving is Barnes & Noble the large bookseller in the U.S. With book sales declining quickly and readers turning to digital readers, Barnes & Noble saw the writing on the wall and moved quickly to create its own reader “Nook”. It created an online presence and made its stores a place where people could meet and socialize by bringing Starbuck’s cafes to the store and offering areas where people could

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just look and read parts of the books prior to purchasing. While they closed many of their stores the ones that remain are always crowded. They changed with the times and found a way to survive. By adapting to the way people were reading while keeping the customers that still prefer to read actual books. At the same time, they established their presence in the Internet and started selling books, CD’s and even renting textbooks to students. While all the other bookstores have disappeared Barnes and Nobles is alive and well.

Smaller companies and new comers to the market are usually well equipped for adaptability since they face the problem on a regular basis. Startups also must adapt quickly as we saw with Lean Startup from the very beginning they must change their products to what their customers really want. In some cases, they have to pivot and start all over again. Adaptability is in the DNA of small companies.

In the videogame industry that is constantly driven by new technological advances adaptability is a prerequisite. This is basically what happened to Atari, it could not keep up with the technological explosion and its games became less and less popular. If a company does not adapt, it will become obsolete. Meantime, game developers must also be constantly adapting. The features being offered by the consoles drive change and the games must adapt in order to be played in the consoles. However, developers must also take into consideration their customers and the types of games that their customers want to play. Customers’ tastes and preferences change with time and the game developer should be aware of those changes.

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ATTITUDE BIG SMALL

Attitude Toward Change Difficult to Adapt Geared Toward Adaptability

Speed of Reaction Slow to React to Market Changes

Ready to change with Market Conditions - Fast

Firm’s Behavior Bureaucratic – Not Interested in Change –Prefers the Status Quo

Forward Looking – Embraces Change

II.E Small Company Development

This concept of the evolution of small companies does not relate to large companies, but it is important to know what happens to small company after it successfully enters the market place. This will give us perspective on the evolution. Also, really even large companies must continue to evolve if they are going to avoid becoming obsolete. So even though, we are basically discussing the small company’s evolution, we must remember that the process does not stop once the small company reaches the maturity company status. Mel Scott and Richard Bruce describe the five stages as Inception, Survival, Growth, Expansion and Maturity. Companies are propelled from one stage through the other by a series of crises. In the inception phase the founder will be driving the business, it will be his vision and his product. “The main effort will hinge around developing a commercially acceptable product and establishing a place for it in the market-place” (Scott & Bruce, 1987, p. 49). The first crisis will be one of leadership. “If owners can accept the demands that the business places on their finances, energy and time, they become stage 2 enterprises” (Scott & Bruce, 1987, p. 49). The second phase is the survival stage that is characterized by high interest on profits and increase in business activity and better finances. These forces will push the manager to delegate some of his responsibilities. The business will encounter more complex crises before it steps to stage 3. These crises will take several forms, it can be brought about Table V. Adaptability.

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through the growing process going out of control, expansion into new products or areas that will require new methods to handle the problem, new competition with pressure being applied to pricing and/or they will face the need to get more solid financial bearing and hiring personnel to handle the finance end of the business. If the company survives, it will enter into stage three. At this stage the company is beginning to make money but with it come some more problems. Money is still tight, but to move forward more investment has to be made into the firm. Competition from the larger industry players will make a price war quite likely. Manager will have to be able to control the growing business while keeping the finances in check. If the company is able to handle all the crises, then they will step up to stage four. This is the Expansion phase. At this point “Budgetary control, regular management reports and decentralized authority accompanied by formalized accounting systems are the order of the day. The need to determine most administrative functions will be fundamental to survival through this stage,” (Scott & Bruce, 1987, p. 50). This is also the time when the firm will need an influx of capital. It will need to either borrow the necessary funds or take a partner. At this stage, the crises are not only budgetary but the decentralization of management. As more and more employees are hired and the manager has to give up his centralized control so that the company can function, Furthermore at this stage, if they have not done so before they will need to expand, diversify and tackle all the problems derived from this move. If the company survives, it will reach the final stage, the maturity stage. At this point the company is still growing. “The key issues facing management are expense control, productivity and finding growth opportunities. The lines of authority may continue along functional lines or be reorganized along product lines.” (Scott & Bruce, 1987, p. 51). They will still face growing pains and expansions along with financial issues but they are at the cusp of becoming a large corporation.

There are other theories like the life cycle theory, Schumpeter’s theory of company evolution and even Steinmetz theory that show only three critical stages. However, all agree that in order to become large corporations companies will have to face a crisis to be pushed to the next stage. The company that survives all cycles or stages emerges as a large mature corporation.

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Companies entering the market will gain enormous insight from learning about these stages of development. They will not panic when they encounter a crises, instead knowing that it means that they are on the verge on entering a new stage, they will consider their options and how best to resolve the crises. A videogame startup will face these stages quite quickly since this business sector moves at lighting speed. The more they learn the better prepare they will be to succeed.

As this chapter ends, we must note that both big and large companies alike can and in many instances both use these same theories and tools while conducting their businesses. The small companies may be more adept at speed with which they make a decision or determine to accept innovation, plan to make more with less, and adapt. Large companies have the wealth of resources that allow them extra time to change and pivot their businesses, their large R&D departments create innovative products all the time, and they certainly will adapt when necessary. I believe whether a company is big or small their focus is to stay in business, survive and grow. Or in the case of a large company to maintain their status. In the next chapters, we are going to learn about my case study KeokeN Interactive and what it is doing. We will also examine whether the theories we have explored in this chapter have been useful to them in their quest to launch their first video game, compete, and survive against the giants of the industry.

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III. Methodology

In order to conduct this research study the author has used literature, articles, Internet websites, and blogs that pertain to the subject matter of Big vs. Small. The author has also used a series of direct observation and unstructured business discussions with the founders of the case study company. To attain this knowledge the author worked three days a week starting from Monday, June 29th for 8 hours a day. Each day at the office the author was slowly introduced and taught all about the video games industry, specifically from the point of view of an independent developer trying to develop a new book. In these discussions, the business side of the company was discussed frequently including competitive strategies, business plans, how to implement marketing ideas, financial matters, and other ways to innovate and penetrate the market were usual topics. Creative decisions were also discussed. Koen Deetman, the firm’s owner, who educated the author about the industry would often say “What I love about us is that we just DO”, referring to the attitude and risks KeokeN is willing to take in order to succeed.

During my first week June 29th to July 3rd_{, the writer was given a crash course into the}

industry, the major players, the competition and the game development process. During this week, the author sat with the head programmer, Remco Dazelaar, who gave the writer a rundown on the Unreal Engine 4 and showed the author what it was graphically capable of. He informed the author that the graphics and the 3D imaging is what makes this game a AAA game. It was during this presentation that Remco had mentioned to the author how they had previously tried to develop a horror labyrinth game called “Horrinth” with a different engine called Unity. Remco went on to describe all the problems they were encountering and how relieved they were to switch the new engine. The concept for the game had not been well received by the focus panel, so it was also changed. The writer was also introduced to the creative team Jom, Brian and Anna. It was at this time that the author observed playtesting for the first time. A small group seemed to be deeply engrossed in playing the game and filled out a questionnaire at the end of the session. It was during this first week that the writer observed that KeokeN had spent a great deal of their resources on the game. When this was brought up to Mr. Deetman, he commented simply that the game is the reason for this company.

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July 6th to 10th was dedicated to finding additional funding. Currently Koen Deetman’s partner, Johan Terink is currently working outside the company and funding the company financially. This would lead the author to examine all possible funding possibilities from private to government funding. The Dutch Gamefonds was the chosen target to pursue the funding. To apply for this grant the company had to submit a formal proposal.

July 13th – 17th Research began on what a proper proposal should entail and gathering information that would be required for it. The proposal included a game description, setting, mechanics, development process timeline, budgeting information on how the funding would be used, and a company profile for KeokeN. Koen Deetman provided the information on the company, which also allowed the writer to learn a great deal about how the company works.

July 20th – 24th, The Company was formally notified that KeokeN had been chosen to have a booth at the Indie Arena at Gamescom 2015 in Cologne, Germany. This news meant that thorough planning had to be conducted to make sure the event would go off without a hitch. Gamescom would be particularly important because it would be the first time KeokeN would formally introduce their game to the public. During this week the writer observed how quickly decisions were made by Koen Deetman. A great example was finding a place for all of us to stay near Cologne at the last minute and within a strict budget when no hotels were available in the area.

July 27th_{– August 1}st_{The week before Gamescom. This week was consumed with what}

their strategy would be for their booth. It was interesting to see KeokeN formulate a competitive strategy to make sure they would stand out at the conference. To do this KeokeN had decided the team would wear outfits that were reminiscent of NASA outfits to give an impression that one was engaging with an actual astronaut. They called this “breaking the fourth wall”. This “breaking of the fourth wall” represented to KeokeN the idea of giving the consumer not only a video game, but also a life experience. It relates to the idea of creating an emotional reaction from the player. This is where innovation really is in video games Mr. Dazelaar expressed. 0Decisions needed to be made about how the booth would physically look and they chose an enormous banner of the game as the back

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wall of the booth. They brought promotional flyers that would be handed out each day. It was also decided that they needed an updated Demo of the game to make sure they had something fresh and that would impress the public. Remco Dazelaar was put in charge of this project. Mr. Deetman also discussed what he expected from the larger developers and how he felt they would most likely ignore KeokeN based on his knowledge of the industry. Mr. Deetman could not recall a single incident where the larger developers decided to attack the smaller developers. He felt they generally ignored the small competitors as if they were too small to worry about.

August 4th -9th Gamescom week. KeokeN full team plus the author participated in Gamescom. Gamescom was attended by 400,000 people, it is one of the biggest gaming conferences in the world. The author observed both big and small firms competing for the public’s attention. The play testing that would occur in the booth was very positively received and the feedback it provided for future development was priceless. Seeing people play the game allows the developer to really understand what is right, what is wrong with the game. This process was clearly explained to the author by Remco Dazelaar during the writer’s first week at KeokeN. The larger competitors clearly had a financial advantage judging from the size and flash of their booths, however many of their games were sequels of previous games, which in Mr. Deetman’s opinion felt as if they recycling old ideas. The creative group reiterated this.

August 10th – 14th searching and analyzing what the press and the public felt about KeokeN’s first debut of their game dominated this week. Koen Deetman felt a newsletter should be started to continue to propel news about the game. Planning also began for the twitch channel. This was important from a strategic point of view to create a community of possible customers whilst also opening up a new channel for revenue.

August 17th – 21st Further details were discussed about how to properly air on twitch. Mr. Deetman enjoyed the idea that this time KeokeN would lead the industry. He stated that he was pretty sure that other developer would be establishing Twitch channels shortly. Talk began on the importance of crowdfunding and possibly trying to do it on Kickstarter. Crowdfunding is a way to get donations on the Internet to help you fund a project. KeokeN

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began to feel as though this may be another valuable source of revenue that could help them fund the game and potentially allow them to complete it more quickly.

August 24th – 28th the last week. This week was dedicated to distribution and pricing. KeokeN management felt the best way to distribute was digitally, because it would save them costly inventory. Pricing was the other big issue of the week. Because “Deliver Us the Moon” is a 3-D game, management felt they were creating a more valuable game than games from other indie developers whose titles were primarily made in 2-D. Mr. Deetman felt they should price the game more in line with the games from triple A studios with which they are trying to compete. The management was also considering whether the costs incurred would be covered by the sales price. Ultimately, the game must sell well in order to recoup the expenses involved. However, Mr. Deetman has a positive attitude in this area.

This was final week of the research with the company since the management and the creative department had given the author ample information to conduct this company project.

The company showed a very open perspective toward the study. The author basically worked with Mr. Deetman as he was working on the business side of the company and Koen Deetman manages the company. Finally, a formal interview was conducted with the two owners of the company. To insure impartiality in the process, the author has requested the company representative to sign off that the information found in the study is accurate.

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IV. Case Description: KeokeN Interactive

IV.A Company Profile

KeokeN Interactive is a small startup in the videogame industry. KeokeN Interactive is a young Dutch Indie game development company that was founded by Koen Deetman and Johan Terink in early 2014. KeokeN Interactive was born out of the passion for developing great video and engaging 3D game experiences. KeokeN Interactive’s basic principles and unique market approach have gone on to become a distinctive indie developer. At KeokeN, they believe they are in the business of creating experiences rather than being a game developer in the video game industry. This core principle has given KeokeN Interactive the ability to attract highly talented individuals of similar beliefs from IT and business backgrounds alike. KeokeN Interactive aims to develop rich and playful game experiences because they believe that gaming must evolve into a more meaningful experience than just simply playing a game.

Their mission is to develop new and unique game experiences, according to KeokeN Interactive’s core standard, which will provide new forms of added gaming value within the Indie gaming market. Their vision is to become one of the best game experience providers in the world and change the image of the video game by involving the player in a reality that makes them think and form opinions about the world around them.

KeokeN Interactive has been working on several gaming titles since the establishment of the company. Currently, it is developing “Deliver Us the Moon” that is expected to be launched internationally to the gaming world in the summer of 2016.

This company pursues a very flat and non-hierarchical business structure and promotes an internal business communication style. Every member of their small team has the opportunity to express his or her ideas and personal opinions about any topic. By constantly consulting each other’s feedback and forms of expertise, they have been able to make excellent business decisions. They believe that the individuals within KeokeN Interactive are the ones that make the difference and that will propel the company on the

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road to success. For this reason, they highly respect each other’s professional/educational background and share the company’s vision and responsibilities with them. Every member of their team feel valued and respected.

It should also be understood that this company is at the developing stage where they are actively pursuing grants and other sources of income. As with most small companies starting out, the founders have been currently using their personal capital to finance the company. However, since they are about to expand with the launch of their first game and the addition of new employees, the firm must find new financial sources.

IV.B History

Before we can fully understand KeokeN Interactive we need some background into the video game industry as a whole.

The history of the video game industry began in 1962 at a room in the Massachusetts Institute of Technology also known as MIT. It was there that on the PDP1, the first computer to ever have a visual display, that the first game was created by an engineering graduate student, Steve Russell. The game was called “Space War” and it was designed to show the capabilities of the PDP1. The game ended up being played by other students that enjoyed the game. It was playing this game that gave Nolan Bushnell, the founder of Atari, the inspiration that really spurred the gaming industry. Nolan thought if he could get these types of games in an arcade and/or in people’s home, that the games would represent an enormous business opportunity. Nolan Bushnell with his partner went on to create Atari in 1972 and under his leadership Allan Alcorn created “Pong” which Atari went on to manufacture and sold over 10,000 Pong machines. “Pong was a simple tennis game but the world had never seen anything like it. Atari went on to become that most successful company of its kind to date. By 1974, Atari introduce the “Pong” home version and the video game console business was born. While some can argue that other system existed before, like the Commodore 64, it was clear that in the early history of the industry, where gaming was being brought to household through the use of consoles that the home owner would connect to their TV’s, Atari was clearly the frontrunner.

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From Atari in the 70’s, the video game industry slowly grew and developed, but was not dynamic. The next system that would really shake up the industry and cement its place in the market place was the Nintendo Entertainment System (NES). “In 1985, the American video game console market was revived with Nintendo’s release of its 8-bit console, the Famicom (a portmanteau of “Family Computer’) known outside Asia as the Nintendo Entertainment System (NES)” (History of Video Games, 2013). Atari had basically died by then due to poorly designed games and management. Nintendo revived the industry. NES was launched in 1985 and it was incredibly successful. Nintendo had incorporated all the latest technological advances in software and was in the forefront of all the graphics innovations of the time. Furthermore, Nintendo also used high quality branding, creating characters like Link from “Legend of Zelda and Mario from the “Super Mario” Games. These characters still remain with us today.

Nintendo’s system while cutting edge was simple to work with and that helped the game designer produce many games for the NES and maintained high quality control at the same time. It was at this point that arcade quality games were brought to our living rooms. At the same time, Nintendo spurred the growth of the industry as more competitors joined the fray Sony Play Station and Microsoft Xbox being the most successful and overtaking Nintendo. The games themselves became more complicated, genres developed like action, adventure, fighting, interactive and multiple player games. The games continue to get better, technology keeps improving and innovation is constant.

As the gaming industry began to grow, so did another aspect of this industry and that was the business side of the industry. As the gaming market grew so did the profits and more and more competitors entered the market aiming to get a piece of the pie. The systems made it fairly easy for third party game designer to create games for the various systems. Consequently, more and more designers began to produce games and they competed to get their games on the various platforms. So the industry that had once been small in the 70’s and 80’s is now a large mature industry where all the players are competing for market share and each company is trying to get and produce the best and the most innovative games in the market. The video game industry had to grow up and become more disciplined

Big vs. small : how can a small startup in the videogame industry enter the field, survive and become a successful company : a case study of a small video game developer trying to make an impression in the market