What can Microsoft learn about market segmentation from the 3 musketeers?

The leading video game console firms, Microsoft and Sony, will soon find themselves in a risky position: after years of enjoying successful products, loyal customers, lucrative market shares, and high profits, they will realize that the good days are over. They will face agile competitors, substitute products, and new business models that undermine the industry. How should they react to such a sensitive situation?

Customer Segmentation (2)

Many firms react automatically: new strategic plan, massive promotion efforts, upgraded products, and expectation to quickly regain market leadership. However, they often realize, to their surprise and anxiety, that the old tricks do not work anymore. Our advice to them: learn from the classic book The 3 Musketeers.

 When there is more diversity than commonality 

 The musketeers’ motto, ‘One for all and all for one,’ might make you think that the musketeers had lots in common, but actually they didn’t. The 3 musketeers – Athos, Porthos and Aramis – were all different. Athos was smart, silent, honorable, immune to women, and father figure to others; Porthos was a flashy and flamboyant womanizer, fond of social intrigues; Aramis was elegant and mysterious with an ambition to join priesthood. Each of the musketeers had unique natures and qualities; each differed from his friends in behavior, needs, and motivation.

 Similarly, today’s customers differ broadly from one another, and they present great opportunities to whoever runs accurate market segmentation. Sony and Microsoft, who had led the video game console industry, learned this lesson when Nintendo launched Wii in 2006 and, instead of targeting heavy gamers (who desired powerful hardware, improved graphics and loads of features), aimed at ‘casual users’ and families. These preferred convenience, simplicity and low prices rather than high-priced performance and graphics specifications.

 The threats to the video game consoles industry 

Today, new challenges threaten Microsoft and Sony (expected to launch new consoles in 2013) as well as Nintendo, which recently launched Wii U:

  • Smartphones and tablets using iOS and Android, with larger screens, stronger processors, and superior graphics than ever. They enjoy a huge variety of games, regular updates, and frequent product launches compared to game consoles (which launch new products only once in several years). No wonder the revenues of mobile games are expected to grow from $2.7B to $7.5B in 2015, and that iPad is considered a major threat for consoles.
  • Controllers for smartphones and tablets. For example, take a look at icontrol pad and Gametel. These controllers offer comfort, user-friendliness, and improved game control. The major threat, that Apple directly enters this market, increased when a relevant Apple patent application was published
  • Turning smart TVs to console substitutes. This is possible through ventures such as Gamestick (which raised $8M via Kickstarter) or Ouya (which is open-source and Android-based). Here, too, Apple is a threat, especially amid rumors about an App store for Apple TV.
  • Shrinking supply of console video game developers. Epic Games recently announced that its iOS game Infinity Blade was more profitable than its Xbox hit, Gears of War. Software firm THQ became an acquisition target for EA after encountering financial difficulties, and Sega closed some branches that focused on games for consoles. In the same time, the number of games, updates, and downloadable-game developers has risen.

Indeed, these are very challenging days for the console industry.

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 How to cope with strategic threats on the industry

These action steps can help fight hungry competitors and disruptive innovation in the video game console sector (and other industries, too).

 1) Study the industry trends and the new and future competitors. 

Absorb the intensity and immediacy of threats. Many companies, from Kodak to Blockbusters, failed, either due to complacency or unwillingness to face the harsh reality.

 In contrast, some organizations adapt smoothly to changing environments. For example, top universities such as Stanford and Columbia understood the impact of online education providers (such as Khan Academy), and opted to cooperate with Coursera. Similarly, Harvard and MIT partnered at the edX venture.

 2) Update your market segmentation. 

Markets are dynamic and customer definitions are changing (for example, a recent customer segmentation defined hard-coremid-core and casual video game customers). You should realize the delicate differences between the different ‘Musketeers.’ Firms should own and manage deep customer segment knowledge and not rely entirely on third-party analyst reports.

 3) Target specific customer segments.

 Look for the segments that you can and wish to serve. These may include customers who once preferred performance and graphics and are now more price-sensitive (and may even prefer the Freemium model); those for whom inter-connectivity with social media is now critical; or users who are now accustomed to tablets.

 Check: how well can you answer the needs of Athos, Porthos or Aramis? Remember that a value proposition aimed at an average customer may miss the entire market. You don’t want all your potential customers to say, “This is a nice product; I personally do not need it, but someone else definitely does.” Rather, you want some customers (ideally, many of them) to say, “Yes! Your product is exactly what I need! Where can I buy it?”

 4) Design a business model that fits your target customers.

Making changes to business models may relate to distribution channels, partnerships with external developers, revenue models, and more. The changes may be radical: for example, consider the advice that a gaming expert recently gave to the Microsoft and Sony: to totally ditch the physical consoles.

 5) Measure yourself.

Today, companies pay heavily for mistakes. Therefore, set relevant performance metrics, track your performance, and make necessary changes ASAP.

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