On Structural Advantage
How the new winners in the gaming industry will destroy lazy incumbents
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To execs, founders, and corporate strategists:
In the history of the world, companies with what I call structural advantage have whooped ass over companies that don’t have it.
And while I don’t recommend that leadership teams focus on competition in the micro, I do recommend that leadership teams do think about competition in the macro. In other words, don’t focus too much on what specific competitors are doing or overly focus on vainly trying to protect market-share in a zero-sum game.
Instead, think of specific competitors as other players in an Infinite game. However, in the macro, on a broad strategic basis, you need to understand and design specific advantages that your company has that others do not.
So, what is structural advantage?
Structural advantage describes fundamental and systemic ways in which a company operates that is radically better than other companies in the same ecosystem.
One of the most archetypal examples of a company with structural advantage is Amazon. Amazon competed against physical bookstores with a vastly larger selection, ability to shop 24x7, ability to CRM customers on a continuous basis, analytics and web-based optimization, and a powerful recommendation engine. Relative to other online retailers, they invested massively in infrastructure, customer service, and advanced recommendation technology.
In fact, Jeff Bezos disliked competition on a “level playing field'“:
The other thing about competition is that you do not want to play on a level playing field… When it comes to competition, being one of the best is not good enough. Do you really want to plan for a future in which you might have to fight with somebody who is just as good as you are? I wouldn’t.
There are a lot of really good examples of companies that deploy structural advantage to win in their respective markets. However, surprisingly, this is an area in which game company leadership teams think very little about. They focus instead more on tactics, execution, and operating “by analogy.” In other words, just doing things the way that other companies do things or how they did it before.
This is the opposite of innovation and one of the reasons why IMHO we should have much more innovation in gaming than we currently do.
In my view, I believe new game companies will emerge that find dramatic structural advantage in unforeseen ways that will destroy lazy incumbents. These insurgent companies will create a new world order of game company leadership leading to better innovation and more products that gamers will actually love to play.
Examples of Structural Advantage
Surprisingly, we continue to see structural advantage deployed by companies that dramatically shift the power dynamics in lots of otherwise super competitive markets.
Here are some good examples:
There are two key takeaways I suggest you think more deeply about.
First, note that there seem to be fairly common sources of structural advantage from the following types of sources:
Data: Use of data/data science for insights or recommendations
Cost: Cost structure advantage
Process: Process advantage in enabling additional time and cost efficiencies
Vertical Integration: Owning a greater portion of a value chain or product to increase efficiency or provide higher profit margins
Can’t Follow: Building strategies predicated on the inability of competitors to follow into specific markets
Culture: Superior culture and communication leading to decision making, efficiency, and effectiveness improvements
Secondly, it appears that all of the examples above seemed to take a unique approach to how they operate their companies. In the words of Elon Musk, they seemed to have designed their businesses through “first principles thinking” rather than by operating “by analogy.”
IMHO Tesla, in particular, will be looked at in the future as one of the greatest companies ever created in the history of humankind built upon massive structural advantage.
How Chip Kelly Revolutionized Football
I first formalized my thinking about structural advantage as a college football fan. In 2007, Chip Kelly’s offense instantly turned the Oregon Ducks football team into the #1 scoring offense in the Pac-10 conference. For me, the history and context of Kelly’s approach were instructive on how a company should also think about its business.
Chip Kelly revolutionized college football through his unique approach. Many of the concepts he developed have been copied by many other teams including NFL teams today and were used to great success. During Kelly’s tenure as head coach of the Oregon Ducks, he took the team to multiple top 5 rankings including an undefeated regular season and the College Football Playoffs in 2010.
So how did he do it?
Although Chip Kelly is known for being an offensive coach. He started off as a defensive coach.
As a defensive coach, Kelly noticed specific situations that gave him a lot of problems as a defensive coach. And he basically took those things and used them as an offensive coach.
So let’s take a couple of examples of systems he installed. First, the hurry-up offense. As a defensive coach, Chip Kelly noticed that when opposing teams ran a lot of plays quickly his defense got tired very quickly. On the offensive side of the ball, Chip made his players become super conditioned. would make his players learn a few basic offensive plays but know them super well. Hence, when he ran a hurry-up offense and would run plays over and over very quickly, opposing offenses not only couldn’t substitute, but they would get fatigued and would often even have problems just getting lined up properly.
Using this concept, Chip Kelly was able to neutralize opposing teams’ super talented 5-star players by having his 2-star and 3-star rated players become super conditioned. Through the hurry-up and the “spread”, he forced defenses to have to run all over the field and without rest, quickly fatiguing those players. Therefore, he beat teams with much better players than his team, by finding a way to gain structural advantage.
Kelly also pioneered the concept of the zone-read option. Without going into too much detail here, by using a more athletic, running quarterback, this system gives the quarterback the option to keep or handoff the football based on how a play develops. It gives the offense a numerical advantage by turning the quarterback into a potential runner. This optionality put a lot more pressure on defenses and enabled the offense to have an extra player on run plays involved in moving the ball forward.
These are a few examples. Kelly also came up with a numerical system for defensive linemen to determine their blocking assignments and many other concepts. The bigger point I’m making, however, is that whether it’s the hurry-up, the zone read, or other systems, all of these systems create mismatches and structural advantage which led to massive success.
Structural Advantage In The Games Industry
In the history of the world, companies with structural advantage ultimately win out. So let’s now talk about structural advantage in the gaming industry.
I’ve already heard from key leaders at companies like Blizzard and others that won’t be named that they are “scared to death” of Mihoyo and the Tencent studios like Quantum and Timi. A dedicated and more motivated work culture, deep and expanding expertise in game development, the ability to leverage frameworks like Unity or Unreal to level the playing field, and massively lower cost structure.
We, at LILA Games, believe we have several ideas and innovations when it comes to structural advantage. Just to be clear, I’m not here to try to convince anyone that we will be successful or to try to do similar things to what we are doing.
However, I do believe that not enough game company leadership teams have spent the time thinking about structural advantage. This has led to the same lazy corporate initiatives around buybacks, focus on M&A, and making the same shit over and over again.
I can say, whether we at LILA succeed or fail, at least we tried.
On that note, let me leave you with a really interesting discussion thinking about structural advantage and long-term defensibility in games by:
Kristian Segerstrale: CEO Super Evil Megacorp, Founder of Glu & Playfish, Seed investor in Supercell
Mark Sottosanti: CFO Riot Games
Lloyd Melnick: GM Chumba Casino, Former exec at a bunch of places including Zynga
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Focus: Discussions and sharing of best practices to help evolve and strengthen the Indian F2P game development community
More info and signup: https://indiaf2p.splashthat.com/
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