THE BLOG
11/16/2010 06:02 pm ET Updated May 25, 2011

Nintendo's Innovation Gap: When a Disrupter Becomes the Disrupted

Four years after revolutionizing the electronic gaming industry with its "motion-sensitive" Wii entertainment console, Nintendo finds itself at a cross roads.

Make that crosshairs.

With sales down a full third this year, and rivals Microsoft and Sony poised to leapfrog it in terms of new gaming technology, many are wondering how one of the most successful innovators of the last 20 years would end up in a defensive battle against would-be disrupters.

The answer has a lot to do with the company's product development model.

Until recently, consumers and investors alike could count on Nintendo to deliver both disruptive and sustaining innovations on a regular basis. Doing both propelled the company to new heights in the early part of the decade. Like Apple, Nintendo appeared to have mastered the art of leveraging an advance in one area with gain in another to produce a multiplier effect across its entire business.

The introduction of the original, breakthrough DS hand-held device in 2004, for example, led to a boost in sales of Nintendo's software games. This, in turn, attracted other developers to Nintendo's platforms. The money they made from DS games convinced many to support Nintendo two years later when it unveiled the Wii console. With significant momentum behind it, Nintendo produced a product that appealed to game enthusiasts and non-gamers alike. Little wonder, thus, that the Wii went on to sell more than 70 million units--more than any electronic game console in history.

By routinely blending disruptive innovations with sustaining enhancements, Nintendo was able to not only defend its gaming franchises, but grow them substantially.

Nintendo had hoped for another boost this Christmas from an upgrade to its hand-held DS device. An electronic marvel that produces a 3-D experience without glasses or additional hardware, the device has been favorably reviewed by several industry professionals. But last month, Nintendo delayed the release of the 3DS until February 2011--long after the critical 2010 holiday shopping season powers down.

Even if the 3DS shipped on time, it's not clear what its impact would have been. While innovative, its screen is small and its graphics are relatively simple compared to those of other devices. To make matters worse, the gaming world is evolving. Facebook and Apple have proven that you don't need a separate device to attract millions of gaming enthusiasts, just plenty of virtual farmland and some Angry Birds.

In addition to new disrupters, Nintendo is also challenged by some reinvigorated foes. Microsoft, for one, has attracted a great deal of attention to its new, controller-free, motion-sensitive gaming technology called Kinect. Though technically an add-on to the Xbox 360 console, Kinect is nonetheless expected to have a disruptive effect on the industry.

While Nintendo's reign at the top of the electronic gaming world may not be over, it's under siege like no time in the past decade. Would reducing the gap between breakthrough ideas help? Many believe so.

When companies find themselves stuck between their last triumph and their next achievement, they need to step back and ask themselves how they got there. Was it to protect an existing revenue stream? Was it to avoid taking an expensive risk, or to focus on customers' short-term needs?

Regardless of the reason, there is a serious price to pay for deemphasizing disruptive innovation. When companies start acting like an established behemoth with little to gain instead of a hungry start-up with nothing to lose, they lose their edge. Eventually, they have trouble holding onto their brightest people and, when a breakthrough idea arrives from another company, their best customers, too.

To prevent this from occurring, companies must review their development models. In particular, they need to make sure they have processes in place to allow disruptive ideas to flourish, and a culture to nurture them to maturity.

To ensure that they pursue disruptive and sustaining innovation with equal vigor, many companies have created different business units to pursue each type of innovation. This enables organizations to establish appropriate objectives, guidelines and measurements for projects at different stages of maturity.

Not every company has the will or energy to go to such lengths. In some organizations, the inclination to preserve the status quo simply overwhelms the instinct to create something new. But those who rise to the challenge can soar above their rivals--just like Super Mario does in his bi-plane in Wii Sports Resort.

Disruptive or sustaining innovation? Successful companies generate their highest scores when doing both.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profits and Drives Tomorrow's Growth. Follow Inder on Twitter at @indersidhu.