Co-Opetition - Adam M. Brandenburger [124]
Nintendo’s engineers had to decide whether to make their new 16-bit system capable of playing Nintendo’s existing 8-bit games. They decided against backward compatibility. One reason was to keep down the cost of the new hardware.15 But there was another reason for backward incompatibility. If 8-bit games had worked on 16-bit machines, that would have lowered the added value of all the new 16-bit games. Backward incompatibility made obsolete all those 8-bit games that kids might already have had or that their friends might have lent them. Just as publishers force students to buy the latest version of a textbook, Nintendo forced its 16-bit customers to stock up on new software.
Nintendo may have been a bit too clever. It didn’t have the 16-bit game to itself. Nintendo found itself behind Sega in the race to build a 16-bit customer base. But it did have a potential advantage. Since Nintendo owned the 8-bit market, there was a massive stock of Nintendo 8-bit software out there. Backward compatibility would have been a strong selling point for Nintendo. One industry analyst said that “Nintendo will be going back to square one when it introduces its 16-bit system … and it will be competing evenly with Sega.… ”16 Not so had Nintendo made its 16-bit systems backward-compatible. By making its 16-bit system incompatible with its 8-bit system, Nintendo needlessly leveled the 16-bit playing field.
3. Links through Rules
Rules are a direct lever for changing the scope of the game. We’ll look at two examples in this section—one applicable in a business-to-business setting and one relevant to mass consumer markets.
In business-to-business dealings, you can control the scope of the game by the length of the contracts you write with your customers and suppliers. One-year contracts create a series of one-year games, whereas a five-year contract turns five one-year games into one five-year game. If you have the power, you can choose the length of the game you—and others—play.
The Long and the Short of It Two suppliers are competing for your business—your incumbent supplier and a challenger. The two suppliers are pretty much alike, and each can meet all of your needs. Thus neither one has much, if any, added value; you have it all. What should you do with this power?
Start by making some rules of the game. Do you want the game to include annual competitions for one-year contracts, or would you do better to have infrequent competitions for long-term contracts?
If you award short-term contracts, you might be disappointed by the results. When suppliers play lots of little games, they may not compete that aggressively with each other. After all, the prize is only a one-year contract—not big enough to tempt the challenger into making an aggressive bid that could have repercussions elsewhere. Remember the Eight Hidden Costs of Bidding: it’s quite likely that the roles of incumbent and challenger will be reversed elsewhere, and the challenger won’t want to provoke the incumbent for a small prize that he doesn’t stand that big a chance of winning, anyway. For the incumbent, losing the competition isn’t a disaster. There’s always another opportunity next year, or other opportunities this year. Whichever supplier wins your contract, the other can expect to win a comparable contract elsewhere. Your game isn’t so big that it’s make-or-break. In this environment, suppliers can settle into a live-and-let-live arrangement.
These implicit links between games don’t help you. You want your suppliers to treat the current contract negotiation as if it’s the only game in town. You want them to play your game all out, regardless of the fallout in the other games they’re playing.
You can achieve this result by lengthening the scope of the game. The longer the contract you offer, the more the suppliers will treat the game as a once-and-for-all competition. The contract is now a big enough prize to induce the challenger to bid aggressively, regardless of the fallout that creates elsewhere.