Innovation and Strategy in Videogame Development: A Multiple Case Study of Taiwans Videogame Industry

A Thesis submitted to The University of Manchester for the degree of Doctor of Philosophy in the Faculty of Humanities

2010

ALGER Y. J. LEE

Manchester Business School/ Innovation, Management and Policy

Table of Contents
TABLE OF CONTENTS.............................................................................................2 LIST OF GRAPHS AND TABLES.............................................................................9 ABSTRACT................................................................................................................10 DECLARATION........................................................................................................ 11 COPYRIGHT STATEMENT ................................................................................... 11 ACKNOWLEDGEMENTS ......................................................................................12 CHAPTER 1. 1.1. 1.2. 1.3. INTRODUCTION TO THE THESIS ..........................................13

RESEARCH BACKGROUND .............................................................................13 RESEARCH GAP, AIMS AND APPROACH .........................................................14 OUTLINE OF THESIS STRUCTURE ...................................................................16 TAIWANESE VIDEOGAME HISTORY AND INDUSTRY .....18

CHAPTER 2.

2.1. INTRODUCTION .............................................................................................18 2.2. GLOBAL BACKGROUND IN THE 1970S ...........................................................18 2.3. CLOSURE OF GAME ARCADES IN TAIWAN .....................................................19 2.4. THE RISE OF HOME-GROWN VIDEOGAMES IN TAIWAN .................................21 2.5. CHALLENGES IN THE 1990S...........................................................................23 2.6. RADICAL TRANSFORMATION SINCE THE LATE 1990S ....................................27 2.7. CURRENT STATUS OF TAIWANESE VIDEOGAME INDUSTRY ............................28 2.7.1. Scope and Extent of Videogames ........................................................28 2.7.2. Taiwans Videogame Industry and Size ...........................................30 2.7.3. Diversified Firm Size and Structure ....................................................31 2.7.4. Activities of Companies.......................................................................32 2.7.4.1. GAMANIA ..................................................................................32 2.7.4.2. INTERSERV................................................................................32 2.7.4.3. XPEC ...........................................................................................33 2.7.4.4. FUNTOWN..................................................................................33 2.7.4.5. WINKINGWORKS .....................................................................34 2.7.4.6. WAYI ...........................................................................................34 2.7.4.7. USERJOY ....................................................................................35 2.7.4.8. LAGER ........................................................................................35 2.7.4.9. SOFTSTAR..................................................................................35 2.7.4.10. PLAYCOO ...................................................................................35 2.8. CONCLUSION.................................................................................................36 CHAPTER 3. INNOVATION, MANAGEMENT, COMPETITIVE
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STRATEGY AND VIDEOGAME SOFTWARE DEVELOPMENT ....................39 3.1. INTRODUCTION .............................................................................................39 3.1.1. Rationale for Literature Selection and Presentation ............................39 3.2. CONVENTIONAL VIEW OF INNOVATION .........................................................42 3.2.1. What is the Conventional View of Innovation? ...................................43 3.2.2. Types of Innovation .............................................................................44 3.2.2.1. Product and Process Innovation...................................................44 3.2.2.2. Radical and Incremental Innovations...........................................45 3.2.3. Product Life Cycle and Basic Assumptions of the Conventional View46 3.2.4. Management of Innovation: Innovation Models..................................47 3.2.5. Limitations of Conventional Innovation View.....................................48 3.3. SERVICE INNOVATION ....................................................................................50 3.3.1. The Nature and Features of Services ...................................................50 3.3.2. Types of Services .................................................................................53 3.3.3. Dimensions of Service Innovation.......................................................54 3.3.4. Management of Service Innovation .....................................................55 3.4. CREATIVE SERVICES AND CHALLENGES ........................................................58 3.4.1. Types and Dimension of Creative Innovation .....................................59 3.4.2. Organisation of Creative Works...........................................................62 3.4.3. Technology and Innovation in the Film Industry.................................64 3.5. COMPLEX PRODUCT SYSTEMS (COPS) .........................................................66 3.5.1. The Nature of CoPS .............................................................................66 3.5.2. Characteristics of CoPS .......................................................................67 3.5.3. Management of Multiple CoPS ...........................................................68 3.5.4. Complex Software Systems and Videogame .......................................69 3.6. INNOVATION AS COMPETITIVE STRATEGY .....................................................72 3.6.1. Rationalist Approach............................................................................72 3.6.2. Competitive Forces ..............................................................................74 3.6.3. Strategic Conflict .................................................................................75 3.6.4. Critique of Rationalist Approach .........................................................76 3.6.5. Incrementalist Approach ......................................................................78 3.6.6. Resource-Based View ..........................................................................79 3.6.7. Dynamic Capabilities...........................................................................81 3.6.7.1. The Dynamic Capabilities approach and its problems ................81 3.6.7.2. Reconstructing Dynamic Capabilities..........................................84 3.7. ISSUES AND CONCERNS OF VIDEOGAME INNOVATION STUDIES ....................87 3.7.1. Videogame and Film ............................................................................88 3.7.2. Product Characteristics of Videogame.................................................91
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3.7.3. Development Process Issues ................................................................94 3.7.4. Creativity and Source for Innovation...................................................97 3.7.5. Strategic Management of Videogame Firms......................................100 3.7.6. Standalone Videogame vs. Massive Multiplayer Online Game ........101 3.8. CONCLUSION...............................................................................................103 3.8.1. Research Questions............................................................................104 3.8.2. Analytical Process and Framework ...................................................105 CHAPTER 4. RESEARCH METHODOLOGY: CHRONOLOGICAL

QUALITATIVE MULTIPLE-CASE STUDY APPROACH................................107 4.1. INTRODUCTION ...........................................................................................107 4.2. RESEARCH STRATEGY .................................................................................107 4.3. RESEARCH DESIGN ..................................................................................... 110 4.3.1. Unit of Analysis .................................................................................110 4.3.2. Multiple-Case Approach .................................................................... 111 4.3.3. Quality Control of Qualitative Research............................................ 112 4.4. DEVELOPMENT AND UNDERTAKING OF EMPIRICAL INVESTIGATION ............ 113 4.4.1. Background Exploration .................................................................... 113 4.4.1.1. Survey of the Videogame Development Industry ......................114 4.4.1.2. Emergence of Underlying Characteristics .................................115 4.4.2. Case Selection.................................................................................... 116 4.4.2.1. Data Collection .......................................................................... 117 4.4.2.2. Conduct of In-Depth Case Study ............................................... 118 4.4.3. Data Analysis .....................................................................................121 4.4.3.1. Data Reduction...........................................................................121 4.4.3.2. Data Display...............................................................................121 4.4.3.3. Conclusion Drawing and Verification........................................122 4.5. CONCLUSION...............................................................................................123 CHAPTER 5. CASE STUDY ONE: LAGER INTERACTIVE .......................124

5.1. INTRODUCTION AND BACKGROUND ............................................................124 5.1.1. Establishment and KoK Project .........................................................124 5.1.2. Expanding and Diversification of Product Lines...............................126 5.1.3. Difficulties of FH Projects.................................................................127 5.1.4. KoK II 3D Project ..............................................................................128 5.1.5. Fairyland Project: A simpler 2D MMORPG .....................................130 5.1.6. Choosing the Right Partners...........................................................132 5.2. EMPIRICAL FINDINGS FROM CASE STUDY ONE ...........................................134 5.2.1. Strategic Management Examples.......................................................134
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5.2.2. Types of Innovation ...........................................................................136 5.2.2.1. Technology-Based Innovation ...................................................136 5.2.2.2. Process and Organisational Innovation......................................136 5.2.2.3. Product Innovation.....................................................................137 5.2.2.4. Content Innovation.....................................................................137 5.2.2.5. Marketing and Delivery Innovation...........................................137 5.2.2.6. Revenue and Business Model ....................................................137 5.2.3. Management of Innovation ................................................................138 5.2.3.1. Organisational Structure for Innovation ....................................138 5.2.3.2. Drivers for Innovation................................................................138 5.2.3.3. Sources of Innovation ................................................................139 5.2.3.4. Skills and Knowledge ................................................................139 5.3. CONCLUSION...............................................................................................139 CHAPTER 6. CASE STUDY TWO: USERJOY TECHNOLOGY.................140

6.1. INTRODUCTION AND BACKGROUND ............................................................140 6.1.1. Establishment of GameCraft and the Super Heroes Series................140 6.1.2. The Twin-Heroes and Fantasia Sango Series: From Simulation Games to Role-Playing Games ..........................................................................141 6.1.3. OdinSoft and the Legend of Three Kingdoms Series .........................143 6.1.4. GameCraft and OdinSofts 3D Strategies ......................................144 6.1.5. Cooperation for MMORPG Development.........................................145 6.2. EMPIRICAL FINDINGS FROM CASE STUDY TWO ...........................................151 6.2.1. Strategic Management Examples.......................................................151 6.2.2. Types of Innovation ...........................................................................153 6.2.2.1. Technology-Based Innovation ...................................................153 6.2.2.2. Process and Organisational Innovation......................................153 6.2.2.3. Product Innovation.....................................................................154 6.2.2.4. Content Innovation.....................................................................154 6.2.2.5. Marketing and Delivery Innovation...........................................154 6.2.2.6. Revenues and Business Model Innovation ................................154 6.2.3. Management of Innovation ................................................................155 6.2.3.1. Organisational Structure for Innovation ....................................155 6.2.3.2. Drivers for Innovation................................................................155 6.2.3.3. Sources for Innovation...............................................................155 6.2.3.4. Skills and Knowledge ................................................................155 6.3. CONCLUSION...............................................................................................156 CHAPTER 7. CASE STUDY THREE: INTERSERV INTERNATIONAL ...157
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7.1. INTRODUCTION AND BACKGROUND ............................................................157 7.1.1. Established as a Multimedia Contractor ............................................157 7.1.2. Exploration of New Lines of Business ..............................................158 7.1.3. Challenges in Game Design and Artworks ........................................162 7.1.4. Technological Capability Development.............................................163 7.1.5. Unexpected Setbacks in the Online Game Business..........................165 7.1.6. Transformation to an International Service Provider.........................167 7.2. EMPIRICAL FINDINGS FROM CASE STUDY THREE ........................................171 7.2.1. Strategic Management Examples.......................................................171 7.2.2. Types of Innovation ...........................................................................173 7.2.2.1. Technology-Based Innovation ...................................................174 7.2.2.2. Process and Organisational Innovation......................................174 7.2.2.3. Product Innovation.....................................................................175 7.2.2.4. Content Innovation.....................................................................175 7.2.2.5. Marketing Innovation.................................................................176 7.2.2.6. Revenue and Business Model Innovation..................................176 7.2.3. Management of Innovation ................................................................176 7.2.3.1. Organisational Structure for Innovation ....................................177 7.2.3.2. Drivers for Innovation................................................................177 7.2.3.3. Sources for Innovation...............................................................177 7.2.3.4. Skills and Knowledge ................................................................177 7.3. CONCLUSION...............................................................................................177 CHAPTER 8. CASE STUDY FOUR: SOFTSTAR ENTERTAINMENT.......179

8.1. INTRODUCTION AND BACKGROUND ............................................................179 8.1.1. Establishment and PC Games ............................................................179 8.1.2. Technology Strategies ........................................................................181 8.1.3. Diversification and Expansion...........................................................184 8.1.4. Attempts of MMOG Business ...........................................................185 8.2. EMPIRICAL FINDINGS FROM CASE STUDY FOUR .........................................192 8.2.1. Examples of Strategic Management ..................................................192 8.2.2. Types of Innovation ...........................................................................194 8.2.2.1. Technology-Based Innovation ...................................................194 8.2.2.2. Process and Organisational Innovation......................................195 8.2.2.3. Product Innovation.....................................................................195 8.2.2.4. Content Innovation.....................................................................196 8.2.2.5. Marketing and Delivery Innovation...........................................196 8.2.2.6. Revenue and Business Model Innovation..................................197 8.2.3. Management of Innovation ................................................................197
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8.2.3.1. Organisation and Structure of Innovation..................................197 8.2.3.2. Drivers for Innovation................................................................197 8.2.3.3. Sources for Innovation...............................................................197 8.2.3.4. Skills and Knowledge ................................................................198 8.3. CONCLUSION...............................................................................................198 CHAPTER 9. SYNTHESIS AND DISCUSSION ..............................................199

9.1. INTRODUCTION ...........................................................................................199 9.2. SUMMARY OF COMPANY HISTORY ..............................................................199 9.2.1. LAGER ..............................................................................................199 9.2.2. UserJoy ..............................................................................................199 9.2.3. InterServ.............................................................................................200 9.2.4. SoftStar ..............................................................................................201 9.3. NATURE AND CHARACTERISTICS OF INNOVATION IN VGD ..........................202 9.3.1. The Conventional View and VGD .....................................................202 9.3.2. Service Innovation and VGD.............................................................204 9.3.3. Complex Product Systems and VGD.................................................205 9.4. TYPES OF INNOVATION ................................................................................206 9.4.1. Technology-based Innovation............................................................206 9.4.2. Process and Organisational Innovation..............................................208 9.4.3. Product Innovation.............................................................................209 9.4.4. Content Innovation.............................................................................210 9.4.5. Delivery and Marketing Innovation................................................... 211 9.4.6. Revenue and Business Model Innovation.......................................... 211 9.4.7. Summary ............................................................................................212 9.5. MANAGEMENT OF INNOVATION ...................................................................213 9.5.1. Organisational Structure for Innovation ............................................213 9.5.2. Drivers for Innovation........................................................................213 9.5.3. Sources for Innovation.......................................................................214 9.5.4. Skills and Knowledge ........................................................................215 9.5.5. Summary ............................................................................................216 9.6. STRATEGIC MANAGEMENT..........................................................................217 9.6.1. Competitive Strategy in Videogame Development............................217 9.6.2. Other Approaches and Features of Strategic Management in VGD ..218 9.6.3. How to Survive: Learning, Developing and Upgrading Capabilities 219 9.6.4. Dynamic Capabilities Usefulness ......................................................222 9.6.5. Definition Problem of Dynamic Capabilities ....................................225 9.6.6. Further Clarification Needed .............................................................226 9.7. CONCLUSION...............................................................................................228
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CHAPTER 10.

THESIS CONCLUSION .........................................................230

10.1. RESEARCH AIMS AND RESEARCH QUESTIONS .........................................230 10.2. ANSWERING RESEARCH QUESTIONS .......................................................231 10.2.1. Nature and Characteristics of Innovation ..........................................231 10.2.2. Types and Management of Innovation...............................................231 10.2.3. Strategic Management .......................................................................233 10.3. EMPIRICAL KNOWLEDGE FOR PRACTITIONERS AND POLICY MAKERS .....235 10.3.1. Content Innovation.............................................................................235 10.3.2. Sources for Innovation.......................................................................236 10.3.3. Drivers for Innovation and Limitation of Conventional R&D ..........236 10.3.4. Strategic Management of CoPS Supplier ..........................................236 10.3.5. Knowledge Management of CoPS Supplier ......................................237 10.3.6. Videogame-Related Innovation Studies.............................................237 10.3.7. Policy Implications ............................................................................238 10.4. LIMITATIONS OF THIS RESEARCH ............................................................239 10.5. AREA OF FUTURE RESEARCH ..................................................................239 10.6. THEORETICAL CONTRIBUTIONS ..............................................................241 10.6.1. Dynamic Capabilities.........................................................................241 10.6.2. Complex Product Systems .................................................................243 10.6.3. Service Innovation .............................................................................243 10.6.4. Innovation Research...........................................................................245 10.6.5. Research Methodology ......................................................................245 10.7. CONCLUDING REMARK ...........................................................................246 REFERENCE...........................................................................................................247 APPENDIX A: AN EXAMPLE OF INTERVIEW GUIDE .................................259 APPENDIX B: THE LIST OF COMPANY AND INTERVIEWEE ...................260

Final Word Count: 75,496

List of Graphs and Tables

Graph 2-1 History of Taiwanese Videogame Industry.................................37 Graph 2-2 Paradigm-Shift of Taiwanese Videogame Industry.................38 Graph 5-1 Timeline of LAGER .................................................................133 Graph 6-1 Timeline of UserJoy..................................................................150 Graph 7-1 Timeline of InterServ................................................................170 Graph 8-1 Timeline of SoftStar..................................................................191 Table 2-1 Market Size and Growth of Taiwanese Videogame Industry ......38 Table 3-1 videogames vs. other products.....................................................94 Table 4-1 Case Selection Criteria and Rationale ....................................... 119 Table 5-1 Key Facts and Figures of LAGER.............................................124 Table 6-1 Key Facts and Figures of UserJoy .............................................140 Table 7-1 Key Facts and Figures of InterServ ...........................................157 Table 8-1 Key Facts and Figures for SoftStar............................................179

ABSTRACT
The University of Manchester Alger Y. J. Lee Doctor of Philosophy Innovation and Strategy in Videogame Development: A Multiple Case Study of Taiwans Videogame Industry January of 2010 This thesis aims to address a major research gap in contemporary innovation and competition research by exploring the nature of innovation and competition in the videogame development (VGD) industry, which is considered a significant part of the creative service industries in the contemporary experience economy. Based on an in-depth, chronological and multiple-case study, this thesis finds that the industry has experienced a radical paradigm-shift transforming itself from producing simple products into supplying complex product systems (CoPS). whole industry over time. This radical transformation consists of numerous incremental innovations across the Despite finding that the precise nature of VGD innovation varies from case to case and firm to firm with a high degree of idiosyncrasy, this thesis demonstrates the significance and function of content innovation in the VGD innovation and competition process. This thesis also finds that, before the rise of the online format, videogame can be characterised as craft-like/simple product but then videogame should be characterised as craft-like/complex service system. However, in terms of the production method, the VGD industry follows the managerial pattern of traditional manufacturing industries as a great deal of formalisation and modularisation takes place within these multiple-CoPS project-based firms. In terms of competitive strategy, this thesis finds that the process and content of strategic management in the VGD industry do not resemble those described in either the rationalist approach or the Competitive Forces approach. In other words, the conventional wisdom of innovation and strategic management research can not offer a satisfactory account of all these aforementioned changes; and only a multifaceted innovation perspective and the dynamic capabilities approach (DCA) can truly capture the phenomenon taking place over the last few years. elaboration to be non-tautological. However, the DCA still needs further

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DECLARATION
No portion of the work referred to in the thesis has been submitted in support of an application for another degree or qualification of this or any other university or other institute of learning.

COPYRIGHT STATEMENT
i. The author of this thesis (including any appendices and/or schedules to this thesis) owns certain copyright or related rights in it (the Copyright) and s/he has given The University of Manchester certain rights to use such Copyright, including for administrative purposes. ii. Copies of this thesis, either in full or in extracts and whether in hard or electronic copy, may be made only in accordance with the Copyright, Designs and Patents Act 1988 (as amended) and regulations issued under it or, where appropriate, in accordance with licensing agreements which the University has from time to time. This page must form part of any such copies made. iii. The ownership of certain Copyright, patents, designs, trade marks and other intellectual property (the Intellectual Property) and any reproductions of copyright works in the thesis, for example graphs and tables (Reproductions), which may be described in this thesis, may not be owned by the author and may be owned by third parties. Such Intellectual Property and Reproductions cannot and must not be made available for use without the prior written permission of the owner(s) of the relevant Intellectual Property and/or Reproductions. iv. Further information on the conditions under which disclosure, publication and commercialisation of this thesis, the Copyright and any Intellectual Property and/or Reproductions described in it may take place is available in the University IP Policy (see http://www.campus.manchester.ac.uk/medialibrary/policies/intellectual-propert y.pdf), in any relevant Thesis restriction declarations deposited in the University Library, The University Librarys regulations and in (see The http://www.manchester.ac.uk/library/aboutus/regulations) Universitys policy on presentation of Theses.

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ACKNOWLEDGEMENTS
I would like to express my most sincere gratitude and dedicate this thesis to my parents, wife and two daughters. They are the source of my personal strength and motivation to finish this research. Every credit for this study goes to them. Without my parents altruistic support and my wifes understanding over the past few years, this thesis would not have been possible. I am also extremely grateful to the following people. Without their help I would not be able to finish this research. First and foremost, I wish to thank my supervisor, Professor Ian Miles. In the past few years, he spent a great deal of time in sharing and discussing his insightful ideas with me which profoundly enriched my knowledge and broadened my horizon. course of this research. I also wish to thank my former secondary supervisor, Dr. Lawrence Green, who constantly offered me a great deal of personal advices and moral support throughout my time in Manchester. In particular, his cheerful and positive attitude greatly strengthened my spirit of carrying on this research. My thanks also go to Chang, Yen-Chen and Fu, Jimmy at the Institute for Information Industry of Taiwan. Chang supplied me a good deal of background information of Taiwanese Videogame Industry. Fu not only introduced me to many Taiwanese videogame companies but also arranged all the first round interviews for me. Without Chang and Fus assistance, and all the interviewees valuable contributions, I would not be able to successfully finish the field work and case studies of this research within the time frame. Last but not least, I am also most grateful to the examiners of my thesis, Dr. James Stewart and Dr. Kieron Flanagan, whose invaluable opinions did not only help me clarify my thoughts but also shape this thesis into a better version. His patience, encouragement and guidance also helped me organise my thoughts, arguments and writing-up throughout the

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Chapter 1. Introduction to the Thesis

1.1. Research Background Since the late 1990s, many national governments around the world have begun to notice the increasing importance of creative industries 1 in their economies and give them a higher priority in their national economic development and innovation policy schemes (Cunningham, 2006). In 2002, the Taiwanese government 2 also incorporated creative industries into the Six-Year National Development programme and stated that: Taiwan's economy has entered a new phase of industrialization and the existing production model of large-scale manufacturing has gradually lost its competitive advantage. In addition to high-tech development, Taiwan must build a more flexible productive organization system to increase the competitiveness of the knowledge-based economy. The value-added model of the knowledge-based economy should be the core of innovative design in production, especially artistic and aesthetic creation, which has been ignored during the past (GIO-Taiwan, 2002). From the late 1990s, the Taiwanese government observed the continuously deteriorating profitability of Taiwans ICT hardware manufacturing (along with its dwindling production and export base) and thriving creative industries elsewhere in world. In this context, the creative industries are to some extent considered to be a Therefore since 2002, supporting and way forward to diversify Taiwans export base and to restore Taiwans economic growth in the future (Cunningham, 2006). innovation and competition policy. nurturing creative industries has become a very important part of Taiwans national However, given their empirical and policy significance, there are surprisingly few academic studies and policy debates
By the definition of the Department of Culture, Media and Sport of the UK, creative industries include 13 industries: advertising; architecture; art and antique markets; computer and videogames; crafts; designs; designer fashion; film and video; music; performing arts; publishing; software; television and radio. 2 By the Taiwanese governments definition, creative industries consist of two groups of industries: cultural and creative and digital content. The first group has 13 industries: visual arts; music and performing arts; cultural performance facilities; industrial arts; movie/film; broadcasting and television; publishing; advertising; design; digital entertainment; branding and fashion design; creative living; architectural design. The second group has 11 industries: computer animation; digital games; e-learning; mobile applications and services; data streaming and video conferencing; interactive television; digital archiving; digital publishing; digital broadcasting; digital music; multimedia software products and services. 13
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addressing the status-quo and potential challenges which these star industries (MOEA-Taiwan, 2008) are facing, let alone their innovation and competitive strategy management in detail. Without an in-depth understanding of creative Thus, industries innovation and competition practices, this thesis doubts that the government can formulate an appropriate scheme to nourish these industries. in order to obtain a better theoretical understanding and to assist policy makers in formulating an appropriate support scheme in the future, this important but under-researched area is worth investigating in further detail. 1.2. Research Gap, Aims and Approach The creative industries are a major research gap, particularly with regard to the issues of innovation and competition, in the contemporary innovation research literature. Recent studies suggest that there is a great deal of innovative and competitive activity in creative industries which still remains hidden from detection and measurement using conventional methods (Green et al., 2007, Miles and Green, 2008, Miles and Green, 2009). developed profoundly. This is because over the past few decades the conventional view on innovation and competitive strategy has This has resulted from a large number of empirical studies However, except the SET inputs, the on technology manufacturing industries, overwhelmingly focusing on the science, engineering and technology (SET) aspect. competitive advantage. While creative industries are playing an increasingly significant role in the economy, this thesis intends to fill the aforementioned research gap by conducting a multiple case study on Taiwans videogame development (VGD) industry and achieving the following three research aims: To find out the nature and characteristics of innovation in VGD industry; To find out the managerial practices of innovation in VGD industry; To find out the competitive strategies and strategic management practices of VGD industry. The reasons the VGD industry in Taiwan was chosen as the object of analysis are as follows: creative industries also require a great deal of non-SET sources for innovation and

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 VGD is part of creative industries: although VGD is a highly technologically oriented industry, it also requires a great deal of culture and aesthetic input. industries. VGD is a potential case within creative industries: with very little support from the government and in the face of strong competition, the Taiwanese VGD industry has still managed to achieve a high growth rate over the past few years (Fu, 2003, Fu, 2004). Thus this makes VGD a particularly interesting object for innovation and competition research. supporting. Heterogeneity of creative industries: as Footnote 1 and 2 stated, creative industries cover a wide range of highly heterogeneous industries. in-depth study on every single sector of creative industries. Given the limited resources available for this research, this thesis is unable to conduct an Thus this thesis only chooses VGD as an example of creative industries and the object of analysis. Understanding of the cultural and aesthetic background: since VGD is classified as a culturally creative industry in a broad sense by the Taiwanese government, its products (i.e. videogames) should be seen as cultural products as well. understanding the videogames. This implies that being familiar with the cultural background is the prerequisite of Taiwan is chosen as the locus to be studied because the author of this thesis has a substantial understanding of the cultural and aesthetic background in which the videogames mentioned in this research have been produced. The author also has extensive knowledge with regard to the history and evolution of the Taiwanese VGD industry. The familiarity with the research background is a valuable asset which gives the author a particular strength in collecting further culture and location-specific data related to this research. By using established theoretical concepts as templates to compare the empirical To some extent, this is also why the Taiwanese government considers it is a potential industry worth further This is also why many national governments include VGD in the category of creative

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results from VGD case studies, this thesis will try to find out whether previous concepts can offer a satisfactory account of innovation and competition of the VGD part of creative industries. If so, this implies that the established concepts may be analytically generalised to the VGD and creative industries as a whole. If not, the discrepancies may help to reveal the hidden features of the VGD and creative industries, and make theoretical contributions to the research areas of innovation and strategic management. 1.3. Outline of Thesis Structure The structure of the thesis is arranged as follows: Chapter Two briefly introduces the global background and history of Taiwans videogame industry. It also presents initial results of the empirical investigations and an overview of the status-quo of the industry. This is used to justify the orientation of the literature review and the logic of the research methodology. Along with Chapter Three, it helps to inform the underlying interests and key themes of the thesis. Chapter Three reviews and discusses a wide range of literature in order to draw on useful concepts and analytical frameworks for empirical investigation. In the area of innovation research, the conventional innovation theory, service innovation (including creative services) and complex product systems (CoPS) are discussed. In the area of competitive strategy, the rationalist approach (including the Strategic Conflict and the Competitive Forces) and incrementalist approach (mainly the Dynamic Capabilities Approach, originating from the Resource-based View) are critiqued. In the area of VGD-related innovation research, several of Overall, this literature review aims to look the most recent studies are addressed.

for an appropriate theoretical lens with which to understand VGD from three perspectives: first, the nature and characteristics of innovation; second, innovative activities and managerial practices; third, competitive strategy and strategic management. Chapter Four describes and explains the process and the logic of the empirical investigation in detail. This thesis has adopted an in-depth, chronological and

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multiple-case study.

By doing so, this thesis can both give an overview of the

evolution of VGD in the long run and provide an in-depth understanding of VGD within each case. In addition, data are collected from multiple sources (and cases) to enhance the quality of this research. Chapter Five to Eight present data from four case studies of VGD companies in detail. In each case study chapter, there are two major parts. The first major part will report the history of the case in detail, particularly with regard to its innovation and competition practices. The second part will present examples of strategic management extracted from the cases history reported, and then demonstrate types and management of innovation have been conducted by the case. Basically the empirical results are analysed from the three perspectives stated in the end of literature review chapter. Chapter Nine synthesises and discusses the empirical findings in light of the theoretical context. This chapter has four major sections. The first section will briefly recap the evolution of each reported case in this thesis. The second section will discuss the nature and characteristics of VGD innovation in the light of different lines of literature. discussed in detail respectively. Chapter Ten concludes with theoretical contributions. answers. This chapter will first In the following three major sections, types of innovation, management of innovation and strategic management in VGD will be

recap the purpose of this thesis, and summarise its research questions and the Then it will outline the knowledge immediately derived from the empirical findings, alongside the limitations and future research areas. After that, theoretical contributions of this thesis will be presented.

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Chapter 2. Taiwanese Videogame History and Industry

2.1. Introduction This chapter will first introduce the history of Taiwans videogame industry since the 1970s until the late 1990s, and outline some of the most acute challenges and radical transformations that have emerged at the turn of new millennium.
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Then, the

current status of Taiwans videogame industry, alongside the scope of investigation, the size of the industry and firm activities, will be described. 2.2. Global Background in the 1970s Before the rise of home computers and videogame consoles on which videogames could be played at home through the internet as nowadays, arcade-game was a synonym of videogame and dominated the industry since the 1970s. successful videogame in history (Kuittinen, 1999). Early in 1972 Atari launched Pong which is generally believed to be the first commercially From then until 1980 (by which time, the industry and market of home videogame was still not well-established), many popular arcade-games (Figure 2-1 to Figure 2-6), such as Gun Fight (Midway 1975), Night Driver (Atari 1976), Space Invaders (Taito 1978), Galaxian (Namco 1979), and many other variants hit the global market in succession. time was regarded as the Golden Era of the Arcade Game. In the early 1980s, two iconic games (Figure 2-7 and Figure 2-8), i.e. Pac-Man (Namco 1980) and Donkey Kong (Nintendo 1981) created another wave of market hype around the globe. The Jump-man (on Figure 8, right-hand side, third ladder from bottom) in Donkey Kong was supposed to rescue the girl captured by the giant ape was later renamed Mario and soon became one of the most successful videogame characters ever invented. During this period, the home videogame industry was not in a good shape because it had gone through a sudden crash in 1977, which was triggered by some manufactures of obsolete consoles and cloned games trying to clear their stock at a loss. After the crash, only Atari and Magnavox survived in the business of game console manufacturing, while Fairchild and RCA retreated from the home videogame market.
3

This period of

However, the crash of the American

During the period between 2006 and 2007 when the survey of the PhD study was carried out. 18

home videogame industry also gave some Japanese companies a window of opportunity to fill the power vacuum in the global videogame market. 2.3. Closure of Game Arcades in Taiwan From the late 1970s until 1980, as part of global phenomenon, Taiwan was caught in the hype of the new form of entertainment brought by arcade games. All the previously mentioned popular games and their variants could be seen throughout the island and running game arcades soon became an extremely profitable business. However, its popularity also incurred some side-effects and antagonism from the public. This was partly due to the lack of clear and accountable policies (and regulations) towards this new form of entertainment, and also partly due to the inertia and mismanagement of the government. One of the results of this was that profitable game arcades soon become a dodgy business in the grey area under each local governments jurisdiction. Unfortunately, during this period, as well as the aforementioned videogames, most local game arcades also installed gambling machines illegally which turned into a cash cow for some local organised criminal activities. In early 1980s, a series of incidents involving teenager offenders and bribe-taking scandals, which were considered to be connected to the organised crime behind arcade business, caught the press and the publics attention, and incurred their antagonism towards arcade games. action and shut all of them down. Later on the government (just newly evolved from the legacy of an authoritarian and patriarchal regime) took severe

19

Figure 2-1 Pong, Cabinet

Figure 2-5 Space Invaders, 1978

Figure 2-6 Galaxian, 1979

Figure 2-2 Pong, 1972

Figure 2-3 Gun Fight, 1975

Figure 2-7 Pac Man, 1980

Figure 2-4 Night Driver, 1976 Figure 2-8 Donkey Kong, 1981

20

2.4. The Rise of Home-Grown Videogames in Taiwan On one hand, the governments stringent conduct eventually set the demise of the arcade game industry, but, on the other, it gave some breathing space to the home videogame industry. The ban put many local suppliers of arcade game hardware out of business during that time; however there were some suppliers who managed to weather the crisis by diverting their manufacturing activities to the Apple II-compatible 4 electronic learning machine market. That was why not long after the ban Taiwan was flooded with various models of cheap Apple II-compatible PCs. Although those learning machines were meant to perform educational functions; in fact the machines popularity was to some extent based on their capability to play many reprogrammed versions of arcade games which were no longer available in the arcades 5. ACER and MiTac were two of the few companies which managed to survive from the closure of arcade game in the 1980s. Their learning machines, the Little Professor and the Little Alchemist, shortly became the top two best selling PCs in Taiwans home computers market and many arcade game variants could be played on them. More significantly, in 1983 ACER, based on its initial success in the the very first videogame magazine and software publishing business, spun off one of its departments and established The 3rd Wave, which was (UND, 2005). professional and also the most decent videogame publishing company in Taiwan In 1984 (partly as ACERs business strategy) in order to encourage the game developing community (mostly were bedroom coders) to create more legitimate and original titles 6, the 3rd Wave held the first ever videogame design contest, the Golden Software Award. This contest was one of the major milestones in the development of the industry. Over the next few years, many young creative talents alongside with their original titles were discovered and financially rewarded by this contest, while the 3rd Wave obtained the publishing and distribution rights of these winning titles. More importantly was that many of these young talents would set up their own studios, contributing to the gradual build up of
In most cases, the manufacturing of Apple II-compatible learning machines in Taiwan then was violating the IPRs of Apple Inc. long before IPRs became a widely accepted legal concept to the public. 5 A few years latter, the declining popularity of arcade games was partly caused by ever-growing power of home computers which could render high quality graphics similar to arcade games. 6 By that time, like many other parts of world, Taiwan was also flooded with numerous low quality and cheap variants of popular original hits. 21
4

the videogame development sector in Taiwan.

The result was that the Taiwanese

videogame game industry was ushered into a new era. From the late 1970s to the 1980s, Taiwan had quite a large pool of bedroom coders (mostly working anonymously) and a growing demand of home videogame software. However the industry and market were still in an unregulated and fluid state. From the supply side, there were numerous home videogames on offer. play those games. On the demand side, consumers needed more transparent information to guide them to choose and However, the link between supply and demand was somehow Hence, after missing and more companies were needed to function as mediators.

ACERs 3rd Wave, two more would-be famous companies, SoftWorld and Kinformation, came onto the scene and joined the videogame magazine and publishing business. In order to secure a stable supply of videogames, they also began to sign long term contracts with some small development teams or individuals. Soon after most of Taiwans non-pirated videogame channels fell under these three publishers control. In 1988, one of Kinformations founders, Y.G. Lee, left the company, teamed up with a few long term contractors and established their own company, SoftStar. Taiwans very first formally established development studio. It was Over the next few

years, SoftStar became a well-known company in Taiwan and some of its products turned into the most legendary genre-setting games 7 throughout the East Asian markets in history. Around the same time, owing to SoftStars success, the publisher SoftWorld considered developing original titles a more profitable business than just publishing and decided to acquire some studios of its own. One year later, one of them released a debut game The Chronicles of Three Kingdoms 8. 170,000 legal copies throughout Taiwan. by a local company at that time.
7

Partly

thanks to SoftWorlds own extensive publishing channels, this game sold more than That was the highest record ever reached In order to secure the source of quality original

Martial Arts RPG Romance, a specific genre originated from Chinese culture. It feels very much like the movie Crouching Tiger and Hidden Dragon. Stories of this kind were mostly inspired by Chinese martial arts fictions written in 1970s and influenced by contemporary Hong Kong Cong-Fu movies. They were also tightly entangled with Chinese ancient history, folklores and fables, which was why they were unique and difficult to people from other cultural background. 8 A period between 220 and 280 AD in China, where there were three empires fighting against each other for assuming the imperial throne of a united China after the Han Dynasty. This part of history had always being a popular subject or background for fictions, television, movies, and for videogames too. 22

titles even further, SoftWorld also adopted a similar approach to the 3rd Wave, hosting a series of game design contests called the Golden Disk Awards to discover young talents and to obtain more potentially profitable titles. Some of these winners would also set up their own studios in the years to come like their predecessors. During the early 1990s, the Golden Software and the Golden Disk were both contributed greatly to the burgeoning home grown videogame industry and market in Taiwan. During the first half of 1990s (sometimes labelled as the Golden Era of Taiwanese Videogame by industrial veterans), even more videogame developers and their products came into play. 1991. For example, T-Time and Dynasty came into operation in The former had strong AI technology applied to various board and strategy

games; the latter made some popular Martial Arts RPG 9 games. In 1993, another two, C&E and Panda joined the industry. About the same time, older companies like SoftWorld, SoftStar and Kinformation all churned out many original titles. But none of them ever became more popular than SoftStars Sword of God (aka Sword of Emperor) & the Wondrous Chivalry (aka Chinese Paladins) 10 released in 1995. Soon after, the latter was even adopted by a same-name TV series, broadcasting throughout the East Asian mandarin-speaking market. In general, this game and its franchises are considered to be the most outstanding landmarks of Taiwans home-grown videogame industry. 2.5. Challenges in the 1990s After the mid 1990s, Taiwans videogame industry began to face some technology and market changes which later on turned into some challenges to these videogame companies. Firstly, all the companies (and studios) enjoyed their game-making business on the relatively stable, open and less complex PC-DOS platform from the mid-1980s, long before Microsofts Window came to dominate the global PC OS 11 market, but when Microsofts Window took more market share, many local companies faced some kind of trouble. Making games for Window OS required a very different set of skills from IBMs DOS. Developers needed to learn new

Role-Play Game Sold more than 10,000 copies in the first five days, which was a remarkable success to a small studio of 10 people in a relatively small market like Taiwan. 11 Operation System
10

23

programming skills and to familiarise themselves with Windows technical structure before mastering the development tool kits which they did not already possess. To some extent, also owing to limited resources and capabilities, they were locked in the DOS platform and would not be able to successfully overcome the obstacles related to the new OS platform. Hence after Windows 95 took over the mainstream OS market, many Taiwanese developers came to realise that they had not obtained sufficient skills and capabilities to produce quality games on the new platform. Secondly, as computer hardware and 3D graphic technology progressed rapidly during the mid 1990s, with ever decreasing prices in real terms, the 3D home videogame market also began to pick up steadily, but many local companies could not catch up quickly to the latest 3D development. technology has a long development history. 3D graphic rendering Ever since the first commercially However the most profound

successful arcade game Battle Zone hit the market in 1980, many companies had been trying to introduce their products to the market. chipset in 1995. 3D impact did not come to the home PC market until 3dfx released the Voodoo 3D At a reasonably affordable price, this Voodoo chipset enabled average household PCs to render much higher quality 3D graphics in real-time than before. It also empowered many international top game developers to entertain gamers around the globe by offering them entirely new three dimensional visual experiences, e.g. Doom (a First Person Shooter game by id Software), Tomb Raider (a Action-Adventure-Shooting game by Core Studio), Meridian59 (the first full 3D MMORPG 12 by Archetype), etc. Windows 13. However, the technological gap between 2D and 3D was tremendous, even wider than that which existed between DOS and Not only the technological knowledge and skills, but also the artworks, processes, management etc. had to change accordingly. In short, many Taiwanese developers original knowledge base and technological capabilities were eroded by the profound change in 3D technology. Thirdly, to the home-grown videogame industry, the variety of videogame games, in terms of genre, content and gameplay, were still too narrowly concentrated on the Martial Arts RPG Romance.
12 13

Although there were a few exceptional great hits by

Massive Multiplayer Online Role-Play Game According to some industry veterans interviewed; they also considered that 3D technology would pose a continuous challenge to game development in the long run. 24

Dynasty and SoftStar, which sold well in the East Asian markets, the industrys overall product quality was still not on a par with the top notch of the international standards. With regard to videogame content of the off-line PC game market, Taiwanese developers also confronted a great challenge. Partly due to the
14

ever-increasing computing power and international competition , in order to fulfil consumers growing expectation and appetite, Taiwanese developers had to increase their productivity of content generation by putting more people and time into game projects, regardless of the technology and quality issues. However, increasing the amount of input did not guarantee better or more outputs in this business, and worse still is that the higher financial risk and more complex management tasks were also associated with this scaling-up strategy. In addition, the scaling-up was also meant to prolong the project life cycle, as a result of the greater technological and managerial complexity. In the late 1980s, on In many average a PC game project cycle only last from a few weeks to a few months. But in the late 1990s, a major project might take almost a year to deliver15. the project on time and on budget. cases, developers could not be entirely sure whether they could successfully finish Even if they finished the projects one year later, they were still unable to know whether competitors (both local and international) would release similar but better quality games which might take away market share. Hence, in other words, to these game developers the market seemed to become less and less predictable. In addition, the advance of CD technology worsened the situation even further. On one hand, the increasing storage capacity of CD meant that developers had to generate more contents by investing more man-months to satisfy gamers appetites, e.g. more stories, better graphics, more user friendliness, etc. On the other hand, Back severe software piracy due to the ease of CD copying resulted in deep financial trouble for many developers, because they earned far less than they should 16. in the late 1990s buying illegal copies of software from street shops, no matter

International top developers could offer much better videogames in terms of 3D graphics and stories. 15 For online game the development time is even longer. 16 Before CD was widely used as the videogame medium, software piracy was less severe to game consoles because then videogames were burned onto the Read-Only-Memory cartridges which had higher manufacturing and hardware cost. 25

14

whether it was pop music, commercial applications or videogames, was easy and risk-free. Even now when the enforcement of Intellectual Property Rights is much more efficient, anecdotal evidence still shows that the ratio of legal to pirate copies in Taiwanese software market is at least 1:7 and the ratio for some more popular games could be even higher. IPRs Regime. Hence, these companies of standalone PC games would not be able to successfully cash-in on their products in a market with a weak This problem also meant that many game companies diverted from the one-shot deal standalone PC games to online games where software piracy was less acute and games could be played on monthly subscription or pay as you go basis. This meant that for online game companies, as long as they could maintain the popularity and playability of their games, the revenue streams would be secured for a longer period. In the context of rapid technological development, a series of industrial events also threatened the robustness of Taiwanese videogame development. and SoftWorld, started to import and localise Japanese Around 1996, videogames. encouraged by growing local market demands, a few companies, including WAYI 17 Unsurprisingly these Japanese games were welcomed in Taiwan because they gave local consumers a much wider range of videogames along with better graphics and quality to choose from. Taiwanese counterparts. More importantly, the price per copy was similar to their Hence local developers market share shrank quickly as a

result of international competition brought about by local publishers. However, needless to say, software piracy also seriously affected these imported games. On average, the price of illegal copies was only 1/10th of legal copies. Local publishers soon found themselves with piles of unsold stock. In order to combat the severe piracy problem, SoftWorld, the biggest Taiwanese publisher, adopted an aggressive low price strategy. On the marketing side, firstly SoftWorld significantly simplified the package of official copies for reducing marketing and publishing costs while still maintaining slightly better packaging and printing quality than pirate copies. It then lowered the retail price of official copies by a large margin to the level which was a not much higher than that of pirate ones. At the same time, SoftWorld still kept expanding its product lines by importing more
17

Another major Taiwanese publisher founded in 1994 26

games to spread overall financial risk. financial liquidity.

On the development side, it paid less to

local developers. This strategy worked for SoftWorld and helped it to restore its As a result, other publishers soon followed suit. However, the Under intense competition, they had no choice but to As a consequence, many sort of collective action initiated by publishers seriously damaged the local development community. accept development deals with less favourable terms. the golden PC games era in Taiwan. 2.6. Radical Transformation since the Late 1990s After the turmoil of 1996-97, PC game development and publishing in Taiwan was generally regarded as an unprofitable business. As a result some surviving companies began diverting their attention to the online game business. In 1999, a small local studio, LAGER, launched the first ever Taiwanese-made MMORPG, the King of Kings. This game evolved from the same-name MUD which had already existed in many Taiwanese universities academic networks for several years. April 2000, WAYI launched Japanese JSS, MMORPG Stone Age. In In July,

developers became bankrupt around 1996-1997, and this period marked the end of

Gamania 18 launched South Korean NCSofts renowned MMORPG Lineage. In August, a SoftWorlds in-house studio, ChineseGamer, started operating its home-made MMORPG Sango Online. In 2002, SoftStar and the 3rd Wave also In 2001 and 2002, there were began to operate their own MMORPG respectively. Taiwanese market 19 (Fu, 2003).

over 60 online games of various types, genres and origins in operation in the Together they ushered the industry into an entirely new but unknown online game era. On Table 2-1 and Graph 2-2, it shows that the industry experienced a drastic transformation in its structure since the late 1990s. In 1999, when LAGER first launched The King of Kings, the market share of online games was only 2.6%, about NT$90 million.
18 19

After then, online games market share and revenue picked up

Then it was a small PC game developer and publisher nearly gone bust in 1997. Although there were so many new online games available in the market, their qualities vary quite a lot. This industry was very new and many companies were just novices. Most of them without solid videogame background dashed into online game business simply because they were backed up by affluent investors who naively considered the aforementioned online games extremely lucrative and popular. However, players mostly concentrated only on these few aforementioned games. More than 80% of the rest were simply money-losing projects, owing to the lack of experiences, technological know-how and capabilities. 27

extremely fast.

Its growth rates from 2000 to 2002 were a staggering 433.3%,

256% and 140% per year, respectively. In 2003, online games revenue and market share already reached NT$6871 million and 77.8%, while the size of the PC game market continuously shrunk. In 2002, PC games growth rate was -33.9%, the biggest drop since 1999. However, PC games circumstances were even grimmer than they looked, because according to MIC, the definition of an online game was only generally referring to Massive Multiplayer Online Games (MMOG, including MMORPG), and excluded many popular LAN, match-making and board games which could be played at home or at an internet-caf. PC game. than the table shows. According to conservative estimation, in the four years to 2003, over 100 online games had been launched in Taiwan. This trend carried on from 2004. development almost ground to a halt. their once-popular PC games. Until 2007, the market share of online games reached 89.9% and the local PC game By this time SoftStar and UserJoy were the last two companies still struggling to release their last sequels or final chapters of Due to such drastic changes, many Taiwanese videogame developers, for both PC games and online games, were facing extremely difficult circumstances. Some of them were put out of business, but some managed to stay in. How they managed to survive, to transform and evolve, and to conduct innovative activities is an interesting industrial history worth further investigation. Their experiences may generate valuable knowledge to both innovation and strategic management researches. 2.7. Current Status of Taiwanese Videogame Industry 2.7.1. Scope and Extent of Videogames The concept of videogame is broad and complicated and requires further clarification for the purpose of this study. mobile-handheld games 22. By videogame hardware platforms, videogames can be generally categorised into console games 20, PC games 21 and By network connection, videogames can be categorised By genre, similar to films, into off-line games, LAN games and online games.
20

The latter was regarded as a

Hence, the growth and size of online games may in fact be even greater

Videogames played on consoles, e.g. Nintendos Wii, Sonys PlayStation 3 and Microsofts Xbox 360 21 Videogames played on personal computers 22 Videogames played on handheld devices, e.g. mobile phone, PDA, etc. 28

videogames can be characterised as simulation, war, action, adventure, fighting, shooting, driving, sports, strategy, role-play game (RPG) and many other mixtures. In recent years, a new dichotomy of videogames is hardcore games and casual games. In general, the hardcore games are usually associated with the design Videogames of concepts of first person shooting (FPS), driving, and fighting, etc.

this kind usually require players to spend a lot of time learning and playing them. Videogames of this kind generally have a full-scale and complex development process which may need over 100 developers working together for two years to complete a project. dollars. The normal budget for this kind of game is several million US Hardcore games usually appeal to players by providing a great deal of

sensational and fast-pace experience, e.g. photorealistic graphics, cinematic special effects and hi-definition sound. By contrast, casual games are much smaller and simpler. Their project scale and budget are much smaller than hardcore games. also much shorter. learning how to play the game. The development time required is Players do not necessarily spend a great deal of time on Casual games are normally played by session or Board games are

round which probably only lasts a few minutes. Players can stop playing the games whenever they have to and no continuation is involved. good examples of casual games. connection. Most casual games can be played via an internet However, videogames (no

Players have to log into the internet to search other players as

opponents or partners (also called match-making).

matter which platform or genre) can be played via an internet connection and should not be confused with the recently emerged phenomenon and jargon: Massive Multiplayer Online Role-Playing Games 23 (MMORPGs). In MMORPGs, players usually assume roles of fictional characters (most commonly in a fantasy setting) and control many aspects of that characters life and activities. MMORPGs most distinguishing features are their large number of players and their persistent online world and story. The rapidly growing online game market in Some of the recent years is a global phenomenon, particularly the Asian market. concurrently.
23

most popular MMORPGs in China can attract over one million users playing South Korea is one of the major MMORPG exporters and winners in

It is a genre of on-line role-playing games in which a large number of players interact with each other in an online virtual world (I think we have had this defininition before?.) 29

this booming trend. 2000.

Motivated by promising commercial benefits, many

Taiwanese videogame companies have also followed suit to invest in this area since

2.7.2. Taiwans Videogame Industry and Size Over the past 20 years, the Taiwanese videogame industry has been developing along two lines of business: PC game development and videogame publishing. Console games are also popular ever since Nintendos first entertainment system: Famicom was released to the Taiwanese market. However, the industry, as a whole, By 2007 only 2 out of 12 has not come to specialise in console game development.

major videogame companies in Taiwan have consolidated their capabilities of making full-scale console videogames. All the other companies are focusing on PC and MMORPG development, online game operation, publishing and distribution. By the end of 2008, accurate information about the population of Taiwanese videogame companies is still unavailable. The size of the industry and sector From various seems somehow elusive to the government and the industry alike. Taiwan varies from 10 to 100.

sources of primary and secondary data, the number of videogame companies in Such a huge variation seems unreasonable. With regard to other Another However, to some extent, it is generally believed that the backbone of the industry is made up by only a handful of indicative companies. so-called videogame companies, it is difficult to trace each of those studios (sometimes they are just one-person companies) activities and status. problem is that there has not been a comprehensive, in-depth survey on the industry by the end of 2008, and thus the corresponding definition of Videogame Company does not exist. According to the managers in the Institute for Information Industry (the III) responsible for supporting the VGD industry on behalf of the Taiwan government, the so-called videogame industry is made of about a dozen of famous and major companies. The inaccurate information on the size of the industry and the elusive number of companies is problematic to quantitative research. However, this PhD study is conducted in a qualitative manner. A rigorous and appropriate research design with the purposive sampling technique can also achieve the goals of this study.

30

2.7.3. Diversified Firm Size and Structure Interview of 10 major companies during the background exploration stage, revealed that the size and structure of firms present in the industry varies significantly. 600 employees. In terms of the number of employees, GAMANIA is the biggest one, claiming to have However, its latest annual report, it shows that only around 90 of The existence them are involved in videogame development and the rest are managerial, operational and supportive staff for its diversified lines of business. of a 90-person team may however overstate GAMANIAs game development capacity because it is believed that most of the employees are taking part in the localisation and operation of licensed videogames, instead of in developing genuine in-house titles. With regard to its companys structure, under the corporate CEO there are three major videogame operation units, and several other units performing necessary corporate functions (e.g. sales, marketing, financial, liaison, customer service, legal support, etc.). support team. Within each videogame operation unit, there are one art design division, two videogame marketing divisions and one technical Each videogame operation unit has around 35 people responsible for In short, in comparison with localisation and running 2-3 online and casual games. and structure. PLAYCOO is the smallest development company (studio) which has been interviewed. It has only 43 employees and a much simpler managerial structure. All the three departments The company is divided into three major departments, by function i.e. Design, Art and Programme, and a small customer services team. resources and their staff are managed by two or three project leaders, under the supervision of the general manager. On average, its online game project requires a minimum of 20 people working together for around one and half years to launch online. Depending on the scale of the project, some game elements, e.g. artworks, music and voice recording, may be outsourced to other skilful individuals outside the company. Inside the company, each project leader (game producer) has to allocate necessary resources (time, personnel and budget) and monitor the progress of the project s/he is responsible for. The working schedule and arrangement of each individual must be mediated by producers and department managers to ensure each individual can fulfil their tasks. It is believed that the practice of game Other companies
31

other cases, GAMANIA is relatively large and more complex in terms of staff size

development in PLAYCOO is the base case scenario.

specialised in developing videogames in-house also have similar structural features to PLAYCOO. 2.7.4. Activities of Companies In this section, the status-quo and activities of Taiwanese videogame companies which have been interviewed will be briefly introduced. 2.7.4.1. GAMANIA GAMANIA was established as a small PC game studio in 1995. It had developed some simple PC game titles for the local market. Since 1997, by taking advantage of the sudden depreciation of the South-Korean Won (KRW) in the Asian Financial Storm, it began to operate several licensed South-Korean MMORPGs. One of them was the Lineage series which very soon became the most popular MMORPG in Taiwan. The huge profit made from operating Lineage resulted in GAMANIA becoming a public listed company. In general, ever since successfully launching Lineage in Taiwan, GAMANIA has been very keen on acquiring potentially profitable online games from South Korea, signing licensing contracts with these original IP holders, and operating the games in Taiwan. However, none of them is as successful as Lineage. Nevertheless, the company still accumulates a great deal of know-how about game localisation, ISP management, internet security, etc. In recent years, GAMANIA is becoming aware of the importance of in-house game development capabilities because the licensing fees of popular Korean online games are ever-increasing which significantly lowers the overall profit margin of GAMANIA. Within the company, there is an argument about the huge amount of As a result the company should licensing fees paid to original IP holders that has already exceeded the would-be development budgets of several game projects. start seriously considering whether to make games in-house (this dilemma also applies to other Taiwanese game companies specialised in operating licensed online games, like WAYI). Since 2005 GAMANIA started trying to build up its own development capability but by 2008 GAMANIA had not released a popular in-house game. 2.7.4.2. INTERSERV Established in 1989, INTERSERV began by producing multimedia presentation projects for MNCs in Taiwan and gradually grew into a public listed videogame
32

company.

INTERSERV has three major lines of business i.e. videogame INTERSERV has specialised in

development (across multiple platforms), art outsourcing and educational multimedia software (mainly on PC platform). developing PC games and educational software for school children since its early years. During the same period, through working with some MNCs in Taiwan, it also learned the management skills which are vital for being a professional console game developer and service provider in the global market. INTERSERV is now one of the biggest videogame artwork outsourcing companies in Asia with many heavy weight clients (including other bigger developers and publishers) from the US, the UK and Japan. INTERSERV also has one of the biggest motion capture facilities and databases for martial art performance because it has long been involved in making 3D Kung-Fu games on PCs and gradually extended to console platforms. 2.7.4.3. XPEC Established in 2000 as a PC game developer (with support from Idea Factory, a Japanese publisher/developer), XPEX gradually become a professional PC/Console game developer and an international outsourcing service provider. Different from other Taiwanese game companies, XPEC does not aim at the local PC and MMOG market. Instead, over the past few years, XPEC has become heavily involved in In several co-developed projects with several Japanese developers and gradually built up its own reputation through these recognisable PC and console game titles. aims to become an independent Xbox 360 and PS3 developer in the years to come. 2.7.4.4. FUNTOWN Established in 1998, FUNTOWN was initially a software solution provider within the ACER group. area. In 2000, it was repositioned as a leisure entertainment software provider. In 2002, it extended itself into the online gambling/board game Before long, it became the most well-established and profitable online During the same period of time, By 2008, it is still gambling/board games platform in Taiwan. markets. general, XPEC is still not a first-tier international PC/console game developer, but it

FUNTOWN also attempted to explore hardcore PC games and MMORPG However, these attempts were not successful. entirely focusing on developing and operating online casual/board/gambling games, and enjoys a profitable business. FUNTOWNs advantage is based on its flexible
33

online board-game platform and huge client database with a wide range of choice of casual games. In addition, FUNTOWN moved into the business of gambling/board games earlier than other competitors and has therefore also established a huge customer base earlier than other market followers. 2.7.4.5. WINKINGWORKS Established in 1998, WINKINGWORKS was initially a PC RPG game developer and released few renowned titles. Since 2003 it began to explore the console game and online game market. Until 2006, it still claimed it had a few grand MMOG and console projects in line. However, by the end of 2008, the company seemed to have already shifted its primary business activity to Chinas outsourcing market and was reluctant to discuss its own projects. 2.7.4.6. WAYI WaYi was established in 1994 as a local videogame publisher. Since 1995, it has begun to import and localise Japanese PC games. in Taiwan. In 2000, it started to operate a licensed MMORPG, Stone Age, developed by DigiPark, a Japanese game company, The huge profits derived from running online games made WAYI one In 2001, WAYI began to However, it Within a year, along with Lineage and Ever Quest, WAYI faced severe competition from other of the public listed videogame companies in Taiwan. operate Stone Age in China.

Stone Age became one of three most popular MMORPGs in China. did not enjoy the success for long.

emerging local Chinese companies for the licensed and operation right to run Stone Age in China. The original IP holders in Japan and Korea preferred to license to local Chinese companies because they paid much higher licensing fees 24. During the same time, WAYI came to realised the importance of having in-house products, and began to buy a set of expensive third-party development tools and acquire several development teams (by spending a good deal of money) across Taiwan and China. Unfortunately, WAYI did not successfully develop games on its own because of its lack of experience, capabilities and management skills. In 2006, WAYI cut down its activities in China and retreated back to Taiwan. By 2008, WAYI was focusing on operating licensed online games only in Taiwan and investing the money made from the online game business to build up its own game
Gamania also faced the similar situation when it intend to extend its operation contact of Lineage in China with NC Soft, the original South Korean developer. 34
24

development capabilities. 2.7.4.7. USERJOY USERJOY was made of three videogame developers in 2004. videogames needs much more human resources than before. They consider the In 2004 they also merger can offer them more competitive advantages because nowadays developing established a development team in China in order to obtain more development capacities at lower cost. Their activities now cover PC, online and casual game development. 2.7.4.8. LAGER LAGER was established as a professional online game developer in 1998. Its success was primarily based on the robust capabilities of network engineering. Over the past few years, LAGER had been trying to explore the global market by searching for business partners in different countries. professional online and casual game developer. 2.7.4.9. SOFTSTAR SOFTSTAR is a veteran in videogame development. Before stepping into the online games business in 2000, it had already been making PC games for more than ten years. Throughout the 1990s, some of SOFTSTARs games were among the most popular and legendary titles in the Greater China market. games on the continuously advancing PC platform. During that period, SOFTSTAR also accumulated a good deal of capabilities associated with making To some extent, SOFTSTAR was considered an outstanding independent game developer, because its products always consisted of a unique touch of Chinese aesthetics which later precipitated an entirely new PC game genre the Chinese Martial-Art Romance. engine and make full 3D MMORPG by itself. 2.7.4.10. PLAYCOO PLAYCOO was established in 2000 as a small online game developer. In 2007, PLAYCOO was acquired by Gamania. By the end of 2008, it had developed four MMORPG titles (of casual game and fairly tale styles). targeting a specific niche market.
35

Now LAGER is still a

However,

SOFTSAR was not very successful in the attempt to develop a reliable 3D graphic

All these games are

2.8. Conclusion This chapter has outlined the challenges and transformations taking place in Taiwans videogame industry over the past few years. From an empirical For perspective, there are some intriguing issues worth further investigation.

instance, what are the new things these companies have to do during the radical transformation and how do they cope with the challenges of technological discontinuity? The next chapter will conduct a literature review from the academic perspective to search for relevant ideas or analytical frameworks with which to address this phenomenon.

36

Graph 2-1 History of Taiwanese Videogame Industry

37

Graph 2-2 Paradigm-Shift of Taiwanese Videogame Industry

12000

Online PC
10000

8000

Million NT$

6000

4000

2000

0 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: MIC, Taiwan 2007

Table 2-1 Market Size and Growth of Taiwanese Videogame Industry Year PC (Mil. NT$) YoY Growth % Market Share % Online (Mil. NT$) YoY Growth % Market Share % Total YoY Growth % 1999 3410 2000 3820 2001 3230 2002 2135 2003 1963 2004 1754 2005 1519 2006 1307 2007 1109

N/A 12.0% -15.4% -33.9%

-8.1% -10.6% -13.4% -14.0% -15.1%

97.4% 88.8% 65.4% 34.2% 22.2% 19.5% 16.8% 13.4% 10.8% 90 480 1710 4104 6871 7228 5.2% 7532 8427 9168 8.8%

N/A 433.3% 256.3% 140.0% 67.4%

4.2% 11.9%

2.6% 11.2% 34.6% 65.8% 77.8% 80.5% 83.2% 86.6% 89.2% 3500 4300 4940 6239 8834 8982 1.7% 9051 0.8% 9734 10277 7.5% 5.6%

N/A 22.9% 14.9% 26.3% 41.6%

Source: MIC, Taiwan 2007

38

Chapter 3. Innovation, Management, Competitive Strategy and Videogame Software Development

3.1. Introduction In this chapter, section 3.2 will briefly introduce what I will refer to as the Conventional View of Innovation first. Following that, section 3.2 will present the conventional views key concepts: the primary typology of innovation, the firm-level innovation management models and Product Life Cycle. Section 3.2 will also argue that the conventional view is insufficient to cope with widely diversified and increasingly complicated scenarios, especially in the service and creative industries which seem to have rather different features and dimensions, and more idiosyncratic innovation patterns. For the above reason, section 3.3 and 3.4 will introduce the features, types, dimensions and managerial challenges of innovative activities in service (and creative service) industries. In section 3.5, the concept of complex product system (CoPS), and its key characteristics and managerial challenges are introduced. To address strategic management of VGD companies, in section 3.6 both rationalist and incrementalist approaches, together with their key analytical frameworks, i.e. Competitive Forces, Strategic Conflict, Resource-Based View (RBV) and Dynamic Capabilities, are reviewed. After reviewing these literatures and referring to preliminary empirical evidences, the Dynamic Capabilities Approach (DCA) will be selected as a better framework to understand firm-level strategic management, and innovation and competition processes. Finally, in response to the rise of the videogame industry and the lack of academic attention to the industry, section 3.7 will first discuss the convergence and divergence of films and videogames as creative products, and argue that attention should be paid to the in-depth study of the videogame industry in its own right. Then by drawing on the key VGD-specific innovation studies, this section further addresses relevant aspects of VGD innovation and management. 3.1.1. Rationale for Literature Selection and Presentation In the introductory part of this literature review, there are two issues that we should clarify at the beginning: the selection of literatures and the presentation of literatures. On one hand, literatures are selected and reviewed in this chapter not simply because they can be categorised into innovation and/or strategic management research in a
39

broad sense.

On the other, the sequence in which they are presented is not simply Instead,

based on their publication time either (nevertheless they still appear so).

literatures are selected and reviewed because they address the issues or themes which are immediately relevant to the three research questions (evolved from three original research interests/aims stated in section 1.2, and informed by ongoing literature surveys and empirical investigations). The sequence in which these literatures are presented literally reflects the underlying theoretical debates between different views (or strands) of innovation and strategic management studies. Following a series of literature surveys and empirical investigations, the original research interests have been translated into three sets of research questions: Innovation Nature Question What is the nature and characteristics of VGD innovation in Taiwan? Over the last ten years or so, what transformation has How far can different views of innovation help taken place in Taiwanese VGD?

us understand the nature and characteristics of VGD innovation? Innovation Type and Management Question Over the last ten years or so, what innovations have been achieved by Taiwanese VGD companies and how have these innovative activities been managed? management in these cases? Strategic Management Question What are Taiwanese VGD companies competitive strategies and how have they managed to survive in a highly competitive and uncertain business environment? management? Before proceeding to elucidate the rationales of literature selection in further details, it is necessary to clarify why after the first two questions the author further asks the third research question. From the perspective of evolutionary economics, a firm has to evolve and change (i.e. doing all kinds of new thing innovations) to survive. However during the innovation process the firm, to a minimum extent, needs a set of reasonably coherent strategies to loosely guide its general direction, and define its To what extent can Dynamic Capabilities be a useful concept to analyse these VGD companies strategic How far can different innovation models/approaches/concepts inform us the practices of innovation

40

objectives and organisation.

These strategies will also legitimise the firms Without such a set of

activities in acquiring necessary resources and capabilities. managerial problems (Nelson, 1991).

coherent strategies the firm undoubtedly will end up in many fundamental In another word, innovation and strategy are flip sides to each other and equally important to a firms growth and management (in this thesis, the four case studies basically are concerned with VGD companies long term growth and development). For this reason, the author is interested in the third strategic management research question. To address the first two research questions, this chapter selects three broad but rather distinct views of innovation to assist the author examining the phenomena. From section 3.2 to section 3.5, these three views are: the conventional view of innovation, the view developed from service innovation research and the view developed from Complex Product System innovation research. characteristics (or features) of innovations, types (or dimensions and localities) of innovation and management (in terms of organisation, source, drive and skill/knowledge) of innovation. These issues are what the first two research questions intend to examine in detail. Therefore relevant literatures are selected and presented in each subsection from section 3.2 to section 3.5. The rationale for first selecting and presenting the conventional view is not simply because it appears earlier than other views in the history of innovation research. Instead, it is because this view still remains as a widely accepted construct and has profound influences on contemporary innovation research in general. However this view also has some limitations and can only achieve a partial understanding of contingent innovation processes and management in various contexts (Tidd, 2006). Therefore some key literatures of service innovation (alongside literatures of creative service innovation) are presented as an alternative view to complement the conventional one. For the same reason, Complex Product System literatures (with regard to its core concept, characteristics and key innovation management challenges) are selected to reveal the possible hidden (or previously unnoticed) It is worth to notice that, between these views, there are stark contrasts with regard to issues such as:

41

aspects of VGD innovation. In addition, based on preliminary and synthesised empirical evidences, we find that the early-day videogame software (in terms of production and transaction) to some extent was very similar to manufactured consumer product, and speculates that the conventional view can characterise the innovation process of VGD. Therefore the conventional-view literatures are selected. Following this, we find that videogame software is becoming more like a service, and undoubtedly its innovation process requires a great deal of culture-related creativity. Therefore literatures of service innovation and creative service innovation are selected. Moreover, we also find that videogame software development and management, especially in the case of Massively Multiple-Player Online Game (MMOG), can clearly be characterised as CoPS. Therefore key literatures with regard to CoPSs concept, features and development challenges are selected. To address the third research question, we present Competitive Force and Strategic Conflict at the beginning not simply because they appear earlier in the history of strategic management research. Despite their shortcomings, they are selected because they have been the key analytical frameworks of the traditional rationalist approach for a long time, and still are well-known and influential concepts in strategic management research in general. Then the RBV and the DCA are presented to complement the crucial but neglected aspects of rationalist approach and to investigate inside the black box of strategic management, from a more realistic and incrementalist point of view. In addition, it is worth to note that the preliminary empirical evidences inform the author that the DCA seems a more suitable and realistic construct in strategic management. analytical framework in the four case studies. 3.2. Conventional View of Innovation According to Schumpeters original definition, innovation can be categorised into five types: new products, new production methods, new sources of supply, new markets and new organisations. However, throughout the 1960s to the 1990s, conventional innovation studies were largely focusing on the first two: product and For this reason, the DCA is discussed more extensively and in-depth in this chapter, and then adopted as the

42

process innovations and new methods of production (Abernathy and Clark, 1985, Clark, 1985, Schmookler, 1966, Utterback and Abernathy, 1975, Utterback and Suarez, 1993). Product innovation is about how to create new or improve existing products. Process innovation is about the new or better ways to make products. This product-process dichotomy proved particularly relevant to innovation studies concerning mass production. However in contemporary commercial activities, especially in the service sectors, and in areas of software development, and complex product systems (CoPS), this dichotomy becomes less useful (Hobday et al., 2000). 3.2.1. What is the Conventional View of Innovation? Before proceeding to the following sections, we would like to briefly introduce what the conventional view of innovation refers to, and to contextualise this view into the setting of theoretical discussion. However we should note that the so-called contextualisation will not be comprehensive enough by reviewing the literatures in section 3.2 alone. The conventional view will be properly situated in the context of this research only when alternative view-points, informed by newer research and evidence, are taken into account. By synthesising literatures in this section, the conventional view of innovation can be described as follows: The conventional view of innovation is predominately originated from empirical studies on the practices of science and technology-based manufacturing industries; Originally there are five primary types of innovation proposed by Schumpeter. However the conventional view mainly focuses on two types product innovation and process innovation; Product innovation in general is assumed to take place before process innovation. These two types of innovation are also two separated phases in the innovation and diffusion process; There are concepts about radical and incremental innovations. However the conventional view emphasises more major breakthroughs radical innovations, and tends to overlook the potential significance of incremental innovations; Innovation is seen as a task performed by R&D personnel or specialists alone, or considered associated only with key individuals. Innovation is not seen as a social process where people of different backgrounds interact to each other and

43

create new things; Innovation is seen as either a linear process (technology-push and need-pull) or a coupling process (interaction between different elements of innovation and feedback loops between them); The science and technology knowledge-base is considered the only or the most important source for innovation; The Product Life Cycle (PLC) is used to describe the diffusion and evolution of innovation. Over the past few decades, the set of concepts referred to here as the conventional view has been influential and widely-accepted. However, compared with other lines of innovation research, the conventional view seems unable to provide a satisfactory account of the recent development of Taiwanese VDG companies and their innovative activities. 3.2.2. Types of Innovation 3.2.2.1. Product and Process Innovation The basic assumption underpinning the product-process dichotomy is that these two kinds of innovation have different impacts on the economic and social environment. For example, as Edquist et al. (2001) contended, product innovation has beneficial impacts on the social-economic system because it creates new markets and new employment opportunities, which will in turn result in an increase in the wealth of the society. However, the overall impact of process innovation to the social-economic system seems uncertain (or even less beneficial), because through efficiency gains (by cost-cutting and reduction in the number of employees), process innovation may cause an increase in unemployment and a lower average income. Faberberg (2005) argued that the dichotomy only sustains while the analytical level remains at the individual firm and sector, but may lose its explanatory power at the aggregate level of the economy, because the product of one firm (or industry) may end up as being used to produce goods or services in another(2005: 7) 25. In addition to the dichotomy of product and process innovation, Edquist et al. (2001) further suggested that process innovation should be divided into technological process innovation and organisational process innovation.
25

The first concept is

This argument is worth further investigating in this thesis because product and process innovations may also be indistinguishable at the firm level of videogame development. 44

largely concerned with the adoption of new machinery and the second is concerned with new ways to organise work within firms. the firm. However, Fagerberg (2005) argued that, from Schumpeters view, new ways of doing things do not only occur within Instead, they also happen between firms, for example new forms of collaboration and alliances. 3.2.2.2. Radical and Incremental Innovations Based on Schumpeters account, innovations can also be divided into radical and incremental innovations by comparing their radicalness to current technology (Freeman and Soete, 1997). A radical innovation refers to the introduction of an entirely new type of machinery to a company or industry. On the other hand it can also be used to describe a phenomenon in which a technological revolution is brought about by a cluster of newly emerged innovations. In contrast, an incremental or marginal innovation refers to implicit and continuous improvements of exiting products or production methods. Schumpeter emphasises the importance (or role) of radical innovations, asserting that they have greater impacts to economic development than incremental innovations (Fagerberg, 2005). Although the distinction between radical and incremental innovations is a widely held view, it can also be disputed. This is because the cumulative impacts of numerous incremental innovations are not necessarily less influential than radical innovations in the long run, and the focus on radical innovations risks losing the insight from the majority of innovation activities and results in a biased view toward the innovation process (Lundvall, 1992). For instance, many radical technology products (the jet engine, the computer processer and the automobile) required a great deal of preceding incremental innovations and continuous improvements in order to be realised. Hence, it can be argued that the bulk of beneficial impact for economic system do not come from the final radical innovations per se, but from the preceding incremental improvements of components, subsystems and production methods all together (Fagerberg, 2005). The conventional distinction between radical and incremental innovations (upon which, together with the notion of product and process innovations, the conventional models of innovation are built) is further challenged by the notion of architectural

45

innovation. By definition, an architectural innovation means that a new product still uses the same technologies and components as its previous version but the new product is architected in a slightly different structure which results in a better performance. Henderson and Clark (1990) found some big well-established companies suffered unexpected setbacks in the competition with smaller competitors in the same market because the latter introduced architectural innovations in their products. In this case, an architectural innovation seems an incremental innovation but it has very significant impacts on the industry structure. 3.2.3. Product Life Cycle and Basic Assumptions of the Conventional View The conventional view of innovation largely originated from empirical studies on the practices of manufacturing industries (e.g. automobiles, petrochemicals, pharmaceuticals, electronics), and is based on a common set of assumptions. In this line of innovation studies, innovation process is viewed as a construct encompassing two distinct types of innovation, product and process. Both follow a kind of predictable linear progression. For example, process innovation, along the progression of product life cycle (PLC) 26 , evolves through uncoordinated, segmented and systemic stages while product innovation progresses through performance-maximising, sales-maximising and cost-minimising stages, when the product in question gradually matures and its market stabilises over time (Utterback and Abernathy, 1975). Along the entire progression, the frequency 27 of product On the innovation is high in the early stage of PLC and then gradually decreases.

contrary, the frequency of process innovation is low at the early stage of PLC and increases over the course of gaining efficiency and lowering costs through streamlining and standardising the production procedures. With regard to the product/industry life cycle, the development trajectories of various units of analysis, e.g. technology, products, markets and industries, are presumably subject to an infancy to maturity progression. Once the winning product or dominant design is selected by the market, the industry will gradually consolidate. In the process, some smaller or non-competitive firms may either exit or be acquired by other surviving companies in this round of competition.
How far the PLC and its predictability can be applied in this research requires further investigation. 27 The assumption of frequency implies that innovation can be quantified and calculated. 46
26

Those

survivors then will carry on competing with each other for even bigger market shares by reducing cost, increasing production efficiency and improving products incrementally (Abernathy and Clark, 1985, Klepper, 1996, Tushman and Anderson, 1986, Utterback and Suarez, 1993). Occasionally, as suggested by Schumpeters notion of creative destruction, radical innovations will emerge to destroy the existing industrial structures and the technological advantages possessed by current market winners, and then a new round of life cycle and competition will begin. 3.2.4. Management of Innovation: Innovation Models Innovation processes are contingent phenomena. They evolve over time and vary At the firm-level, the across various companies and industries (Pavitt, 2005).

management of innovation processes and activities (and our understanding of these phenomena) is also evolving into more diversified and complicated patterns over time. By synthesising previous studies, Rothwell (1994) classifies the various patterns of firm-level innovation management into five models (or generations) of innovation management as follows. The reason for reviewing the following models as part of the conventional view of innovation is that these models (particularly the first generation) originate from and have been evolving alongside the mainstream innovation study. These models have been widely-accepted and have represented researchers understanding of high-tech manufacturing companies innovation management during different periods of time. In the first technology push generation (1950s Mid-1960s), the management of innovation within a company is seen as a linear progression of technology commercialisation. It starts with basic R&D, and runs through the design and manufacturing processes, to consumers in the market. In this model, science and technology is regarded as the only source for innovation. In the second market-pull generation (Mid 1960s Early 1970s), the management of innovation was still a linear progression but the whole sequence was pulled by the market demand. initiating role. identify the need of consumers. R&D was no longer considered to play an Instead, within a firm the sales and marketing departments first Then R&D and the production line are ordered

47

to manufacture products for the market. In the third coupling generation (early 1970s mid-1980s), technology-push and market-pull are considered equally important to a firms innovation management. Both technology development and market demand can provide the Asymmetrically emphasising either of them may vital sources for innovation.

run high risk of losing the insight of technology trajectory or the market trend, and end up a failure in the new product development. In the fourth parallel development generation (early 1980s early 1990s), the process of innovation management is not considered to be a linear progression anymore. Instead the whole company competes like a rugby teamall its functional departments running forward in parallel and passing the ball (i.e. new product development) back and forth in between until reaching the goal (i.e. the market). This is co-called rugby approach is considered to be capable of coping with the more competitive environment where the product life is ever-shortening and the pressure of time-to-market is ever-increasing. In the fifth networking generation (after 1990s), this model considers innovation as a multi-actor and multi-level networking (and social) process interlinked by a sophisticated ICT system. (Tidd et al., 1997). This model appears to be complicated because it encompasses all the elements of previous four models The major difference between this generation and the other That makes the four generations is that this generation is featured with using modern ICT technologies to link all the information path and feedback loops. firm organisation and managerial process more flexible and efficient. The evolution of innovation management models to some extent reflects the growing complexity in manufactured consumer products, the progress of technology, and transformation of industrial organisations and the marketplaces since the 1950s. The evolution also resonates with the growing academic interests in innovation research in the last few decades. Starting from a simplistic linear concept, innovation models gradually grow into a multi-actor extensive network and appear to gain greater strength in characterising innovation processes of different industries by adding more factors and dimensions into consideration. 3.2.5. Limitations of Conventional Innovation View

48

However, the conventional modelling of innovation management has difficulties in capturing the key features of the emerging service industries and complex product systems, especially after the 1990s when ICT started playing a key role in economic and innovative activities. For example, a set of common features, such as intangibility, interactivity and information-intensity characterises many services and differentiates them from manufacturing (Miles, 2005). A new framework called CoPS emerged during the mid-1990s and shed some light on the conceptualisation of large scale product systems with a high degree of complexity and novelty. These newer concepts that will be presented in the following sections provide alternative views and might be helpful in understanding the growing complexity (and hidden aspects) of innovation processes. The conventional view of innovation, to a great extent originated from mass production commodity industries, and therefore exhibits some shortcomings if used for to explore the production of large-scale, tailor-made and complex products (or systems/services), e.g. a commercial airplane or satellite. One of the shortcomings is related to the concept of radical/incremental innovation, because this concept of radical innovation is incapable of explaining why some established firms fail in competition after newly emerged competitors introduce only marginally improved products. By the same token, the radical/incremental innovation is challenged by Joe Tidds (1995) research on the home automation industry. Tidd points out that a radical change at the component level may only lead to an incremental change at systemic level. He points out that the cumulative incremental changes at various component levels may only cause a step-change in the systematic performance or functionality. In other words, the concept of radical/incremental innovation is not useful in clarifying the impacts of the so-called radical and incremental innovations in the context of a product system with high degree of complexity. Another limitation of the conventional process/product innovation dichotomy and the account of PLC is that they only appear relevant in the description of manufacturing-commodity industries. According to the conventional PLC account, process innovation usually comes after product innovation during the entire efficiency-gaining process, while the PLC gradually enters the mass production phase. However, in contrast, in some prominent service sectors (e.g. insurance and

49

finance services), IT-based innovation follows a Reverse Product Cycle (RPC) which encompasses three consecutive phases improved efficiency, improved quality, and new service production (Barras, 1986, Miles, 2005). In these service sectors, new products (services) only become possible after the service providers improve their efficiency and quality of information processing by installing a new IT systems and changing the managerial practices accordingly. In addition, by analysis of the evolution of the cellular mobile communication system, Davies (1997) argues that the life cycle of a large system does not follow the conventional PLCs suggestion. Instead, the system has a strong tendency to remain in the fluid phase of product innovation for a prolonged period and a high volume of process innovation is unlikely, even if that system reaches a mature operational stage. A large systems life cycle usually evolves through two basic phases which differ markedly from conventional models (Davies, 1997). In the first phase, a new system (or product) architecture is constructed and agreed by various participants, e.g. the system integrators, primary and secondary suppliers, professional bodies, regulation authorities, and organizational users. Secondly, in the new product generation phase, the component and systemic innovations become more frequent and more new products (or services) will be generated without fundamentally changing the original design and architecture of the system. The life cycle of the system is rather different from that suggested by the traditional PLC perspective. In short, despite the fact that the conventional view is influential and widely accepted this view has certain limitations. should be taken into consideration. 3.3. Service Innovation 3.3.1. The Nature and Features of Services Before the 1960s, the services sector was not considered to be of particular economic significance or a valuable research domain by either policy makers or academic researchers. Despite the growing economic significance of the sector throughout the 1970s and 1980s, innovation studies still overwhelmingly focused on manufacturing. In comparison with manufacturing and on the basic assumption of In order to address the research questions proposed in section 3.1.1 and section 3.8.1, alternative views of innovation

50

services as technological laggards, the conventional critics on services since 1960s generally considered that services only consisted of low-quality labour, small-scale organisations and unmodernised practices which were unable to contribute to overall economic and productivity growth. This conventional view on services remained largely unchanged until Gershuny and Miles (1983) suggested that applications of new IT on services would hopefully improve the pricing structure and quality of services. In the same period, Richard Barras (1986) introduced an influential concept of the Reversed Product Cycle (RPC), to the study of service industries. products to their clients and the market. RPC was used to describe how IT-based and information-intensive service providers introduced new According to this account, service providers first adopted new IT to improve their efficiency of back-office work. Service providers gradually achieved process innovation by improving the efficiency and quality of delivering existing services, and then achieved product innovation by providing new types of services. laggards. In RPCs account, IT-based service providers could no longer just be seen as non-innovative and technological On the contrary, they were not only the adopters and users of new technologies but also innovators themselves. According to the OECD (2009), the service sector accounts over 70% of aggregate OECD GDP and employment in 2008. In Taiwan, the service sector now accounts The service sector now 72% of GDP and more than 60% of employment.

apparently is the largest sector in the modern economy across all the developed and developing countries, and deserves to be studied in-depth and in its own right. However, the service sector encompasses a wide range of economic activities and subsectors, and each of them has its own dynamics and trends. complexity of services, Despite the Miles (1993), one of the earliest service innovation

researchers, pointed out there are still some salient common features shared by most service activities described as follows: In terms of service production, the workforce often engages in craft-like production with limited management control of details of work; production is often non-continuous and economies of scale are limited; the level of skill and

51

knowledge inputs varies across different service activities. In terms of service product, the nature of the product is non-material and often information-intensive; process and process are hard to distinguish; products are usually customised to clients requirements. In terms of service consumption, production and consumption are co-terminous in time and space; clients or suppliers sometimes have to move to meet the other party; services are consumer-intensive which requires a good deal of inputs from consumers into design and production process; self-service often requires consumers formal and informal interaction with suppliers. The debates over the nature of services since the 1980s have addressed questions including whether the service sector was unique in it own right, whether the service sector can be understood from the manufacturing perspective and what are the differences between services and manufacturing. With respect to these questions, innovation research can be grouped into three approaches (Miozzo and Miles, 2002). The first approach demarcates services from manufacturing, and suggests that the particular features of services as intangibility, interactivity and information intensity make services profoundly different from manufacturing. The second approach assimilates services with manufacturing by arguing that services innovation is basically similar to product and process innovation in manufacturing (Sundbo, 1994). Underpinning this transformation is that service firms disintegrate the production activities into standardised components and modules, and recombine them to meet clients requirements. These practices resemble the innovation model (alongside Thus standardisation and modulisation) found in most manufacturing firms.

service innovations can be studied by the methods and concepts developed by manufacturing innovation research. However, Coombs and Miles (2000) argue that a synthesis approach is more desirable. This is because the demarcation approach, by stressing the peculiarities of services, can assist researchers to reveal more neglected innovative aspects and characteristics of service firms and industries. Whereas adoption of the established measurements and tools developed by manufacturing innovation research can lead researchers to reconsider whether they can develop a better understanding the contingent nature of innovation process (Miles, 2000), because not only are services growing and changing, but manufacturing is also rapidly transforming.

52

The aforementioned debates over the nature of services and features identified by previous literature indicate that services actually, or to some extent, are different from manufacturing industries, and can be a complicated phenomenon in its own right. They also imply that to some extent service innovation may have unique features as well and is an area worth further studying. 3.3.2. Types of Services Some innovation research attempts to classify service activities in order to obtain a better understanding of services and their innovative activities. Despite the aforementioned debates and typical dichotomy between technological product and process (TPP) innovations, Miles (1993) suggests that services can be differentiate into three groups by what is changed by services. physical artefacts. Some mainly transform people. Some services mainly transform Some others mainly transform

information. It is worth to note that the transformation in each group usually is a matter of degree and may take place in combination. This taxonomy is useful because it can lead researchers to find out what has been changed by services and identify the areas where innovations may take place. By analysing the data obtained from three key service innovation surveys 28, Howells and Tether (2004) classified service business into four sets: physical services, people-oriented services, information processing services and knowledge-creating services. The last set is mainly concerned with activities associated with the Instead services also create knowledge for provision of knowledge based services and implies that services are no longer just the recipient of the innovation process. the whole process. following areas: products or services that business provides; the means of producing services; the means of delivering services; the technologies used to produce or deliver services; the skills of the workforce used to produce or deliver services; the organisational structure of the business; They also identified service innovations can take place in the

28

The Innobarometer Survey, CIS-2 and Four-Sector Survey 53

 the way in which the business inter-relates with its customers; the way in which the business inter-relates with other businesses. The previous studies imply that service innovations are taking place in more diversified areas than the conventional view on innovation suggested. VGD innovation in this thesis. 3.3.3. Dimensions of Service Innovation The conventional account of product and process innovation, radical and incremental innovation, and models of the innovation process are largely originated from the logic of traditional manufacturing industries. (Miles, 2008). They sometimes seem unable to offer satisfactory description to the emerging service innovation activities By arguing that service innovation is not only limited to The four product/process dichotomy, den Hertog (2000) suggests a four-dimension framework to evaluate the level of innovativeness of services. dimensions are: The service concept; The client interface; The service system delivery and organisation; Technological options. The first dimension particularly addresses the intangibility of service innovation. Since service innovation tends to involve a greater deal of new conceptual elements than manufactured products, the novelty of service innovation cannot be judged by the tangible characteristics and criteria which are usually applied to a manufactured product. Thus, the key to judging the novelty of a service innovation is how new the proposed service concept (and the following application, implementation and knowledge involved) is to the providing company, the client and the particular market. The locus of the market can be regional, national or global. The aforementioned taxonomy of service innovation can be a useful concept to identify

The second dimension addresses the interactions between service providers and clients, which is usually overlooked by the traditional manufacturing perspective. Co-development by suppliers and clients is a common practice in service innovation.

54

Thus, unlike manufacturing innovations, in the production of a new service, business clients or consumers in some cases may play a very significant role. The third dimension addresses that in order to deliver a new service an organisation or a firm can carry out changes to its internal organisational arrangements. These changes may also require new training, new skills, new workflow and managerial practices to be developed. So the novelty of a new service may be evaluated from the changes in these internal organisational arrangements. The fourth dimension points out that the novelty of a service can be judged by the changes of the breadth and depth of a service providers technological knowledge-base in delivering that new service. It is worth to note that some new services do not necessarily require technological inputs at all, whereas some new service concepts will not be brought into fruition without using new technologies. In some other cases, what technologies to be used is a matter of choice. This four-dimension model is an alternative perspective to uncover the nature of service innovation. It can be a useful concept to evaluate the innovativeness of a new videogame in empirical studies. 3.3.4. Management of Service Innovation Reworking Sundbo and Galloujs (2000) original taxonomy, Miles (2009) categorised innovation management in services at the firm level into the following seven groups: The classic R&D pattern: this pattern is less common in the service sector. However, some large service firms follow the tradition of manufacturing. Within these firms, there is a clear distinction between R&D and production. They set up specialised departments to development new services and improve their quality. Usually these firms are large service providers specialising in mass processing of information, building maintenance and telecommunication. The service professional pattern: in this pattern, firms are usually medium-size professional service providers. These firms do not really sell products, but

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services, i.e. knowledge-based competencies and abilities to solve clients problems. These firms do not have formalised innovation structures. Innovation processes within firm are usually performed collectively by employees with different expertises and skills, rather than by a dedicated R&D unit. This kind of firm does not usually have strong strategic or managerial controls. Their organisations tend to be built bottom-up rather than top-down. The advantage of However, the this type of organisation is that firms can respond quicker to clients requests and it also enables the circulation of ideas among its employees. disadvantage is the high risk of not completing innovation processes (e.g. service projects) because of the lack of control. Many consultancy firms and some parts of creative industries follow this pattern. Neo-Industrial Pattern: this pattern is a mixture of the first two patterns. In some

service firms, alongside a formalised R&D or innovation department, a good deal of innovation processes also takes place in the course of professional practices. Some health services and large consultancies following this pattern (Miles, 2009). In fact, the demarcation between services and manufacturing becomes less distinct. Many traditional manufacturing businesses have already transformed themselves and toward acting like service providers e.g. IBM, whereas many large software system providers which originated from tailored-consulting business began to industrialise their services by formalising R&D functionalities, modularising and commoditising their service products, etc. The organised strategic innovation pattern: this is the most typical pattern in the service sector, followed by many service providers, both large and small. stronger strategic and managerial control. In this pattern, firms do not have a permanent R&D department but they tend to have At the firm level, there is more research than development (researching implies that searching for new innovative ideas or concepts, and this kind of searching is part of all the staffs daily routines). The so-called development is carried out by project teams Stronger strategic and managerial control plays an It oversees the process of project development and which assemble employees of different skills and expertise from different functional departments. important role in these firms.

ensures the projects can deliver on time and on budget.

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 The entrepreneurial pattern: this pattern is usually followed by start-up firms with radical innovations. These firms do not have any R&D department, but they are Their primary As they grow, often new spin-offs from universities or large firms laboratories. task is to sell their radical innovations or solutions to other firms. they tend to evolve into other patterns of innovation management. The artisanal pattern: this pattern can also be characterised as low-technology. Firms following this pattern tend to offer operational or non-technological services and do not have any R&D or IT department. technologies from other sectors if necessary. The network pattern: this pattern describes a number of service providers creating a network which is meant to offer a set of new services or solutions to this networks member firms. This pattern is also very much like a cooperation The network may or may not However, because the network involves many among firms but in a more formalised fashion. have its own R&D department. They only import

firms, managing such a network can be a challenging task. Despite Sundbo and Galloujs account, these managerial patterns are probably still unable to generate enough insights from within firms, because even within the same firm service innovations may be organised very differently (Miles, 2009). The basic assumption underpinning Sundbo and Galloujs taxonomy firms are unitary entitiesmay not hold true in many service businesses. Thus Toivonen and Tuominens (2006) suggestion of five innovation patterns which vary in terms of their formality and collaborative nature is worth considering. They are: Internal processes without a specific project: innovations emerge from unintentional and evolutionary processes; Internal innovation projects: these include well-planned project-based innovation efforts carried out within the firm; Internal innovation projects with a pilot customer: in these projects, ideas are born within the firm and a customer is sought afterwards. The customer acts as a critical evaluator and informant and may also supply resources to the projects to

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increase the chance of success; Innovation projects tailored for a customer: these are projects developed for a particular customer to solve their problems. time; Externally funded innovation projects: these projects are the most formal projects with better managerial control which ensures a better chance of success. Usually these projects are research-oriented and involve several firms. results to the public. Aforementioned studies on types and dimensions of service innovation and the patterns of managerial practice reflect the complexity and the wide variety of service industries. They also implicitly suggest that service innovations vary from case to case, firm to firm and industry to industry. Thus, probably more dimensions and patterns can be founded and added into the list once more empirical studies are carried out. However, this framework provides a set of intriguing perspectives and starting points toward the quest of the subject of this PhD thesis, which will address innovation in VGD. 3.4. Creative Services and Challenges According to many countries standard industrial classification, activities of creative (or cultural) economy mostly take place in the service sector. Recently, witnessing the burgeoning creative industries alongside their high-profile marketing campaigns around the globe, policy makers have begun to pay more attention to these industries and prioritise their status in national industrial policies (TIER, 2003). The logic behind promoting creative industries basically assumes that funding and encouragement of innovative activities will subsequently lead to larger economic scale and output. However, before we can eventually see the outcome of these policies, a more fundamental question is whether the nature and characteristics of cultural/creative industries (which videogame software development belongs to) can be understood in the light of manufacturing or service innovation studies. In many ways, the situation is reminiscent to that encountered when services innovation first began to emerge as an area for innovation studies to address seriously (Miles and The funding may come from external sources, e.g. the public sector, and aim to provide beneficial These projects may be one-off or involve continued development and maintenance stretching over a long period of

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Green, 2009). Innovation in the creative industries is less studied than both manufacturing and service innovation in general. This is not only because they are newly emerging Firstly, creative industries industries, but also for the following the two reasons. economy before.

were generally seen unworthy of serious attention in a manufacturing-dominated Secondly, measuring of novelty (or innovation) in creative industries is a always minefield to innovation research, because production of creative products (and services) requires a great deal of non-technological and non-functional inputs of which progress or differences cannot be measured in absolute terms (Miles and Green, 2009). personal preferences and cultural context. 3.4.1. Types and Dimension of Creative Innovation Despite the challenge derived from the nature of creative industry, there is only a small number of studies have addressed the challenge of understanding innovation in creative industries. Among them, by looking into the media industries, Handke (2006) suggested two types of innovation: content creation and humdrum inputs. The former is the defining feature of the creative industries and the latter mainly refers to conventional technological product and process (TPP) innovations. Handke (2006) further suggested that the innovativeness of the content of a specific media product can be measured by two indicators: the total investment in the production of media content and the sales of this new media product. However, this measurement is problematic, since it implies that the novelty of content creation can be purely judged in financial and monetary terms. Another problem with this perspective is that many old materials can be reproduced repeatedly in different ways and still yield high sales figures in the market, but it does not necessarily mean that the newly released (and reproduced) old materials are genuinely more innovative. In another research, by arguing that the conventional view largely overlooked the aesthetic aspect of innovation, Stoneman (2008) suggested that soft innovation is worth further recognition, particularly in creative industries (e.g. music, books, film and fashion). This is because innovations of creative industries are primarily meant to impact upon consumers sensory perception by offering new In addition, judging the novelty of content, fashion styles and aesthetic issues is also, to a great extent, subject to

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services/products aesthetic appeals. However, other than these types, there are some other dimensions in creative innovation worthy of further exploration, e.g. experiences that many companies in our modern economy intend to provide (Pine and Gilmore, 1998). particularly relevant to creative industries. Experience is This is because, in the experience

economy, sellers (i.e. firms or stagers) aim to offer guests (i.e. consumers) sensational and memorable experiences down to the personal level; and this is also the most distinct feature and the heart of creative/entertainment business economic activities (Pine and Gilmore, 1998). For instance, videogames can offer consumers immersive and escapist experiences, because during the gameplay they need to actively participate in the gameplay and deeply immerse themselves into the game universe. To create and design experiences, Pine and Gilmore suggest five key principles: To theme the experience; To harmonise impression with positive cues; To eliminate negative cues; To mix in memorabilia and; To engage all five senses. These principles also point out the potential locus where the experience innovation may take place. Voss and Zomerdijks (2007) empirical study on experiential services further showed that innovations, in terms of designing and affecting customers experiences, mostly take place in the following five areas: The physical environment; The service employees; The service delivery process; Fellow customers; and Back office support. Voss and Zomerdijk argued that although innovations in these five areas are relevant to any service, designers in experiential services pay even more attention to them, while manufacturing and most other services mainly focus on conventional TPP innovations.

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More recently, an exploration of hidden innovation in four UK creative sectors (advertising, broadcasting, product design and videogame development) showed that innovation is far more complicated than the conventional view suggested, and can be organised into four groups and identified in at least 15 areas (Green et al., 2007, Miles and Green, 2008, Miles and Green, 2009). In the first group, some service and creative businesses have some sort of R&D concept, but in practice the content of R&D is rather different from the traditional perspective. R&D in creative sectors may include firms research on customers tastes and preferences, which plays a very significant role in service/product design. However, this kind of R&D is not measured by the traditional innovation indictors. The second group of innovations refers to creative sectors organisational innovations. Delivering new service/product often requires firms to adopt new forms of organisation, relocate to a new position in the value chain, outsource some work to business partners, and explore new sources of revenue (i.e. changing business models). This kind of innovation is common in service and creative businesses, but is neglected in the traditional measurement. The third group of innovations may or may not involve new technologies. is to combine existing materials and technologies in a novel way. The key

In creative

services, repurposing and repackaging existing materials into to different formats and platforms are commonplaces. The object of recombining and repackaging is primarily to create new market segments by offering new experiences to consumers. The fourth group of innovations refers to a good deal of non-reproducible, one-off and on-the-job innovative activities taking place during the production and delivery phases. However this does not only happen in creative industries. Many industries innovation processes also include this kind of highly innovative practice. However, in general they are neglected in the conventional view because of their non-reproducible nature. Miles and Green (2009) went on to demonstrate that innovation can be identified in the following 15 areas:

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 General administrative activities and financial management; Business and revenue models; Value chain location and positioning; Communications beyond the boundary of the firm; Internal communications; Back-office/ backstage production processes; Transactions; Marketing and customer relationship management; Content and symbolic substance of product; Performance and front-stage production processes; Product format; Delivery of product; User interface with product; User interaction; and User capabilities. Broadly speaking, previous studies on types of creative service innovation imply that innovation, either in manufacturing or creative services, can no longer to be limited to the conventional TPP sense. Instead, it should be seen as a multifaceted social process which takes place across various knowledge domains, involving many kinds of actors and which can be embodied in different forms. 3.4.2. Organisation of Creative Works Unlike the manufacturing, innovations in creative services are usually carried out by project-based organisations (PBOs) (DeFillippi et al., 2007, DeFillippi and Arthur, 1998, Grabher, 2001, Grabher, 2002, Grabher, 2004). In a research on film making, DeFillippi and Arthur (1998) found the so-called firm in this industry retrogrades into simply providing a temporary meeting ground between the industry and project participants. In the film-making business, they found some paradoxes against the conventional wisdom, such as: Strategy (envisioned by few key participants) always precedes project-based enterprises formation; Once a new film company is established, its structure and staffing are always temporary;

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 Its capital investments are also temporary; The company will dissolve before outcomes (e.g. sales of box-office and popularity) are available; Sometimes, idleness is necessary for aesthetic reflection and learning; In this business, jobs are unstable and highly mobile but ironically that fosters the industrys stability because the latter can quickly find necessary talents for new projects. These salient features of the film making business imply that multiple communities and social networks alongside projects all play a very important but overlooked role in the innovation process. Moving away from the sectoral understanding of the innovation process and looking into the management of innovation in two project ecologies, software development and advertising, Grabher (2004) found some convergences and divergences in between. In terms of convergences, projects both in advertising and software are evolving around a core team. A core team is firstly assembled to solve clients problems. The core-team members alongside other project In practice, both ecologies participants all contribute their skills to the projects.

involve a good deal of ongoing and repeated learning to enhance these skills, thus economies of repetition can lead to the build-up of better project-to-project and project-to-business capabilities in the long run. Both advertising and software development work require a good deal of creativity, however they each follow their own business logics. In terms of divergences, it appears as though only software can reap benefits from economies of recombination, because software developers usually modularise the knowledge that has been accumulated from previous projects into reusable tools or solution-modules. On the basis of these modules, software developers can quickly reassemble these modules with necessary modifications when clients need solutions for their new problems. In the long run, their problem-solving capabilities and On the contrary, in the advertising efficiency are enhanced by recombination. proposals from the agents.

business, clients tend to see some revolutionary concepts conveyed in new campaign In other words, recombining old materials is not a

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desirable practice, but breaking away from the tradition is 29 . developers, being revolutionary is not the priority.

To software

Instead, delivering stable and

quality solutions on time and in budget are their priorities for their works. Aforementioned researches show that management of creative services has characteristics. Whether these characteristics can be found in VGD innovation is worth further investigating. 3.4.3. Technology and Innovation in the Film Industry Technology also plays a significant role in the creative industries. For example, over the last one hundred years, the motion picture industry has experienced a series of radical transformations. The content, production, organisation and distribution of the film industry are all are profoundly impacted by technology development. The motion picture industry first appeared in the late nineteenth century. The period from 1885 to 1910, is the technology driven era. During that time, the basic technologies, camera manufacturing, film developing, relevant apparatus, etc., became standardised. goods. Most companies produced a large number of short and similar actualities and sold them to the exhibition channel like manufactured After 1910, these standardised technologies enabled some entrepreneurs, who wanted to differentiate themselves from the mainstream actualities, to create a whole new array of genres by incorporating film stars and new plots into the motion pictures to appeal to the audience. Ever since then, feature-length films became the mainstream. Their abundant content meant these rather dull and Before long, in the late 1920s, new Talkies made the experience of monotonous actualities rapidly declined (Kerr, 1990). Thus, the industry rapidly transformed into the content-driven era. synchronised sound recording technology became available to the industry, which resulted in the end of production of silent films. watching feature-length films more real and enjoyable, and offered an entirely new form of entertainment to the public while the industry went through a good deal of change.

However, there are always some exceptions. For example, old advertising clients may like to have similar and recognisable styles blended with some new elements in their marketing campaigns. But at least one thing is for certain that is no two advertising clients prefer to have identical marketing campaigns. 64

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First, the emergence of feature-length (enabled by standardised technologies) and sound films (pushed by new sound technology) required a whole new set of skills in the production process. In pre-production, skills of writing detailed continuity scripts and screenplays for feature films became desirable. In the following one hundred years or so, the continuity script itself turned into the most important managerial tool for resource management, budget control, scheduling, etc. 2006). The emerging tasks further required their own skills and expertise (Allison and Lampel, The use of sound recording technology in the late 1920s also changed the Script writers had to be able In the main-production and post-production stages, Thirdly, for actors and skills and the composition of the crew in filmmaking. to produce lines for dialogue.

the studios needed audio technicians to record, edit, reproduce and synchronise different kinds of sound, dialogue and special effect. actresses, looking good was no longer enough; they also had to sound good too. If they sounded good, they also had to remember lines and learn how to use their voices as well as their bodies in acting (Jones, 2001, Moul, 2001). Despite old technologies, information, communication and digital technologies since the 1990s make filmmaking, which nowadays usually involves many geographically dispersed organisations and teams, even more flexible and efficient (Palmer et al., 2001) this sentence makes no sense. In practice, remote collaboration technologies (e.g. electronic delivery, accessing online digital resources and materials, and joint real-time remote decision-making) has the following impacts: In pre-production, decision makers can jointly decide matters such as casting and location selection across different counties, whereas previously these kind of issues usually had to be solved face- to-face; In production, dailies or rushes can be transmitted immediately from multiple shooting sites to decision-makers, previously these materials took at least a few days or weeks to reach the decision-makers; In post-production, relevant works can begin much earlier or alongside the main production because post-production staff can obtain materials and approvals on a daily basis. Previously, work such as editing and special effects had to wait until the main production had finished.

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In addition, digital technology also profoundly changes the filmmaking process (Eliashberg et al., 2006). the schedule and budget. It gives directors and producers much better control over This is for the following reasons: Using them can save a

Digital camera and shooting do not need traditional film. production is not used;

lot of production cost because, on average, about 85% of the film shot at Thus, there is no need to develop negatives, select shots and ship them to a post-production house for assemblage. etc.; Digital technology transfer the process from linear to non-linear, because materials can be rapidly transmitted via electronic networks and managed in digital formats without gong through the traditional linear procedure; Digital technology can also give producers and directors better control over the shooting environment in which the story is narrated. For example, film makers can use Computer Generated Imagery (CGI) to create virtual environments to avoid the problems associated with building and dismantling physical settings. Virtual environments are more manageable because directors do not have to consider the weather conditions. Film makers can also use CGI characters to replace real actors Special effects can be or actresses in high-difficulty or dangerous sequences. satisfactory standard by the film makers. The previous studies show that technology has profound and multifaceted influences on the evolution of the film industry. As VGD is also a highly technology-related industry, to reveal technology developments impacts on the VGD industry and its innovation can also be an intriguing research theme to this thesis. 3.5. Complex Product Systems (CoPS) This section will illustrate the concept of CoPS, its characteristics and the management of multiple-CoPS firms. videogame is becoming more like CoPS. 3.5.1. The Nature of CoPS This section will also explain why That includes physically joining individual sequences together, adding special effects, going through colour timing,

repeatedly simulated and modified on the computer until they are considered to be a

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Despite the increasing elaboration of innovation models, the conventional view of innovation is still unable to capture some of the most salient features of innovation activities of complex product systems (CoPS). In fact, CoPS are not a new phenomenon to the modern economic system. They have been in place for a long time but have not receive much attention or become considered as an analytical category in its own right, because they are usually treated as special cases from the convention perspective (Mowery and Rosenberg, 1985). Hence, a new analytical framework, i.e. CoPS, has been introduced in an attempt to illustrate the innovation and production of products of high complexity and cost (Hobday, 1998, Rush, 1997, Tidd, 1995). The nature of CoPS is highly contingent because there are so many CoPS existing in different industries and sectors, performing various functions and connecting a wide range of economic activities. For example, Hobday (1998) suggests a very long list of candidate examples of CoPS, including various kinds of complex systems, e.g. large-scale transportation and storage systems, traffic control systems, weapon-defence systems, petro-chemical processing systems, electricity networks, telecommunication systems, aerospace projects, internet and supercomputers etc. The candidates are heterogeneous in nature and finding a universal definition for them is no easy task. 3.5.2. Characteristics of CoPS The following are the salient product and production characteristics of CoPS which can be used to identify CoPS and distinguish them from mass produced goods, as suggested by Hobday and Rush (1999): CoPS are high cost, tailored made products (or services), usually consisting of a large number of interlinked components, subsystems and control units, and underpinned by a sophisticated and embedded IT system; Functions and performance of CoPS are usually customised to meet a set of specific requirements for large organisations or companies. In most cases the subsystems and components are also high cost, tailor-made and complex; The production process of CoPS is full of ad-hoc on-the-job innovations for solving unexpected technical difficulties (both major and minor) and responding

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to clients requests (or evolving design ideas); Users (or clients) and suppliers usually work together closely from the early stages of CoPS development. The level of users involvement tends to remain high throughout the whole production process. Users do not only offer feedback at the production stage of CoPS, they also continuously play a key role in CoPS operation and evolution throughout its lifespan by requesting new functions or adjustments. In contrast, end-users feedback in commodity marketplaces can only be fed through arm-length transactions; CoPS tend to be developed by project-based organisations (PBOs) and in small batches. Most CoPS are capital goods to business users. Their performance and functionality play a decisive role in business users growth and profitability. 3.5.3. Management of Multiple CoPS In an exploratory study of how multiple project-based, service-enhanced construction firms mange their innovative activities and build up innovation capabilities, Gann and Salter (2000) suggest that bringing the project process and the business process together can enhance the efficiency of project management and capability-building at the firm level in the long run. and their project-based innovative practices. They argue that conventional innovation studies fail to recognise the increasing prevalence of PBOs The conventional view also ignores the differences between the project process and the business process. Thus it inadequately equates the highly innovative capabilities developed by projects (i.e. project process) with the administrative and supportive capabilities developed by the multiple-project firm (i.e. business process). In fact, as Gann and Salter argued, in PBOs innovative activities at the project level do not automatically constitute the firm-level competitiveness because the business process (working at the firm level) and the project process (working at the project level) are very different. the centre of the company. company. The former is ongoing and repetitive, and tends to perform general-purpose functions at In contrast, the latter is temporary and unique, and has a tendency to perform more difficult or innovative tasks away from the centre of the In other words, the latter is more innovative than the former.

Despite multiple-CoPS being difficult to manage, Gann and Salter find some CoPS suppliers in the construction industry still outperform their competitors by

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establishing better linkages between the business process and the project process. These linkages are fostered by feedback loops (from project to centre) and support loops (from centre to project) between the firm-centre and projects. In addition, a range of good practices facilitate information flows along these loops. These good practices may include: better understanding clients requirements; frequent formal and informal communication among staff and mangers across different departments and administrative levels; the firm-level R&D helping projects to solve problems. As a result of these good practices, multiple-CoPS PBOs can continuously learn, accumulate knowledge and develop technological capabilities. Gann and Salters research is relevant to this PhD study and may help to develop insight into the management of VGD, because most contemporary videogame developers are PBOs running multiple projects (inc. MMOG projects as CoPS) concurrently. VGD teams usually are self-contained and semi-independent organisations within a VGD company. However, they still need support from the company while the company needs project teams performance (knowledge, experiences and capabilities) to contribute the firms competitiveness as a whole. 3.5.4. Complex Software Systems and Videogame Complex software development is also gradually becoming an important area in CoPS research. This line of literature tries to understand why some complex software projects are difficult to manage. One possible explanation is that, despite the availability of tools, much of the software innovation activity remains a human centred, craft based, individualistic activity, which is difficult to estimate, control and automate. Major software projects present individuals and teams with large numbers of alternative design options, leading to the use of experience, heuristics and muddle through in new product development (Hobday and Rush, 1999). On the contrary, the conventional approach tends to treat software development as a rational and formalised process similar to manufacturing. The problem with this approach is that it fails to account for uncertainty and informal activities. For example, human factors e.g. personal choices and motivation, and variation in leadership quality and communication skills, all seem to play a significant role in project management especially in complex software development.

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From the human factor perspective, complex software and VGD seem to share certain qualities. For example, contemporary VGD is usually considered to be a In addition, VGD highly uncertain process because each member of a project team usually has a great deal of flexibility and discretion in a specific part of the system. from individual preferences and can not be rationally justified. also requires a great deal of personal aesthetic judgement which usually originates Hence, the relevance of the CoPS literature for understanding VGD seems worth further investigation. To some extent, the trajectory of VGD can be illustrated as an evolution from simple product to CoPS. In the early 1980s, many popular videogames were written At that time the simplicity of computer hardware and single-handedly by teenage boys in bedrooms on primitive home computers (so-called bedroom-coders). person in few days. design, meant that VGD was a far simpler process and a game could be made by one In the bedroom-coder era, issues such as division of labour, They could then sell copies of specialisation and management were irrelevant because bedroom-coders were capable of doing almost everything by themselves. games through published game magazines or mail-order. Nowadays things have changed quite radically in many respects, because the cottage-craft has grown into a huge global industry. A contemporary console game project (e.g. Sony PlayStaion 3) normally needs a team of at least 100-150 people, with a budget of several million pounds and an 18-24 month development time. The resources, knowledge and skills required have also grown extremely complicated and specialised, internally and externally to the company (and team). Outsourcing and cooperation among companies are also becoming commonplace. The emergence of Massive Multiplayer Online Games (MMOG) after the increasing prevalence of the internet from the 1990s, further exhibits some salient features of CoPS. For example, an MMOG is itself a complex software system, made of numerous tailor made components, subsystems and control units, and has a very elaborate hierarchical architecture. The interface between tens of thousands of end-users and the MMOG grew much more complicated because the MMOG was designed to simulate almost all aspects of human and social interaction. By the same token, the interface between designers, programmers and operators, and the

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MMOG also grew more complicated as the available technology progressed and development works became more specialised. A contemporary MMOG needs a lot of financial resources because, after spending a huge amount of time and effort to develop it the developer still has to commit financial resources to operate it for the following few years. programmers and managers. subcategories. In terms of job positions, an MMOG requires the four major types of staff: artists, designers, Each type can further be divided into several In total a contemporary AAA MMOG project may also need

more than 100 people for around two years. In terms of knowledge domains, the inputs for an MMOG can range from fine art to mathematics, from literature to physics, and from psychology to economy. In addition, MMOG development does not resemble conventional innovation models. Instead, tens of thousands of end-users feedback, generated throughout the project cycle and the online lifespan play a key role in the innovation process. MMOG development is highly flexible and craft-like, because of the high level of novelty in the process. Technological difficulties may occur sporadically. market situation may change unexpectedly. requirements can bring about new problems and delay the projects. The Emerging design concepts and detailed Innovation and

diffusion within VGD collapse into each other because all kinds of new ideas and improvements with regard to the new product are generated and implemented by all sorts of team members within the project, not through the arms-length market transactions. Moreover, the knowledge of VGD is not physically attached to any kind of machinery; instead it is almost people-embodied. Once an MMOG is launched and operational, through the internet connection, tens of thousands of users around the globe will interact (or play) with each other as individuals or groups in front of their own PCs. staggering amount of data. activities will take place. All the information will be generated, sent, processed and relayed by an array of server clusters hosting a To some extent, an MMOG is pretty much like a virtual In this society, all kinds of human However, the evolutionary path of the society itself human society existing in cyber space.

and the result of a particular event are rather unpredictable and the society often

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malfunctions and approaches the brink of collapse.

In this sense, managing or In

policing this society is a challenge for the MMOG developer and operators. operation show that videogame in this context is similar to CoPS. 3.6. Innovation as Competitive Strategy

short, the aforementioned discussions on contemporary MMOG development and

In the field of innovation and competition strategic management, the fundamental questions which concern researchers and managers most are how a firm can develop and retain competitive advantages, and how managers can implement a competitive strategy (Teece and Pisano, 1994). Underlying these pivotal questions, there is a long lasting debate between rationalist and incrementalist viewpoints, which represent two very different schools of thought towards strategic management and implementation. The rationalist approach tends to present researchers and practitioners with an ideal model of strategic management and issue prescriptive remedies for relevant managerial problems. To a greater extent, advocates of this ex-ante prescription approach believe that conforming to the model and prescriptions will achieve competitive advantages and business success. However, similar to most innovation studies which following the logic of induction, the incrementalist approach is concerned more with the process of strategy formation and implementation. In general, this approach addresses the uncertainty in strategic management and seems better at providing ex-post (and descriptive) explanations to contingent business practices. In this section, different analytical frameworks will be introduced along the line of rationalist-incrementalist debate. It will be suggested that the DCA is a more appropriate concept in strategic management, because it is more inclusive and practical as it accounts for uncertainty and path-dependency as well as various resources and capabilities. 3.6.1. Rationalist Approach Since the 1980s, a good deal of literature began to be concerned with the formation and implementation of corporate strategy. Among the literature which emerged, the main stream of thought was the rationalist approach. From the rationalist perspective, the formation and implementation of competition strategy consists of at least three formal and sequential stages: the first is to describe, understand and analyse the environment; the second is to determine a course of action; the third is,

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carry out the decided course of action (Tidd et al., 1997).

This linear model of

strategising is based primarily on the rationality of human beings and their conscious choices, and believes that managers will make the right decisions at the right times, and possess perfect information with regard to the decision making and predicting the future. In fact, the rationalist approach is profoundly influenced by the military tradition of strategy, which sees business management and competition as military campaigns (Whittington, 1993). Managers act like army generals who calculate, plan and This approach also The mobilise available resources to defeat enemies in the field.

claims that managers are the only strategists in the companies to identify companies strengths and weaknesses before positioning themselves in a vantage point. hesitation. subordinates are expected to follow and implement the managers directives without Then tasks will be accomplished and the business will succeed. However John Kay (1995) argues that the military metaphor is not entirely appropriate in the context of business management because, unlike the armed forces in the battle field, destroying enemies may not be the primary and only goal to companies. To some extent, it is probably true that some companies primary goal is to drive competitors out of business. However, in the real-life business world, most companies are both competing and cooperating with each other at the same time in an elaborate social network. In some circumstances, by working with other companies, firms can obtain complementary resources and new ideas which are beneficial to competitive advantage in the long run. According to Mintzbergs summary (1990), the rationalist approach has at least the following basic assumptions (or salient features): strategy formation should be a controlled, conscious process of thought; responsibilities for that control and consciousness must rest only with the chief executive officers; the model of strategy formation must be kept simple and explicit; strategies should be unique and be the best result of a process of creative design; emerging from the design process, strategies should be fully formulated and prescribed and ready to implement; strategic planning and implementation are separated stages in the process;

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Based on these assumptions, an ideal type of strategy formation models will emerge. In this model, first of all, the management of a firm will exercise two The former is to spot threats and kinds of appraisals, external and internal. company.

opportunities in the environment and then identify the key success factors to the The latter is to understand strengths and weaknesses of the organisation and then exert the distinctive competences. Secondly, within the company, both kinds of appraisals will be fed into the decision-making process (including the creation, evaluation and choice of strategy) for consideration. 1990). 3.6.2. Competitive Forces The rationalist approach was the dominant paradigm of strategy analysis throughout the 1980s and Michael Porter was probably one of the most well-known proponents of it. Based on the rationalists basic principles and assumptions, Porter introduced a very influential model Competitive Forces (1980). This model consists of five Each industry-level forces 30 entry barrier, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry of industry incumbents. various opportunities and threats to firms. plays significant roles in determining the course of industry competition and posing A companys position and competitive advantages are subject to the influence of these forces, however, the company can also use technology or associated innovative activities to alter the competition course. The primary function of this model is to assist a company to locate a vantage point and from which to defend itself or influence others in its favour within a competitive industry. Porter further proposes four generic strategies, derived from the model, from which companies can choose. These are: overall cost leadership; product differentiation; In order to be more competitively cost focus; and differentiation focus. Thirdly, once the best solution is decided upon, the organisation will begin to implement it (Mintzberg,

advantageous, for instance, a firm can chose to be an overall cost leader (e.g. through economies of scale by installing new ICT system and more advanced production lines) to gain more bargaining power over its suppliers and buyers, to
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Theses five forces in fact also represent five sets of relationship which establish the linkages between firms and the industry. 74

deter potential opponents, and to acquire existing competitors market shares. Alternatively, a firm can also choose product differentiation (e.g. enhancing product qualities and features) to avoid the direct confrontation with established opponents with similar products, and target the niche market. companies. No matter which strategies are used, Porter emphasises that a firm must eventually decide to be either an innovation leader or follower. In order to lead the innovation competition, a firm must always to be first to market, based on its overall technological competences. This firm must fully commit itself in the area of research and development, linking its resources and capabilities to customers needs. It also has to be willing to take high risks of all kinds of necessary innovative activities and investments. leading companies. On the other hand, once a firm decides to be a follower in the competition, it aims to be late to market, and to imitate and learn from the This strategy requires the firm to develop strong capabilities in These intelligently analysing market information and reverse engineering. process and to cut costs (Porter, 1980). 3.6.3. Strategic Conflict Another influential line of thought within the rationalist paradigm is strategic conflict. In Shapiros the theory of business strategy (1989), he considered that strategic conflict emerged as the predominant methodology of business strategy analysis. This approach uses the tools originated from Game Theory, focusing on the rivalry between firms and their actions and behaviours in the context of industrial organisation economy. The major purpose of this approach is to find out how a firm can influence its competitors behaviour and the environment where they are operating, and increase its own profits. In some cases, investments in capacity or advertising can be seen as a useful means of influence. Investments of this kind require irreversible commitments to be made by the firm in order to be effective. However, the activities in question will have no effect at all if they can be undone without cost. In the sense of strategic conflict, firms are presumably Competition among firms can be specified profit-maximising and non-cooperative. Or, a firm can adopt a hybrid strategy consisting of all the four practices to compete with other

capabilities help the firm to differentiate product lines, to improve manufacturing

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as a particular set of games which consists of an extensive form of plays and a series of sequential actions and counteractions. To solve the dilemma of zero-sum games, analysts and managers must be precise about the specific nature of competition, knowing what the race all about, and meticulously calculate their next moves (Shapiro, 1989). 3.6.4. Critique of Rationalist Approach In many cases, the strategic conflict approach utilises game theoretic tools to formalise the process of business rivalry and competitive behaviour (e.g. predatory pricing, patent races, etc.). competing firms. It tends to lead readers into believing that business competition can be illustrated as a series of actions and counteractions among The procession of the game-play follows a certain set of rules. The outcome of the game in question is predictable as long as the model is suitably and correctly specified. In fact, the explanatory power of a game theoretic model is usually based on ex-post rationalisation and observed behaviour of a particular case. In order to explain other cases, models have to be configured differently. Hence, by rationalising observed behaviour by reference to suitably designed games, in explaining everything, these models also explain nothing, as they do not generate testable predictions (Teece et al., 1997:512). With regard to Porters competitive forces analysis, its major strength is to establish the linkage between firms and the environment where they operate. In a rival context, a firm must manoeuvre itself into a competitive position using its innovation strategy. This framework points out that technology and other relevant However, the activities are the key to assisting the firm in changing its relationship with the environment and its opponents behaviour for its own sake. weakness of this framework is that it underestimates the power of overall technological change to influence the industrial structures and overestimates managers power in deciding and implementing innovation strategies (Tidd et al., 1997). In addition, the competitive forces framework claims that the choice of competition strategy are totally depended on mangers decisions and eventually companies have to follow either a broad front or a focused technological strategy. However,

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Pavitt (1990) argued that in fact mangers neither have the overwhelming power in strategy formation nor a completely free hand in choosing the content of technological strategies. In many cases, the choices available to a company are actually preordained by its size. A large company can usually afford to have a wide range of product lines, to be involved in various kinds of R&D and to operate in several market segments. broad front strategy. lines. Hence, managers of a large firm is bound to pursuit a However, a small company has less resource and its

managers can only choose to be specialised in one or a few activities or product A firms established product and knowledge base also has a role at play in the firms strategy formation because firms technological strategies and innovative activities tend to expand into the immediately adjacent domains rather than into far-reaching ones. For example, a petro-chemical firm is unlike to end up producing home computers, and vice versa (Tidd et al., 1997). Pavitt also pointed out that Porters suggestion with regard to a firms strategic choice of being either an innovation leader or an innovation follower in a particular innovation race is misleading, because in many areas, it is not clear who is in the race, where the starting and finishing lines are, and what the race is about. Even when it is firms may start out wishing to be a leader but end up being a follower (1990:20-21). This critique of competitive forces also indicates that the rationalist approach in general overlooks the evolving and uncertain nature of competition (and innovation) processes where technological opportunities are always emerging from advances of in knowledge (Tidd et al., 1997:79). and incidents may also impede the implementation of strategy. By the same token, beyond the strategic formation stage, unforeseen challenges, difficulties To take on these opportunities and challenges effectively, it is necessary for a firm to learn from mistakes, adjust strategies and reconstruct organisational structures accordingly. In general, Mintzberg (1990) contended that the rationalist approach of strategy management has at least three following shortcomings. The first one originates from one of the rationalist approachs fundamental assumptions that there are two separate stages in the process of strategy management, i.e. strategy formation and implementation. divided. From the rationalist perspective, these two stages are clearly However, Mintzberg argued that this dichotomy is unrealistic in real-life

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managerial context where managers usually adopt the step-by-step (incremental) approach to handling the continuously changing environment. Secondly, conceptually speaking, the rationalist approach posits that strategy must come before organisational structure, and the latter should be determined by the former. However, Mintzberg contended that, in practice, the assessment of In this organisational competences is a significant input to strategy formulation because organisational structure also plays a significant role in determining strategy. sense, strategy planners must take the organisations capabilities, adaptability and flexibility into consideration before drawing a feasible plan; otherwise the new untenable plan may only bring disastrous effects to the existing organisation. More importantly, Mintzberg pointed out that, by placing strategy prior to structure, the rationalist approach entirely ignores the significance of history the time an organisation has been travelling through. An organisations feasible strategic solutions are both enabled and limited by its history and organisational structure. However the rationalist approach does not take this into account. Thirdly, one of the implicit yet fundamental assumptions of the rationalist approach the environment is stable and predictable is questionable (Mintzberg, 1990). This assumption is also related to the formulation-implementation In the sense of rational planning, strategies coming out of the dichotomy.

formulation stage remain valid and ready for unproblematic implementation only when the environment where the strategies were formulated remains unchanged at least until the start of the implementation stage. (Schumpeter, 1942). However, in real-life business, scenarios of this kind are unrealistic because the business environment is never static However, the rationalist approach does not pay adequate attention to the dynamism and unpredictability in the real-life context. 3.6.5. Incrementalist Approach In contrast to the rationalist approach, another school of thought in strategic management considered strategy formulation and implementation is an iterative and incremental process, because perfect information and complete understanding about the ever-evolving and complicated reality is virtually unattainable. Hence, managers and strategists are unlikely to formulate a set of perfect and non-adjustable

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action plans for the future (Tidd et al., 1997). In formulating and implementing strategy, the incremental approach contended that managers and the organisation as a whole have to muddle through the process, learn from experiences and accumulate knowledge, where necessary strategies and objectives should be adjusted to fit into the emerging environment. Companies that do not recognise the possibility of change and the uncertain nature of the environment are in fact irrational actors, because rigid and inflexible strategy management may lead the company to a disastrous result. 1997). The incremental approach has at least two implications for strategy management (Pavitt, 1990). First, managers should not be expected to pursue the content of strategy as the rationalist approach suggested 31 , because the options and opportunities of a company are largely predetermined by its size, the nature of the business environment in which it operates and the competences the company already possesses. Second, because competences require time to be nurtured and the innovation processes evolves organically, whether a company can survive in the long run depends on its capability of learning from experience and the technological developments. 3.6.6. Resource-Based View Before discussing Dynamic Capabilities in the following sections, the Resource-based View (RBV) of strategic management must be briefly introduced, because the concept of Dynamic Capabilities is originated from the RBV (Ambrosini and Bowman, 2009). A firms rare and difficult-to-imitate resources which potentially could generate economic profits or competitive advantages received little attention in the mainstream strategic management research before the 1990s. However, from the perspective of evolutionary economics, the firms Penrose was resource base plays a key role in its growth and competitive strategy. In this sense, the incremental approach is more rational than the purely rational one (Tidd et al.,

one of the earliest scholars emphasising the significance of resources, and considered that firms basically are administrative organisations of collections of
In a competition race, the rationalist approach considers a company should choose to be a leader or a follower, confront a broad front or a narrow one, and focus on either product or process innovation. 79
31

heterogeneous resources that are historically determined (Penrose, 1980). Wernerfelt (1984) in his seminal paper A Resource-based View of the Firm found that not only resource is a very useful concept in analysing firm growth and strategy, but also there is a causal relationship between a firms resource base and competitive strategy. In general, the RBV argues that the firms performance is determined not only by the environment (or the industry) where it operates, but also by, to a greater extent, the unique resources it possesses. The firms economic profits and competitive Therefore the firm advantages are fundamentally generated from its resource base. enable the firm to achieve better performance.

should formulate competitive strategy corresponding to its resource base which will In principle, the RBV can be seen as a five-step analytical framework (Grant, 1991): A firm should first identify and classify its resources, appraise its own strengths and weaknesses relative to competitors, and identify opportunities for better utilisation of resources. The firm identifies its capabilities and resource inputs to each capability. The firm appraises the rent-generating potential of resources and capabilities in terms of sustainable competitive advantages and possible profitability. The firm selects the best strategy to exploit its resources and capabilities relative to external opportunities. The firm identifies its resource gaps and decides whether it needs more investments to replenish, acquire or upgrade the resource base. According to this framework, we can see the RBV suggests that resources are a firms foundations of strategy and profitability. However, the RBV has some shortcomings. For example, some researchers argue that the RBV is too optimistic In fact, a firms about the relation between a firms resources and its performance. about a better firm performance.

unique resources and its effort to change these resources do not necessarily bring There are still many factors out of the firms In addition, the critique This is because, control that could inflict unexpected outcomes to the firm.

also argues that this view of strategic management is too static. does not take the time into consideration.

from identifying internal resources to exploiting external opportunities, the RBV From the Resource-Based perspective,

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the entire process per se seems a series of routines executed by a firm operating in a rather stable business environment. However, the real-life business world is a rather dynamic and unpredictable environment. In order to survive, the critique of RBV argues that, despite unique resources, the firm must possess and develop Dynamic Capabilities to respond to ever-changing and highly competitive environment. 3.6.7. Dynamic Capabilities In line with the incrementalist thought and derived from the RBV of strategic management, Teece, Pisano and Shuen (1997) proposed the dynamic capabilities approach (DCA). This approach, following the RBV, argues that analysis of competitive forces is too concerned with competition that exists at the industry level and how technology can be used to manipulate relationships with other actors or entities in the environment but overlooks the valuable, rare, inimitable and non-substitutable (VRIN) resources and capabilities inside of the company which is what a companys competitive advantages based on (Teece et al., 1997). The DCA also argues that the strategic conflicts overemphasis on gaming and strategising is unrealistic, and the strategic conflict framework is only suitable to recap the showdown between two giant competitors. Its explanatory power depends on how the game in question is specified. In addition, from the DCA, the RBV only indicates the importance of the VRIN resources to a firms competencies but fails to address how companies can turn their resources into competitive advantages in the high-velocity business environment (Wang and Ahmed, 2007). processes and actions in strategic management. 3.6.7.1. The Dynamic Capabilities approach and its problems Teece et al. considered that the concept of dynamic capabilities may shed some light on the shortcomings of other analyses of strategic management and defined it as the firms abilities to integrate, build, and reconfigure internal and external competences to address rapidly changing environments (1997:516). The DCA covers two essential aspects which are not addressed by previous work. First, it refers to the capacity to renew competences so as to achieve congruence with the changing business environment; certain innovative responses are required when time-to-market and timing are crucial, the rate of technological change is rapid, and
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In other words, the

RBV is a rather static perspective and lacks a dynamic aspect to address the

the nature of future competition and markets difficult to determine.

Secondly, it

emphasises the key role of strategic management in adopting, integrating, and reconfiguring internal and external organisational skills, resources, and functional competences to match the requirements of a changing environment (1997:515). The DCA also mentions the role of path dependence and firm-specific history in the analysis of strategic management which do not receive adequate attention from other frameworks. The DCA considers that competitive advantages, to a large extent, depend on the path or trajectory on which the company has been travelling, and that the technological options and opportunities available to a company also reside in the resources (and capabilities) which the company already possesses. In order to exercise dynamic capabilities (for competition and survival in the business), the management of a company has to conduct three major functions: coordination and integration, learning, and recombination. Coordination and Integration is a relatively a static concept indicating that managers should efficiently mobilise resources and competences to deliver products or services within a specific period of time. The time frame does not usually last very long Learning is a and the business environment is relatively stable. This means that the management can use their existing knowledge base to deliver services or goods. dynamic concept stating that, through repetition and experimentation over an extended period of time, organisational learning will generate organisational knowledge which will reside in the teams or groups of people. The learning function can upgrade the firms existing resources and capabilities to some extent, but will not change the overall structure of its knowledge base. Reconfiguration is a transformational concept suggesting that the management should constantly scan the environment, look out for competitors, and be flexible in terms of strategy and implementation to survive the market in the long term. This function usually operates at the higher level within the firm and over a longer period of time. It can profoundly alter a firms strategic orientation, organisational structure and resource and knowledge base. By addressing some most intriguing aspects of strategic management which are overlooked by other analysis frameworks, the DCA has gradually emerged as a main

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line of inquiry in strategic management research over the past ten years or so. However, this approach also encounters two key debates (Easterby-Smith et al., 2009). The first debate concerns the nature of DCs and the definition of the term. That is

because the original definition is quite inclusive and uses a range of seemingly interchangeable terms, e.g. ability, competence, capacity, capability. The meaning of each term and the relationships between the terms do not appear to be well defined. In this line of debate, some researchers tend to define DCs as a superior capability (also the mainstream definition) which is able to change other subordinate capabilities and resources inside the firm whereas some other researchers tend to define DCs as a strategic and managerial process in which firm capabilities and resources are altered. The second debate concerns the relationship between DCs and competitive advantages (the firm performance). indirect. Some researchers contend that DCs can directly lead to a firms competitive advantages whereas some consider the link is Some others even take an agnostic view on this issue by contending the The indirect view argues that relationship is uncertain (Zollo and Winter, 2002).

DCs only make impacts on a firms resource base (including capabilities). However, a firms new resource base does not necessarily bring about a better firm performance in the market, because the new resource base may not be good enough in new market condition or is created into a wrong direction by managers. Despite the above debates, another critical issue is how to observe DCs. DCs per se do not appear to be observable and a researcher cannot assert the existence of DCs simply because a firms resources or performance changes (Ambrosini et al., 2009). The observation of DCs poses a great challenge to this approachs research To solve this problem, Easterby-Smith et al. (2009) suggest that methodology.

more longitudinal studies are needed to provide insights into the practice of DCs. Other studies suggest that we can observe DCs at work when people are taking actions and doing new things in a firms Value Creation Process (Ambrosini and Bowman, 2009, Ambrosini et al., 2009).

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Closely related to the second debate, the DCA has long been criticised for being tautological because the early DCA literature assumes there is a direct association between dynamic capabilities and competitive advantages (the first/original tautology). To solve this problem, some researchers try to decouple the direct linkage and redefine DCs as the capacity to directly change other firm capabilities and resources, not the firm performance. Despite their efforts, this definition still seems confusing and ends up creating a further tautological problem (the second tautology). This problem will be further discussed in Section 9.6.5. 3.6.7.2. Reconstructing Dynamic Capabilities In the past decade, many studies have attempted to contribute to the DCA by offering more refinements and specifications. One of them defines DCs as the capacity of an organisation to purposefully create, extend, or modify its resource base (Helfat et al., 2007: p. 4). From this definition, it is clear to see that this approach attempts to tackle the tautological problem by decoupling DCs and firm performance, and specifying that DCs are meant to directly impact on firm resource base, not firm performance. It also specifies that dynamic refers to the resource base, not the capabilities themselves or the dynamism of the environment because DCs can also work (or are also supposed to work) in a relatively stable business environment (Ambrosini and Bowman, 2009). Despite the aforementioned capacity definition, Eisenhardt and Martine disagree and define DCs as the firms process to alter resources to match or create market changes (2000). Another key issue which should be clarified is the definitions of dynamic capabilities and capabilities, because these may cause some confusion. According to the most recent definition, these two are distinct concepts. management. The former seemingly can be treated as an analytical framework for strategic The latter, in a broad sense alongside actions, reputation, assets, etc., are part of firm resource base where as Dynamic Capabilities are intended to make changes to the firm resource base including capabilities. In addition, Dynamic Capabilities are difficult to observe and measure. They seem only observable when an organisations strategic plans or value creation processes are in action. By synthesising previous works, Ambrosini and Bowman (2009)

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reconstruct DCs and incorporate them into a value creation process which consists of three sets of sub-process: DCs creation, DCs operation and Resource Base alteration (prior to the formation of DCs, it is believed that DCs originate from learning, experiences and managerial perception). Along the value creation process (VCP), a companys internal environment, paths and asset positions, managerial behaviour, complementary knowledge and resources, and social capital, etc. can all influence the trajectory of the process. Ambrosini and Bowmans synthetic overview of DC concept can be reinterpreted as follows: it is a descriptive construct of strategic management which encompasses a value creation process (VCP). Within the VCP, Dynamic Capabilities will be created and exerted by the managers to change the firms resource base. The VCP as a whole is shaped by the existing internal firm position (e.g. capabilities, resources) and managers actions (including their perception to the business environment). Within the VCP, the firm resource base will be changed by However, the new firm resource base does not Dynamic Capabilities.

necessarily lead to positive outcomes (i.e. better firm performance in the market). Instead, there is a high probability that a firm fails to perform better after carrying out VCP because of the time-lag, the uncertainty of the market, and the complexity of technology. In this overview, the DCs-driven VCP may have four outcomes. First, the VCP can bring about a firms long-term sustainable competitive advantage; second, it may give the firm some temporary competitive advantage; third, it may only be enough for a firm to make a living in the existing business environment; fourth the firm may fail in the end. In other words, DCs only directly impact on the firms resource base within the value creation process and the firm does not have total control over its own performance. and technological complexity. In terms of types of DC, Ambrosini and Bowman (2009) point out that many functional and departmental capabilities within a firm can be DC. organisational reconfiguration, resource divestment, etc. These capabilities may include R&D, acquisition, product/service development, marketing, Searching and sensing, often emphasised in the SWOT analysis, is a fundamental capability a company To some extent, the outcomes of the value creation process depend on factors outside the firms control, e.g. market uncertainty

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must operate (Teece, 2007).

In addition, DCs can also be differentiated by the

levels at which they operate. Based on previous typologies, Amborsini, Bowman and Collier (2009) reorganise DCs into three types: incremental DCs, renewing DCs and regenerative DCs. Incremental and renewing DCs both directly impact on the resource base but from different levels. At the first/lowest level, incremental DCs continuously improve the firms resource base in a relatively stable environment. At the middle level, renewing DCs refresh, adapt and augment the resource base in a dynamic environment. At the highest/strategic level, regenerative DCs do not directly change the firm resource base. Instead their function is to change the portfolio of incremental and renewing DCs for the firm when necessary. In short, regenerative DCs are the capability to change other dynamic capabilities. The overview of DCs has defused part of its criticism and allowed development into a more useful construct for the following reasons: First, it specifies that DCs can only directly change a firms resource base, and have no absolute control over the outcomes of the DCs-driven value creation process, effectively decoupling the direct link between DCs and firm performance. Thus this construct is not tautological. Second, it gives us a clearer picture of the composition of DCs. different levels within the firm. empirical studies. Third, since DCs themselves are difficult to observe, this overview suggests that researchers can observe DCs at work through various managerial processes and actions. It further points out that so long as researchers can identify discreet processes inside the firm that can be unambiguously causally linked to resource creation not only the existence of DCs can be confirmed but also the tautological problems will be avoided (Ambrosini and Bowman, 2009). The DCA may not yet be a perfect framework in strategic management but it appears to be developing toward a more complete and logical one. useful for innovation studies for the following reasons: The DCA does not only focus on technology in strategic management. Instead, This makes it DCs encompass a range of functional and departmental capabilities, and also capabilities at Thus it may be helpful to indicate the locus of DCs within the firm and then identify the potential candidates of DCs in future

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it addresses a wide range of resources and capabilities held by a company that reflects the holistic reality that innovation processes involve a good deal of non-technological issues, artefacts or activities. Robust technology alone does not automatically constitute a successful innovation. Because terminology used by the DCA is rather inclusive, innovation processes can be referred to as new processes, new product development or even new business models. This inclusiveness allows the DCA to cover a wide range of activities taking place within and across the firm boundary. The DCA states that a whole range of heterogeneous resources should be taken into account, and meets the general expectation that there is no such thing as a unanimous or universal winning formula for successful innovation (Lawson and Samson, 2001). The DCA explicitly address the uncertainty and recognise the role it plays. in the complicated and competitive business world. To sum up, the DCA and the aforementioned overview will be used together as a theoretical lens to compare the practices of the strategic management of Taiwanese VGD companies, and to see whether the DCA can offer an account to the phenomena in question. 3.7. Issues and Concerns of Videogame Innovation Studies Videogames did not receive much attention within academia before 2000. By that time, there were only some videogame-related studies focusing particularly on the negative psychological and health implications of gameplaying, treating videogames as a social phenomenon with bad influences (Kerr, 2003). However, since the 1980s, in many popular books and media, numerous journalists and industrial practitioners enthusiastically report the details of videogame production and consumption. As the marketing campaigns of the videogame industry, especially the giant hardware platform holders, e.g. Nintendo, SEGA, SONY and Microsoft, stir up videogame-hype one after another around the globe; this phenomenon began to attract some academic attention. Among them, some are from cultural and In some studies, media studies. In this area, videogames are usually seen as a social phenomenon and a by-product of popular culture and technology development. That makes the DCA a better framework with which to analyse strategic management

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videogames are also drawn in parallel with film and film production in order to make videogames more comprehensible. To some extent, film is used as a view-point to the understanding of videogames because both share a number of ostensible traits. In order to provide an overview of videogame-related studies, this section will first discuss the convergence and divergence between film and videogame. Then innovation related videogame studies will be addressed. Some of them may shed some light on potential direction of this study. 3.7.1. Videogame and Film As a new form of entertainment media and part of the creative industries (DCMS, 2006 September), videogame is often considered in parallel with film, for several reasons. First, videogame, regarded as a newly emergent social/commercial phenomenon and an entertainment format, is studied in the light of film studies probably because both contain a great deal of narrative and entertaining elements. To some extent, with the assistance of contemporary technology, both are also meant to provide some kind of entertainment experience through the audio-video representation of reality to the end-users. In addition, from a technological and industrial organisation point of view, the film industry is well established and much older than the videogame industry. The latter seemingly resembles the formers growth-path since approximately one hundred years ago (King and Krzywinska, 2002). In terms of business strategy, the convergence between film and videogame can be seen from the many direct adaptations (in terms of titles and intellectual property) between films and videogames. Many heavy-weight companies, e.g. SONY, Lucas Entertainment, Vivendi-Universal and Walt-Disney, frequently turn their film titles into games as means of exploiting their existing franchises (or intellectual property) and of exploring additional market segments. As a result, the convergence is evident, through these companies marketing activities, when consumers enter into high-street videogame stores and see many videogames labelled as Superman, Batman, Spiderman, Cat Woman, Harry Potter, 007 James Bond, Lord of Rings, etc. Direct adaptations from videogame to films are less common, but there are a few successful cases, e.g. the Resident Evil and Lara Croft (Tomb Raider) series. However, the cross adaptation between film and videogame are not a general

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practice to the videogame industry per se, as some media and cultural studies envisaged, because there are still a large number of videogames which are not related to films. Similar to the film industry, videogame has also become a highly hit-driven business. According to the Financial Times (14 August 2001), less than 5 per cent of some 6000 games released each year make a profit. consolidation of the industry. The fierce competition poses serious challenges to videogame companies and is the driving force behind the Smaller developers that cannot afford ever As a result, the average size of game While the increasing development and marketing budgets may either go bust or seek opportunities for mergers and acquisitions. developers has become much bigger that it was previously.

consolidation was taking place, game developers also began to outsource some tasks to other companies or professional studios, in order to lower the financial risk and increase efficiency. This pattern is similar to the evolution of the film production industry which has been growing from a small-scale craft into a vertically integrated industry while the disintegration takes place, due to environmental transformation, along with the geographical agglomeration (Storper, 1989, Storper and Christopherson, 1987, Waterman and Kagaan, 1982). A broad overlapping area between film and videogame can also be found in the classification of genre. Genre has been used to categorise different types of film. Similar to films, videogames It is also now employed to differentiate videogames. science-fiction, etc.

can be categorised into different genres, i.e. war, action, horror, adventure, In addition, games can also be labelled as strategy, first-person-shooting, driving, sports, etc. However, classification by genre has a serious limitation because each genre can be both sub-divided and remixed. Action-shooting, horror-science fiction, sport-driving and war-strategy are popular and prominent examples (King and Krzywinska, 2002) and role-playing-game (RPG) is a special genre particular to videogames. Another overlap between film and game is the use of cut-scenes in the production process and design. Cut-scenes are short, pre-render audio-visual sequences usually played back between missions or levels informing the players of storylines

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or the general condition of the gameplay. Cut-scenes are also used at the beginning and end of the games. feature films. This technique is similar to most contemporary main stream Despite cut-scenes, some cinematic devises, i.e. the camera angels

and view points employed by filmmaking are also very familiar to most game designers. These techniques, along with powerful hardware and development tool kits, are intended to offer more cinematic qualities and experiences to game players. For example, in the production of the console game Medal of Honour, in order to recreate the feeling of D-Day landing on Omaha beach, the development team worked closely with Steven Spielberg (and the DreamWorks), the director of Saving Private Ryan, to recreate the immersive and documentary-style experiences from the first-person angle (King and Krzywinska, 2002). Despite the convergence between film and videogame, the two still have some fundamental differences between them. Videogames interactivity enabled by Although it modern technology is one of the most distinct features. Interactivity can offer immersive experiences which passive-viewing of film can not offer. is argued that, to certain extent, other forms of media also interact with the audience, at the level of cognition and emotion, or in the psychological process. However, as a result of certain rules and goals built inside the games, game-playing requires a much greater deal of physical involvement from players (Aarseth, 1997). Within a specific cinematic setting of a game, players can transform themselves into the central characters (or avatars) to perform the game, i.e. save the world from aliens or create a world for themselves. rules, players may fail or succeed in the game. Players involvement actually has According the certain All these kinds of Players may also be rejected or significant impact on the narrative or outcome of the games.

frustrated if they commit some wrong-doings or bad-moves. films (King and Krzywinska, 2002).

aesthetic experience can not be offered by even the most immersive and touching

From a technical perspective, gameplay and its experiences are enabled by different kinds of game engine. Game engines are sets of code providing a game with Within a functionality, which in turn predetermine the nature of the game-world. different functionalities.

videogame system, there are different kinds of game engines responsible for Physics engines decide the rules on how objects and

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characters move or exist within the games. solidity and density effects.

They may also simulate gravity,

Graphics engines are responsible for visual

components and decide how and in which manner the images will be rendered. The lighting, camera angles, special visual effects, resolutions, texture, etc. are operated by graphic engines. generating sound effects. Artificial Intelligence engines decide how smart or Sounds engines are responsible for Similarly, the skills (the The capabilities of the game engines will have human the game characters can be.

significant impacts on the representation of games. and features of games. computing power.

manner of utilising game engines) of game developers will also influence the traits In turn, all these functionalities are down to the hardwares

The relationship between software (and gameplay) and hardware evolves in an iterative manner. forward. More powerful hardware enables more immersive gameplay experiences. In turn, the desire to making better games drives computing power However, this kind of relationship seems difficult to apply to contemporary film production because filmmaking is more of an adaptor than a driving force of technology development in general. The basic equipment, i.e. camera and projector, were standardised by the turn of last century (Jenkins, 2005). That enabled filmmakers to concentrate on creation of new content and experiences of films rather than constantly relearning new toolkits and technology. However, nowadays game designers still have to stay alert to the latest technological developments and be aware of the relevant impacts on game development on average every 18 months. Thus, the difference between films and videogames in Despite the convergence between film Therefore videogame should be studied terms of technology involvement is clear. technology, interactivity and experiences.

and videogame, the two forms of media remain fundamentally different in terms of in its own right from a technology and innovation management perspective. 3.7.2. Product Characteristics of Videogame In earlier innovation-related videogame studies, videogame is generally treated as hardware and studied from the console manufacturers strategic management perspective at the global/industry level. Among them, some industrial economists particularly focus issues such as industry structure, network effects, competitive

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forces, dominant designs and zero-sum competition between different technological standards, i.e. videogame consoles, etc. (Belleflamme, 1998, Clements and Ohashi, 2005, Dietl and Royer, 2003, Gallagher and Park, 2002, Grant, 2003, Johns, 2006, Shankar and Bayus, 2003, Williams, 2002). production process of videogame software. Although these studies provide an This body of literature treats In addition, they also Moreover, overview to this PhD thesis, they still lack an in-depth of understanding of the videogame software as a set of complementary assets to the console platform holders and videogame software producers homogeneously. overlook the PC game market segment and the burgeoning Massive Multiplayer Online Games, which are played on PCs, and not game consoles. Taiwan traditionally plays a significant role in the global OEM value chain of PC and game console hardware manufacturing, but not in the global network of console game software production. for this PhD project. In comparison with the hardware and holistic perspective, some innovation studies which treat videogame as software are particularly useful because they provide a number of alternative perspectives and detailed accounts in the quest to understand the nature and characteristics of videogame innovation process. In studying the process of videogame software development, Baba and Tschang (2001) contend that the process is far more complicated than the conventional innovation theory suggests. The process is not only driven by the need for better efficiency and functionality which characterise most manufacturing and commercial software industries, but also by a synthetic need for originality and design. The latter two driving forces are closely related to artistic and aesthetic cognition at an individuals psychological level that in turn result in unpredictable outcomes for potentially innovative videogames. Tschangs (2005) comparison of product characteristics between videogame and other products (more than just comparing with manufacturing) is particularly intriguing (seeing Table 3-1). He stresses that, unlike other manufactured products, by nature videogames are produced for fun and entertainment purposes. Although there are some other commercial products which are produced for similar entertainment purposes, e.g. films and music, they do not have any kind of high Consequently these studies can provide a limited scope

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level interactivity which embedded within videogames.

Some other complex

product systems, e.g. commercial flight simulators, do have some kind of high-level interactivity. However, they did not come into existence for reasons of fun but for efficiency and problem-solving.

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Table 3-1 videogames vs. other products

Film Amusement Park Ride (Virtual Simulation or Physical Ride) Characteristics Cost and Scale Usually very high cost for commercial production High cost; large scale, complex, small batches High cost; large scale, complex, usually few in number Medium cost (few million US dollar); small scale, complex, large batches (tens of thousands to millions) Purpose Pleasure or fun (involving a range of emotions) Interactivity Non-interactive (user is passive) Non-interactive (user is passive) Interactive user controlled and feedback-based User Interaction Linear, no branching of story path Component & Integration Integration of story with visual sequential content Linear, no branching of story path Integration of story with hardware (physical sequence) or virtual content (including software and art) Linear, with branching of story paths Integration of hardware technology and content (software and art) Interactive user-controlled and feedback-based Linear, with branching of story paths Integration of game play (design) with software technology and content (story and art) Pleasure (more visceral thrills) Practical, training Pleasure or fun, play (involving a range emotions) Commercial Flight Simulator Videogames

3.7.3. Development Process Issues Videogames are not only different from other products in terms of product characteristics, but also in terms of the product development process. In most conventional new product development (NPD) literature, research approaches such as rational plan, communication web and problem-solving are usually used to investigate the process of NPD (Brown and Eisenhardt, 1995). The rational approach intends to address how rational planning and different styles of
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management impact on the development process; the communication web approach emphasises the function of communication in the development project; the problem-solving approach focuses on how the development team, suppliers and project leaders deal with the practical issues in the NDP. structures. However, Tschang (2005) argues that these preceding approaches seem insufficient to capture the high level of uncertainty and complexity embedded in the videogame development process. In practice, in order to alleviate the risk and difficulties of videogame development, project managers and designers do not rely on pure rational planning. Instead, experiences are more important to them. Thus the author suggests that videogame development is more of an experience-dependent and muddling-through process. After investigating 65 videogame project reports (also called post-mortem as industrial jargon) and interviewing around 30 game designers, Tschang (2005) identifies seven major aspects of concern in game development. development. Game Design Game Play Sequel/Licensing Design Level Design Interface Feature Iteration 32 Multiplayer Feature Creep 33 Conceptual Design
Synonymous with repetition, it means designers tend to re-use or re-cycle the codes for particular features that have been used before, either from the same game or other games, rather than reinventing the wheel every time, in order to save valuable time. 33 It means during the game production, designers tend to add more and more features onto to game design. On one hand, more additional features can make the game cool or sexy. On the other, this practice may seriously delay the project. Being too ambitious in adding too many features may also incur many other technical problems. 95
32

All these approaches to a

certain extent conceive of NDP as a set of codified and prescribed processes and

Each aspect

consists of a number of factors which may influence the progress of game These aspects and factors are listed as follows:

Feature Design Technology Game Engine Development Tool Engine and Tools Programming Software Content Audio Visual/Graphics Content Bloat 34 Development Process Process Improvement Testing/QA/Tuning System Performance Prototyping/Preproduction Concurrence/Integration/Pipeline 35 Project Management Team related Management Scheduling External Relationship Publisher User Contractors Subject Experts Collaboration Others Product Release/Launch Marketing Reputation Postproduction

This is a derogatory term to describe the content of games using more system resources than necessary. 35 Technology, design and content have to be developed somehow concurrently. Before integrating all components together, some components need to wait in the pipeline before another one is finished and tested. Any slippage among these components may cause serious trouble to project delivery. 96

34

According to Tschang (2005), in the Game Design category, good practice in the activities of gameplay (i.e. fun), sequel/licensing design and conceptual design are essential to a successful game. However, undisciplined feature creep practices may easily jeopardise the whole project. In the Technology category, game engines and development tools are fundamental to a successful project. A tight grasp on game technology is imperative. In the Content category, appealing visual/graphics is still In the Development Process very important to a good game, however; too much content (content bloat) may have negative impact on the overall system performance. delivered on time with good quality. a disastrous result. category, continuously improving process and testing will ensure the game is However, any slippage on managing concurrent workflows, system integration and pipeline formulation may end up with Overall, good practice in Project Management is crucial. Achieving every single milestone on time is the only way to ensure the game is ready to launch before the Christmas holiday. More importantly, good scheduling is closely related to efficient HRM (team-related project management). Especially when a company grows bigger, the question of how to mobilise staff among multiple projects/teams across different time-frames is a daunting to studio head/lead designers. These aforementioned aspects and factors construct a useful framework to identify managerial issues in the game production. 3.7.4. Creativity and Source for Innovation Source for innovation is an important topic in innovation research in general. Traditionally, large firms R&D labs with their science and technology knowledge base have always been considered as the most significant source for innovation. In a study of about 2000 innovations of science and technology related industries in Britain since 1945, Pavitt (1984) identified three more distinct sources for innovation: suppliers, the production process and fundamental science research. After that, von Hippel found that business users, consumers and competitors can also be vital sources for innovation (von Hippel, 1988). In addition to these findings which still remain as significant innovation sources for many industries (including creative industries), Cave (2000) suggested that artistic inspirations is also an important but neglected source for innovation, especially in the emergent creative industries. Moreover, in a study on the foundation of Japanese videogame industry, Aoyama and Izushi (2003) identified that cultural resources, e.g. comic
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books, cartoons and animations, constitute the vital source for innovation in the videogame industry. Relative to the importance of innovation source, the aspect of creativity receives less attention in innovation research as a whole. However, along with the growing economic significance of creative industries since late 1990s, creativity management is gradually becoming an important issues for innovation research on creative industries (Bilton and Leary, 2002, Cunningham et al., 2004, Jeffcutt and Pratt, 2002, Wilson and Stokes, 2005). But in a broad sense, creativity management has not been thoroughly investigated and lacks an integrated view to bridge the gap between individualistic creativity and collective innovation. In the paper When does an idea become an innovation, Tschang (2003) tries to fill this gap by proposing a descriptive framework to couple individual and group creativity in VGD process. In the quest to understand the creativity aspect of videogame development, the author consciously avoids getting involved in the debate on tacit and explicit knowledge because he considers in part these academic concepts do not resonate easily with industry people, and in part because the process of creativity is largely tacit anyway (Tschang, 2003). As a whole, the study suggests that individual creativity appears to be more important at an earlier (idea conceptualisation) stage of a new VGD project whereas group creativity is more important at a later (implementing) stage. In the idea conceptualisation stage, individual creative thinking is the major source of game concepts. In addition, individual creative thinking, as the study found, is Designers can draw on material from their The profoundly influenced by designers backgrounds and personal traits (i.e. training, skills, experiences and side interests). background to continuously inspire or stimulate their creative thinking. etc. and trigger a process of analogy in the designers minds.

stimulus may come from external inputs, i.e. books, movies, sports and other games, Game concepts may also be shaped by designers personal tastes and interests. For instance, if a game designer prefers war movies, he would be more likely to develop game concepts around these topics. In addition, it is worth to note that player model is a particularly intriguing

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phenomenon and makes creativity processes of videogame development unique. According to the author, most people working in videogame studios have lifelong interests in playing games. They are usually enthusiastic end-users and producers Thus, they can use both a designers and For example, they of videogames simultaneously.

consumers view-point to experience and improve their work. effort to make it look right to players. next time.

can evaluate some visual effects, e.g. an explosion, themselves and then spend more They can also play and evaluate a game developed by others and then use these experiences to improve their own design Along their career path, they also care about whether the games they made are fun to play or whether they standout. This sympathy towards consumers makes the videogame development a particularly interesting topic to study. In the pre-production and full implementation stages of a VGD project, the role played by group creativity becomes more important. problem-solving. As opposed to individual creative thinking, the implementation process can be characterised as collective In addition, time and time again, designers noted that ideas In latter stages, individual creative ideas The are cheap or plentiful, and that implementation was key to a games development and eventual success (Tschang, 2003). and visions need to be embodied by a group of people with various skills. feature of a game in detail.

process usually commences with a hundred-page document which defines every All the programmers, engineers and artists have to build up the game line of code by line of code, image by image, and level by level. Each individuals work is monitored on a daily basis because development time is limited. Although features of a game have been pre-defined in the document, all For example, members of a team still need to continuously re-define and improve the original concepts or functions whenever they encounter practical problems. when the designer intends to implant a special visual effect, i.e. an explosion, at a certain of point of time and place in the game, engineers have to creatively tweak the codes and try out different ways of code writing in order to make the explosion look real and function smoothly. Sometime these on-the-job innovation All the fine-tuning activities may take a few days to a few weeks to work out. members of the team.

work needs to be done creatively and made to interlink flawlessly by all the At the implementation stage, this process can be characterised as a collective and continuous form of creativity.

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3.7.5. Strategic Management of Videogame Firms Human resources, as the primary source of originality and creativity, are one of the most valuable assets to videogame developers in the long term (Tschang, 2003). retaining and mobilising distinctive and talented human resources. In light of the resourcebased view (RBV), firms are supposed to compete in attracting, In other words, firms should compete through people (Wright and McMahan, 1992), because creative staff can add positive value to the firm, make the firm itself unique or rare among potential and current competitors, and make the firms position and competitive advantages difficult to be imitated by others. However, based on the RBV, Autier and Picq (2005) find that twenty French VGD companies, as they growing bigger and more complex, proportionally speaking, these companies gradually hire less in-house creative staff while more humdrum staff are recruited for administrative works. In other words, general and collective inputs replace rare and inimitable inputs in the process of growth. This finding contradicts the conventional RBVs suggestion of attracting and retaining talents. A possible explanation for this contradictory finding, as the authors suggested, is that when the companies grow bigger, their goals and strategies also shift accordingly. When the companies are at the stage of small single-project studio, However, as they can only exert all the strength on creative activities because creativity and talents are easier to manage at individual level and at a small scale. the companies become multi-national publishers or developers, they encounter different sorts of challenges and tasks, i.e. global marketing, distribution and multi-project control. The changes in circumstances require companies to develop new administrative skills and begin to outsource non-critical works. With regard to creativity capabilities, the big companies can always have sufficient financial resources to acquire or maintain contractual relationships with small dynamic and creative studios or freelancers. VGV is a high-risk and unpredictable business, in which creative personnel may easily become obsolete in the same corporate context. Keeping a large population of creative staff in-house for no obvious anticipated demand is a dangerous business conduct. For big emerging game companies

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encountering new challenges, the circumstances leave them no choices but to only work with the rare and unique creative individuals on a flexible and contractual basis rather than in a bureaucratic-subornation relationship. Although this study starts by investigating videogame companies HR strategic management from the RBV, its findings implicitly suggests that the RBV is unable to offer satisfactory explanation with regard to videogame company development in the long run. That in turn indicates that the DCA could be an appropriate framework for studying videogame companies shifting strategic goals and evolution in an ever-changing business environment. In a research on UK videogame developers innovation and competition strategic management, Readman and Grantham (2006) also reach a similar conclusion by arguing that the RBV is not enough to adequately capture the nature of strategic management of videogame developers. understanding. their survival in a high-velocity market. Instead, the DCA can provide a better Buyers of their products particularly value This empirical study shows that dynamic capabilities are crucial for

their dynamic capabilities because only dynamic capabilities can actively satisfy buyers frequent short-term preferences and quickly respond to changes in the market. However, apart from these findings, the authors also notice that how firms actually develop the so-called dynamic capabilities for the long term survival is still an under researched area. 3.7.6. Standalone Videogame vs. Massive Multiplayer Online Game Massive Multiplayer Online Games (MMOG), which have emerged since 1997, are, in many ways, a disruption and a new phenomenon to the videogame industry and the market, especially in countries like China, South Korea and Japan (Strom and Ernkvist, 2006). However, most recent videogame-related innovation studies, including the studies mentioned in preceding sections, have not yet engaged with this new phenomenon as a serious research agenda. Usually MMOG is taken as a homogeneous part of videogame and its most salient feature, Massive, is overlooked. Although most contemporary videogames (played either on Console, Their game design can normally only PC or other hardware platforms) can be played in an online multiplayer mode, they are not a massive multiplayer game.

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accommodate a few (2-16) concurrent players. This kind of gameplay mode is also called online match-making. By contrast, to be massive, a MMOG has to allow tens of thousands players to login and play online concurrently 36. Thus, to be massive makes MMOGs very different from other offline, standalone and matchmaking videogames and poses a good deal of challenges to development work. Strom and Ernkvist (2006) identify the most significant differences between conventional console/PC game and MMOG. The differences are as follows: Business models: the revenues of console/PC games are primarily from retail channels box-sales, whereas MMOG is from box-sales, on-line sales, monthly subscription, trade of in-game items, in-game advertising, etc. Financial risks: both console/PC and MMOG face increasing financial risks as development budgets have soared in recent years. But the former only has a few weeks to recoup the majority of investments while the latter has a few years, only if the latter can be successfully released to the market and last for more than two years (in another words, console/PC games product-shelf life cycle is much shorter than existing MMOG). retain old players. However, MMOG developers must invest heavily and continuously in the existing MMOGs to attract new subscribers and Thus, in total, an AAA MMOGs development cost is on However, an MMOG can be average two to five times higher than an AAA console game. The former can sometimes be as high as 20 to 30 million USD. extremely profitable once it reaches a dominant position in the global market. Development time: console/PC game usually needs 12 to 24 months where MMOG needs more than 24 months. Size and complexity: MMOG is three times bigger and ten times more complicated than console/PC game. Financing development cost: console/PC game is mostly financed by bigger publishers and platform holders. Sometimes developers may share some costs. MMOG is usually financed by publishers and venture capital. For some smaller scale MMOG it is also common to see developers self-financing. Development resources and capabilities: apart from what console/PC games already need (e.g. game design, programming, content creation), MMOG also
However, there is no an absolute standard or number to define how many players an MMOG should have to be massive 102
36

require additional server technologies, database know-how, continuous content delivering and technological upgrading, integrated financial and billing systems, and 24-7 customer service and support. Quality assurance: all testing of console/PC game is done in-house before releasing the Golden-Master. For MMOG, iterative closed and open beta testing may last for a few months until the game system is stable and reliable enough to formally release it charging subscription fees (throughout the testing period, a large number of free-playing users is required). fees. 3.8. Conclusion After reviewing a wide range of literatures with rather distinct perspectives towards innovation and strategic management, this chapter has the following findings: The conventional innovation view can, to some extent, illustrate the traditional standalone videogame as boxed-product. But it cannot well describe the newly emergent online games, especially MMOG, because these possess some salient features of service industries and complex product systems. It seems that VGD still have some unique yet uncovered dimensions and characteristics, particularly in relation to the creativity elements and sources for innovation, embedded in its own innovation process. The phenomena of innovation and management in VGD are manifold and evolve over time. In reality, the situation is far more complex than any particular line of To achieve a comprehensive understanding of this literature can capture. into account. Combined with the result of background exploration, this chapter finds the DCA seems the most productive and appropriate approach to analysing the strategic management of Taiwanese VGD industry because of the following reasons: The DCA contends that a firms competitive advantages and economic benefits are built on its firm-specific asset position (resources and capabilities). According to the preliminary investigations, we find that VGD companies can survive and generate revenues because their specific resources and capabilities enable them to provide new products or However, there are many MMOG projects that never pass the testing and fail to launch for charging

phenomenon, it is necessary to take the contributions of different lines of literature

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services. The DCA contends that the technological resource/capability is by no means the only source of competitive advantage. In the preliminary investigations, we also find that, in order to survive and compete, VGD companies need a wide range of resources and capabilities. The DCA recognises the aspect of path-dependency in analysing a firms growth and evolution. According to the background exploration, we find that VGD companies grow and evolve incrementally. successful and failure experiences. The DCA stresses that firms by no means operate in static business environment. or create the In order to survive and compete, firms have to external market changes. According to the It dynamically change their internal resources and capabilities to respond to background-checking, we find that this claim is very similar to the circumstance that these Taiwanese VGD companies were facing. seems very crucial for them to dynamically develop the necessary capabilities and resources to respond external changes or capture market opportunities. However, the DCA has long been criticised for its vagueness and the apparently tautological nature of some of its claims. Therefore this thesis is interested in finding out how far exactly the DCA can be applied as a useful analytical framework for studying strategic management in these cases. 3.8.1. Research Questions Based on the findings of this chapter, the results of Chapter 2, and the Research Aims stated in section 1.2, three sets of Research Questions are proposed: Innovation Nature Question What is the nature and characteristics of VGD innovation in Taiwan? Over the last ten years or so, what transformation has How far can different views of innovation help taken place in Taiwanese VGD? These processes are largely shaped by their firm specific asset positions, and past

us understand the nature and characteristics of VGD innovation? Innovation Type and Management Question Over the last ten years or so,

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what innovations have been achieved by Taiwanese VGD companies and how have these innovative activities been managed? management in these cases? Strategic Management Question What are Taiwanese VGD companies competitive strategies and how have they managed to survive in a highly competitive and uncertain business environment? management? 3.8.2. Analytical Process and Framework In order to answer these three Research Questions, in each case study (from Chapter 5 to Chapter 8) the author will: First produce a detailed historical account for each company. The detailed historical account will assist to answer the first research question. Then the author will develop an analytical framework to draw on useful information from the historical account (inc. interviews) to answer the other two research questions. The analytical framework has three major parts which will be used in the analytical sections of each case study: Strategic Management, this part is meant to answer the third research question and carry out the following steps to test how useful the construct of Dynamic Capabilities is: Whether there are discrete Value Creation Processes (VCPs), as examples of strategic management, intentionally aiming to alter firm-specific resource base (inc. capabilities) that can be found inside the firm as relevant literatures suggest. non-tautological construct. Once VCPs are identified from each cases detail historical account, the analysis will look into the VCP by illustrating: how the process is initiated, who participates in the process, and what resources and capabilities are involved, created and changed along the process. Finally this step will If this kind of VCP can be found, Dynamic Capabilities, to a minimum level, would seem to be a useful and To what extent can Dynamic Capabilities be a useful concept to analyse these VGD companies strategic How far can different innovation models/approaches/concepts inform the practices of innovation

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try to understand what exactly the VCP is. Following the DCAs suggestions, this step will try to find out whether VGD companies strategic management are path-dependent, where the sources of competitive advantages come from, and what capabilities are needed for survival and competition. Type of Innovation, this part address the second research question and analyse the VGD innovation phenomenon in the following six headings: Technology-based; Process and Organisational; Product; Content; Marketing and Delivery; and Revenue and Business Model. These headings have been gradually emerged, informed and consolidated by iterative literature surveys and interviews. In the research process, the author notices that different lines of literature and interviewees were found to use some similar and interchangeable terms, e.g. type, style, aspect, dimension or area, to describe different kinds of innovation in respective research areas. To facilitate data management and the understanding between the author, interviewees and readers of this thesis, the author uses six types of innovation to classify and describe different kinds of VGD innovation found in this research. Management of Innovation, this part also addresses the second research question and analyses the evolving innovative activities of VGD industry from four aspects: Organisational Structure for Innovation; Drivers for innovation; Sources for Innovation; and Skills and Knowledge for Innovation. and interviews. Similarly these four headings have also been gradually informed and consolidated by literature surveys The four headings are chosen for the convenience of data management and communication between the author, interviewees and readers. In short, the aforementioned analytical framework will be adopted to capture and organise useful information, present the analysis, and answer research questions.

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Chapter 4. Research Methodology: Chronological Qualitative Multiple-Case Study Approach

4.1. Introduction This chapter first states the rationale of the research strategy and then describes the undertakings of empirical investigations in detail. primary and secondary sources. Data are collected from multiple Throughout the whole research process, the With the

chronological event-listing is adopted as a platform to iteratively collect, verify and analyse data. This is the key to ensure the quality of this research. assistance of the chronological event-listing, this research will produce a timeline-display for each reported company. This kind of visual representation (i.e. timeline-display) makes the highly complicated innovation and evolution path of each company more comprehensible. In addition, the timeline-display is also of great help to summarise the empirical results and draw conclusions. 4.2. Research Strategy Economic development, in his (Schumpeters) view, had to be seen as a process of qualitative change, driven by innovation, taking place in historical time. (Fagerberg, 2005) Case study, as a research strategy, is an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 2003). As stated in preceding chapters, this PhD study aims to reveal the evolving nature and practices of innovation and competition in videogame development (VGD) as a part of creative industries in Taiwan. In order to achieve these goals, this research One of the primary adopted a chronological qualitative multi-case study approach.

reasons for employing this research strategy is that, from a Schumpeterian perspective, innovation is an evolutionary and non-stationary process which takes a considerable time in revealing its true features and ultimate effects , and

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underwent a process of qualitative change in real-life contexts (Schumpeter, 1942). In addition, the reason for addressing the chronological aspect is that the importance of history in innovation and business management studies has long been recognised by Harvard Business School and many prominent scholars (Bannister, 2002, Kantrow, 1986, Knowles, 2006, Miles and Huberman, 1994a, O'Brien et al., 2004, Remenyi, 2005, Schumpeter, 1951). Historical studies can, firstly, provide the knowledge of current circumstances and a framework for securing and integrating new information; secondly, it can help researchers to frame the right questions; thirdly, historical research allows for the construction of an integrated framework which presents research data in a manner that is vivid, understandable and applicable (Knowles, 2006). This research is an intellectual exploration of a newly emerging but relatively under-researched industrial sector videogame development, in the theoretical context of innovation and strategic management studies. In the quest of an In in-depth understanding of VGD, this research intends to explore the application and scope of relevant theories, and to test their compatibility in the area of VGD. statistical generalisation. aim of this research. Another reason for using qualitative methods is that this research intends to investigate the empirical process of innovation in the arena of videogame software development (e.g. how the process of game software development is organised and managed; and how a does company develops its competitive capabilities over a long period of time), to understand the meaning and feeling of relevant industrial practitioners, and to interpret their activities and behaviour in a highly competitive real-life context where the boundaries of phenomenon and context is blurred (Yin, 2003). This research also undertook a series of background research and fieldwork. These activities yielded a good deal of evidently observable, yet complex phenomena (and information) which was inappropriate for transformation into numbers and figures. This is because, the process of reduction and representation another words, this research is meant to deliver analytical generalisation, rather than Thus a qualitative approach is more appropriate to the

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of the phenomena (and stories) in numerical formats, would run the risk of losing a good deal of contextual meanings and information (Creswell, 1994, Merriam, 1988). There are also some practical reasons for not adopting quantitative methods. regard to the videogame industry does not exist at present. First

of all is that secondary quantitative databases that may potentially be useful with The videogame software industry is a newly emergent industry. In Taiwan, the government did not put it on the industrial policy list until 2002. This resulted in a lack of statistical data of the industry, and because of the limited time-frame and resources, it was not feasible to launch a full-scale statistic survey. At aggregate level, the Taiwan government has only very rough figures of the size of the videogame industry (in the period of 2003-2007). The method of calculating This the output value of this industry was just adding up all the annual revenue of major Taiwanese videogame companies and then estimating the size. VGD over time. At firm level, representing creativity and problem-solving activities in numeric format is inappropriate, especially by studying company financial reports and balance sheets. As one industrial practitioner stated: Investment and financial reports produced for auditing and taxation purposes can not reflect the companys efforts and enthusiasm towards innovation We spend a great deal of money on buying-in Korean online game but from the government and investors point of view, especially by the governments R&D tax exemption criteria, we are not creative and innovative enough However, getting the online game operated run smoothly and safely in Taiwan indeed requires and generated a lot of new knowledge and capabilities which we dont have before Even the original source code provider does not know how to solve these Taiwan-specific problems either. 37 Another eminent industrial practitioner mentioned the process of innovation and recalled: Sometimes new ideas and creative solutions just came about from the chatting
37

methodology overlooked the complex reality and characteristics of the process of

Source: interview of SoftStar 109

with colleagues on a business trip. 38 Some interviewees considered that their current successes are largely based on their iterative trial-and-error learning experiences which are not suitable to be quantified. Most important of all seemed that many industrial informants shared a consensus that quantification of the content of a videogame, e.g. aesthetics, feeling, styles and martial-art romances, would not be of much help to understand the nature of VGD innovation. Last, but not least, at product level, the reliable information with regard to the revenue or the number of copies sold of a specific game (online or offline games) does not exist, because of the severe software piracy problem in PC the game market and the strong tendency of overstating the number of online game players by operating companies. Therefore, information in numeric format is not particularly helpful in the context of this research. Although the qualitative-case study methodology is often criticised on the basis of weakness in terms of validity and reliability, Yin (2003) suggests that the approach (when applied rigorously) can include several techniques to mitigate alleged weaknesses. These can include generating multiple sources of evidence, having key informants review draft case reports, replicating logic in multiple-case studies, and using a case study protocol. procedures in further detail. 4.3. Research Design 4.3.1. Unit of Analysis In this research, the company (i.e. videogame developer) is the primary unit of analysis which encompasses two other types of embedded units: namely product and project. This primary-and-embedded unit of analysis design appropriately reflects the reality and the practices of the videogame industry and VGD processes. In the industry, videogames 39, as consumer products, are usually produced by game companies in the method of a development project. In some cases, a videogame can be co-developed in a project by more than one company. However, in most
Source: interview of Suzuki Yu from SEGA In this research, videogames are refer to PC games which can be played in a single-player mode or multi-player mode (up to 16 players through the LAN or Internet Match-Making connection), console games and Massive Multiplayer Online Games (MMOGs).
39 38

The following sections will illustrate the

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cases, one game is made by one company during a period of time and it is rare to see a company that has only developed one game in its history. In that case, the company must be out of the business already. Thus, the reality is that videogame developers, in their own histories, usually have conducted or tried-out various development projects and most of them are multiple-project developers running a handful of projects concurrently and releasing the products at different points of time during the year. 4.3.2. Multiple-Case Approach In addition, this research adopts a multiple-case approach in the process of data collection, data analysis and case reporting, i.e. more than one company was selected for in-depth and chronological investigation, and each primary case further covers several embedded cases across an extended length of time 40. For each primary case, at least three key participants with extensive knowledge and experiences had been formally interviewed, and most of them had been contacted more than once (either through following-up in-person or telephone conversation) in seeking further clarification. level of validity. This approach is of great help to ensure the minimum However, in the execution of fieldwork, data collection and

analysis, it was not possible to mention all of the embedded cases without omitting some less significant ones, because the time-frame of this research was limited and interviews (and data collection) could not collect every single piece of information and experience-derived comment. Besides that, during the interviewing process, repeatedly asking the same set of probing questions about every single product and project was inappropriate because it interrupted the flow of conversation and experience-sharing. Thus, to mitigate the potential problem of information insufficiency with regard to certain specific cases, following-up interviews were conducted when necessary. Another reason for focusing on firm-level analysis is that, both in qualitative and quantitative research projects, for analysis or communication sake, it is necessary to reduce the reality or experiences into simpler formats, i.e. number, text, graph or model, by selecting a few key events and artefacts to illustrate the whole phenomenon. Therefore, for analytical purposes, this research is primarily

40

The length of time varies according to how long the company has been established. 111

focusing on firm-level analysis, while the researcher is still aware of the existence of embedded cases which would be addressed when necessary (e.g. stating landmark events, key decisions, and important products and projects, etc.). 4.3.3. Quality Control of Qualitative Research The quality of scientific research is usually judged by a set of criteria: construct validity, internal validity, external validity and reliability (Yin, 2003). conduct of the investigation processes. However, qualitative research is often criticised for the lack of validity and reliability in the In terms of validity, what primarily concerns most quantitative-approach proponents is that the measure used in qualitative research can not capture or reflect the elusive nature of the construct and phenomenon being studied (the construct validity problem). Secondly, it is also a concern that qualitative research can not efficiently establish the underlying causal relationships between events, actions and results of a particular setting or phenomenon (the internal validity problem). Thirdly, it is considered that a In terms of the qualitative-case study approach can not yield applicable results to the immediate cases of a particular research (the external validity problem). reliability problem, some researchers consider that the qualitative case study approach is not a reliable measure to be used in scientific research, because it does not guarantee the same result when the setting of a particular piece of research remains unchanged. However, the criticism of qualitative research is largely biased and misunderstands the very nature of qualitative research and the relevant approaches. In fact, both quantitative and qualitative research techniques serve the same purpose, i.e. finding the truth and yielding applicable results. A quantitative research method, through data collection and analysis techniques, reduces the reality into a numeric format and then elaborates it into a document of a written verbal format. reality into a long written document. However, by similar processes and techniques, a qualitative research method directly reduces the The former method is not necessarily more accurate or less biased than the latter one. Because in the transformation from phenomena to numbers and then to words, parts of the very essence of the phenomenon may also lost in the translation. Therefore, as long as a piece of qualitative research can adopt a rigorous procedure, it can also accurately measure

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and observe the phenomenon; comprehend the underlying logics of that phenomenon; and yield applicable results beyond the immediate cases of a particular study. This PhD research follows a rigorous and reliable procedure, which consists of a series of stages. Throughout these stages, the techniques of multiple cases, multiple sources of evidence and iteration of analysis and verification are adopted. Most important of all, in each case reporting process, a chronological event listing and graphical representation approach is devised to perform as a data collection and data analysis management platform. By doing so, a complex reality (the construct) can be comprehended by a rigorous procedure, yet retain a certain degree of flexibility, which allows the investigator to amend the content of research, if necessary. Then, the causal relationships are observable when events are listed in a chorological format. This platform can also be used in other case reporting in the future, if there is any. This platform makes the iteration of information reduction, confirmation and re-collection manageable. It also facilitates the understanding and communication between the investigator of this research, and his readers and informants (including interviewees). The following sections will describe the development of this research methodology in further detail. 4.4. Development and Undertaking of Empirical Investigation 4.4.1. Background Exploration After the preliminary literature review, the investigator began the fieldwork by conducting a series of background exploration activities. events in the UK and Taiwan. industry most. From 2005 to 2007, the investigator had attended many videogame industrial shows, seminars and social These occasions gave the investigator a good deal of opportunity to familiarise himself with the context and issues which concern the Through numerous on-site networking conversations, the investigator also obtained a good deal of hands-on experience-driven comments, e.g. difficulties of the business, creative processes, the status-quo of the industry, etc. from many industrial practitioners, some of whom were prominent people in the industry. In addition, attending these industrial events was of great help in obtaining initial access to the key informants and interviewees for this study.

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Prior to attending these events, searching relevant information and news on the internet, and reviewing some popular videogames was helpful to initiate dialogue and the experience-sharing process with industrial practitioners. However, much more than casual conversations and chatting away, the practice of videogame software development processes is not a research topic that can be easily understood without a degree of prior knowledge. The investigator of this study could relatively easily initiate a conversation and follow through by asking a series of the right questions, because he had attended a six-month software programming and system analysis training course prior to his PhD study. computer sales representative. He had also worked as a Thus, to a certain extent, he has the necessary

interpersonal skills to facilitate his exploration and information gathering process. 4.4.1.1. Survey of the Videogame Development Industry In early 2007, a survey of Taiwans VGD industry was conducted. During this period, there were more than forty people from twelve organisations (inc. the III and other companies) were interviewed. During this stage, a rigorous questionnaire 41 was applied to collect data from the whole population of Taiwans VGD industry, but the sampling process did not comply with the rigorous statistic protocol used in most quantitative surveys. The sampling techniques applied were largely The latter technique was information searching (e.g. from tradeshows and the internet to see which companies are the major players) and snow-balling. particularly important. This was because with full assistance from the analysts of

the industrial supporting unit of III, the investigator was introduced by the analysts to all their prominent and less prominent clients in their working list and obtained preferential access to some of these companies most senior managers. Although a few of these clients did not accept the investigators interviews, after verifying the information obtained from the analysts and key informants from the industry, the investigator believed that the samples (the companies being talked to) were big enough to represent the whole population of Taiwans VGD industry. Prior to the interviews, questionnaires were sent to each companys senior mangers of the management, technology and design or artwork division (or the equivalents). Each of them was asked to fill in the questionnaires and to involve include
The questionnaire was developed based on the literature review, advices from the investigators supervisors and industrial informants, and the investigators background exploration. 114
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discussion of the questionnaire in the interviews.

However, for practical reasons,

e.g. each interviewee was busy for his/her tight schedule, the investigator decided to visit each company and meet all the would be interviewees at the same time as a group-meeting. Thus, in each company that was visited, there were at least three interviewees present at the meeting, and each meeting lasted for at least two hours. The major downside of this conduct of interviewing was that the investigator had little control over the interviewing process and it was difficult to force the group to focus on the specific agendas suggested by the investigator. in-person conversations, after the transcription of the meetings. On the other hand, this survey and group meeting interview method had four unexpected benefits which were of great help in guiding the orientation of this PhD research. Firstly, in the process of applying the rigorous questionnaire to each company that was visited, the investigator found closed-end questionnaires were not suitable for the research. This was because it was unable to fully capture or reflect the complexity (and the reality) of VGD innovation and the evolution of each company over the long term. Secondly, the investigator found that the types and Instead, they should be seen as Thirdly, from the lively management of innovation, and competitive strategies were not suitable to be isolated from one another in the context of VGD. an evolving process or phenomenon, as a whole. However, this problem could be mitigated by following-up questions either through telephone or

conversation with interviewees and the on-site observations after the meetings, the investigator considered that having a list of a few open-ended or semi-structured questions (with the assistance of a graphical representation of company growth) and letting the interviewees talk freely about their experiences in innovation and strategic management would be a better approach to this PhD research. The final reason was that throughout the process, many underlying trajectories and dynamics had been revealed which shed light onto the important agendas the study should cover. 4.4.1.2. Emergence of Underlying Characteristics To sum up, the general background exploration and the survey informed the following underlying characteristics: VGD had been undergoing a paradigm shift transforming from simplicity to

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complexity. Undertaking innovation is difficult and the outcomes of innovation are unpredictable. The industry structure had been experiencing a radical structural change and the business environment is highly-volatile. The so-called strategy does not usually work. It is common to see companies fail to achieve their strategic objectives. These preliminary findings also informed the investigator that there are some conceptual frameworks in the areas of innovation theories and strategic management, e.g. complex product system and the dynamic capabilities approach (DCA), which may be relevant to the future direction of data collection and analysis. 4.4.2. Case Selection In quantitative studies, probability sampling is the primary technique of selecting cases to represent the characteristics and patterns of the population as a whole. However, purposive (non-probability) sampling is a popular case-selection technique in qualitative studies (Kemper et al., 2003, Patton, 1990). By definition, purposive sampling means that some information-rich, typical yet critical cases meeting certain criteria are intentionally selected by a researcher to fulfil the purposes of the study (Patton, 1990). technique was adopted. The aforementioned background exploration was of great use to inform the purposes 42 of this study, which not only assisted the investigator to decide what data to look for and how to look for it, but also where to look for it. Following that, based on the on-site observations (seeing how people worked together as a team in a studio when visiting interviewees companies) and the background knowledge of the industry (e.g. information of the size of the industry, major players, legendary and popular videogames, etc., obtained from cross-checking with different key informants and internet/archive research), four companies were selected.
That is looking for rich and reliable information sources which can tell the readers of this thesis what the nature of innovation is and how innovation and competition are managed in the context of VGD. 116
42

In this PhD research a purposive sampling

As stated in Table 4-1, four cases (LAGER, USERJOY, INTERSERV and SOFTSTAR) were selected because of their number of employees, longevity of establishment, breadth of business, and complexity of operation, along with some other unique aspects (achievements) in their own right. Companies of this calibre possessed abundant information and experiences which could reflect the very nature of videogame software innovation and development of capabilities over a long period of time. These cases were all established before 2000. Thus they have witnessed the radical changes in the business environment and the industrial structure over the last ten years or so. Now they are all running multiple projects concurrently while engaging various game development and operation activities. During the growth of these companies, they all have been through a mixture of both success and failure experiences. Some companies that had been interviewed in the background exploration stage also had long histories of being involved in VGD activities. However, they were not selected because their primary lines of business when this study began were not videogame software development. In other words, they were not so-called Some even had dodgy dedicated and professional game developers.

backgrounds in the game publishing business, which were not suitable to be reported. Some other companies were not selected (although their primary business line was game development), because they were newly established, had only released few unnoticed online games (or simple casual games) and did not have recognised PC game product lines previously. However, it was notable that most interviewees in these non-reported cases were experienced industrial practitioners who still provided valuable insights to this research. 4.4.2.1. Data Collection After the background exploration and the targeted cases being selected, the investigator commenced to draft each cases evolution chart in time-order display fashion. At this stage, the information obtained from prior meetings, observation, and internet/archive research were collated in charts. In order to strengthen the validity and reliability of this study, all the information used to build up each companys evolution chart (e.g. key events, product-line life spans, organisational

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changes, major strategic decision, etc.) was obtained from multiple sources (i.e. triangulation technique), such as company websites, news archives of professional videogame-dedicated websites, trade magazines, key informants, etc. correction and the generation of further insight. 4.4.2.2. Conduct of In-Depth Case Study At revisiting each targeted case, a semi-structured question list and a company evolution chart were employed with the aim of collecting more in-depth first hand information. The primary benefit of using these techniques was that complex questions/issues/processes could be discussed or explored in further detail (especially important as the study if focused particularly on the significance of path dependency and history). In particular, the chart could reveal the meaning behind certain actions and company behaviour by allowing interviewees to express themselves with minimum limitation. Based on background knowledge obtained from preceding stages, the investigator presumed that three types of managers, i.e. project managers (producers), lead programmers and chief designers/artists, were the people who possessed the most knowledge and experience with regard to VGD and company history. However, different from the general exploration and in order to control the proceedings of the second visits, the investigator initially only interviewed the general manager (or the equivalents) of each case. overview and strategies of their company. This was because it was presumed that they possessed the most authoritative information with regard to the They might also possess some detailed knowledge covering particular projects, products or events. During the interviews, the investigator also obtained the GMs consent to talk to other project leaders, programmers or artists/designers (some already met in the background exploration) if necessary. In general, data collection is an ongoing and iterative procedure, which may extend into and overlap with the data analysis stage. By graphically and chronologically representing each cases history in the chart, the data collection, data analysis and verification become more manageable, and chains of evidence can be established. The charts were then taken back to the targeted companies in order to allow for comment,

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Table 4-1 Case Selection Criteria and Rationale Company LAGER No. of Employee 200+ Year Established 1998 Breadth of Business MMORPG development & operation Third-party MMORPG operation Development tool licensing Co-development Variation of game-play, style and genre USERJOY 250+ 1995 PC game development MMORPG development & operation Console game development Co-development MMORPG operation Third-party MMORPG operation Games of various genre and style Multiple-project management Multiple-location management International MMOPRG operation International cooperation and marketing Multiple-studio merger and acquisition Genre-setting games Product-line variation Drastic company transformation Some unsuccessful experiences Successful merger and acquisition experiences Complexity of Operation Multiple-project management Multiple-location management International cooperation and marketing Distribution chain-internet caf management Other Unique Factors First Taiwanese MMORPG (1999) First Taiwanese full 3D MMORPG First MMORPG operating across Taiwan , Hong Kong and China Some unsuccessful experiences

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Company INTERSERV

No. of Employee 330+

Year Established 1989

Breadth of Business PC game development Console game development MMOG & Match-Making game development & operation International outsourcing provision Various genre and styles

Complexity of Operation Multiple-project management Multiple-location management International MMOPRG operation International cooperation and marketing Multiple-studio merger and acquisition

Other Unique Factors Competent 3D know-how on PC and XBox platform Competent project management capabilities Motion & Facial Capture Martial Art Database Genre Setting games on Xbox Some unsuccessful experiences Drastic transformation experiences

SOFTSTAR

500+

1988

PC, Mobile, Console and MMOG development Third-party MMORPG operation Publishing & Distribution International co-development A wide range of product lines

Multiple-project management Multiple-location management International MMOPRG operation International cooperation and marketing Multiple-studio merger and acquisition

Several genre-setting & legendary product lines First Taiwanese developer for SEGA-SATURN Competent 3D know-how on PC platform First Taiwanese selling games in Japan A good deal of unsuccessful & transformation experiences

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4.4.3. Data Analysis Unlike statistical analysis, there are few fixed formulas or cookbook recipes to guide qualitative analysisinstead, much depends on an investigators own style of rigorous thinking, along with sufficient presentation of evidence and careful consideration of alternative interpretations (Yin, 2003). Nevertheless, the data analysis could still proceed by following the three stages: data reduction, data display and conclusion drawing, as outlined by Miles and Huberman (1994a). Throughout these stages, the relevant theoretical conceptual frameworks 43 together with informed underlying interests would be the overall guidance. 4.4.3.1. Data Reduction Following the preceding background exploration and in-depth interviews, a large amount of raw data obtained either from conversations, observations or information searching needed to be divided into smaller pieces, categorised, selected and reorganised, and represented in a simpler and manageable format. Throughout this stage, tabulation was a convenient technique to handle the data. Selected and pieces of information were placed under suitable key constructs or themes accordingly in various tables. with each other. However, this task was still very challenging because all the pieces of information were somehow intertwined and overlapping Following Miles and Hubermans (1994a) suggestion the investigator profoundly immersed himself in and became very familiar with the raw data, and repeatedly checked the potential links between data and questions by reading them carefully, several times. In some cases, ambiguity emerged amid this process; and then the investigator searched for new information, or contacted key informants or interviewees for verification. 4.4.3.2. Data Display In this stage, the chronological-event listing was the very foundation of the data presentation. findings.
In this study, conventional innovation models, Complex Product Systems and Dynamic Capabilities provide the most parts of theoretical construct. 121
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Based on this technique, each case was reported in an extended

narrative consisting of two major parts: historical background and analytical

Chronological-event listing was particularly important to this study because, as Miles and Huberman (1994b) suggested, displaying data by time and sequence preserves the historical chronological flow and permits a good look at what led to what, and when Some of the events occur before other events, some afterWe usually believe that connection exits between events. Also, Yin (2003) noted that In this sense, the the chronology is likely to cover many different types of variables and not be limited to a single independent or dependent variable. chronology can be richer and more insightful Apart from that, the innovation studies literature ever since Schumpeters illustrations of the process of creative destruction and business cycles have long emphasised historical aspects and factors (Schumpeter, 1942, Schumpeter, 1951). By the same token, the DCA of competition strategy studies also deems that path of company evolution plays a key role in shaping a companys innovative capabilities and strategies. Innovation activities and company behaviours are themselves fluid and multidimensional phenomena that encompass many interrelated and overlapping events, e.g. products, projects, investments, decisions, organisational changes, etc. In a real-life business context, companies do not only make one move at a time. Instead, they engage in various activities and forms of planning and strategising concurrently. This is certainly true of the videogame developers featured in this study. Hence, in order to illustrate these complex and multidimensional processes that each company had experienced, the researcher first displays all the key events in the form of a graphical timeline, and then provides an extended narrative and analysis (based on this display and other supporting evidence) in order to portray and explain the full richness of the chronology. 4.4.3.3. Conclusion Drawing and Verification In the last stage, all the analytical findings were grouped and synthesised under the relevant constructs. and verification. Then the draft report was shown to the company for reference The draft began with a narrative of the companys development

and ended with analytical findings with regard to the nature and characteristics of

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innovation and strategic management.

During this process, some key facts and In general,

figures were checked, and some parts of the narrative were amended. comments. 4.5. Conclusion

some minor modifications were required according to the key informants

This chapter has outlined the research strategy and illustrated the undertakings of empirical investigations in detail. The techniques adopted in the methodology, i.e. background study, survey, multiple case approach, data triangulation and chronological event-listing, help to uphold the research validity and reliability.

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Chapter 5. Case Study One: Lager Interactive

Table 5-1 Key Facts and Figures of LAGER Year of Establishment Capital (NT$) in 2007 Number of Staff in 2007 Primary Lines of Business Company Achievement 1996 175,000,000 213 MMORPG development and operation Taiwans first MMORPG developer Taiwans first 3D MMORPG developer First Taiwanese company operating online games across the regions of Taiwan, Hong Kong and China

5.1. Introduction and Background 5.1.1. Establishment and KoK Project In 1996, a group of graduate students with a background in technological and engineering established Game Work R&D Team and tried to transform a text-based Multi-User Dungeon
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(MUD), King of Kings (KoK), into a In 1999 the Team

graphic-based version. During that time, KoK was a non-proprietary and popular MUD played in many Taiwanese universities computer labs. renamed LAGER. commercialised. was acquired by China-Soft, a public-listed software publishing company, and Before long, KoK was successfully launched and Not only was this game Taiwans very first graphic-based

MMORPG, but it also marked the beginning of the MMORPG era of Taiwans videogame industry (soft6.com, 2004). KoK quickly became a popular MMORPG because it offered entirely new gameplay experiences to KoK MUDs original fan-base and many other PC game players. After installing and logging into the virtual KoK world, a gamer could play with several hundreds of real people in real time, not just with a computer AI system or a handful of people located in the same computer lab. To the original MUD

Originally MUD was a class of text-based multiplayer online computer games without graphic interfaces and could only be accessed at computer labs on campus. 124

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players, they do not need to imagine the game from the text on screen because they can actually see the game-world from the graphics on screen. In addition, the content (i.e. names of avatars, objects, locations, historical events etc.) of KoK was primarily adopted from the legacy of Chinese culture. Hence, KoK also became a popular MMORPG in Hong Kong, China and Korea by 2001. By March 2001, after KoK launched the Shanghai Server Site, the total number of fee-paying players of KoK across Taiwan, Hong Kong and China had exceeded 400,000 (LAGER, 2001). technological challenges. With regard to the content generation challenge, a producer of LAGER pointes out: It took us about two years to make the KoK project fully operational and another six months to produce an expansion pack which contained new stories, bug-fixing patches, new features (and functions), updates, and etc., but an experienced player could accomplish all missions and reach the highest ranking in a matter of few weeks. Without new content being released, the KoK would reach a saturation They point which means no more unexplored land to conquer for these players. The games popularity brought LAGER great financial success but at the same time the company also had to take on content generation and

will soon get bored; leave KoK and search for new games to play. In order to retain old customers and attract more new ones, so as to maintain the revenue streams, we have to continuously release new content. We even cooperate with a television production company and repurposed some story-lines of one of its mini series to the first expansion pack of KoK. KoKs life span. Technological challenges would also emerge when more players joined the game, for example, the difficulty of sign-in (because of the lack of capacity). In June 2001, LAGER decided to solve the capacity problem by kicking off the Tornado Project. This project planed to set up three new server sites: Xi-An (in the central part of China), Chen-Du (in the South West of China) and Guan-Zhou (in the South-East of China, near Hong Kong), and expand two old sites: Beijing and In 2002 we further released the second and third expansion packs to catch up the attrition of content and in hope to prolong

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Shanghai. After that, the maximum capacity of KoK in China would reach 50,000 concurrent players (LAGER, 2001). However, installing new servers was just the beginning, the massive array of server clusters needed a great deal of technical and managerial skills (and know-how) to run smoothly. As the operation manager of LAGER descried:

Because of limited financial resources we can not do everything by ourselves. We must find a suitable local hosting partner and ISP in each city first. Then we must manage and police the game by employing more engineers as game masters whose duties will range from monitoring the game servers passively to restoring the Justice of the game world initiatively, on the 24/7 basis. At the same time, we also have to hire and train more customer service personnel to respond to and solve complaints from customers. The operations team must be ready to deal with all kinds of problems which sometimes we do not exactly know what cause them. 5.1.2. Expanding and Diversification of Product Lines In early 2000, immediately after the launch of KoK, LAGER planned to grow by expending its product line. (GNN, 2000). cinemas. By the end of 2000, LAGER declared their partnership with PiLi Multimedia which was an IP owner of the Palm-Puppet Show in Taiwan The Palm-Puppet Show had long been a popular and Taiwanese-specific form of public entertainment prior to the arrival of modern-day Hence, LAGER began to repackage the original story and content of the After more than a year of Palm-Puppet into a new 3D MMORPG project.

development, in August 2001, a new full 3D MMORPG, Fantastic Heroes I (FH), was launched for testing. Few months later, the FH II was released to fix technical problems spotted in FH I. FH II also contained a good deal of new content and Launching the FH project was a From this project, LAGER features in order to retain its player community.

significant achievement for LAGER because it was the very first Taiwanese company capable of developing a full 3D MMORPG. stability problems. before that time. developed a new stream of technological capabilities to solve internet security and LAGER also learnt how to manage a large-complex project based on licensed IPs, which was something the company had not experienced

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In order to extend the product lines, at the time of launching the FH II, LAGER also began to run the New Lord of Heroes (NLH) in Taiwan developed by Taewool, LAGERs strategic partner responsible for running KoK I in Korea (GNN, 2002b). This kind of cooperation was new to LAGER. grow. According to the management, they considered that working with other companies in this manner was the easiest way to However, in practice, operating a full 3D MMORPG made by another company was not that easy as first thought. As the general manager of LAGER pointed out: Despite the huge budget of pre-launch marketing campaign which was necessary in an over-crowded market, both of us should commit a significant amount of resources, e.g. money, staff and time to keep the game community at the minimum level of satisfaction. We should work seamlessly to solve any abrupt incidents, which meant that they should grant us the fully access to their source code before we can fix all kinds of bug and internet security problems on-site but the suppler does not want to release the source code to us. In addition, they also should release new content more often so we need to quickly localise and offer it to our players. However they seem having their own problem on that matter. As a result that cooperation was not successful. 5.1.3. Difficulties of FH Projects Commercially speaking, maintaining and operating a 3D MMORPG was a great financial and human resource burden. The effort necessary for upgrading a companys competence from 2D to 3D was also huge. In addition, creating a licensed IP-based MMORPG, like Fantastic Heroes, was not as easy as LAGER first thought. At the beginning, LAGER considered the new project would not be too difficult, and the game would be popular and profitable because of the fame of Palm-Puppet in Taiwan and the IP, which already offered them a very intriguing starting point. However, LAGER soon realised that it did not enjoy much creativity freedom in this licensed IP project. The Palm-Puppet icons offered the company an inspirational starting point but also imposed a lot of limitations on creativity. A MMORPG must have plenty of stories to play and a wide range of distinct avatars (of unique images, shapes, capabilities, personalities, etc.) which

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thousands of players could choose from.

Hence, LAGER had to create many new

characters out of the limited numbers of Palm-Puppet characters in the original show. For LAGER, the challenges were not only about how to bring about new ideas with regard to avatars and stories in the game. The real challenge was also about how to create new avatars with unique attributes but not spoiling the genuine touch-and-feel of the Show. By the same token, how to generate new contents without revealing the story plots of same-name TV episodes showing during the same period was also a major creativity obstacle, particularly in the context of PiLi Multimedias conservatism and unwillingness to offer more support (because PiLi did not understand the nature and challenges of MMORPG development very well). This constrained situation left LAGER with no choice but to generate more images, models, stories, etc. by investing more man-months in the project. After the FH II was launched in early 2002, LAGER still managed to maintain the project, by releasing two new expansion packs while the game still retained a certain level of popularity. However, the popularity of FH did not significantly improve LAGERs profitability on this project because a large percentage of the gross profit was paid to PiLi Multimedia as licensing fee (PiLi-MultiMedia, 2007). still intended to increase the licensing fee. Worse still, the latter The negotiation between the two parties

did not yield a satisfactory outcome; hence LAGER demonstrated its intention of giving up this unprofitable project by allocating minimum resources to other projects and stopping taking fees from FHs players in early 2004. Technically speaking, in terms of solving the problems of internet lags, cheating plug-ins, client-end 3D rendering, and server architectures, the FH series was a good product. But the iconic Palm-Puppets per se were simply too Taiwanese, which made the game difficult to export beyond the island. servers in 2006. 5.1.4. KoK II 3D Project The original KoK series, launched in 1999, was LAGERs most successful product ever. It was also one of the most critically acclaimed MMORPG in the Greater It managed to survive amid harsh China market, along with the Lineage (by Koreas NC Soft) and World of Warcraft (WoW, by USs Blizzard) (soft6.com, 2004). competition for more than five years. However LAGERs ambition to extend the Eventually LAGER was not be able to find a willing partner to operate the FH series in China and closed all the FH II

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life span of the KoK title was not successful. LAGER spend three years (2002 to 2004) developing KoK II 3D, but the game still failed because of technological and managerial reasons, and market uncertainty (LAGER, 2007, Yin, 2005). With regard to market uncertainty, as one LAGER producer recalled, the company was not really sure about how much effort and resources they should commit to the new project because they already had FH and NLH in hand. profit either. In a competitive and overcrowded market, they were not sure whether the new project could make a In addition, the novelty of 3D technology made it difficult for the development team to master the coding part of project. Although LAGER had a robust technological competence ever since its foundation, this was to a large extent based on its server-end know-how whereas its client-end 3D competence was still in its infancy. Apart from the fact that FH and KoK II were both full 3D MMORPGs, FHs was using 3D technology prior to year 2000, which was not feasible for a 3D MMORPG planed to launch in 2005. In the year 2000, players could be easily satisfied by low resolution 3D images which LAGER was still able to handle. company. But in 2005, players expectations of graphics resulted in great pressures for the Therefore, when KoK II was ready for the 1st closed beta (CB) testing, the 3D technique and know-how embedded in KoK II had already become obsolete. This incurred a great deal of players complaints and negative reviews about screen glitches, freezing and unfavourable gameplay experiences. By the same token, in terms of game engines and development tool kits (dev-kits), the team was also struggling between making them in house and buying-in. As a LAGER producer explained: In the short term, although buying-in the packaged engines and tools would cost a lot of money, it would also save us a lot of time to develop everything from scratch. However, the downside was the tacit knowledge (and codes) deeply embedded in the packaged software was usually beyond our reach. not be controlled by a third-party supplier. This was not ideal for maintaining and upgrading in the long run because the companys vital tools should On the other hand, developing everything in-house was very expensive as well, because we have to commit a large With regard to this extremely critical issue, there was no entirely satisfactory solution.

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portion of engineering staff and time to do all the works from scratch. What engines and tools to make largely depends on what game (and gaming experience) we planned to deliver. However, ironically, the dilemma was no one would exactly know what features or functions the engines should or will have until the game was eventually done. The KoK II project had struggled in the aforementioned circumstances for three years. The team members also changed frequently. After undergoing three unfavourable closed beta (CB) tests in the first six months of 2005, the team were caught in a vicious circle the more problems they tried to solve the more bugs would emerge. 2006a). The numbers of players who liked to participate in each CB also diminished rapidly from several tens of thousand to just a few hundred (GNN, Back in the year 2000, online game players were more patient and tolerant However, by 2005, the situation was to unfinished products simply because they were relatively inexperienced and did not have many alternatives to choose from. very different because players were much more experienced and there were many alternatives. Once a game did not give players good gaming experience, they would turn quickly to others and the game would not last for long. from the very beginning. The lead producer of KoK II admitted that we were totally wrong and got lost in game design This kind of confession was rather unusual in this business; however it also indicated how seriously the project went wrong. The bug-laden KoK II had also undergone a problematic series of CBs in China, which was run by LAGERs partner in Beijing, a relatively new and smaller operator. Complaints from players all over China soon became unbearable and exceeded the partners capability of efficient handling. Taipei offer timely support. Neither could LAGERs head office in Three months later LAGER The partner thus gave up the game entirely in February

2007, blaming the incurable technical design flaws. also shut down the server site in Taiwan. 5.1.5. Fairyland Project: A simpler 2D MMORPG

During the period from 2002 to 2003 LAGER was growing into a multiple-project developer. By then, LAGER not only had large scale projects like KoK, New Lord of Heroes, Fantastic Heroes, but also a new smaller 2D MMORPG project, Fairyland (FL) planned for launch in early 2003. This game was targeted at school children

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and the young female market, because the team liked to differentiate this game from LAGERs other MMORPGs which contained more violent and fighting elements. On the other hand, the company did not have much idle capacity (i.e. in terms of finance and human resource) available hence a smaller 2D MMORPG was the only feasible option. By the same token, its content, gameplay, user interface etc. also tended to be less complicated in design. More importantly, a 2D project required far less effort than a 3D one. Thus the team could fully concentrate on content generation. In order to appeal to the intended market segment (youngsters and females), the team repackaged a good deal of free elements and iconic characters from fairy tales, primarily based on the Brothers Grimm and Han Christian Andersens works, into the project. One of the major benefits of doing so was that this content did not have any IP-related issues like the Fantastic Heroes series. In addition those well-known fairly tales, stories and characters could be more easily recognised and accepted by the player group with less marketing effort. FL was a very popular game and in total it had six major expansion packs released. Within the first two months after the launch, the number of registered online players had exceeded 200,000 across Taiwan, HK and China (GNN, 2003). This number was more than that of the legendary KoK. markets. As a result of the right game design and relatively low maintenance effort, the game also successfully entered some overseas Except Taiwan, LAGER signed contracts with local operators in Hong Kong, Thailand, Malaysia, The Philippines, Singapore, Canada, US, UK and France. However, in China, the market of most strategic importance to many Taiwanese videogame companies, LAGERs partner became unexpectedly bankrupt due to financial problems. market. Nevertheless, LAGER was still encouraged by the success of FL and intended to exploit it a bit further by releasing a similar game, Mystina (MT), which was totally set in the Chinese Cultural context. This time LAGER tried to find a bigger and more financially-sound partner in China. Therefore, LAGER singed a contract with The 9th City, a big Chinese company running two of the most famous MMORPG, World of Warcraft and Lineage, in China, and considered MT to be in safe hands this time. Unfortunately LAGER was wrong again - a bigger partner did not mean a better partner. The 9th City already had two extremely popular and Hence the FL series lost out on its chance in the Chinese

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profitable product lines in hand, which meant this partner was reluctant to spend more resources on marketing a new game with little market recognition. 5.1.6. Choosing the Right Partners Being aware of the increasing uncertainty of the videogame industry, in mid 2006, LAGER decided to follow a risk-averse approach by forming a partnership with Giant, a Shanghai-based MMORPG developer. Basically this move was still in line with the logic of a right partner searching strategy. But this time LAGER became more meticulous and employed a set of guidelines in partner selection. The guidelines included two basic principles: Both of them were experienced in developing and operating MMORPG, and both of them had a similar company size. These criteria for partner selection were based on LAGERs previous unsuccessful experiences. In the cooperation with Giant, LAGER exchanged its KoK III Using this co-development right for operating Giants The Road of Conquerors (RC) in Taiwan, which had already been a great hit in China since 2005 (GNN, 2006c). strategic alliance, LAGER intended to transform itself to a publishing-operating company and divest a portion of its development capacity. After the launch of RC in 2006, LAGER also planned to operate the advanced 3D KoK III in Taiwan when it was ready. Drawing a conclusion on whether the KoK III project will succeed still requires further observation.

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Graph 5-1 Timeline of LAGER

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5.2. Empirical Findings from Case Study One From the history of LAGER, some salient examples emerge of strategic management encompassing various types of innovation and managerial practices intentionally meant to create value and change the companys asset position. These examples show that the DCA is not tautological and can be a useful construct in strategic management, because they are discreet processes inside the firm that can be unambiguously causally linked to resource creation (Ambrosini and Bowman, 2009:44). In the following sections, examples of LAGERs strategic management, types of innovation and managerial practices will be outlined. 5.2.1. Strategic Management Examples The following section outlines two examples 45 of strategic management initiated and implemented by managers and staff. renew LAGERs asset position. envisaged by the strategy planners. From a text-based MUD to a graphic-based MMORPG, 1997-2002: LAGERs conversion of the KoK MUD to a MMORPG was a revolutionary innovation because videogames user interface, technology-involved, system architect, concurrent-user capacity, gaming experiences, etc. all changed radically. In terms of project management, LAGER had to learn how to manage a much larger project than it had ever managed before and hired more personnel to handle more specialised work while trying to find efficient ways to utilise human resources. LAGER also prioritised the QA and testing functions in the development procedures and established after-service teams (e.g. in-house call-centre, server-cluster/database management, content/patch updating) to extend the games online life span. In order to access new markets, LAGER formed partnerships with many local operators and internet caf chain stores, and offered them a powerful and user-friendly tool to manage the gameplay and cash flow in real time.
45

They collectively create, upgrade or

Along the processes various capabilities are

involved. However the outcomes of these processes are not always as ideal as

As a result of LAGER continuously generating new content and providing

It should be noted that it is impossible for this research to exhaustively collect every single piece of information and present every single possible case of strategic management that has existed in LAGERs history. Thus, this research only selects the most significant and salient ones to represent how LAGERs competition strategies are managed alongside various innovative activities and capabilities at play. The situation also applies to the other three company case studies. 134

timely technological supports to its partners, KoKs market grew rapidly and remained popular until 2004. In terms of capabilities, while LAGER incrementally upgrading its technological capabilities in the fields of 2D graphics, server/database management, internet security and middleware development, LAGER also created new capabilities, e.g. content creation, project management and marketing. In terms of the firm resource base, these aforementioned value creation processes created the valuable game title KoK, with a large fan base across Taiwan and China attached to it, and a good reputation for LAGER. The KoK project also brought in a large amount of financial resources which enabled LAGER to support other 3D MMORPG projects in the future. These processes accumulated a great deal of technology know-how which later turned into a powerful software system managerial tool which LAGER licensed to other software development companies. Full 3D MMORPG projects, 2000-2005: LAGER decided to diversify product lines and upgrade all its future games to 3D graphics around the year 2000. It began to develop its in-house 3D graphic engine for FH (a licensed-IP project) and then kicked off the KoK II and operated NLH (a Korean third-party MMORPG). During this period, LAGER rearranged its staff for new projects To implement This strategy in and outsourced most of the artworks to partners in China, while retaining its technology and content/gameplay design capabilities in Taiwan. partners and multiple project coordination had to be created. this strategy, capabilities such as 3D technology, communication with business general was meant to diversify LAGERs product lines and upgrade them to 3D generation. However, the result was not entirely successful. First of all, the NLH failed because of its poor quality and supports from the Korean supplier. Secondly, the FH project was technologically and commercially successful in general but the original IP holder was reluctant to continue the cooperation after 2004. Thirdly, KoK II ended up a total failure because the development team After losing a great deal of could not scale-up the in-house 3D engine (originally developed prior to 2000) to cope with the gaming requirement after 2005. financial resources from these 3D projects, LAGER decided to follow a safer growth strategy by only developing 2D projects in-house while seeking opportunities to co-developing large 3D project with the right partners.

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5.2.2. Types of Innovation From the history of LAGERs the following types of innovation can be identified: 5.2.2.1. Technology-Based Innovation LAGERs Technology-based innovations can be found in the following areas: Client-end 2D/3D graphics, system architecture, server-end/database management, internet security and middleware development. At the client-end, LAGER has to At the continuously improve its graphic rendering capabilities. However, the outcome was not ideal between 2002 and 2005 because of the lack of experience. ever-increasing size and complexity. server-end, LAGER had to deal with the database and server clusters with With regard to internet security, LAGER In order to simplify must minimise the adverse effect of communication lags and packet losses to its game design while continuously fighting attacks from hackers. (and increase the efficiency of) the problem-solving and development procedure, the company incrementally modularise its capabilities (skills and knowledge) into a proprietary software package, e.g. the Distributed Server Cluster SDK. Two major benefits of modularisation are that the company can replicate its competence in other contexts more quickly and decrease its dependence on the human-embodied skills/know-how. Since LAGERs early days, modularised SDK has offered the company a robust competitive advantage in securing new markets. 5.2.2.2. Process and Organisational Innovation When videogame systems become more complex and bigger in size, the game development process also changes profoundly. LAGER kept trying to find an Within LAGER, all the efficient way of managing the processes with specialisation and division of labour emerging both internally and externally to the company. development staff are divided into four major divisions, conducting functions like artworks, client-end 3D, server-end, and game design respectively. At the same time, all the staff members across the four divisions are individually assigned to different project teams. Each project leader (producer) is not only responsible for In addition, LAGER also set up new his/her own project but also the overall coordination of the human resource management alongside other producers. teams responsible for customer services, technical support and operations to meet the emergent needs of online game business. Externally to the company, the most
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obvious organisational and process changes are artwork outsourcing and strategic alliances because the company can no longer do everything by itself. 5.2.2.3. Product Innovation In LAGERs case it is evident to see that its products (MMOG systems) become increasingly complex (in terms of novelty of technology, system architecture, new features/functions, etc.) as the project scale is increases (in terms of man-months, budget, the ranges of skills/knowledge inputs, etc.). company has never done before. To LAGER, each new product is a significant innovation because it always contains something very new that the Each new project also involves a series of By incremental innovative activities in game design, programming and artworks. achieves product variation and differentiation. 5.2.2.4. Content Innovation Content in VGD refers to a wide and elusive range of elements (or artefacts), e.g. in-game avatars, maps, scenes, animations, music, stories, artworks, feeling, atmosphere, and many others. isolated from each other. In the interview with LAGERs management, Product and content can not be content is seemingly tantamount to product per se.

conducting numerous radical and incremental innovative activities, LAGER

New content is regarded as more important than the

technology used in the VGD process because new content design generally directs the software programming and players are attracted by new content not new technology. In order to prolong product life span, the company must generate new content on a regular basis, make necessary organisational changes and commit a significant amount of human resources to that process. 5.2.2.5. Marketing and Delivery Innovation LAGER accesses new markets by forming partnerships with other online game operators and internet caf chain stores, and delivers the game through them. To a greater extent, LAGERs technological capability, i.e. SDK, facilitates the cooperation because it gives partners more convenience and flexibility to manage the operation. 5.2.2.6. Revenue and Business Model LAGER took a public good and converted it into a rent-generating proprietary
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game title. After that, by working with business partners, more revenues were brought in through them. Alongside charging for gameplay by time, LAGER also added new game design to sell in-game items to players. of revenue. 5.2.3. Management of Innovation The following sections describe the managerial practices of VGD innovation found from LAGERs case. 5.2.3.1. Organisational Structure for Innovation MMORPGs are developed by projects. The development time of each project If the varies from one to three years, depending on each projects complexity. Few years later, LAGER also began to license its SDK to other businesses to generate a new stream

game is popular, (e.g. having good quality and after-services), it will operate for another two to three years (or more) until it loses the critical mass of fee-paying players. LAGER originated from a small single-project studio and gradually By 2004, it grew into a multiple-project developer, concurrently increased its product capacity and product lines by assembling new teams for new projects. running four in-house projects and operating one third-party game. 5.2.3.2. Drivers for Innovation In the case of LAGER, there are four major driving forces for VGD innovation. Technology development in the areas of hardware and internet drives LAGER to continuously upgrade its technological capabilities and configuration of R&D department. Market competition and consumer demand drive new design ideas and Inside the the creation of new content/experiences. In order to cope with these driving forces, LAGER also needs to change the practices of game development. also play a very significant role. company, the managements entrepreneurship and the staffs gamers enthusiasm As a result of this, the company is willing to take risks, try new things and elaborate the quality. The enthusiasm is vividly remarked upon by one of LAGERs senior project leaders: most of us are experienced videogame players too. We all have played a lot of games since we are kids. We know what makes good games and what makes bad games and of course we dont want to make bad ones, and disappoint consumers and ourselves too

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5.2.3.3. Sources of Innovation There are several major sources of innovation found in LAGERs case. Outside the company, hardware (PC/Server) suppliers provide the fundamental knowledge for game development and system architecture. Business partners and consumers feedback, even hackers attacks, help the company elaborate quality and services. Inside the company, accumulated technological knowledge also turns into a source for innovation because the company can use and refine it to solve technical problems. Designers and artists are an important source too, because a great deal of VGD activities is derived from their concepts which in turn are profoundly influenced by other cultural products and heritage. 5.2.3.4. Skills and Knowledge Schools can only provide very basic level of knowledge and skills for development work and almost all the aforementioned capabilities that VGD required are informally learnt and self-taught from the practical jobs. Despite that, most incremental innovations are one-off and ad hoc solutions. Thus relevant skills and know-how are rather difficult to compile and manage. However, LAGER still manages to modularise skills and know-how into a range of development tools. 5.3. Conclusion This chapter has reported the development and evolution of LAGER in detail. It also has extracted some salient example of strategic management, and types and management of innovation from its history. The empirical evidence shows that the DCA can be a useful construct to describe strategic management as organisational and strategic process in the long run. This is because it can help to identify some intentional value creation processes alongside various innovations and capabilities changing LAGERs asset position while its innovations and managerial practices evolve over time. The empirical results demonstrate that LAGERs implementation of competitive strategy is incremental and path-dependent as the DCA suggested. This chapter also finds that LAGERs innovative activities are multifaceted and evolutionary, and can not be singlehandedly described by the conventional view of innovation.

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Chapter 6. Case Study Two: UserJoy Technology

Table 6-1 Key Facts and Figures of UserJoy Year of Establishment Capital (NT$) in 2007 Number of Staff in 2007 Primary Lines of Business Company Achievement 1995 202,000,000 250 PC / MMORPG development and operation Transformed to MMOG developer in 2000 Merged with EWSOFT and OdinSoft in 2004 Publicly listed in 2007

6.1. Introduction and Background 6.1.1. Establishment of GameCraft and the Super Heroes Series GameCraft (GC) (few years later merged with and EWSOFT and OdinSoft to form UserJoy) was established by around ten experienced game developers in 1995. year later, it released an award-wining debut title, The Super Heroes (SH). platform. A This

game was a futuristic science-fiction simulation game (SLG) for the PC-DOS The games success primarily resulted from its AI system and interesting story-lines. Based on the success of SH I, GC further exploited this title and released SH II in 1997, which could be played on both DOS and Windows 95. Compared with its predecessor, except for improved graphics, SH IIs new parallel storylines design concept made the gameplay results more unpredictable, which was the major selling point of the sequel. In 1998, GC released SH III. This time Except the game had even more significant differences from its two predecessors. the parallel storylines design concept.

for being powered by an advanced game engine, the third sequel further elaborated In the new sequel, players could assume These More the role of one of the two leading characters, a hero and a heroine, to explore the adventurous journey. This feature was not available in the first two sequels. design concept of the legendary Twin Heroes series in the years to come. role-playing game (RPG) development. unique two-characters and parallel storylines features later became the core significantly, the third sequel was GCs first attempt to transform from SLG to By 1998, GC had grown into a
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three-project studio of around 40 employees. Lord of Ancient Kingdoms.

The first team carried on developing

new sequels for the SH series. The second team developed a less renowned game, The third team was prototyping Twin Heroes.

6.1.2. The Twin-Heroes and Fantasia Sango Series: From Simulation Games to Role-Playing Games Based on the initial successful attempt of SLG to RPG transformation in 1997-98, GC began to work on a more ambitious RPG project. In 1999, GC released the critically acclaimed Twin Heroes (TH). Completely different from GCs previous The reasons for adopting this IP works, this new games contextual background was largely derived from a well-known martial art fiction of the same name. were not simply because of its low licensing fee in comparison with other well-known martial fictions at that time, or of the ease of finding a starting point for the game. It was more the case that the development team, who were actually very familiar with martial art literature in general, considered the detective-story nature of the Twin Heroes fiction to be suitable material for use in GCs multiple storyline design expertise. The fact that this fiction was well-known in Taiwan, Hong Kong Soon after the games release in and China also contributed to its attractiveness. mandarin-speaking markets.

1999, it quickly captured the fan-base of martial art literature across In 2000, after taking a lot of end-users comments and This time with an improved suggestions, GC released the second sequel of the TH. endings.

AI and story-line design, the game eventually could have an unlimited number of GC also significantly upgraded the combating system allowing players to perform more complicated techniques with simpler controls. In 2002, GC made some major changes to the third sequel. On the graphic rendering system, in order to give players more dynamic and three-dimensional images, the designer, together with the programmers and artists, decided to represent the combat scenes in a 45-degree pseudo 3D perspective along with more graphical special effects, while still keeping the non-combating scenes as simple 2D images. In the two predecessors, graphics were all simply presented in the 2D-scroll fashion and the special effects (e.g. fighting actions, flashing, and explosions) were somehow primitive. The new design also made the graphics looking more realistic, in terms of human body movement, cloth-wavering and terrain/climate changing. against each other within a LAN. This sequel also had match-making functions, which allowed four people to play In addition, based on previous experiences and
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players complaints, particularly with regard to the lengthy game loading time, the programmers spent a great deal of effort to improve the overall efficiency of the game system, making the game-play smoother and more enjoyable (GameKing, 2006). Four years later in 2006, GC (by then renamed UserJoy) finally released the The primary reasons for such a long delay were the unfavourable next sequel.

business climate for PC games and the soaring development budget over the past few years. In addition, UserJoy had already launched the Twin Heroes Online in 2005; hence there was no spare capacity to execute another project in Taiwan. Therefore for risk aversion and training purposes, UserJoys management decided to have its Beijing-based studio, Airship (set up in 2004), make the latest sequel under supervision of Taiwanese project managers to see whether the new team in Beijing would be able to handle the entire project on its own (Airship had already participated in a few projects). By doing so, UserJoy could also save up to two thirds of the total development budget if it was made in Taiwan, which meant that if anything went wrong the loss would be bearable to the company (FonZhei, 2007). The Fantasia Sango (FS) series (first released in 2003) was the last major PC game series of GC (UserJoy) before the company entirely shifted to the online game business in 2007. mandarin. Sango was the pronunciation of The Three Kingdoms in The naming of Fantasia Sango indicated that GC intended to exploit Unlike the latters

the historical legacy in a fantasy way, which would also differentiate the game from its strategic partners (OdinSoft) the Legend of Three Kingdoms. relatively more formal and realistic narrative of the Three Kingdoms era, stressing more of the strategising and warring elements in the game-play, the FS did not accurately repackage the history into the game, instead it just ostensibly borrowed the names and characters which sounded familiar to the target consumer group and recreated a whole new cutesy cartoon style of martial art RPG romance. Except for several new and improved design features which the game had, the most notable change was that this time the new game was no longer made by a group of young male hardcore gamers, instead, by a team managed by female lead artist, designer and programmer. The new team composition was meant to appeal to the potential young female market by the feminine sense and touch in design, whereas the hardcore gamer market had long been flooded with numerous war and fighting games. Eventually, this strategy worked and won this title the best script, the best

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music and the best programming award in Taiwans 2004 Game Star Contest (Lan, 2004). In total the FS series released four sequels. The second and third sequels were even published in Japan, in 2005 and 2007, which was an unusual commercial success to most Taiwanese videogame companies. 6.1.3. OdinSoft and the Legend of Three Kingdoms Series Throughout the late 1990s, under intense competition from Japan and American imported videogames and the fierce software piracy problem, only three indigenous studios, Dynasty 46, GC and OdinSoft managed to survive in the local PC simulation game market-segment 47 (VeryCD, 2007). Established in 1997, Odinsoft was a small studio with a handful of employees specialised in artificial intelligence (AI) and board/gambling game making. However, owing to the over-crowdedness and low margin of the board/gambling game market, OdinSoft intended to rearrange the studios product lines. At that time, largely inspired by the fascinating There were two Three-Kingdom period and the success of few Japanese games drawing upon that legacy, OdinSoft decided to go for Three-Kingdom as well. main advantages of that strategy. Firstly there was no intellectual property issue involved which meant the studio could have access to a lot of free story-telling materials to be split, recombined and recreated. Secondly the studio did not have to educate buyers how to play the game because the three-kingdom is a very well-known cultural heritage. Hence, a year later, OdinSoft released its first This game received some flagship game, the Legend of Three Kingdoms (LTK).

positive reviews because it had a unique feature, which was a dynamic panorama camera angle capable of representing the entire scene of the battle field. In total the LTK series released seven sequels while UserJoy 48 gradually stepped into online game business. Each sequel had its own specific features. In 1999, a new domestic politics management system, was added into the second sequel. Thanks to the new in-game management system, the game-play no longer consisted of just waging wars against the AI-controlled foes. Players could also simulate resources management and mobilisation before going into wars, which made the game-play more realistic.
46 47

In the third sequel of 2002, players were allowed to

Established in 1991 amidst the rise of Taiwanese Golden PC Game Era. There were other local PC game market-segments, e.g. RPG and Martial Arts, proving breathing spaces to a handful of local studios. 48 The new company name after OdinSoft merged with GC in 2004. 143

create new characters within the game, which eventually blended some RPG concepts into the series. In the fourth sequel, released in 2003, a new real-time/weather system plus a smarter path-finding AI came into play, which made the game-play more realistic and less predictable. More impressively, the game system was capable of managing much more complex combating scenarios and battle-operation functionalities, largely thanks to OdinSofts ever improving AI engine (UserJoy, 2006b). In addition, OdinSoft, and GC both came to Since around acknowledge the significance of end-users review and feedbacks.

2000, they have begun to selectively screen the gamer communities comments and suggestions, and put the ideas that they consider to be feasible into practice. Moreover, these two companies even invited the communities to propose their own creative ideas with regard to the stories for the future SH and LTK sequels because project teams sometimes needed more external stimuli (UserJoy, 2003). 6.1.4. GameCraft and OdinSofts 3D Strategies With regard to 3D technology, UserJoy (GC and OdinSoft) approached this aspect of game development with some degree of caution. The management of UserJoy considered that no matter which direction or market segments the company aimed for, working in a full 3D 49 development environment was inevitable in the long run. However, 3D projects were much more expensive than 2D ones and the budget required for a new 3D project continued to rise. Along with the rapidly increasing capacity and speed of computer hardware, a developer had to (and also was expected to, from the end-users perspective) create more high-resolution 3D content. many technological obstacles. With knowledge of the higher risks and high failure ratio associated with full 3D projects from other Taiwanese studios experiences, the UserJoy management decided to play safe and only make 2.5D (or pseudo 3D) games during the transitional period. The reasons for this were, although full 3D games were inevitable for the future, they still needed time and money to develop their capabilities in this area. UserJoys management also pointed out other concerns. For example, not all the fan-base gamers would necessarily appreciate the new 3D To achieve that, the company must employ more people to do the jobs and overcome

49

All the objects that can be seen on screen should be three dimensional models. 144

graphics because the fully rotating 3D images had the potential to cause serious dizziness for many players. Also, in the early phase of the transitional period, the resolution of 3D graphics had to be lower than 2D games while still consuming greater computing power on a PC. If players did not have powerful enough PCs, glitches or screen-freezing would cause unpleasant gaming experiences. In addition, in order to ensure a bug and glitch-free 3D game, a developer must possess an extensive and deep knowledge base of a wide array of 3D graphics cards and chipsets. However, by 2007, UserJoy did not posses this kind of knowledge base (Yang, 2007). Since early 2005 UserJoy started to learn new 3D engines and tools for the preparation of the FS III. Taking all the aforementioned issues into consideration, a compromised 2.5D design concept was brought about. the major movable things e.g. characters, The concept was that all animal and NPCs

(Non-Player-Controlled Creators) would be 3D modelled whereas the scene of game-play would mostly be represented in 2D, i.e. 3D models moving about in a 2D world. By doing so, the team could preserve the original artistic touch (of the However in the action scenes, i.e. combat settings) inherited from the first sequel.

and fighting, the characters, settings and special effects would be shown in full 3D. In addition the team also applied modules developed through previous projects to simulate 3D graphic rendering within 2D settings for the non-action scenes. general this project was a mixed success. In On one hand, the practice saved a

considerable amount of man-months, particularly in the part of artwork outsourcing, by limiting the 3D modelling to a certain extent. The new sequel did indeed appeal to the original fan base by offering something new but still retained the original artistic painting style. However, on the other hand, one of the major downsides was that the game system became very inefficient owing to its unique mixture of 2D and 3D algorithms. Programmers and artists worked together to try and improve the efficiency but did not succeed. In the end, to many potential gamers surprise, this 2.5D martial art RPG had even higher PC hardware requirements than some newly released mainstream full 3D FPS (First Person Shooting) games at the same time (UserJoy, 2007). 6.1.5. Cooperation for MMORPG Development

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Since the mid 1990s, GC and OdinSoft had begun to work with each other (outsourcing) on programming and game design, because neither had sufficient human resources to do everything by themselves. co-develop their first online game. development. know-how. In early 2000, in addition to their long term cooperation, they decided to enlarge the scope of cooperation and This was because both companies were aware that a MMORPG would be much more complex and difficult than PC/RPG or SLG A MMORPG project needed more resources, capabilities and In order to maintain an MMORPG until it became profitable, a

company also had to commit a good deal of financial resource for at least three years (two years development and one year operation). In this new project, GC was responsible for the game design and OdinSoft was responsible for providing technical solutions for the server and client-end. shared the workloads equally. With regard to artworks, they After nearly two years In 2001 this new project team was officially

established as a new company called EWSOFT.

development, the Holy Land (HL) was launched for CB testing in Taiwan, Hong Kong and China. However, in general this new MMORPG did not received good reviews. In comparison with other MMORPG during the same period, the HL was The game had complicated design and still premature (MoonSoft, 2003). fan-base.

functionality but its content (story context) did not seem to appeal to GC/OdinSofts Players also complained the understaffed EWSOFT could not pay In Taiwan, the HL was operated by enough attention to players suggestions and release extension packs as frequently as other MMORPGs (GameBase, 2007c). EWSOFT and then by UserJoy itself, which managed to keep it online by releasing several extension packs until it lost the critical mass of players. In China, the situation was not good either because GC/OdinSoft did not manage to find the right partner for their first MMORPG. In June 2003 a Shanghai based operator, WonCore, began to establish seven sever sites and sell gaming credits to tens of thousands gamers all over China. However to everyones surprise, WonCore shut down the server sites one after another during the period from late 2004 until mid 2005, without any warning or explanation and closed all its online business (Chang, 2005). This incident did not only severely impact the reputations of the two studios involved but also meant that they failed in their first MMORPG attempt. In 2004, the management of GC and OdinSoft decided to formalise their long term

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cooperation by merging three studios and renaming the new group to UserJoy. This new company consisted of three teams transformed from the three independent studios. In response to rapid technology development, a new department was also set up for developing/maintaining engines and tools, and providing technical solutions. Except that except that the new merger, UserJoy acquired Airship, a development team of around 40 people based in Beijing, China, responsible for providing 2D and 3D artworks. By the end of 2004, UserJoy grew into a large developer with more than 140 employees and running six major projects concurrently (three MMORPG and thee PC games). After UserJoys first MMORPG attempt failed, the company was more cautious and decided to bring its renowned Legend of Three Kingdoms series onto the internet. On one hand, the management considered that the potentially huge fan-base of the LTK would be advantageous once the LTK Online launched. offline PC game market. One the other, they considered that going online was inevitable because of diminishing returns from the In terms of technological strategy, UserJoy chose a less This decision saved a great deal of time for risky approach and stuck with 2D.

UserJoy because it could easily recycle and modify the artworks from preceding sequels, and focus on creating more stories, maps, and ad-hoc missions etc. However, transferring an offline game onto the internet was still challenging. player on one PC. In offline games, the game system is much simpler, because it is designed for one However a MMORPG is designed for tens of thousands of They The development team was people playing against each other concurrently across different localities. system that is required is therefore far more complex.

unable to predict what would happen and how the game would be played. For example, although UserJoy went through a very lengthy Closed Beta (CB) testing stage, from early 2004 to late 2005, to ensure that the LTK Online system could tolerate the extreme high loading of tens of thousands of players on the system, the LTK Online still encountered numerous problems when it was launched for the first Open Beta 50 testing in China. In this test more than 10,000 players entered on to Within a week, the numbers of concurrent According to the management of In the system in less than five minutes.

online players exceeded 100,000 (YeSky, 2005).

UserJoy, most of the problems were never even considered by the team.
50

Players can register and play-test the MMORPG for free whereas for Closed Beta (CB) players have to apply for permission before play-testing the game. 147

MMORPG, sometimes the so-called bugs were not caused by programming errors, as is the case for most offline games, but by loop holes in design logics (i.e. design flaws) which were impossible to spot and fix before the game launched. The bigger the system grew, the more loop holes the system could have. Hence, as well as generating new contents regularly, UserJoy had to assign another support team to stand by and fix all possible problems on a 24/7 basis, all the way along the life span of this MMORPG. In general these two MMORPG titles were popular across Taiwan, Hong Kong and in other East Asian markets. The popularity could was evident from the increasing After a series of CB(i.e. Closed-Beta, numbers of server sites in these territories.

internal online testing) for more than three years, the LTK Online still reached a record-breaking 80,000 concurrent online players in Taiwan alone (GameBase, 2007a). To some extent, selecting the right partner had also greatly contributed In Taiwan, UserJoy teamed up to the success of UserJoys second online attempt.

with SoftWorld and one of its affiliated companies, GameFlier. SoftWorld was responsible for marketing and promoting the new games, and GameFlier was mandated to the online operation. Hence UserJoy could concentrate on delivering new contents on a regular basis and solving technical problems. games were mandated to Iyoyo, also a child company of SoftWorlds. other major Chinese cities. In China, the Not only the

marketing of the LTK Online, Iyoyo also managed to find suitable server hosts in UserJoy and SoftWorld had been working together in Trust and the PC game publishing business for a very long time already. facilitated their new cooperation in MMORPG. Commercially speaking, UserJoy had been very successful over the past few years, in comparison with other major Taiwanese videogame companies (UserJoy, 2006a). This is confirmed by its public listing on the Taiwan Stock Market in 2007. Its success was largely based on the smooth transformation from PC to MMORPG. However, UserJoy was rather weak in 3D technology. This problem became After that, particularly acute when the company was developing the FS III in 2005.

familiarity built over time between the managements of the two companies,

the management decided to buying-in a full set of 3D engines and tools from BigWorld Technology, an Australian software provider, because the internal team

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failed to come up with a satisfactory solution. UserJoy planned to use these new tools to make its next-generation of full 3D MMORPG. 2007b). Before that, UserJoy could only run third-party 3D MMOG to fill the gap in its existing 2D product lines (GNN,

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Graph 6-1 Timeline of UserJoy

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6.2. Empirical Findings from Case Study Two The following sections will first describe the examples of strategic management from the history of UserJoy, and then will outline the types and management of innovation, respectively. 6.2.1. Strategic Management Examples This section gives three strategic management examples from the history of UserJoy showing that there are some discreet value creation processes. values (i.e. changing existing assets) for the company. managers and staff members. and competition processes. The growth of GameCraft, 1996-2003: During this period, this small single-project studio managed to grow and expand by multiplying their product lines and differentiating the content/design they offered. It incrementally refined its technological capabilities in the areas of 2D graphics, artificial intelligence, internet communication, etc. These capabilities enabled GameCraft to create new content/design and offer new experiences to players. Content creation and technological capabilities both helped GameCraft to explore niche markets. During this period, GameCraft began systemically selecting feasible end-user feedback and using it to influence its game design while the PC games themselves became more complex and real in terms of design, functionality and gameplay. By the end of this period, some obvious changes to its firm resource base had occurred. For instance, GameCraft created two valuable titles: Fantasia Sango and Twin Heroes. GameCraft also developed a set of editing tools for game In general, the design and developed a good reputation for game development. as an offline PC game developer. From PC-offline to MMOG business, 2000-2004: During this period GameCraft planned to enter the MMOG business but found its technology and resource base were insufficient to cope with this strategy, because an MMOG was much more These processes are These processes also initiated by managers, full of various innovative activities and meant to create involve various capabilities which are developed, upgraded or modified by In fact, these value creation processes are innovation

outcome of this strategy was successful and GameCraft remained in the business

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complex than a offline/LAN PC game, and the project life cycle were also very different owing to the requirements of content generation, quality control and online operation. Thus, it adapted a series of new practices setting up a new firm with OdinSoft with which it co-developed its first MMOG. Using this strategy, GameCraft intended to convert its business model from one-shot deals to continuous online subscription. To make this happen, GameCraft developed a new set of capabilities, such as communication and coordination with strategic alliances, large-scale/long-term project management, technologies related to internet/server engines, continuous content creation and MMOG operation services. This strategy made some changes to GameCrafts resource base. The It also gained complementary but firms game portfolio had been widened. flexible.

crucial resources from the strategic partner. The firm structure became more In addition, the firm obtained valuable experience in MMOG In general the outcome of this strategy was development and operation.

successful except that the first MMOG did not manage to find a right operation partners in China (because of the lack of experience). 3D technology strategy, 2005-2007: The newly merged UserJoy pursued the 3D graphic strategy meticulously, because it was well aware of the failure of other companies in full 3D MMOG projects. benefit of this approach was three-fold. Consequently it decided to adopt a UserJoy thought the First, it could start learning the 2.5D approach, i.e. 3D models moving in a 2D world.

production of 3D models and objects which was inevitable to stay in this business. Secondly, it would limit the soaring full 3D MMOG budget to a certain extent. Thirdly, it would face less technical difficulties by not going for the full 3D world. During this period, it tried to develop a set of in-house engines and editing tools while gradually outsourced artworks (including 3D modelling) to a business partner in China. 2D/3D graphics, During this period, technology capabilities in the domains of internet communication, server/database management,

middleware development played a crucial role in this value creation process. This process was intended to create new technology assets and content creation capacity for future use. However, in the end, the 2.5D system performance Thus it decided to acquire a was far from ideal and could not be used on its MMOG projects. Neither did UserJoy make a good 3D engine by itself.

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third-party 3D tool set in 2006.

However, before it could release its own full 3D

MMOG, UserJoy operated third-party MMOGs to fill the gap in its product lines. 6.2.2. Types of Innovation 6.2.2.1. Technology-Based Innovation In general, GC and Odins technology-based innovations are found in the areas of 2D/3D graphics, Artificial Intelligence, special effect programming, internet communication for LAN/MMOG and game engines/tools development. robust competitive advantage in the market since their early days. carried on improving the AI engines in the MMOG era. The programming capability of artificial intelligence had given these two studios a Their war simulation games had become popular because of their superior AI engines and they In terms of graphic rendering, USERJOY continuously improved the quality and special effects of 2D graphics, and adapted a not-so-successful pseudo 3D approach to take on the technology discontinuity it faced. To the company itself the pseudo 3D approach was innovative but it did not work out as well as envisaged. UserJoys technology-based innovations can also be seen in activities associated with learning how to construct a large complex MMOG system and the back office supports (server/data base management, internet security, etc.) which the company had never experienced before. The company also tried to assemble and build its own game engines and tools from accumulated knowledge and experiences. 6.2.2.2. Process and Organisational Innovation To cope with the increasing financial risk, specialisation, technological novelty and increased workload, the two studios conducted some process and organisational changes. First of all, the management tried to utilise human resources more Secondly, beginning from efficiently by rotating them around different projects.

outsourcing and cooperation, the two studios then set up a new firm and co-developed their first MMOG project. In 2004 they eventually merged into a new company, UserJoy. Thirdly, they prioritised the importance of the game testing in MMOG projects and tested the quality at every single stage of the development project. This practice had not existed in the offline PC game project until that point. In addition, in order to operate MMOG projects, new teams and departments were established to perform functions such as content/patch releasing,
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customer-services and operation management. problems and provide services. few years. 6.2.2.3. Product Innovation

Except for activities associated with

content/patch releasing, these staff worked on a 24/7 basis to solve technical This was also a first time practice in the industry. In short, there were significant organisational and process changes over a period of a

In terms of product innovation, the following practices are found.

GameCraft and

OdinSoft tried to diversify product lines/content and to explore niche markets. Their videogames experienced incremental changes as they continuously added new content, patches, subsystems, components and functions onto the new releases. More importantly, it should be noted that the concept of videogame per se changed radically during the transition into MMOG business. software service. The offline PC game to some extent is like boxed-product. However, the MMOG is more like a large complex The formers shelf life usually only lasts for few weeks whereas the latters online life span may last for a few years. 6.2.2.4. Content Innovation GameCraft and OdinSoft continuously created new content to offer new gaming experiences to consumers. music. Content is a comprehensive concept that includes Thus almost every aspect of game design, e.g. story, gameplay, style, aesthetic, avatar and In fact content can not be disintegrated from the videogame itself. product line diversification is also about content diversification. In the case of UserJoy, empirical evidence suggests that content innovation played a driving role in technology-based, process and organisational innovations. 6.2.2.5. Marketing and Delivery Innovation When moving into the MMOG business, UserJoy gradually stopped selling games through the traditional distribution channels and publishers. business line. 6.2.2.6. Revenues and Business Model Innovation In the offline PC game business, revenues were generated from arms-length transactions and one-shot deals between the game studios and consumers, mediated
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Instead, it began to

deliver its service products through the internet as MMOG became its primary

by the publishers. the internet.

This business model changed radically when UserJoy entered

the MMOG business in which consumers deal with the company directly through

6.2.3. Management of Innovation 6.2.3.1. Organisational Structure for Innovation Videogames are produced by projects. Since the late 1990s, the size of development projects grew radically, from a handful of people in an offline PC game project to around 80 in a 2.5D MMOG project. The increase in the size of projects was accompanied by an increase in the complexity of game making. In the offline PC game era, a project team would usually be disbanded after the game was published. But in the MMOG era, the project team continuously worked on the game for few years until it ceased online operation. 6.2.3.2. Drivers for Innovation On one hand, technology development in the areas of hardware and software forced UserJoy to adopt the relevant skills and knowledge, and put them into practice in its new products. On the other, technology development made software pricey more severe, so UserJoy considered going for online game business was inevitable in order to bypass such as a crisis. Market competition together with consumer demand and expectation also drove UserJoy to make new games with new designs, content and experiences. In addition, evidence from interviews suggested that the designers enthusiasm for making better and more interesting games also playing an important role in driving VGD innovation. 6.2.3.3. Sources for Innovation Technology development in hardware and software (especially their suppliers) provided necessary knowledge for technology-based innovations. To some extent, end-users provided valuable feedbacks for quality control and future game design, as UserJoy started to select feasible ideas and put them into practice. designers and artists who played a significant role. 6.2.3.4. Skills and Knowledge
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Programmers

and engineers did not play leading roles in initiating projects in UserJoy, unlike

This case study found that skills and knowledge required for VGD were accumulated from the muddling-through process and experiences. was informal and mostly done on-the-job. engines and development tools. MMOG projects. The training The studios tended to retain these tacit

skills and knowledge within the organisation by modularisation them into game However this practice did not guarantee success. In fact UserJoy failed to develop advanced 3D graphics engines and tools for Thus it acquired the relevant skills and knowledge from a third-party by buying in its development tool kit. 6.3. Conclusion This chapter has offered a detailed historical account of the company development. It also has extracted some salient examples of strategic management (alongside types and management of innovation) from the company history. This case study finds that the DCA can be a useful concept in strategic management because it can help to identify and describe UserJoys value creation processes which involved different kinds of innovative activities and capabilities. The processes are intended to change UserJoys resource base and strategic position. However, the outcomes of strategic management are not always successful. The empirical results also demonstrate that UserJoys success is a muddle through long term process as the DCA suggested. In terms of types of innovation and management of innovation, The the findings do no entirely comply with the conventional view of innovation. findings imply that alternative points of view should be taken into account.

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Chapter 7. Case Study Three: InterServ International

Table 7-1 Key Facts and Figures of InterServ Year of Establishment Capital (NT$) in 2007 Number of Staff in 2007 Primary Lines of Business Company Achievement 1989 240,000,000 330 PC/Console/MMOG development and Operation Advanced 3D and Motion Capture Technology 3D Martial Art Speciality Genre-Setting Game on Xbox International Outsourcing Service Provider

7.1. Introduction and Background 7.1.1. Established as a Multimedia Contractor InterServ was established in 1989 as a small multimedia contractor, specialising in producing multimedia projects for some of MNCs (Multinational Corporation) branches in Taiwan. experiences in From working with MNCs, InterServ obtained valuable management and learned the significance of project

attention-to-detail in software development, both of which were key to fulfilling the requirements of demanding international clients. Working with MNCs made InterServs development rather different from other Taiwanese videogame companies. This was because, from its initial establishment, InterServ was already exposed to a harsher and more challenging business environment. provider in the years to come. Strengthened by those international experiences and gradually building up its reputation, InterServ was mandated to develop a software application of music education programme for school children in 1993. Later that year, the application PR was the very first Palala Rhapsody (PR) was successfully released and then received the best educational software award from the government. Taiwanese-made cross platform (PC and Mac) CDROM product, which
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This was also

probably why InterServ could make itself an international outsourcing-service

demonstrated that InterServ already possessed certain capabilities in software development. In 1994 InterServ was further commissioned to develop A-Maos ABC, an English learning application for children, which was later distributed by Longmans channel throughout the Asian markets and sold over 60,000 units (InterServ, 2007). Ever since then, the A-Maos education series has been one of the companys most famous franchises and gradually evolved into numerous categories and sub-product lines, ranging from language learning, painting, music composing to webpage making. Ever since then, InterServ started to publish its growing array of educational game-playing software, while still carrying on its original multimedia business, working with MNCs on projects such as staff management and training multimedia applications for IBM and McDonalds in Taiwan. According to InterServs general In 1994, manager, by 2007 InterServ had developed more than 3600 web-based games and applications across 23 product lines in its e-learning and training business. InterServ also began considering videogame development. To a greater extent, its

success in multimedia and education software was of great help because it had already accumulated financial resources and management experiences. InterServs reputation also helped it to obtain financial support from bigger local companies, i.e. E-Ten (a big software publisher), Acer (a renowned hardware manufacturer) and Third-Wave (a large publishing arm held by Acer). 7.1.2. Exploration of New Lines of Business In 1994 InterServ planned on using its competences to explore a new line of business, which was videogame development (Du, 2001). In 1995, its debut game Takalamagan the Legend of Dunhuang was released. In many respects this was an innovative product. Derived from the companys earlier education software business, the game was basically a word and mathematic puzzle adventure blended with some elements of Buddhist-wisdom and oriental mysticism. The story context was adopted from folklore circulating in Ancient Northern China. Moreover, instead of just adding monotonous MIDI music to games like other local companies, InterServ spent a substantial amount of budget on the sound tracks making the game-play more engaging. The game, which was considered to be a Chinese version of Indiana Jones, was critically acclaimed and sold over 300,000 copies,

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translated into nine languages. 2004).

This was a great success for InterServ because none

of Taiwans videogame developers had had such achievement at that time (Kao, In the technological respect, in order to offer players more sensational visual experiences and to overcome Microsofts technical limitation on CDROMs screen size, InterServ adopted its proprietary graphic engines to render full-screen 3D graphics in real time, which made the game-play an absorbing 3D First-Person adventure. Thus, Dunhuang was awarded with the best innovation application in 1995s Outstanding Information Product Contest. As a result of InterServ Soon after, the demonstrating its robust competence in 3D graphic rendering technology and project management, in 1997 Acer decided to finance its new 3D project. project also received R&D funding from Taiwans government. After the success of the first attempt at videogame business, InterServ planned to pursue a more ambitious strategy, to become one of the top international videogame companies with the capacity to run multiple full 3D projects in-house concurrently. Hence, soon after the release of Dunhuang and the start of new 3D engine/tool project, InterServ allocated a staggering budget of NT$ 36,000,000 (much larger than any of its contemporaries) to develop an original-title project, Yamaraja 51. It planned to run for three years (1996-99) and to create a totally new series of 3D action/adventure games. During the same period, InterServ was also commissioned by Acer and Golden-Harvest, a Hong Kong based film production MNC, to develop Hot War, a 3D action PRG based on the same name movie in 1998. On one hand, the Hot War project was an exemplary case of cross industry cooperation which had not been done by a Taiwanese game company before. InterServ also showed that it could deliver the project within a very tight schedule 52. However, owing to the tight budget and schedule, and the fact that the film producer did not understand the nature of videogame development, InterServ could only use its obsolete 3D technology to make the game and had very little time left to polish the details. Hence this game was not very popular and did not stand out as the funding party expected (GNN, 2006b). InterServs ambitious Yamaraja did not progress as smoothly as it had been thought because the project was much bigger (content and team size-wise) and more
51 52

Hinduism, the Lord of Death. InterServ was asked to release the game at the same time as the film. 159

complex (technology and management-wise) than had been expected.

The

company underestimated the level of technological novelty. The company planned to create this new 3D match-making action game (for up to 8 players) using its newly developed 3D tool set (from the aforementioned 3D engine/tool project). However, in practice, the engine/tools were too immature to support the development teams requirements and the company had problems in recruiting sufficient engineers to work on the engine/tools project. Other agendas such as the undefined division of labour, the disarrayed pipeline of workflow, the unorganised working documents and numerous technological limitations, particularly with regard to 3D rendering and internet connection, all together undermined the quality of the game and resulted in a huge financial loss (including the money made from education business). promised a new financial support scheme (Chang, 2004). Later in 1999, another team released Sacred Sword. Different from previous game From The failure of this project nearly forced the chairman of InterServ to declare bankruptcy before investors

design, this title was a mixture of RPG and Real-Time Strategy game (RTS).

the technological perspective, this game had superior performance on 3D graphics rendering, which resulted from a building on the Hot War projects graphic engine. In fact, InterServ was the only Taiwanese developer at that time which was capable of developing games of fully rotating 3D graphics and offering fully operational zoom-in-zoom-out functionality. However, in the area of RTS games, being competent in artificial intelligence 53 was one of the key elements. Unfortunately InterServ had less know-how and experience in this area. Hence on the game community forums, players frequently complained about the Non-Player Characters (NPC) strange movements and the unfairness in the game-play. But a more serious problem was that this game did not come with an absorbing and well-known contextual setting (story). Thus this game experienced difficulty in the marketing aspect of the process because it lacked a strong selling point. This case illustrates that astonishing cutting edge 3D graphics alone were not enough to make a good game (GameBase, 2007b). Actually, in
in which way and how intelligent the AI should be, varies from case to case and truly depends on the nature of game design 160
53

1997, the management had noticed the potential challenge of creating an original title without borrowing ideas from any well-known stories. 54 with them. In early 1999, after releasing Yamarajr 2 and Sacred Sword, InterServ carried on developing its next large scale RPG projects for the PC platform, Sword Man (SM) and Giant Eagle (GE). fictions. Both were converted from the same-name martial art This was The SM team was much larger than the GE team, because the former was Hence, in 1998, InterServ decided to sign up several martial-art IP contracts and planned to work

also responsible for SM Online (Sword Mans MMORPG version). InterServs very first attempt of MMOG business.

In 2000, the two martial art titles were released, one in summer followed by the other in the winter. These two series along with other popular martial art titles In the making of these games, including Wind & Cloud 2 (2001), Mater Li (2002) and Meteor Blade (2002) were all based on well-known martial art stories. InterServ took full advantage of its now mature 3D technological capabilities and tools developed since 1997, which were capable of rendering much higher resolution 3D models and smoother motions (by using Motion Capture). InterServ made the martial art RPG much more realistic and better than any other competitors. While the products and technology were becoming better, the management of production was becoming more challenging and complex. required 3,000. For example the leading characters of SM1 only required 500 polygons to render but a year later in SM2 they To some extent, this was driven by rapid technology development particularly in hardware. However in the meantime, the project had to at least triple the size of the art division to handle the extra workload. In SM2, designers also added few more functionalities to the game system in order to increase the variation of game-play, such as players could change weapons and learn new fighting skills whenever possible, and players could change combinations of NPC team-mate to accomplish a specific mission. To meet the requirements of the new design, the They programmers needed to generate hundreds of thousands more lines of code to command the much more detailed characters, objects, and special effects etc.
54

Throughout the late 1990s, most of the popular local games were more or less based on licensed IPs, i.e. renowned Martial-Art Fictions, without cutting-edge technology. 161

also had to overhaul the previous AI and combating systems in order to fit into the new design concept. 7.1.3. Challenges in Game Design and Artworks In terms of game design, although InterServ had obtained a set of potentially attractive IPs, the company still had much more work to do. First of all, it had to find more professionals to rewrite the martial art fictions into operational screenplays. Then the screenplays (and storylines) had to be discussed thoroughly In particular, many extremely important fictional among team members to with regards to feasibilities, company resources, technological capabilities etc. martial-art elements e.g. fighting techniques, forms and styles, that were written in the books, needed a great deal of creativity and imagination to transform into graphical fighting sequences. InterServ also had to hire more leading artists to control the overall aesthetic settings and the look of in-game characters, while dispatching other artists to carry out fieldworks in the exact locations of China mentioned in the original books to recreate the authentic ambience of the poetic martial art world. The management was aware that these details cost more time and money but were vital in order to differentiate themselves from other similar products in the market. In 1999, InterServ began to outsource a good deal of artworks to third parties in Taiwan and China because of the increasing amount of development work. However, the third parties in Taiwan could not provide sufficient support to InterServ whereas service providers in China were not trustworthy in terms of trade secrets. Hence, InterServ decided to scale up its Shanghai office into a fully The new branch was primarily responsible for generating operational branch.

labour-intensive works in large quantities, ranging from 2D concept arts, 3D modelling, 3D animation, full motion videos (FMVs) to game testing. After that point, every time the Taipei head office set aesthetic concepts for new projects, the Shanghai branch would start to rig up numerous variations against each original document or draft, and send it back to Taipei for selection and approval, and then rework the selected ones accordingly. Even the seemingly least important in-game objects might be sent back and forth for several times, let alone the very

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important items such as leading characters, scenes, and weapons etc. In order to secure the support for this work, InterServ had to keep a large number of artists (200+) in the Shanghai branch, because artists were not be able to mass-produce their work. In some cases, a specific artist was unable to generate the feeling which was required by the head office and the branch manager had to find alternative artists. In some other cases, artists were under stress and needed to freshen-up their feeling by working less intensely for a while. It was also common to see that artists could not just work on something of ancient Chinese idyllic style this week and next week be assigned to draw something of post-industrial futuristic style. By the same token, the production of animations Therefore, InterServ had to keep a large team of and FMVs was also a highly skilled, labour-intensive and time-consuming process, which required diversified inputs. sources. 7.1.4. Technological Capability Development Motion capture (MoCap) is an important firm-specific capability for InterServ. Since 1997, InterServ started to use MoCap to improve the unnatural and robotic movements of its in-game characters. graphics and animations. In 1999, InterServ found it was worth acquiring more advanced MoCap facilities because it greatly improved its 3D The company started to use it more comprehensively in In order to ensure that MoCap Then the all its future games, especially the martial art ones. artists in order to retain a certain level of flexibility and variability of the artwork

could deliver what InterServ wanted, project leaders had to forecast their MoCap requirements using written documents with graphical presentations. MoCap team began to arrange proper directors, performers and timetables for each project. On average, a larger project might need to capture few thousand sets of motions. Including onsite-redo, modification, exporting, texturing, key-frame tuning and discussion within teams, the whole process usually took several months. The workloads were quite heavy and intense, and required a substantial amount of experience and communication skills to smooth the iterative multi-tasking process. Giant Eagle 1 (2000) was InterServs (and also Taiwans) very first game made with full-scale MoCap technology. After that point all InterServs games were made

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with its ever improving MoCap technology.

In Wind & Cloud 2 (2001), InterServ

bought-in the latest tracking devices for facial expression capture (FaCap) for the in-game animations. This required much higher levels of precision and attention-to-detail than the MoCap, and also contributed to the game becoming a great hit across the Greater China market. In Mater Li (2002) the MoCap team Gradually adopted wire-work to perform the in-game flying-kicking and flying-jumping stunts 55 which had never been seen in a martial art RPG before. InterServ refined its MoCap capability and began to offer MoCap services to other companies, ranging from videogame developers and animation producers to film makers around the globe. During this period, because of the MoCap works, InterServ had the chance to invite numerous martial artists with unique combating techniques and styles from all over China to perform and accumulated a great deal of valuable know-how. According to InterServs GM, by 2007, it was probably the only company in the world to possess such a large martial arts MoCap database, which was an invaluable asset and offered a huge advantage to InterServ in game-making. InterServ started working on contemporary 3D technology in 1997. years, it experienced mixed successes. In the first two

After that, it received a substantial amount The new Technical

of funding from private and public sources, and hired a new Technical Director to carry on developing engines, tools and working platforms. Director had not only helped to develop the platform, but also brought his civil engineering background into InterServ to assist the company in streamlining the production pipelines, formalising schedules and milestones and mobilising resources etc. In general, InterServ developed robust capabilities in 3D graphics since 1997. InterServs technology division started working on server and network related technology in 2000. At that time, the division was trying to solve Sword Man Onlines lagging problem, i.e. screen freezing caused by traffic congestion between servers and clients, by implanting a path-prediction algorithm loop, which had been widely applied in telecommunication and navigation technology, into the game architecture. The algorithm was designed to predict the NPCs movement paths on the client end when the data packets were lost or delayed between servers and clients.
55

Like the stunts in the movie Matrix or Spiderman. 164

Hence, whenever that happened, the algorithm would keep moving NPCs along the predicted paths until the connection was restored. To some extent, the algorithm was meant to solve the lagging problem and was a key component in ensuring a pleasant gaming experience. However, when the SM OL was launched for testing, players still reported the lags of game-play. To some extent, this was owing to the relatively bigger size of network data packets which jammed the internet traffic and server sites. Reducing the size of data packets was possible but would inevitably compromise the gaming experience. In the standalone Sword Man PC game, the system was only dealing with up to four people within a LAN at one time. In the MMORPG version, the game system was in fact handling hundreds of thousands of players concurrently and each of them might have a slightly or entirely different PC architecture and quality of internet connection. There would also be a lot of players using cheating applications or plug-ins to hack the system for their own benefit. Many other issues, similar to the data packet size problem, were not discovered before the game was launched for pressure testing. According to one senior programmers remark, in the standalone PC games time, we all fell into a huge relaxation when the game passed the last testing stage, but nowadays in MMOG era all what we can do is just waiting so perplexedly to see what is going to happen and nobody knows In practice, the technology division kept fixing major problems one after another by issuing updates and patches while designers and artists were working on new designs, features, stories, contents, etc. from early 2001 to the end of 2002 (GNN, 2002a). However, by the time the system had been optimised, the games fresh feeling to the fan community had already gone, especially when there were 160 or so alternatives in the market at that time 56 (BNext, 2003). 7.1.5. Unexpected Setbacks in the Online Game Business From 2001 to 2003, by launching two LAN games and three MMORPGs in a very short period of time, InterServ transformed from a PC game developer into a multi-project online game developer. However, InterServ overlooked the high risk
In 2003 there were 160 or so online games (including MMOG and Online Match-Making games, Taiwanese-made or imported) in the Taiwanese market alone, whereas in 2000 there were only about 10. 165
56

and underestimated the level of resource commitment required to run several projects concurrently. Especially in a big country like China, the costs of finding a suitable partner for each region and of getting the product exposed to the public was extremely high. Before long, InterServs management realised that the risk of At that point InterServ was still doing all kinds of online game business was about five to ten times higher than the offline-PC game business (China-Times, 2004). works by itself i.e. maintenance, operation and marketing, while all its LAN/Match-Making and MMORPGs were not making sufficient money. As a result, in the two years to the end of 2003, the company had already lost a staggering NT$ 160,000,000, equivalent to 70% of company original capital and the EPS (Earning Per Share) of 2003 dropped to minus NT$6 57 (Kao, 2004). That was the biggest ever setback since InterServs incorporation. In 2004, InterServ reconsidered its strategy and decided to team up with WaYi, once a resourceful publicly-listed Taiwanese publisher, in the MMOG business. WaYi would operate all InterServs remaining online games both in Taiwan and China, while InterServ would concentrate on game development and reduce the marketing budget to the minimum level. However, after losing the big operation license contract of Stone This incident Age (a very popular MMORPG in China) from the original Japanese developer, WaYi also became caught in a series of financial troubles. encouraged WaYi to try to transform itself from a publishing operation into a game developer by recruiting new staff, buying expensive new tools and acquiring new local studios. But none of WaYis development projects succeeded. Hence, from 2004 to 2006, all InterServs game servers run by WaYi in Taiwan and China were shut down one after another. The only exception was InterServs Taiwan-Japan co-developed M2 (MMORPG). This game was still being run, maintained and updated by a local company in Japan called UTD, until late 2007. This case indicated how important a capable and resourceful local partner was in the online game business. The partnership with UTD reduced the sheer operation and marketing loading for InterServ. The former also fed in design concepts from the local perspective, which saved InterServ a considerable amount of trying-out time.
57

Moreover, it was notable that it was

The original price per share was NT$10. In this case, 60% of investors money was lost. 166

InterServs first ever successful cross-cultural international cooperation and proved to be the key stepping stone for the companys next round of transformation. 7.1.6. Transformation to an International Service Provider The 2001-03 setback did not only force InterServ to retreat temporarily from online game business but also to transform to a third-party outsourcing service provider. However, being an international service provider it still had to overcome a series of challenges. First of all, raising awareness of the company among the biggest top developers was a lengthy and uncertain process. potential clients and gather market information. networking events yielded no immediate results. FMVs). InterServ had to regularly attended events such as conferences, seminars, trade shows, etc., in order to meet In most cases, these kinds of On a few occasions, potential

clients might ask for some artwork samples (ranging from 2D and 3D modelling to Once clients acknowledged InterServs capability (quality, style and Gradually punctuality) and after trying them out several times, they might first give InterServ some simpler tasks e.g. making unmovable 3D in-game objects. InterServ built up its track record in global artwork outsourcing business and began to provide more complex services with more technological elements e.g. MoCap, FMVs, testing and even full game projects. On one hand, outsourcing service provision was not merely a series of labour-for-money processes. In fact, InterServ also gained a good deal of experience and know-how, ranging from conceptual brain storming and marketing skills to negotiation techniques. The most important were the opportunities to learn ways of doing things from the top players in global videogame development business. On the other hand, however, the extent of service provision InterServ could provide was always confined by its own real-life experiences and cultural boundaries. In one case, InterServ failed to win a major outsourcing contract from a top UK developer on a football videogame project because, after several rounds of trying-out, InterServs artists were still unable to recreate the authentic feeling of a football match and footballers motion, muscular features and textures etc. The client later realised that was also owing to the lack of artists real-life experiences in

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the sport. In some cases, Japanese, American and European clients might have very subtle differences in the perception of aesthetics, such as the colour of moonlight, the thickness of fog and setting of scenes. As an artwork outsourcing service provider, InterServ needed to learn these differences and tried to offer services (with right touch and feeling) to clients when clients first received the artwork samples back from InterServ. This capability was very important to save time and money. In some another cases, the level of difficulty and attention-to-detail of working with top international clients was also far beyond InterServs expectation. For example, once InterServ and the other company entered the last round of the bidding competition, the other company won the contract simply because InterServs naming of the development specification document did not comply the clients requirement, which indicated InterServs documentation management was not good enough and might compromise the games quality (Kao, 2004). After working with various top players in this business on numerous projects over the past few years, InterServ gradually built up the necessary capabilities and reputation, and made itself known to the top international publishers (e.g. SEGA Sammy and Microsoft XBox). By 2005, InterServ had become the first non-Japanese Xbox game developer in East Asia. The title Iron Phoenix (IP) which had been funded since 2003 was published Actually, this title had already won the Most by SEGA Sammy in 2005.

Innovative Game Award in E3 2004 because it is the first game of its kind, joining strategic team-play with weapon-based melee combat, and featuring characters, weapons and a storyline worthy of a Kung-Fu film Iron Phoenix introduces a new genre to online games, allowing up to 16 simultaneous players in team combat with Xbox Live enabled play (TeamXbox, 2004). The Iron Phoenix project was a three-way cooperation between InterServ, SEGA-Sammy and Microsoft and was also the toughest outsourcing case the company had ever delivered (GNN, 2004). In fact the IP originated from Meteor Blade (MB, 2002) and MBs genuine game-play design concept could be traced back further to an extremely popular LAN/Match-Making 3D FPS game Counter Strike (developed by Valve Software, 1999). Early in 2000, the staff started considering the feasibility of adopting CSs

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intense, quick-paced, round-based and teamwork-oriented game-play into the context of 3D Cong-Fu fighting games. At the same time they also found that no one had ever tried to do so in the overcrowded martial art RPG market. Thanks to InterServs proprietary 3D technology plus its experienced MoCap team, the MB project was capable of combining all the necessary elements to deliver an entirely new gaming experience and became a popular LAN/Match-Making game throughout the Greater China market. to Xbox. After Iron Phoenix, another Japanese videogame company, Namco Bandai, mandated InterServ to develop Mage Knight (a 3D LAN/Match-Making game) which was released in 2006. Before long, the Microsoft-funded Word Puzzle (an Xbox 360/Live Arcade game) was released in 2007. By 2008, InterServ had already became a renowned third-party console game developer and an outsource service provider, while at the same time working on its own next major MMOG project. According to the general manager, InterServ will keep its strategic flexibility and return to the online game business when it is ready. In 2003, InterServ managed to pitch the MBs idea to SEGA Sammy and then converted MB (later renamed to Iron Phoenix)

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Graph 7-1 Timeline of InterServ

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7.2. Empirical Findings from Case Study Three Based on the previous sections, InterServs strategic management, types of innovation and management of innovation will be reinterpreted and addressed in the following sections. 7.2.1. Strategic Management Examples Based on InterServs history, this section will briefly describe three examples of strategic management. In general these strategic management examples were initiated by InterServs top management and meant to create values for the company. In fact these processes were also innovation processes because they involved various kinds of innovative activity. Alongside these processes, different kinds of capabilities 58 were dynamically and intentionally used, created and upgraded by managers and employees who all contributed to changing the firms resource base. However, theses value creation (and innovation) processes did not always successfully achieve the original objectives of competition strategies. Entering VGD business and technology capabilities development, 1996-2001: Based on the success in the multimedia and education software business, and its 3D capability, InterServ entered VGD business with an initial success. In the In At following years it continuously upgraded its 3D capability alongside the hardware technology development and formalised the 3D R&D department/team. motion capture technology (MoCap) and formalised a MoCap team in 1999. match-making and MMOGs. order to make its 3D graphics even better, InterServ began (in 1997) to explore the the same time, InterServ also started to engage internet technologies for Interacting with real people in the online games was thought to be more exciting and more fun. Despite bringing games from offline to online, InterServ diversified its product lines by incorporating new content, gameplay and 3D special effects (MoCap, martial-arts) to offer astonishing experiences. To cope with the growing complexity and demand of content generation, the company had to hire more non-technology personnel (or work with film/TV directors and martial artists), such as artists, designers, script writers, animators, etc.
58

Meanwhile, the company attempted to stabilise the VGD process

It is important to remember the distinct between Dynamic Capabilities and capability. By definition and in a broad sense, a capability is part of a companys resource base that can generate rents. Thus a capability can be changed (learnt, created, renewed, etc.) like the resource base in general. However, DCs are a framework for analysing strategic management. 171

by imposing more stringent engineering disciplines because the company had to manage much larger projects which it had little experience of. These were all new things for InterServ and it consequently had to upgrade some of its existing capabilities (3D graphics, project management, etc.) and create some new ones (e.g. content creation, game design, MoCap, online gaming, etc.) The actions conducted by bosses, managers and employees collectively changed InterServs technology assets, product portfolio, reputation, managerial experiences and content creation capacity. by this strategic campaign. Entering the Match-Making Game(MMG) and MMOG Markets, 2001-2004: To prevent software piracy and transform its business model, InterServ entered the online game markets in 2001 initially by repackaging its kung-fu, fighting and round-base PC games as an online MMG. other through the LAN connection. Up to 16 players can fight against each It offered much more exciting gaming However, although not all the changes were positive, because some projects lost money, in general, the firm performance was enhanced

experiences than just playing against a PC. InterServ worked with many regional internet caf chain stores to hold fighting contests throughout Taiwan and China and soon created a great deal of market-hype for Meteor Blade.Net. This game comprised of some of the best elements and capabilities that InterServ had developed over the past few years, such as kung-fu combating, MoCaP, 3D graphics, martial-art genre, high quality artworks, etc. However, this round-base, quick-paced combating game lacked absorbing stories (or content) to increase its stickiness to players and it consequently failed to generate a long-term stable revenue stream. campaigns and maintenance works. Thus the fan base enlarged and dwindled quickly alongside a series of high-sunk cost marketing InterServ made a good deal of process and organisational changes for its MMG and MMOG plan, such as new server cluster management teams, a much larger artwork force, a new project life cycle, and new QA and after-service practices, etc. By 2003, it was running six projects concurrent (one PC, two MMG and three MMOG), which collectively consumed a huge amount of financial resources. During this period, some capabilities played significant roles, such as marketing, technology, content creation, financial support, multiple-project management, etc. By 2005, some obvious changes of the firm resource base could be identified. InterServ became even more famous with more advanced 3D and server

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engines.

It gained experience in concurrently managing multiple large projects

while increasing content generation capacity radically. Its product portfolio was diversified and expanded; including the legendary Meteor Blade.Net but InterServ had also lost a great deal of financial resources. The overall outcomes of this strategy were multifaceted. The trajectory of 3D kung fu fighting games led InterServ to The ambitious strategy ended release the highly acclaimed Iron Phoenix to Xbox. service provider. Staying in business as an international third-party service provider, 2004-2007: After realising the high risk and difficulties associated with being an all-inclusive game developer, operator and publisher, and suffering heavy financial losses, InterServ shifted its focus to service provision. The management assumed that the revenue streams in this new business model would be more predictable. During this period, the company again made some significant organisational changes. It first divested some of its in-house online game management and operation capacity and let third-party operators to run its surviving games. in-house projects. Then it cancelled some Meanwhile The redundant artwork workforce was not laid-off immediately.

up losing a lot of money. InterServ was then forced to transform into a third-party

Instead, it was regrouped to serve different international clients.

InterServ established a set of KPIs to evaluate the performance of each staff member and project team, respectively. In order to attract more attention from potential clients, InterServ attended tradeshows, conferences and other industrial events more frequently in order to showcase its 3D graphics capabilities, Martial Art MoCaP, concept arts, etc. and explore the needs and trends in the global VGD outsourcing market. During this transformation, the previous experiences and know-how of working with some heavy-weight clients, e.g. Microsoft Xbox, Sega Sammy, Namco Bandai, and high quality games and artworks were valuable assets. Based on that, InterServs capabilities, such as marketing, requirement capturing, documentation/QA, business negotiation, artwork creation and cultural difference awareness, were either created or enhanced. The outcome of this strategy was overwhelmingly successful as one of the senior managers remarked. 7.2.2. Types of Innovation From the cases above, the following types of innovation can be found.

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7.2.2.1. Technology-Based Innovation Cross platform (PC and Mac) multimedia development and overcoming limitations associated with MS Windows on 3D graphic rendering had established InterServs initial technological competences from the early days. At about the same time, the company started to improve its AI engines in order to compete in the RTS/SLG market but the result was not ideal. In the long run, continuously improving its 3D graphics engines (funded by government project and bigger companies) and Motion Capture (with a large martial art database and relevant know-how) constituted the companys most significant technological innovative activities. These later assisted InterServ in developing popular 3D martial art action games for PCs and consoles, and becoming a globally renowned developer and outsourcing provider. InterServ also engaged in some less obvious but still significant innovative activities such as learning and improving internet and server technology in order to optimise the performance of online game systems. technological sense. Working in a new development environment (from PC to console) also required a lot of learning and trial-and-error in a Although console makers, like Microsofts Xbox will provide development platforms and know-how, porting an old title to a new console platform is a still difficult task, because they have different hardware layouts and architectures. A significant part (codes and content) of a PC game system has to be rewritten and reconstructed in order to fit into the new consoles system pipelines. In addition the developer also needs to redesign the user interface. Hence, although superficially the look of a console title may be identical to its old PC counterpart, underneath the system, there are a lot of implicit innovative activities embedded within the new title. 7.2.2.2. Process and Organisational Innovation From only a handful of people to few hundred, InterServ has been undergoing a series of process and organisational change since its establishment. of public listing 59. First of all, InterServ quickly expanded the numbers of project and product lines especially around the time Secondly, the level of division of labour, specialisation and In practice, InterServ has complexity in VGD also went up significantly. In order to cope with those changes, more efficient HRM became the key to survival.

59

However, the ambitious expansion also inflicts the financial crisis. 174

implemented a HRM platform along with an array of Key Performance Indicators (KPIs) to evaluate each individual and each project teams performance. In the past, when project teams were small, communication was not a significant managerial issue. However, when a project involves several locations, companies and more than a hundred personnel, the company has to learn the importance of formal communication. Hence, the exchange of ideas, solutions and technical notes and memos has been gradually documented and standardised, and can be accessed on a common platform across the whole company. changes as well. In terms of project management, there were some However, testing The testing and Before game testing was only seen as a secondary function and

would only be carried out when the project nearly finished. no longer headed by relatively inexperienced junior QA managers.

became much more important to MMOG and console projects so the testing team was debug functions are now used in the early stages of the projects, inseparable from the process of game development as a whole. In general, although the company was trying to formalise the organisation and process (pipelines) to increase efficiency of VGD and HRM, the pipelines continue to evolve in the long run. Hence, the company has to keep learning and adjusting dynamically to new circumstances. 7.2.2.3. Product Innovation InterServs innovations can also be observed in the history of its product line diversification (in style, genre, gameplay, content etc.). affordable). New products usually evolve from old products by combining ideas (old and new) and technology (new but In an attempt to produce new products, InterServ created a whole new This new genre is based on a genre of 3D Chinese Martial Art Action, by chance.

series of well renowned Chinese martial art novels and enabled by InterServs advanced 3D and Motion Capture technique. In order to appeal to consumers and to offer new experiences, the development teams continuously add new features and functions to new products. when they go online. 7.2.2.4. Content Innovation InterServ utilised its available resources and capabilities to gradually transform from education software to videogame, and then third-party service provision. VGD domain, the content of its VG is rather culture and history-centric. In the The Hence, new products become larger and more complex

management of InterServ considers that content is probably more important than

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technology 60, because new games (particularly sequels and online game updates) do not necessarily have to comprise new technology 61, but they must have new content. Hence new content is almost a synonym for new product, and content innovation is tantamount to product innovation. Content design is difficult to segregate from technologically innovative activities within the company, because, in the process of implementing new content, there are always numerous, lengthy and intense iterations ongoing between designers, artists and engineers, throughout the project cycle. They learn to understand each others thoughts and languages in order to work together. In general, content design will set the direction and reasons of the technological activities of the company. At least in InterServs 3D martial art action games, that is the case. The sources of content are prosaic and various, giving more emphasis to aspects such as the feeling and touch. Sometimes decisions with regard to content design come down to very subjective decisions, or personal favourites. 7.2.2.5. Marketing Innovation When InterServ first entered the online game market in 2001, it conducted a series of marketing campaigns with many local internet-caf chain stores in Taiwan and China to promote its match-making games. business clients. 7.2.2.6. Revenue and Business Model Innovation InterServ has experienced three major business model transformations. First it evolved from a multimedia/education software company into a high-end PC game developer, then from offline PC game development to the online game business. In 2004, for the sake of survival, it radically transformed to a work-for-hire business model and became a low-profile outsourcing service provider. 7.2.3. Management of Innovation The practices of innovation management seen in the aforementioned examples of strategic management will be addressed in the following points. Since 2004, InterServ carried out a series of marketing activities in the outsourcing market to draw attention from international

I believe this is a way that interviewees emphasise how important the content is. Good technology capabilities are always important to VGD. 61 It could only contain patches for fixing bugs. 176

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7.2.3.1. Organisational Structure for Innovation VGD is organised by projects. The size and life-span of projects increased radically since InterServ entered the online game business. InterServ ran 5 to 6 large projects concurrently. offices. 7.2.3.2. Drivers for Innovation Technology development both in hardware and software drove InterServ to continuously renew and update its in-house capabilities and tools. InterServ also kept generating new content alongside astonishing new special effects and experiences to satisfy growing consumer appetite. role in driving VGD innovation. 7.2.3.3. Sources for Innovation Outside of the company, sources of innovation came from technological development (in the areas of hardware, graphics, internet, etc.), hardware suppliers (e.g. MoCap and console), consumers and clients and tradeshows etc. generated many executable ideas. Within the company, informal social activities, formal internal competition and brainstorming also Artists and designers concepts, shaped and influenced by other cultural products and heritages (TV, film, fiction, martial-art, etc.), were also crucial sources for innovation. 7.2.3.4. Skills and Knowledge As well as the aforementioned technology-related skills, a wide range of non-technology skills or knowledge in the domain of arts, design, management, cultural awareness, etc. are all crucial to InterServs survival in the long run. To a great extent, most of these are accumulated from experience and on-the-job training. 7.3. Conclusion This chapter has first described the history of InterServ in detail. management of innovation undertook by the company. Then it has extracted some salient strategic management examples, and analysed types and The analysis finds that the DCA can be used to describe the strategic and value creation processes in which the
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Between 2001 and 2004,

To cope with the complexity and

workload, InterServ had to coordinate these projects across different locations and

In addition, evidence shows that

developers enthusiasm and managers entrepreneurship also played a very important

company dynamically utilises its resources (including its capabilities), alongside multifaceted and evolutionary innovative activities, to survive a high-velocity business environment. The success and survival of InterServ in the long run in However, fact is an incremental and path-dependent process as the DCA described.

as the DCA suggested, the empirical results also show that there are no guarantees of success. Thus the construct of dynamic capabilities, to some extent, is a useful in the research of strategic management.

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Chapter 8. Case Study Four: SoftStar Entertainment

Table 8-1 Key Facts and Figures for SoftStar Year of Establishment Capital (NT$) in 2007 Number of Staff in 2007 Primary Lines of Business Company Development 1989 4,700,000 500+ PC & Online development & operation Chinese Martial Art Romance genre setting games Taiwans first console game developer (SEGA Saturn) Taiwans first PC game developer selling games to Japan

8.1. Introduction and Background 8.1.1. Establishment and PC Games In 1988, three videogame hobbyists decided to formally incorporate their amateur SoftStar periodical as a professional videogame magazine reporting the latest foreign videogame news (primarily from US and Japan) and introducing videogame tricks (e.g. secret passages, magic passwords, weakness of the foes, etc.) to Taiwans growing videogame market. In the following year SoftStar began to expand its business by recruiting more people to localise these foreign games into Chinese versions because most local consumers did not have sufficient English or Japanese proficiency to read the instruction manuals or to understand the in-game conversations. Before long, videogame localisation and translation became one of the companys primary business lines. Apart from that, SoftStar also began to make in-house games by imitating some of the most popular imported games at that time. By 1992, SoftStar released two games by itself and achieved initial success in the game development business. Given the simplicity of game-making and the growing A Taiwanese market in the mid-1990s, SoftStar rapidly grew into one of the most productive developers in Taiwan, capable of releasing 10 to 12 new games a year. few of them later turned into the most long-lasting and popular titles in the market. For example, Sword of Emperor (SE) and Chinese Paladins (CP) were two of the most renowned and best selling games across the greater China market. SoftStars success was unique and unprecedented in comparison with many other Taiwanese
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counterparts, because, throughout most of the 1990s the Taiwanese RPG market was dominated by imported games. in the Taiwanese market. SoftStars Sword of Emperor, first released in 1990, was a genre-setting (Chinese Martial Art RPG) game in the greater China market. It adopted a good deal of Chinese prehistory folklore and mythology as the games story-lines, and used Chinese ink-wash painting techniques to express the in-game artistic conception. These two unique features were both unprecedented in the industry and the market, providing the authentic Chinese idyllic atmosphere that imported PC games did not have. media. In addition, the whole contextual story of this videogame was originally In terms of technology, the SE was also an advanced product when it was Thanks to the teams engineering background and created by the development team, not converted from any particular existing novels or released to the market. During that period, in terms of quality and design, SoftStar was the only company that could compete on a par with foreign game makers

knowledge, the SE was the one of handful Taiwanese-made games supporting the new AdLib audio standard and discrete VGA graphical cards which, together with original story lines, offered more sensational and absorbing gaming experiences to players (ITOC, 2000). Thus the game rapidly became a popular RPG title across the greater China market and a landmark franchise from then on (SoftStar, 2001). Four years later, SoftStar released a sequel to carry on narrating the unfinished story from the debut edition. The graphic resolution of the sequel was still the same as its predecessor (320 x 240 pixels) but the colour that the new game system could render was upgraded from 8 to 16 bit. This improvement was largely the result of the teams efforts to catch up with the latest PC hardware development. As a result of overall superior quality and originality, the SE 2 was one of the very few Taiwanese-made games to be sold in Japan. In 1995, based on the same technology platform (DOS), SoftStar released another expansion pack. After that the SE team faced some challenges because Microsofts Windows was overtaking DOS to become the mainstream Operation System on the personal computer market, and SoftStars knowhow on DOS needed to be renewed. It took the development team three years to learn the new technology and tools before they could convert the SE series onto the Windows OS. Finally in 1998, the latest Windows edition of SE on CD-ROM was released to the market. This edition was not only a new sequel but also included all

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the previous contents (with much improved graphics and special effects) plus many newly composed sound tracks. As well as retaining the authentic Chinese touch, alongside with better graphics, music and animation, the team also invented several new features into the game design, e.g. the Pot of Evil Refining system, the Five Element Medicine system, and new combating & weapon system. and also made the gameplay more versatile and unpredictable. created a new market segment (SoftStar, 2001). SoftStars other famous franchise was the Empire of Angles (EA). In 1993 in order to differentiate from the already famous SE and to attract more female and younger players, one team adopted a non-violent and no-bloodshed approach to making the real time strategy (RTS) game, the EA. debut, a sequel was released in 1994. feedback. Unlike the overwhelming Chinese Touches attached to the SE, the EA offered more of a western look. After the EA Both were popular and received positive However, in 2000 when the company released a new full 3D edition for These subsystems By that time, the and ad-hoc functionalities gave players a greater sense of control and entertainment, essence of the Chinese martial art RPG genre had been largely precipitated and

the Windows 2000 platform, the game did not receive good reviews, because SoftStar had released the game prematurely. At that time, SoftStars 3D capability was still not good enough to perform smoothly on the new Windows platform of various hardware configurations. failed. Thus, SoftStars first attempt at 3D game development However, a bigger problem was that, according to one senior producer,

SoftStar did not have a properly coordinated 3D technology strategy, which made different team within the company struggling to make their own development tools. As a result, that wastes a great deal of value time and human resources in the first few years of the new millennium. 8.1.2. Technology Strategies Throughout the first few years of the new millennium, SoftStars technology strategy had always been fluid. The company did not clearly decide on the approach of the Thus the company did not implement a consistent development of the game engines and tools (e.g. developing them in-house or acquiring from a third-party). technology policy across different teams and branches either. That was because each in-house development team had long tradition of independent operation in game

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design and tool development. The pro-independent tendency of each team was not a problem in the 2D era given the relative simplicity and ease of game development, in terms of technology, human resources and time and budget management, at that time. For example, back in mid-1995, from brainstorming to beta testing, a major project such as SE or CP only needed a handful of experienced people to get the project done in less than six months. commonplace. tasks than nowadays. Within each team, multi-tasking of personnel was Each person performed a wider range of (but much less specialised) 3D graphics were irrelevant because only 2D images were

needed, and producing 2D images did not require advanced engineering background and skills by todays standards. Thus, the division between programmers, artists and designers was not as definite as it is today. These practices were in place because At back then everybody was using the same artwork tools called PRO-MOTION on DOS workstations, and everyone could grasp the 2D concept without much trouble. by one team, hence outsourcing did not exit. that time, the level of division of labour was low and most of the work could be done Game testing and debugging were considered the last and simplest task attached to the end of each project. However, when it came to the 3D era, from technological perspective alone, work became far more problematic. Numerous unexpected technical problems, big or small, emerged sporadically throughout the project. For example, in setting a 3D Then character, in-game avatars can be put into 2D drawing only after a series of discussions and iteration with regard to its would-be feeling, looking, style etc. the in-house artists or third-party artists need to produce different versions of the 2D-conceptual avatar which the development team or the designer can choose from. At about the same time, 3D artists will begin to draw the wireframe for that avatar when its 2D conceptualisation is almost done, and then try out different kind of skins and textures on the wireframe. But at this state the avatar is still far from finished. Artists will be asked to make more changes before the model is ready to be used. Considering that one avatar may take a three-person team a month, the magnitude of the job becomes clear when it is considered that there can be few dozens of 3D avatars like this to be made in a major project 62. After that programmers had to generate million lines of code through game engines to
Not all avatars require the same level of attention-to-detail, some may need less effort (man/month) to finish. 182
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bring 3D characters to life after animators fine-tuning on their body-movement and weighting. Apart from that, 3D games also have to consider camera angles, scenes, setting, lighting, any moving parts, objects, special effects, etc. In the case of SoftStars EA project, with limited time, budget, number of technical personnel, and knowledge, an independently operating team without much external help would not be able to manage all these challenges by itself. Even the company as a whole could In 2002, not provide support because other teams were busy on their own projects.

in order to restore the EAs reputation and fans confidence, the team gave up the 3D attempt and decided to make the new sequel entirely by advanced 2D technology (Lin, 2007). The lack of adequate technology and management experience also reflected upon the mixed-success of other new 3D projects from 2000 onward. In 2001 after the SE team failed to develop new 3D engines on its own, the team took over the Empire of Angles semi-finished 3D engines in the hope that they could modify and upgrade the engines for it next 3D projects, the SE 4 and the SE Online (GamesSina, 2004). Unfortunately, neither project is regarded as successful. aspect. The SE 4 was heavily criticised for its underperforming 3D graphics and inferior quality in almost every Also because of the rough 3D graphics, these two games lost the authentic Chinese Touch inherited in previous SE editions (because the quality and resolution of the 3D graphics had to be compromised) and disappointed the huge fan-base across the greater China market. Even worse, the SE Online was full bugs and loopholes with which players could easily use plug-ins to collect the in-game valuables and to move up their ranking in the virtual world (SoftStar, 2001). That situation was grim for SoftStar, because it not only increased the costs/workloads of operation team but also decreased the amount payments that SoftStar received. During the same period of time, another bad decision was made by SoftStars management 63 after the CP 1 for Window 2000 was released in 2001. The thing was that SoftStar appointed two teams at the same time but working separately on the same CP franchise. 2 (2D) and CP 3 (3D) games in 2003. company time and resources. This opportunistic decision-making resulted in SoftStar releasing two totally unrelated CP This was a serious misallocation of valuable A senior project leader admitted that, during that

period, SoftStar did indeed have difficulties in strategy planning and implementation,
Anecdotal evidence suggested that was because different teams (based in Taiwan and China) were competing for the control over the lucrative Chinese Paladins franchise. 183
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because all the agendas were entirely new to them. The situation only got a little better after the company gave up pursuing other daunting business plans, closed redundant units/branches and introduced a new common development platform, RenderWare (DuoWan.com, 2007). 8.1.3. Diversification and Expansion In SoftStars early years, product diversification was its primary strategy to explore market opportunities. Within the company, different project teams were encouraged to compete with each other and to propose new game ideas. All together the company had many attempts to create hit titles but not all of them succeeded, except for a few games, e.g. the aforementioned SE, the Empire of Angles (EA) and the Chinese Paladins (CP). The CP, along with the SE, was always regarded as one of SoftStars most legendary and popular franchises throughout the Greater China market. It was also the very first videogame made by a Taiwanese company ever been converted to TV drama. In fact the revenue of licensing contract in 2005 came just in time to save SoftStar from the brink of bankruptcy due to serious mismanagement, expansion and internal competition from 2000 onward which left the company in a bad shape. Back in 1995, encouraged by the impressive success of the SE, another team began to prototype its own project. In order to be different and unique, the CP team also attempted to create an original story based on Chinese cultural heritage. In practice their way of constructing the story was rather different from the SE, instead of adopting a realistic and historical event-based world-view, and emphasising the stand-off between good and evil, the CP team fabricated a surreal romance setting in an unknown epoch. martial art RPG. Unlike the SEs gameplay the second sequel became more of a heroic and large scale real time strategy style, however the CP was still genuinely a The debut CP was made for the DOS platform in 1995 and quickly became a market hit title. At the same time the CPs popularity across the Greater China market caught SEGAs attention and then the giant Japanese publisher decided to convert the CP onto its own game console, SEGA Saturn. Asian markets in 1999. After the CP Windows 95/98 edition released in 1997, the CP for Saturn also published across the other East Technologically speaking, it was a remarkable achievement for SoftStar, because after three years work, SoftStar was the first ever Taiwanese

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company capable of making console games, which required the team to have a whole new set of technical skills and knowledge. The game development process and the techniques that were applied were so different from DOS and Windows platforms because the consoles fundamental hardware layout was very different from IBM-compatible PCs. However, this technological achievement did not bring proportional commercial benefits to SoftStar, because SEGAs defeat in the game console battle against Sonys PlayStation in 2001 also annihilated SoftStars significant investment of time and effort in Saturns technology domain. Despite the aforementioned setback, SoftStar still managed to become listed as a public company on the Taiwan Stock Exchange in 2001 (largely based on its previous commercial success throughout most of the 1990s). That public-listing enabled the In company to pursue more ambitious business plans by capitalising on the market.

2000, for growth and expansion purposes, the company established SoftStar Beijing (for PC game development) and SoftStar Global (in Taipei) for online game business. In 2001, the Taipei HQ set up a new division for mobile game development and signed several online game operation deals with foreign companies for online game operation. Then, in China, the company set up NetStar (in Beijing) and SoftStar Shanghai, responsible for a long list of tasks ranging from game development (PC and online), operation and marketing to publishing. In 2003, the management carried on its grand strategy, targeting platforms such as mobile, PC, online and consoles. But all these expansions and diversifications seemed to be happening too quickly and unchecked. In 2004-05 SoftStar suffered from a massive financial loss, and soon realised most of it plans were not achievable. Even though the management debated the companys general marketing and technology strategies a satisfactory conclusion was never reached and the company was forced to cease stock trading, to close branches companies, and to lay off redundancy in 2006-07. 8.1.4. Attempts of MMOG Business Since the year 2000, when SoftStar became a public company, it has shown a great interest in online games and intended to expand its presence in that area, because it appeared to be a new lucrative business. Soon realising that launching totally new business lines was not easy, SoftStar could only sign an operation contract for Fantasy for You (F4U) with Eyagi, a Korean online game developer. However, this new

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third-party games popularity only persisted for a few months after which the highest number of concurrent players dropped from 350,000 in February 2001 to a few hundred in January 2003 (Lai and Wang, 2003). Apart from fierce competition in the online game market, lack of operation and management experience were the primary causes of its failure, because at the very beginning SoftStar did not realise the importance of access to the game source codes, hence it did not buy the codes from Eyagi. By the time the game was fully operational and constantly loaded with For example, several thousand players on the servers, numerous problems emerged. parameter setting without the developers real time support. plug-ins) and requests (for new content).

SoftStar was unable to carry out any minor modifications, content localisation or Thus SoftStar could not rapidly respond to players complaints (with regard to others players use of illicit Over time the game lost customers to other When Eyagi started new or well-managed like-products. The lack of experience also resulted in SoftStar choosing a wrong partner in the risky online game business. the online game business. the cooperation with SoftStar in the first place, this Korean developer was also new to Although its game had reasonable quality, by the time the In fact, for the sake of survival, Eyagi had game was in full operation in Taiwan, this small company had failed to arrange sufficient support and human resource. already diverted its very limited resources to other new projects (SFStudio, 2003) . As a result of the unpleasant experiences of cooperation with Eyagi, SoftStar changed its operation strategy. First of all, SoftStar would no longer prioritise finding the cheapest original game providers as although Eyagi asked for a relatively low licensing fee their after services quality was not ideal. Secondly, SoftStar became For more cautious about potential providers track records and sustainability.

example, SoftStar would study whether potential partners online games were already successful, whether the games had operated for more than a year or so, whether those partners were regularly releasing new stories and patches, and whether relevant websites had a lot of discussion about the games. Also of importance was whether The contracts of this the partner was willing to reveal the source codes to SoftStar.

kind might cost SoftStar dearly but the games also had a better chance to be profitable in the longer run. According to these principles, SoftStar decided to team up with Square Enix because this big Japanese game company had many successful franchises around the globe, such as Final Fantasy and Dragon Quest. SoftStar also

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considered Square Enixs superior capabilities in technology and development would save a lot of trouble when the game went online. In early 2001, SoftStar began a series of free tests of Square Enixs Cross Gate (CG). By the end of this year, after CG started charging fees from players, the number of concurrent players had already reached 25,000. This figure was very good in comparison with many other MMOGs in Taiwan when the competition was extremely intense (GNN, 2001). Generally speaking, CG was a successful operation project in Taiwan, not only because the game had better quality but also because of the abundant contents which had been regularly released form Square Enix. In addition, because SoftStar possessed the source codes, the game had always been well-managed (SFStudio, 2003). applications, developing new contents, etc. SoftStar could promptly handle many kinds of problems by itself, e.g. combating illegal This was very important when the market competition was fierce and players loyalty to a specific game was low. However in China, the CGs operation was not successful owing to Chinas massive market size. As SoftStar had already decided to operate CG entirely by itself, its subsidiary company (NetStar in Beijing) had to manage finding qualified local server sites, ISPs and Internet Cafs across every single major city in China. NetStar also needed to take care of all the customer service jobs and launch efficient marketing campaigns on a regular basis to create market hype. Even if SoftStar had the source codes in hand and frequent new contents from Square Enix, the sunk managerial and marketing cost of CG in China was very high, particularly while SoftStar was suffering massive financial losses from its other expansion plans (from 2001 to 2004) (Ho, 2007). Hence, before long, CG was given up in China.

In September 2007 Square Enix announced a new 3D CG had been under development for a year or so and the old 2D CG in Japan and Korea would soon be phased out (GNN, 2008). Owing to CGs long term popularity, anecdotal evidence showed that SoftStar would also sign a new operation deal with Square Enix. However, whether the later would release source codes and whether the former could manage the game smoothly this time still required some further observation beyond 2008. On one hand, working with Square Enix on CG project was relatively fruitful. To some extent, Square Enix used Taiwan On the other had, it did not guarantee all products from a bigger company would necessarily become great hits in Taiwan.

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as a new products testing ground because it was much cheaper to launch a new game in Taiwan than in Japan or China (PacificOnline, 2005). Actually from 2002 to 2005 SoftStar had been mandated to launch two online games (Depth Fantasy and BuyKo) in closed beta (CB) format in Taiwan for Square Enix and the results were quite embarrassing. Although the two projects ran many rounds of testing for a year or so but never attained a satisfactory result. To a big company like Square Enix, the results just meant they had to close these projects and transfer the teams to other upcoming projects. However, to SoftStar it was a serious waste of time and money, and, even worse, it jeopardised SoftStars reputation in online game business (PacificOnline, 2005). In order to avoid this kind of embarrassment in the future, Hence, SoftStar Blade 3D SoftStar began actively searching for more potential partners.

introduced some more third-party MMORPG to Taiwan after 2004. famous ones.

Online (by Chinas PixelSoft) and Cruz del Sur (by Japans KOEI) were relatively

Since 2000, going online had become imperative to SoftStar. Except bringing in several third-party MMORPGs from in Japan, Korea and China, SoftStar also planned to transform its critically acclaimed CP and SE franchises onto the internet. In fact, in 1998 SoftStar had already secretly initiated the CPs online transformation. However in the ten years to 2008, the CP Online never passed the online testing phase. To some extent, from the managerial perspective, the extreme disorientation and diversification of SoftStars strategy form 2002 to 2007 might somehow explain the failure of CP Online project. During that period, SoftStar engaged too many lines of business concurrently. For instance, it not only intended to develop games for PC, consoles, online and mobile platforms, but also planned to be a developer, publisher and operator across the Greater China market on its own. studios were struggling for the control of valuable franchises. From 2000 to 2007, the All these Among them, the lack SoftStars HQ in Taipei had to manage six studios in China and Japan.

of coordination, in terms of technology strategy, knowledge-sharing and resource management, made the long existing internal competition even worse (Gao, 2007). From a technological perspective, going online was not an easy proposition to implement. When SoftStar first tried to make online games in 1998, the team did not recognise the potential level of complexity and the amount of work involved.

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Hence the internet engine of CP Online could not handle the extremely high volume data stream when several thousand players logged into the game servers. The team tried to improve the engines performance, but the fundamental design of the game system was flawed and needed to be overhauled accordingly. Therefore SoftStar had no choice but to suspend the project in 2001. About the same time SoftStar had already begun operating MMOGs for Eyagi and Square Enix, and come to realise the nature of online game operation. Belong long, SoftStar reactivated the CP Online project but in 2003 it failed again. This time was because SoftStars 3D technology and relevant managerial skills were still far from maturity, which resulted in countless bugs and delays in the gameplay (17173.com, 2006). In order to save the reputation of the company and the valuable franchise, SoftStar suspended the project once again. On the other hand, the situation of SoftStars another famous franchise, the SE, was not too good either. Because SoftStar wanted to launch its own MMORPG so desperately (owing to the diminishing PC game market and booming MMORPGs in Taiwan), the company rushed the SE Online into market and began charging a fee from players in October 2002 prematurely. The SE Online adopted the same 3D engine as the SE 4, which had already been heavily criticised for its underperforming graphics, hence this online game resulted in another major failure in SoftStars attempt at online game provision. The quality of SoftStars games only got better in 2004, after SoftStar bought-in and became proficient at a totally new set of engines and tools, RenderWare 64, which had been used in the projects of SE Online 2 (also called Dream of Mirror), SE 4-1, CP 4 and CP Online (2007). Similar to other third-party MMOGs operated by SoftStar, SE Online 2 was popular in Taiwan but faced very strong competition and high sunk costs in the greater China market. Therefore the better quality-SE Online 2 did not ultimately improve SoftStars overall financial health until the end of 2007.

RenderWare was a set of 3D graphic rendering engines and APIs developed by a UK game studio, Criterion Software. RenderWare had been widely used in many globally renowned games. In August 2004 RenderWare was acquired by Electronic Arts. Although after the purchase EA announced it would honour all the old licensing contacts made by Criterion, many high profile developers still considered it was too risky to use technologies owned by a hostile competitor and began to develop their own engines and tools. In reality EA also gradually dissolved RenderWare into its internal structure, which meant after RenderWare 4 this software would no longer be commercially available to any third party developers. Hence, SoftStar would soon face another major challenge in technology development after these turbulent years. It must either buy-in another new set of technologies, develop them entirely in-house, or choose a point somewhere in between these two extremes, as its next technology strategy. 189

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In general, from the year 2000 onward, SoftStar had been experiencing a series of great challenges. Its impressive success in PC RPG throughout the 1990s did not However guarantee a smooth transformation to 3D and MMORPG development.

SoftStar still managed to learn, adjust and survive. In December 2007, SoftStar announced another significant change which was that henceforward SoftStar would give up all the previous self-righteous visions (GNN, 2005) and transform itself to a professional game developer and would only operate third-party MMOGs in Taiwan on a selective basis. As for overseas markets such as China, Japan, the US, etc., SoftStar would mandate all its products to the local operators accordingly, in order to focus on developing new contents and technologies (GNN, 2007a).

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Graph 8-1 Timeline of SoftStar

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8.2. Empirical Findings from Case Study Four The following sections will address the empirical findings from SoftStar. Firstly, examples of practices of strategy management will be drawn from the history of SoftStar and reinterpreted using the analytical framework of dynamic capabilities. Then, based on these examples, types and management of innovation will be addressed in further detail. creation process. 8.2.1. Examples of Strategic Management The following examples of strategic management of SoftStar show that there are many discreet value creation processes taking place inside the company. These processes are initiated by the companys management which also drives other managers and staff members to engage in a wide range of innovation activities. Within these processes, different kinds of capabilities, at the firm, project and individual levels, and with different functionalities, can be observed at work when managers and staff members are making decisions, solving problems, doing something new, etc. All these value creation (and innovation) processes are meant to However, owing to various reasons (e.g. change the companys resource base. result in a better company performance. The growth strategy in the early 1990s: In the value creation process, SoftStars original founders strategically decided to seize the booming local videogame market by increasing their output. To achieve this goal quickly, they recruited more staff and used mature 2D technologies on the DOS platform to imitate some popular PC games in the market at the time, before they made their own games. Given the simplicity of game design and technologies, a company of about 20 employees like SoftStar could make 12 games a year in 1992. During this process, top management mobilised the project management and technological capabilities, and then changed the firm resource base, i.e. diversifying and expanding the firms portfolio and establishing a reputation for offline PC game development. The outcome of the process was positive. SoftStar did not only increase its size and income, but it also created two lucrative and legendary titles, Sword of Emperor (SE) The findings in these three areas are, to some extent, overlapping and repetitive, because they are closely related to each other in the value

market uncertainty and technology complexity), these processes do not necessarily

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and Chinese Paladins (CP). Creating new titles and exploiting their popularity: In the early 1990s, SE and CP came out as radically innovative games. However, the radical innovativeness to a great extent, owed to the content (e.g. aesthetic, style and experiences) created by talented individuals, not new technology. For the debut versions, SoftStar only After that, the project leaders used familiar technologies on the DOS platform.

along with the top management team decided to exploit the two popular titles by incrementally improving graphics, upgrading game design (functionality) and adding new content to offer even more user experience. Within this value creation process, SoftStars technology skills and knowledge were updated and its reputation and market position were further strengthened by the success of the two popular titles. Converting CP to SEGA Saturn, 1995-1999: SoftStar planned to expand into the console game market and began to port CP to SEGA Saturn in 1995. With SEGAs support, SoftStar developed new skills and know-how for the new platform. It also adjusted the development procedures and practices to meet the clients quality control requirements. During this process, capabilities such as acquiring new technologies, adjusting project management and communicating with clients were very important. In 1999, when SoftStar released CP to Saturn, it was the first ever Taiwanese company that had the knowledge required to make a console game. However, despite expending a great deal of effort, these valuable In short, this value creation process failed due to reasons out of resources soon became redundant when SEGA withdrew from the console platform business. SoftStars control. Developing full 3D PC games, 2000-2004: SoftStar began to upgrade from 2D to 3D technology. During this process, SoftStar had to learn how to use new 3D technology. significantly. The development process and organisational structure also changed Capabilities such as firm-level resource coordination, game engine During this period,

and tool development, project and human resource management, and quality control were crucial to the success of this technology upgrade. SoftStars graphic technological capability was updated as a result of some

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experience making full 3D projects.

However, SoftStars reputation (for Chinese

martial art videogame development) was undermined, because the new 3D graphics that they produced were low-resolution and were deemed to have lost SoftStars legendary Chinese idyllic touch. The outcome was not ideal, because the management team failed to recognise the difficulty of managing new technology and impose an efficient firm-level resource coordination mechanism. After this, SoftStar decided to use a third-party 3D development toolset, RenderWare, for its subsequent games. Full 3D MMOG development, 2001-2007: The challenge posed by pursuing full 3D MMOG was even greater. During this period, the following aspects of innovation could be identified: Technology, strategic alliance, process and organisation, content and product, service delivery, and business model. These innovation activities interplayed with SoftStars capabilities in strategy making, technology, content creation, communication, project management, etc., collectively contributed to significant changes in SoftStars resource base. third-party games. For example, by 2007 it successfully launched in-house MMOGs while simultaneously operating some However, SoftStar also abandoned its over-ambitious plans In general, the outcome of this value creation and divested some resources. development business. To some extent, these aforementioned examples drawn from empirical results have shown certain qualities which make the DCA a suitable analytical framework to describe the process of strategic management of SoftStar. 8.2.2. Types of Innovation The following types of innovation can be identified within the aforementioned value creation processes. 8.2.2.1. Technology-Based Innovation This type of innovation can be further divided into the interrelated areas of hardware, graphics, middleware, and online game-related. SoftStars technologically For innovative activities largely involve incrementally improving these capabilities.

process was barely enough for SoftStar to make a living in the videogame

example, the company have been continuously upgrading its graphic rendering
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capability alongside progress in computer hardware technology over the last twenty years, because every few years the basic architecture of hardware changes. Accordingly, the company also has to upgrade or overhaul its graphic engines and development tools. SoftStars improvement in technological capability is primarily on on-the-job innovative activities, ranging from defending internet hacking and tweaking special effects, to establishing versatile billing subsystems. In essence, this involves ongoing problem solving iterations among programmers, artists, designers and managers on a daily basis. All the so-called major technological breakthroughs, such as new 3D engines or new server platforms, are ultimately based on these numerous minor innovative activities. 8.2.2.2. Process and Organisational Innovation Over the past 20 years or so, SoftStars production process and company organisation have been organically evolving alongside the technological development and overall complexity of videogame. This is evident from the growing development team size, far longer delivery time and soaring budgets, of SoftStar projects. ranges of expertise than was previously the case. It is also clear that online game development requires both more highly specialised and much wider In addition, SoftStar has grown from a single project team studio into a multi project international corporation. These new teams are mandated to diversify product lines and platforms. Through a process of trial-and-error, SoftStar has carried out some organisational changes as follows. First, the increasing number of personnel, projects and locations required increased coordination between each team and functional division. The company therefore set up a new coordination advisory board to operate on each project which consisted of many senior managers to facilitate knowledge-sharing, and information flows. Second, due to the increasing complexity of technology, a project team can no longer handle all the necessary technological tasks by itself. Thus SoftStar set up a specific R&D department to maintain and upgrade engines and tools for all the project teams. Third, since new projects require a far greater amount of content, SoftStar started to outsource its artworks to cheaper locations. Fourth, in order to provide better services, SoftStar began to set up a call centre to serve tens of thousands of its online game players. 8.2.2.3. Product Innovation
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In terms of product innovation, SoftStars innovative activists are continuously releasing new videogames, and diversifying its videogame franchises and platforms. Meanwhile each new videogame title (or new sequel of old title) has been becoming more complex and versatile as the company constantly adds new content, functions and features to the existing videogame, so as to extend their life span. The company also tried to diversify product lines by making new videogames of different styles and genres. In many cases, new videogame are actually built upon the old ones by In However, recycling and modifying old design concepts in a new technology environment. this sense, a great deal of product innovation in VGD is incremental.

considering SoftStar converting some of its old offline-PC game titles into MMOG titles, this kind of transformation can be seen as a radical product innovation to the company itself. 8.2.2.4. Content Innovation Content is an elusive but significant concept in VGD. It refers to a wide range of elements in the game-making process. experiences to consumers. consumers. New content is meant to deliver new Content can be the stories, feelings, the artistic styles,

gameplay, characters, features, music, etc. These elements are meant to appeal to In general, the consensus within SoftStar is that content is more In practice, the development of programming expertise important than technology. project.

and technological capabilities is driven by the emerging requirements of each new On many occasions, designers and artists, who are primarily responsible for delivering new content, take the leading roles to direct the orientation of technology-based innovation within the company. The growing demand for content in MMOG and the complexity of generating content also drove SoftStar to change its organisation. At the conceptual level, product and content are different constructs but empirically they can not be separated from one another. 8.2.2.5. Marketing and Delivery Innovation SoftStar attempts to exploit new markets by product/content/genre differentiation. It also forms strategic alliances with foreign publishers to explore overseas markets. Meanwhile SoftStar also began to deliver its videogames and service packs through the internet. Before 2000, SoftStar entirely relied on the conventional distribution channel controlled publishers to sell its videogames.

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8.2.2.6. Revenue and Business Model Innovation SoftStar gradually withdrew from the offline PC game market and the one-shot deal business model with the consumer, and entered the online game business. Immediately after entering the online game business, SoftStars revenue was mainly generated from MMOG players monthly subscription fee. However, before long, Thus some some of its new online games became free-to-play and pay-by-item. of SoftStars revenue was generated from the sales of in-game-item then. 8.2.3. Management of Innovation SoftStars practices of innovation management can be addressed from the following perspectives. 8.2.3.1. Organisation and Structure of Innovation VGD is organised by project. Over the last ten years, the average project size increased radically alongside the growing complexity of 3D and MMOG technologies, and the rising demand for content. To cope with these challenges, SoftStar first outsourced some art work to China where the labour cost is lower and then set up new fully operational teams/offices there to reduce the development cost. Within the firm, a new R&D team was established to develop in-house game engines but this attempt failed. To serve MMOG players, a new department was established to run the call centre and online game forums as a new interface between the firm and consumers. 8.2.3.2. Drivers for Innovation Market competition and consumers demand drive SoftStar to make more new games and content. Technology advances in hardware and software drive SoftStar to learn Enthusiasm of and upgrade its relevant capabilities, and enter the MMOG business.

developers urges themselves to make better quality and more exciting games. Entrepreneurship and ambition of SoftStars management play a significant role in initiating the value creation process. 8.2.3.3. Sources for Innovation Developers often refer to similar products to design their own games. often dictate the style/genre of new games. Personal tastes/experiences under the influence of other cultural products or heritages will Business partners and end-users Hardware and
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feedback is important to both game design and quality improvement.

software suppliers always hold some crucial information in regard to game system optimisation. In addition, informal social interactions alongside formal meetings can provide inspirational ideas or solutions to ad-hoc technical problems. 8.2.3.4. Skills and Knowledge Skills and knowledge for innovation can be divided into two groups: technology-based and non-technology. In the first group, client-end 3D, server-end database, internet communication, etc. are the key domains. In the second group, game design, content creation, project management, aesthetic/experiences provision, etc. are the key capabilities. According a senior programmer of SoftStar, the technology-based skills and knowledge are crucial but still far from enough to VGD; and the non-technology-based skills and knowledge seem becoming more important when consumer are demanding for more new content and experiences. 8.3. Conclusion This chapter has reported the companys long term development in detail. Then it has extracted some significant examples of strategic management from its history, and described types and management of innovation conducted by the company. This case report shows that, in general, the DCA is a useful concept to describe the processes in which how SoftStar conducts its strategic management and how value creation processes alter the firms resource base (including different kinds of capabilities). The analysis finds that, as the DCA suggested, these value creation processes do not necessarily improve the firm performance, achieve the goals of competitive strategy and guarantee the business success. This chapter also reveals that along the value creation and competition processes, the nature and management practices of innovation are evolutionary. This implies that innovation in VGD is more variable than suggested by the conventional view of the innovation process.

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Chapter 9. Synthesis and Discussion

9.1. Introduction This chapter will first briefly summarise the history of four reported companies and address the aggregate nature and characteristics of VGD in the context of different lines of literature. Then types and management of innovation in VGD will be Finally, the features and discussed in the light of different lines of literature. Capabilities approach (DCA) will be outlined. 9.2. Summary of Company History 9.2.1. LAGER LAGER was established in 1998. internet technology capability. Its initial success was based on its superior Using this capability, LAGER successfully

practices of strategic management in VGD alongside the usefulness of the Dynamic

commercialised a non-proprietary text-based MUD game the King of Kings (KoK), which had already existed in many of Taiwans universities LAN for few years, into its proprietary same-name 2D graphic-based MMORPG. Taiwans very first MMORPG developer. In 1999, LAGER became LAGERs better internet technology

capability also made MMORG installation and operation a lot easier. As a result LAGER could find many overseas partners willing to run KoK in their home markets. Soon after KoK became a very popular MMORPG throughout several South-East Asian countries and China. However, despite the early success, LAGERs attempt to become a full 3D MMORPG developer over the years to come encountered many difficulties in various areas e.g. the lack of creative ideas, the high complexity of design, the rapid development of 3D technology, the increasing demand of content, and the search of right partners etc. Thus LAGER decided to go back to the 2D MMORPG business and wait for a better opportunity to undertake 3D projects. Meanwhile, LAGER also went through a trial-and-error process to find more suitable partners for exploring overseas markets and co-developing new large scale projects. 9.2.2. UserJoy UserJoy emerged from a merger between two independent studios, GameCraft and OdinSoft, in 2004. Before the incorporation, these two studios were specialised in different kinds of PC games with different capabilities, and already had a long term
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co-development relationship, which had existed since the late 1990s.

In 2001,

because neither of them had sufficient capabilities to carry out a new MMORPG project on its own, they decided to enlarge the scale of cooperation and set up a new studio, responsible for exploring the opportunities in this entirely new line of business. UserJoys attempt of MMORPG business went well. To a great extent, this was The because the company decided to play safe rather than enthusiastically pursuing a full-3D ambition it stuck to areas where the company was most familiar. financial shape until 2007. strategy adopted by UserJoy worked well and helped the company to stay in healthy However, this playing safe strategy also resulted in the All the company falling behind in terms of the latest 3D technology development. problems.

so-called 2.5D games and technologies could only temporarily solve present In 2007, UserJoy gave up the plan of developing 3D engines on its own because it found that developing it from scratch, especially when lacking a concrete vision, was extremely difficult, and therefore decided to buy a third-party engine. Before UserJoy could make a full 3D MMORPG using the latest technologies on its own, it could only operate third-party games to fill the 3D gap in its whole product range. 9.2.3. InterServ InterServ was established as a multimedia and learning software producer in 1989. Since the early 1990s, it began to work with some MNCs in Taiwan. performance. These MNC clients were very demanding in terms of project management procedures and graphics Hence, in comparison, InterServ learnt project management skills and These unique 3D graphics capabilities earlier than most of its local counterparts. games (martial art/action genre) in Taiwan. through the internet connection or LAN.

experiences made InterServ the very first company capable of making full-3D PC In 2001, it brought these games onto a PC-matchmaking platform, which allowed 4 to 16 players to fight against each other In addition, InterServ also planned to bring However this plan failed (even the some popular titles onto MMORPG platform.

though the company already had good 3D graphics and project management skills) because the game design, content, technology and management between MMORPG and PC-matchmaking LAN games are very different. As a result of trying to maintain its first large scale MMORPG project and not loose face, InterServ suffered heavy financial losses. After that, the company decided to temporarily scale-down

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its online game ambition and partially transformed itself into an international out-sourcing service provider. This strategy eventually worked and helped the In fact, InterServ had not According company to spread risk and diversify revenue streams.

given up bringing its legendary titles back to MMORPG platform again. to its top manager, InterServ will do it again when it is ready. 9.2.4. SoftStar SoftStar is a veteran in videogame development.

Before stepping into the online

games business in 2000, it had already been making PC games for more than ten years. Throughout the 1990s, some of SoftStars games were among the most popular and legendary titles in the Greater China market. During that period, SoftStar also accumulated a good deal of capabilities associated with making games on the continuously advancing PC platform. To some extent, SoftStar was considered an outstanding independent game developer, because its products always consisted of a unique touch of Chinese aesthetics which later precipitated an entirely new PC game genre the Chinese Martial-Art Romance. However, after 2000, SoftStars performance deteriorated. This was for several reasons. Firstly, the struggle between different teams for control over development of the companys most valuable titles resulted in a rather unfavourable managerial situation. Secondly, the lack of smooth coordination and communication made the companys multiple-project human resource management very inefficient. Thirdly, SoftStars over ambitious expansion Hence, SoftStar was not very strategy failed and caused very heavy financial losses. MMORPG by itself.

successful in the attempt to develop a reliable 3D graphic engine and make full-3D In order to overcome these problems, in 2003, SoftStar decided to use RENDERWARE (developed by Criterion Software) for both PC and online game projects. However, in late 2004, Criterion Software was unexpectedly and acquired by Electronic Arts in a hostile takeover. most aggressive and powerful videogame company. In other words, the future of EA would still honour old SoftStars most important development tools was now in the control of the worlds contracts signed by Criterion until expiration, but, after 2009, SoftStar would encounter the big decision again, whether to make tools in-house or search for external alternatives. In general, although SoftStar experienced many radical challenges over the past few years, it still managed to survive by adjusting strategies and learning from failed experiences.

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9.3. Nature and Characteristics of Innovation in VGD 9.3.1. The Conventional View and VGD The conventional innovation model along with the dichotomy between product and process innovations is a useful conceptual framework to describe the innovation process of manufacturing industries. In this model, product and process innovation can be defined as the introduction of a new product and a new way of producing the product, respectively. This model suggests that the former usually dominate before the latter but, over the course of industrial turns, the balance between product and process innovations changes. At first, there are a lot of product innovations (i.e. new product development, NPD). Then once product features are more stabilised. The focus of innovation and competition shifts to process innovation (e.g. cost minimisation) in the mass production (MP) stage. However, this conventional innovation model is not applicable to the VGD innovation process (although the empirical evidence shows that videogame companies also have conducted a great deal of product and process innovations). This is because manufactured product and VGD have totally different innovation processes. Before being sold to the market, the former has to go through the NPD and the MP stages. MP stage 65. Product innovation first takes place in the NPD stage and then process innovation takes place in the MP stage. However, VGD does not have the This implies that both product and process innovations can only take place during the NPD stage before videogame being released to the market (either through the internet or the conventional distribution channels). In fact, during the entire NPD stage, a videogame project team does not only try to make a new videogame. Based on their experiences acquired from previous projects and by planning meticulously at the early stage of NPD, they also try to improve the process when making the current new videogame. In addition, it is noteworthy that, although all videogames may follow the similar development process, no two NPD stages (i.e. VGD processes) will be exactly the same.
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This is because each new videogame must be unique in its own right and its

Videogames being duplicated and pressed on optical-disc in large number should not be equivalent to the MP stage of manufacturing industries; instead this should be only seen as part of the distribution and delivery process of videogame. To VGD companies, the internet and the conventional distribution channels are just two different delivery and marketing methods to reach consumers. 202

process will be new to some extent as well. In this sense, VGD product and process innovations do take place concurrently within the entire NPD stage. Moreover, the empirical evidence shows that, once a new online game is released to the market after being through the NPD stage, VGD product and process innovations also take place concurrently throughout the games entire online life span while it is actually in the market. Therefore, because VGD does not have the MP stage and its product and process innovations do not separate as the conventional innovation model suggested, this model is not applicable to VGD innovation process. The conventional view also mathematically depicts that, in a cycle of innovation process, the rate of product innovations is higher than the rate of process innovation at the beginning of the cycle, and then the former gradually decreases while the latter picks up as a result of efficiency maximising and cost minimising. However, from the reported companies, this research finds that product and process innovations are difficult to quantify and calculate in numbers as they are manifold, and indistinguishable within in the development process. Product and process innovations are largely indistinguishable within a videogame development because elements of a new videogame/product (e.g. concepts, editing tools, lines of code, artwork assets, etc.) made by a team will be recycled, adopted, modified and upgraded by another team to improve its own development process (i.e. process innovation). another new videogame/product. The outcomes (e.g. tacit knowledge, skills, tools, Thus, conceptually, although product and etc.) of that process innovation will again be used by yet another team to produce process innovations refer to different constructs, empirically they can not be differentiated in the practices of contemporary VGD. In addition, a game developers innovativeness can not be measured by the number of products a company releases either because, for example, it will be very wrong to conclude that a game developer, which could release 10 products a year in 1995 but by 2007 only two products a year, is becoming less innovative. On the contrary, a new videogame requires a far greater amount of innovative activities in technology, creative and management aspects today than was previously the case.

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The conventional view on radical and incremental innovation is only useful to a certain extent. For example, in terms of product and production characteristics, radical innovation can be used to describe that, at the aggregate level, VGD has been transformed from simple product to complex product system over the last few years whereas, at the individual level, incremental innovation can be used to describe the continuous improvements on videogames per se and production practices. However, the impacts of radical and incremental innovative activities on firm and videogame performances are difficult to measure. This is because within a development company all kinds of innovative activities, either radical or incremental, take place at the same time and their impact on a large scale game systems performance and stability are difficult to separate from one another. Particularly when few seemingly tiny loop holes in the design concept or errors in coding may crash a whole online game system and timely spotting and fixing of these small problems can improve the overall performance by a huge margin. 9.3.2. Service Innovation and VGD The literature on service innovation indicates that services have some features that manufacturing does not have. For instances, services per se are intangible, information-intensive, product/process indistinguishable and clients/user-oriented. In terms of service production, the process also has some specific features as well. For instances the process is similar to that of developing a craft which usually has low managerial control and requires a wider range of skill and knowledge inputs. In terms of service consumption, the process is usually co-terminous and interactive, and consumers inputs play a significant role in the innovation process. The empirical findings of this study demonstrate that VGD reflects many features mentioned in the service innovation literature. For instance, videogame per se is not a physical artefact. It is a bundle of information stored on an optical disk or a cluster of hard disks. In the early days, videogame production was a craft-like and one-off process with low managerial control which required a great deal of non-technology inputs. As explained in previous sections, amid the production, the product and process are indistinguishable. In videogame consumption, a high level of interactivity takes place between the supplier, game system and end-users.

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End-uses feedback is very important to game quality and innovation. Despite reflecting some of the service features, the videogame companies also demonstrate a strong inclination of industrialisation because they all attempt to discard their past craft-likeness by trying to formalise their development pipelines, impose tighter managerial control, and modularise some procedures into game engines and tools when they grow from small single-project studios into large multiple MMOG-project corporations. industries. 9.3.3. Complex Product Systems and VGD Comparison with the conventional view of innovation and the construct of complex product systems, it is found that the nature and characteristics of VGD have undergone radical transformation in the past few years. In terms of product characteristics videogame has been transforming from simple product-in-box to large complex online software system because MMOG reflects the salient features of CoPS, i.e. a high quantity of tailored components/subsystems, hierarchical integrated architecture and high technological uncertainty/novelty. videogame is becoming more like CoPS. For example, firstly, both PC and online games functionality and user-interface are becoming more versatile and user-friendly, as game design and technology progress, title after title and sequel after sequel. The images of videogames are also continuously improving from text-based to graphic-based, from 2D to 3D, and from low resolution to high resolution. The gameplay in the offline-PC game era was just single-player mode, but in the MMOG era the gameplay usually involves a few thousand people concurrently. Unlike mass produced commodities, each development project has to make a unique, craft-like, product in terms of gameplay, functions and content. To some extent, elements of previous games can be recycled for the new games. uniqueness. However, to a greater extent all the subsystems and components of a new product must be tailored-made or fine-tuned in order to achieve Also, in terms of product interfaces, functions, cost, life cycle, skills/knowledge input, etc., However it is of note that the industrialisation does not mean that VGD is becoming more like manufacturing

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Secondly, the product life cycle was still a relevant concept for PC game development around ten years ago, but when these companies embark on the online game business, this concept becomes irrelevant. That is because PC games are, to some extent, like other manufactured boxed-products sold through physical distribution channels. The transaction between the game producer and each end-user is just a one-shot-deal. But in the online game business, the transaction can generate continuous incomes for the producer as long as end-users repeatedly log back in to the product and play the game. Basically the end-users are charged by the Therefore, online game subscription fee and in-game-items which they buy.

companies all have strong incentives to prolong their games online life span by providing as much new content as possible to strengthen the end-users stickiness to the game. In practice, many online games can last for few years whereas the shelf-life of most offline-PC games is only a few weeks. Thirdly, the size and system architecture of videogame has become extremely large and complex. For example, in 1998, the data size of Chinese Paladin I was 557 MB The size of its MMORPG but in 2007 the size of Chinese Paladin IV is 2480 MB.

version is much bigger because the amount of data stored in at least few thousand client-end PCs and the massive array of server hard disks must be taken into account. Offline-PC games system architecture is much simpler than that of online games, especially MMORPG. The former is basically a series of actions and reactions However, an between a game system on a client-end PC and an individual person, which does not involve any kind of managerial tasks from game developers. MMORPG is extremely complex, and involves tens of thousands of real people interacting against each other, and requires a group of people to maintain the system stability, offer 24/7 customer services and deliver new content on regular basis. From the hardware architecture perspective, an MMORPG system is comprised of at least few thousands client-end PCs, with different hardware configurations and internet connection qualities, interlinked by an array of servers through the internet across different geographical regions. 9.4. Types of Innovation 9.4.1. Technology-based Innovation
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Empirical

evidence

collected

from

the

reported

companies

shows

that

technology-based innovations in VGD take place in the following areas: Client-end 2D/3D graphics, server-end database construction and management, cross-platform game system design, internet engineering/security, middleware (engines/tools) development, motion capture, artificial intelligence etc. In general, innovative activities in these areas are largely associated with using software programming techniques to achieve the project requirements, to solve on-the-job technical problems on daily basis, and to deliver desirable content/experiences to consumers. Before the rise of online games, traditional offline-PC games had much simpler architecture. However, along with the progression of technology, videogame They also have to continuously upgrade their systems are becoming larger and more complex, developers must keep learning how to master new technology. development tools, applications and engines to catch up with the latest hardware technology, and to optimise their games performances in accordance with emerging requirements from artists, designers and end-users. As the technological know-how becomes more specialised and the game systems become more sophisticated owing to numerous upgrades and modifications, companies tend to modularise their cumulative technological know-how into bundle game engines, designers interface applications and common working platforms etc. These modularised software packages usually represent the core technological assets of a game development company. convert people-embodied tacit They can both help the companies to retain and knowledge into machine-embodied codified renew crucial technological know-how within the organisation (i.e. an attempt to knowledge), and to enhance the efficiency of development work in the long run 66. However, the attempt to conduct technology-based innovations does not always succeed because of the lack of sufficient human and financial resources or the novelty of the new technology.
Software programming and continuous problem-solving are by nature individual and intellectual creativity processes without any physical presence like traditional machinery in factories. Hence, if the know-how is not modularized, which might be accumulated ever since the company started its game development business, into software machinery, the company will soon loose the know-how. On the contrary, software machinery, e.g. game engines and applications, will help the company continuously retain and absorb new knowledge. Software machinery can also be shared by the staff as a knowledge-exchanging platform as they may keep adding new functionalities onto it and do not have to repeat identical problem-solving processes which had been done by others before. Hence, the efficiency of game development will increase as a whole. 207
66

9.4.2. Process and Organisational Innovation Since 1999, the process and organisation of VGD have experienced a lot of radical changes. First of all, the most obvious change is that the number of people and the Before development time of a project team that is required increased dramatically.

the rise of online games, a PC game project normally only needed a handful of people and a few months to release for publishing. But in 2007, some MMOG projects needed almost 200 people and more than two years to launch for testing. required 67 . Secondly, the development budgets also soar because of the growing team size and time Thirdly, the level of specialisation and division of labour of VGD increases owing to technological development and growing amounts of content. Within a project team, four types of job gradually emerge. These are manager, designer, artist and engineer. Each type further drives some more specialised roles and functions. Along with the job specialisation, companies have been trying out different styles of staff organisation e.g. functional-division, project-centric and matrix-management, in order to utilise human resources and their capabilities more efficiently. Fourthly, game developers start outsourcing some of the works and seeking cooperation with other companies because they do not always have sufficient financial and human resources to do everything in-house. In addition, owing to the rise of online game development and operation, the concept of project cycle becomes very different from before. Before, when a PC game project finished its testing and debugging, the project would come to an end, and the team might be disbanded to other teams or assigned to a new project after a short break. But for an MMOG team, the project may last for a few years because of maintenance, upgrades and customer service. The project will not finish after online testing launched. According to most interviewees, the real challenges only come after the game has been launched and workloads may become even heavier, because anything can go wrong when tens of thousands of players flock onto the game servers and the team members must stand by to solve all kinds of emerging problems. Designers and artists of the team also have to carry on producing new content for the player communities as long as the game is still generating revenue streams for the company. An online game company also needs to establish its own 24/7 call centre

67

The development budget is usually calculated by how many man-months a project needed 208

to serve its players.

The call centre is in practice is not suitable to be outsourced and

run by a third-party, because it involves a great deal of secret information and technology know-how linking back to the companys database. Except the data security issue, the difficulty of training call centre staff also prohibits the company from outsourcing it, because solving problems for tens of thousands of online game players requires a wide range of technological know-how and gameplay experience with immediate supports from the project team who possess in-depth knowledge of the game in question. Therefore it is better that the call centre is run by the company itself so as to respond to any emergencies in real time. games. All these aforementioned issues and managerial tasks did not exist before the online game business. Hence, amid these changes, companies encounter a great number of challenges and begin to learn how to manage the entirely new line of business. Overall, the learning is largely based on the resources and capabilities the companies already have, and the strategies they envisage. path-dependencies and trial-and-error. 9.4.3. Product Innovation When videogame developers gradually grow from small single-project studios (producing simple VG) into large multiple-project companies (supplying complex VG), diversifying product lines, prolonging product/title life cycle and creating new videogames are usually their primary product innovation activities. In practice, an established development company normally has a handful of project teams mandated to produce entirely new games or sequels by revamping old ones. No matter whether these games are entirely new or just sequels, the primary strategic goal of mandating different teams to develop different games is to diversify the product lines and target different markets. A new title usually means the game has a new aesthetic style, gameplay, story, and set of avatars, functions and features, whereas a sequel normally consists of a new extended line of story and some upgraded functions and features. In other words, the innovative activities in process and organisation are by nature based on a process of In the long run this practice is also cheaper because the in-house call centre can also be used for other online

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In this sense, the former is in general is more innovative than the latter and the difference between the two types of product is a matter of degree. However, in essence product in game development is rather different from that in the conventional sense of mass-manufacturing industry, because each videogame, both in terms of new titles and sequels, must be unique to the company itself and to the industry as a whole. In addition, these products are also increasingly elaborated, in terms of system architecture, project management and operation, particularly while developers manage to catch up to using the latest 3D and internet technology. 9.4.4. Content Innovation In general creating new content is about the variation in genre, gameplay and gaming experience. However, content is still an extensive and elusive concept, because except the lines of code embedded in the game system per se, it can refer to almost every single element which can be sensed during a gameplay. indistinct from the product itself. As a prominent designer commented content is the soul of our games and technology is the mechanism enabling the soul to express itself we need both of them to make good games but content to some extent seems more important in the long runcreating new content is the key to appeal to consumers and generate revenues from them. From marketing perspectives, another designer regarded, most consumers do not care what is the technology being used behind our new game or how many polygons we use to produce the new in-game avatars what concerns them most is how does the new game look and feel like, what is the new story about or is there any new type of gameplay this time?. Content generation is a collective process of creation which involves engineers, artists and designers. In this process, artists and designers usually take the lead, and then In other words, the need to software programmers provide the solutions to their requests, or try to achieve the vision and feeling the former propose to deliver. method to deliver the content. deliver new content is the driving force of VGD innovation and technology is just the Hence, it is

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Content innovation consists of numerous iterations and a good deal of trial-and-error, in which the demarcation between content and technological innovations is blurred, because artists and designers often end up modifying developments tools and do some more simple coding themselves, while programmers assist them in creating the artworks and ensure that the game system can run smoothly when all the artworks are put together. In some cases, game designers and script writers also need to have extensive knowledge of the technical performance of computer hardware and internet communication, because, if they do not have, their design and story may not be represented as smoothly as required during the gameplay. 9.4.5. Delivery and Marketing Innovation The empirical evidence demonstrates that in the transformation from offline PC games into MMOG business the reported companies have some new practices in marketing and delivery. For instance, they no longer rely on the conventional distribution channels controlled by large publishers to sell their boxed-videogames. Instead, they start marketing campaigns on the internet, and work with local portal websites to display their advertisements. the internet. At the same time, a range of practices such as game installation, content/patch delivery and customer services is all done through Those changes also require the firm to change its organisation In terms of accordingly and develop a range of back-office technical supports.

marketing strategy, working closely with local internet-caf chain stores, InterServ has held a series of high-profile campaigns (i.e. Match-Making game contests) in order to create market-hype for its fast-pace action games, and attract the press and consumers attention. LAGERs marketing campaigns are less noticeable. Its strategy for reaching different regional markets is to offer local internet-caf partners timely and convenient technical support, especially regarding cash-flow and real-time game management. Thus local partners have stronger incentives to work with LAGER than other companies. 9.4.6. Revenue and Business Model Innovation Underneath the overall transformation in the last few years, this research finds that videogame companies revenue streams along with their business models have undergone obvious changes. Previously, in the offline PC game business, revenues But in for these are generated from arms-length transactions of boxed-videogame.

the online game era, game players can be charged a monthly-rental fee (in MMOG) or
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for each gameplay session (in online board games and match-making games). Before long, most MMOGs become free-to-play but players have to buy in-game-items if they want to move up along the social-ladder of the virtual game world. Thus these in-game-items become the major source of revenues.

Unlike traditional arms-length tractions, in the online game era, these companies do not only deal with end-users directly but also manage and interact with them intensively. In addition, these companies also know their end-users well because they compile a great deal of personal information and gameplaying history for each player in their database. By using back-office data mining techniques and receiving direct feedbacks (or complaints) from players, game companies know what is going on and the trends in the game world. They can improve the future designs and content while conducting direct-marketing to individual players. 9.4.7. Summary Based on the literature review, an industry-wide survey and four in-depth case studies, this research finds that, although innovation in VGD can be semantically categorised into the aforementioned types, within each type, innovative activities evolve dynamically over time. This research also finds that the nature innovation in VGD Thus, this research suggests that can not be understood from just one perspective.

adopting a synthetic viewpoint and studying VGD innovation in its own right can better capture an overall, yet detailed, picture of VGD innovation. Regarding types of innovation found in different lines of the innovation literature, the features found in VGD innovation reflect the point that VGD is more akin to services and creative industries in general. Videogame, especially online game, is not like most manufactured product that can physically stand alone and operate without extensive back-office supports. Videogame becomes an online service and its existence is embodied by these back-office supports (and processes). outcome of a development process. with the overall process over time. In the MMOG era, videogame is not just an Instead, it is part of a lengthy innovation

process (including developing, operating and servicing), and mingles and evolves

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 The conventional innovation perspective, after Schumpeter, overwhelmingly focuses on technological product and process innovation (TPP). However, this research finds that technology is just one of many important aspects of VGD innovation and conducting technology-based innovation in VGD is not only for improving videogames functionality and economic efficiency. Instead, innovation in VGD (with the assistance of technology-based innovative activities) is associated with the creation of content and entertaining experiences for consumers. products. Den Hertogs (2000) four dimensions of service innovation are a useful construct to some extent, because these dimensions are also found in VGD innovation. It is noteworthy that the service concept dimension is similar to the design concept of videogame. However, related to this dimension, this research further reveals that content innovation plays a very significant role in VGD innovation and should be addressed in its own right. 9.5. Management of Innovation 9.5.1. Organisational Structure for Innovation Empirical evidence shows that VGD innovation is carried out by project-based organisation (PBO) which has experienced radical quantitative and qualitative changes over the last ten years or so as described in section 9.4.2. The reason for adopting PBO in VGD is that each videogame is meant to be unique and tailored-made in its own right and a PBO has more flexibility than a functional department to coordinate a range of heterogeneous resources and capabilities, bring about new ideas, and manage uncertainty. It is of note that as the PBO grows larger and more complex the managers also gradually learn and develop new project management capabilities through experience. 9.5.2. Drivers for Innovation The empirical research finds that technology development in hardware, 3D graphics and internet offers game developers new opportunities and means to deliver new videogames. However technology development in general also makes software
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In this sense, videogame is similar to film and other cultural/creative

piracy deteriorating rapidly.

Thus, the combined force of technology development

drives game developing companies to transform from offline PC games to online game business and continuously renew relevant capabilities to catch up with the latest developments and apply new technology in game design. Increasing market competition and consumer demand also drive game companies to continuously release new games with new features and content. These elements combined with new technology assets aim to offer immersive and sensational gaming experiences. Within the company, this research finds that both entrepreneurship and enthusiasm play very significant roles in VGD innovation. Entrepreneurship (from the owners or the top management) drives a small single-project studio to grow into a multi-platform/multi-project company and explore overseas markets. Along with these competition strategies initiated by entrepreneurship all kinds of innovation will take place. Developers (i.e. project manages, designers, artists and programmers) strong enthusiasm towards videogame and gameplaying, from both professional and hobbyist perspectives drives them to make new games with higher quality and new features. 9.5.3. Sources for Innovation The empirical study shows that VGD has a wide range of sources of innovation which include: Hardware suppliers (e.g. PC hardware and server manufactures); Software suppliers (e.g. third-party engine/tool developers, third-party MMOG developers); Business partners (e.g. co-developers, IP holders, operators, clients); End-users (especially in MMOG quality control); and Development Staff (i.e. designers, artists and programmers). Particularly with respect to the development staff, there are three salient features worth noting. Firstly, in the VGD process, personal aesthetic preferences and Secondly, these personal judgements have significant influence on game design. products.

attributes are profoundly shaped by the overall cultural environment and other cultural Thirdly, despite videogame companies having tried to formalise the procedures of implementing creative ideas, empirical evidence indicates that the ways

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(and locus) of generating creative ideas still remain very informal and fluid, as one senor designer 68 explains: although we have regular brainstorm meetings at the project level and internal proposal competition at the firm level, in fact most clever ideas or technical solutions emerge from informal and ad-hoc conversations among colleagues. 9.5.4. Skills and Knowledge The empirical research finds that skills and knowledge for VGD innovation have the following features: They are largely tacit and human-embodied. They are mostly acquired and developed through on-the-job learning and self-training. Apprentice learning is a common in VGD. A great deal of VGD work is ad-hoc, including one-off solutions to unexpected problems, thus skills and knowledge are difficult to accumulate. In some cases, companies will acquire skills and knowledge from third parties, e.g. buying in development tool kits from other software suppliers if they fail to do it in-house. In most cases, companies tend to convert tacit, human-embodied skills and knowledge into codified, machine-embodied knowledge, i.e. game engines and development tools, and turn them into proprietary assets, but they do not necessarily succeed. For non-technology, managerial-related skills and capabilities, companies in general muddle through and learn from experience which will assist them adjusting to appropriate practices at the time. The learning by doing nature can be best described by a senior managers comment: people entering the online game business usually lose a lot of money on the first project, strike a financial balance on the second and then start making some money on the third. But regarding the fourth project, it is difficult to tell, because another round of new technologies and new PC hardware are coming to the market. We still have a lot of new stuff to learn 69.

68 69

From SoftStar. From LAGERs general manager. 215

9.5.5. Summary The research finds that management practices in VGD innovation develop through an evolutionary process which should be observed chronologically and a snapshot of the process is insufficient to understand the complexity of this phenomenon. The underlying logic of the evolving practices is that these companies have to keep adjusting themselves to the changing technological and business environment, and try to find more efficient production methods. Regarding different lines of literature, some general features are found: Management of innovation in VGD is not a linear process as the conventional view of innovation suggests. Instead it is more like the fifth-generation of innovation (Rothwell, 1994); a networking process in which capabilities such as system integration, organisational flexibility and parallel information processing assisted by electronic system all play a crucial role. Videogame can not be judged by a set of absolute criteria, such as capacity, speed, performance, functionality, etc. which are criteria usually used to evaluate a new manufactured product. That is because videogame encompasses a great deal of aesthetic and cultural elements which are usually subject to end-users personal aesthetic judgement. VGD companies gradually formalise R&D teams/departments specifically to cope with growing technological complexity and manage production efficiency. Thus, VGD is like some services which adopt manufacturing practices as it grows from a small craft-like business to an industry (Sundbo and Gallouj, 2000). However, in VGD innovation, R&D is not only carried out by the engineering staff in the R&D department. the process. VGD is not a supplier-dominant process. Instead, through learning and Designers and artists, alongside other back-office staff, also conduct a great deal of non-traditional research and development work in

trial-and-error, a great deal of innovation takes place within in the companies driven by the development staffs creative ideas (den Hertog, 2000).

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 Despite outsourcing some work to China where the labour cost is lower than in Taiwan, cutting costs is not the priority of management tasks and competition strategy to these VGD companies, as the average development project budget increases over time. Instead, outsourcing of VGD is part of organisational innovation aiming to improve production efficiency. VGD innovation reflects the salient features of the software development and advertisement industries at the same time. These two have rather distinct features The former usually takes advantage in terms of learning and innovation practices.

of the economy associated with recombination and modularisation, whereas the latter has to brake away from tradition and be revolutionary (Grabher, 2004). VGD companies have to find a balance between these two strategies. 9.6. Strategic Management 9.6.1. Competitive Strategy in Videogame Development To synthesise empirical results from case studies, this thesis finds that, despite there is variation in practice, VGD companies competitive strategies encompass the following major elements (and trajectories): scaling-up videogame from small/simple ones to big/complex ones; upgrading videogame graphics from 2D to 3D; transforming videogame from standalone ones to online ones; prolonging videogame title life span from few months to few years; diversifying videogame genres; alliancing with other companies. In order to implement these multifaceted and evolving strategies, VGD companies have to undertake manifold innovative activities aforementioned in previous two sections. Meanwhile many capabilities (e.g. technology-based, game design, In addition, artistic-related, project management) are created, modified and renewed. significantly to the non-technology areas.

it is worth to notice that the knowledge base and skills required for VGD also expand For example, some developers have to use Some knowledge from psychology to design more rewarding gaming experiences.

developers have to learn economy from textbooks in order to keep the MMOGs
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virtual world and economic system in equilibrium.

This is because if a MMOGs

game-world and its economy system are unfair, crashed or frustrating, the MMOG will soon lose its user-base. Some developers have to learn martial-art techniques from real practitioners and cinematic techniques from TV/film shooting to present appealing 3D visual effects to players. These are only few examples among many showing that although competitive strategies in VGD can be synthesised into few elements, in reality the phenomenon is far more complicated. 9.6.2. Other Approaches and Features of Strategic Management in VGD This research finds that videogame companies do not innovate and compete in the simple and mechanistic fashion as suggested by the construct of strategic conflict. Competition is not a zero-sum game either. Instead, empirical results show that reported companies consider other companies to be potential business partners (such as the establishment of User-Joy, the lesson LAGER learned from alliance-forming activities and the outsourcing services InterServ provided to other Taiwanese and international developers, let alone the fact that five Taiwanese developers established a publishing and distribution agent in Beijing). In other words, competition and cooperation can occur practically at the same time between companies so long as it is necessary. This research also finds that these companies do not like to involve in any kind of head-on confrontation with other companies. Instead, while trying to diversify the product lines within the company (different project teams responsible for rather different videogames to avoid direct-competition between products from the same company), they also try to differentiate homemade products from other companies like-products. On some occasions, they even avoid launching a new The practice of avoiding videogame in the same week or month as other companies.

direct-competition can also be seen from their stronger inclination to retain as many exiting customers as possible by offering new features and new content in the existing product lines (these product lines were already different from other companies) than the inclination to attract as many new customers as possible (either entirely novice ones or experienced ones from other companies products). The empirical study finds that videogame companies can not carry out strategic management as the framework of competitive forces suggested either, because this framework is far too simple to assist companies formulating and implementing

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strategies, as one prominent interviewee 70 explicitly put: The well-known competitive forces and the SWOT analysis do not tell us much about how to conduct our strategy, given the high uncertainty and complexity we face. We do look around to see what is happening in the industry and what are other companies doing, but the most important thing of all is to turn our attention back to the inside of the company and try to convert brilliant ideas into games. success. The framework of competitive forces originated from industrial economics analysis and can better analyse the firm at the industrial level, but its outward-looking perspective overlooks the fact that firm-specific competitive advantages are developed within the firm, not at the level of the industry. In addition, the competitive forces analysis suggests that, in the end, a company has to choose to be an innovation leader or follower. misleading for two reasons. range of products can be chosen from. However, that suggestion is On one hand, in the videogame market, there is a wide One of the videogames offered by a In a That means we have to develop the capabilities that we need by our self and no one can guarantee

company can be a superior product in a specific market segment but another videogame may end up being an inferior product in another segment. high-velocity business and technology environment, a videogame company does not know whether strategies can be implemented as smoothly as planned. It may plan to be a market leader in the first place but fail to achieve the goal in the end. in the market. 9.6.3. How to Survive: Learning, Developing and Upgrading Capabilities In general, the dynamic capabilities approach (DCA) appears to be a better framework for analysing strategic management of the companies in question, because it does not only focus on using technology to manipulate a companys relationships with the outside world or rely on managers capabilities of strategising and playing the game with competitors. Instead, this research finds that each company is more likely to be It may also start with an experimental project which then unexpectedly turns into a great hit

70

A senior designer from SoftStar. 219

competing with itself in the long run.

The process is path-dependant and the source

of competitive advantage comes from the learning processes of trial-and-error, knowledge accumulation and capability building within the organisation over a long period of time. In the processes, managers alongside the staff learn how to execute multiple projects more efficiently, e.g. by formalising development pipelines to integrate available capabilities (and resources) within and external to the company to deliver projects, and knowing when to do what. The core competence of multiple project management is the circulation of human resources and it is coordinated by department and project leaders together with the assistance of a common project management platform which can track each individuals tasks and performances. best practice per se is the result of learning processes. Software engineers improve the companys technological capabilities by adopting mature hardware and software technologies to optimise the game systems, and to make game engines, development tools and applications for their colleagues. It is of note that many software engineers agree that game development requires a much higher level of coding skills and knowledge than other business electronic system development projects. This is because most of them are largely functionality-oriented and developed for existing commercial entities or business models, and therefore the requirements and tasks are easier to capture. However, in a game project, especially a MMOG one, the final project only exists as a vision. The design concept usually remains elusive in the first six months and they are always asked to try out designers and artists new ideas as the project proceeds. The emerging requirements are challenging because they usually have to use their skills and imagination to deliver the sensational graphics and special effects on the screen while trying to keep the game system running smoothly. Artists and designers capabilities of story-telling and bringing about new ideas from a wide range of inputs are essential to game development. More difficult for them is that they also have to master 3D development tools to bring their ideas into practice. On many occasions, they need to solve technical problems by themselves before the overstretched programming personnel can support them. Thus, to some extent, the This kind of

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jobs of artists and engineers are overlapping. In the transformation from offline PC game development (like mass-production) to MMOG development (like CoPS), VGD companies face severe discontinuities in tacit knowledge transformation, capabilities development and continuous learning. These problems are quite common to large complex software project development and there is still a lack of sufficient empirical studies informing practitioners how to overcome them (Hobday and Rush, 1999). Except that, the dynamic capabilities approach is also criticised for the lack of apparatus by which to advise firms on when and how to reconfigure their core competences (Williamson, 1999:1093). However, this research provides a valuable insight into these problems by showing how to implement the complex learning processes which could facilitate long-term capability-building. First of all, game developers find that they can themselves retain tacit, human-embodied knowledge and skills within the organisation by packaging repeatedly used codes 71 into various game engines (e.g. 3D engine, artificial engine, server engine etc.) and software tool kits (special-effect editor, map editor, mission editor, and etc.). All these engines and tools can be used, modified As a result a newly assembled They can create their own and upgraded by other programmers, artists and designers for other projects in accordance with future technology development. team does not need to do everything from scratch. work.

variations on top of the existing tools. This practice can increase the efficiency of Engines and tools created collectively by the staff over time do not only On the basis of represent the accumulated routines within the company and its specific ways of doing things, but also crystallise into the companys valuable assets. proprietary software packages, the company can absorb more information and requirements from other projects and external sources to renew its core competences. To sum up, with the assistance of the DCA which particularly emphasising the internal capability-building in the long run, this thesis is able to reveal detailed information with regard to how capabilities are built with in VGD companies over the past few years.

They represent various routines within the firm and its specific ways of doing things. They also contain other individuals know-how, thoughts and solutions in previous short-term projects. 221

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9.6.4. Dynamic Capabilities Usefulness This thesis has adopted the suggestions of DCA and the Overview of DCs (stated in section 3.6.7.2) to address the third research question. From the four case studies strategic management examples (in section 5.2.1, 6.2.1, 7.2.1 and 8.2.1), we conclude that Dynamic Capabilities is a useful construct in the following aspects: Inward-looking perspective: the case studies show that although VGD companies are concerned about the trends and events taking place at the industry level, they do not only compete at the industry level. They are also very inward looking as the DCA suggested they are in effect competing with their own past performance (e.g. trying to create ever-better videogames), and their strategies are not simply devised to compete against other VGD companies. Instead, from the evolution of each case, it seems that these companies also compete with themselves and find their route to competitive successes by building firm-specific resources and capabilities to offer better videogames and services. Path-dependency: in line with the DCAs suggestion, the case studies demonstrate that the evolution of a company is profoundly limited and shaped by its existing resources and capabilities, and its history (i.e. experiences of success and failure in the marketplace). Their new resources and capabilities are all built on old ones. Instead they tend to explore new areas that Furthermore, even when VGD companies developing new games do not take actions that are only remotely related to what they had done before. are immediately adjacent to their current business lines.

firms embark on a new online game business, they can only achieve the envisaged strategic goals especially those involving new service features incrementally. Typically this is largely accomplished through trial-and-error, and managers plans rarely work out completely successfully. More often, strategies for new service features have to be abandoned or modified as a result of unexpected developments. Sources of competitive advantage: following the RBV, the DCA emphasises that the firms competitive advantages and economic benefits originate from the firms resource base and its capabilities to change the resource base dynamically. case studies point to a similar conclusion. Our The VGD companies survive or

generate incomes because they can dynamically utilise, develop and upgrade their

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capabilities and resources to release new videogames (and content) or provide new services. However, we also like to point out that being dynamic is not a stable and predictable source of competitive advantages. The effort to build capabilities and resources dynamically is often adversely affected by factors or incidents beyond the managers control and expectation. lead to competitive successes. Uncertainty: the DCA suggests that the managerial challenges and uncertainty are caused in particular by the time-lag of strategy implementation, and by the complexity of technology and the environment. The overview of DC also For instance, the mentions that the Value Creation Process (applying DCs to change firm-specific resources and capabilities) will lead to unpredictable results. Value Creation Process can at least lead to four different outcomes to a firm: a long-term competitive advantage; a short-term competitive advantage; just making a living in the business; or a failure. Creation Process at a time. In the case studies, a similar yet more complicated picture emerges because a VGD company does not have one Value Results of Value Creation Process in the VGD For companies are uncertain due to changes in markets or competitor behaviour. a niche market when they first tried to develop it. In short, our case studies show that being dynamic is necessary for company survival but will not necessarily

example, LAGER did not expect that its simpler new online game would succeed in UserJoy was forced to abandon a ready-to-launch online game when it realised that a competitor was releasing a similar online game with superior quality. There is also a high failure rate in attempting to create new valuable resources for the firm. great amount of time and resources. For example, SoftStar failed more than once to develop its in-house 3D graphic engines after investing a InterServ, despite its competent 3D graphic The firm often capability, failed several times in the MMORPG business line. fails to achieve its envisaged competition and growth objectives. Heterogeneous firm resources and capabilities-building: the DCA does not only focus on technological capabilities or resources. competitiveness. Instead it recognises that a wide range of resources and capabilities are all potentially crucial to the firms For instance, firms also need other complementary assets, e.g. financial resources, reputation, organisational flexibility and marketing capability.

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According to our case studies and the synthesis in section 9.6.1 and 9.6.3, the VGD companies need many different resources and capabilities to make videogames and offer services. all-important. Technology-based capabilities are among these but by no means This will come as no surprise to innovation researchers, of course,

who have long used ideas such as complementary assets to account for patterns of success and failure in competitive new markets. Observing and identifying capabilities in VCP: Capabilities are not an entity with physical presence, thus they are difficult to observe. However, the literature of dynamic capabilities (Ambrosini and Bowman, 2009, Ambrosini et al., 2009) suggests that we could go about assessing capabilities in a firms Value Creation Processes. According to the literature, identifying purposefully initiated Value Creation Processes and observing capabilities at work is the first and key step to ensure Dynamic Capabilities are a useful concept in strategic management. new things) to make impacts on firm resources. In the Processes, we can see people use their capabilities (e.g. taking actions and doing The newly changed firm In other words, resources may or may not bring about a better firm performance.

peoples actions do not directly and necessarily lead to a better firm performance. Therefore the relationship between peoples actions (i.e. applying capabilities) and the outcome (i.e. the firm performance) is non-tautological. Our case studies indeed observe capabilities at work in the VCP. For instance, from the reported companies, at the firm level, the top management team makes strategic decisions and coordinates multiple projects. within the firm. The necessary capabilities (of strategic decision making and project management) have profound impacts on other people These other people will learn, develop and renew their own capabilities when they work together to deliver the envisioned strategic goals. At the project level, project managers use their capabilities to manage new videogame projects, during the process, the development staffs capabilities are created or renewed as well. At the individual level, each person also continuously upgrades his/her capabilities from learning and on-the-job innovation. For instance, we were informed by many interviewees, as staff members of VGD companies of this research, that individual staff members constantly learn from their own successful or failure experiences at work, or from external sources to strengthen their skills and capabilities in their own respective areas.

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 Dynamic Capabilities for Firm-Level Innovation Process: the concept of Dynamic Capabilities was proposed to complement the shortcomings of its previous counterparts for analysing and formulating competitive strategies. Departing away from strategising at the macro-industrial level and following the suggestions of the RBV, the DCA leads us to look inside the firm and investigate the black box of value creation process. Combining the aforementioned findings, the DCA proves a useful concept for strategic management because it points out some of the crucial but previously-overlooked levels, aspects and elements in the process. Through the theoretical lens of the DCA to investigate the object of this research Taiwanese VGD innovation and competitive strategies, we find that VGD companies Value Creation Processes (employing existing capabilities and resources to create a new resource base for new videogames and services) are also firm-level innovation processes. This is because these Value Creation Processes are always launched with certain strategic goals and full of myriad innovative activities (i.e. new things or trial-and-error carried out by mangers and staff members, individually or collectively). Therefore the DCA is a useful concept for not only firm strategic management but also firm-level innovation process. 9.6.5. Definition Problem of Dynamic Capabilities Despite the aforementioned usefulness of the concept of DC, the fundamental definition of dynamic capabilities still needs further clarification. There are different and not always clear definitions in the literature. In this section, we would like to argue for a useful DC definition one that is suitable for examining innovation in very turbulent environments. In the literature, the mainstream definition of DCs is the capacity of organisation to purposefully create, extend, or modify resource base (Helfat et al., 2007, p4). This definition obviously intends to bypass the original criticism of being tautological by using the term purposefully, and claiming that DCs is a capacity impacting directly on firm resources only, not firm performance. and correct in its own right. This definition seems useful In the course of empirical investigation, it can

intuitively lead or somehow encourage us to search for the crucial capacities

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(seemingly they can also be labelled as the capabilities or Dynamic Capabilities) for VGD innovation and competition. However, to be a theoretical proposition, this Following the the definition seems rather confusing because capacity and capability are synonyms and, in a broad sense, both are part of the resource base. capacity definition we could easily end up another tautological kind of conclusion a firms dynamic capability is its capacity to change its resources which also include some capabilities. In another word, Dynamic Capabilities seem to be the capacity to change other capabilities. To sum up, so far this thesis has pointed out two tautologies (see Section 3.6.7.1). The first is the original one DCs is the ultimate source of competitive advantages and will necessarily lead to better outcomes (firm performance). and decoupling DCs and firm performance. other capabilities. If DCs are defined as the process of using resources, the aforementioned problem could be bypassed. In the course of empirical research, this thesis finds that Eisenhardt and Martins definition of DCs (2000) specific organisational and strategic processes (e.g. product innovation, strategic decision making, alliancing) by which managers alter their resource base seems a less confused definition. This is because this definition sees DCs as a process and recognises that human beings, who initiate the strategic management processes, are the fundamental source of capability-building and competitive advantages. Our case studies also reveal that firm-level strategic processes are actually innovation processes because VGD company managers and staff were conducting all kinds of innovative activities to changes their existing capabilities and resources, and to achieve envisaged strategic goals in a high velocity market. This definition, with some more elaboration (e.g. combining with the overview of Dynamic Capabilities stated in section 3.6.7.2 and incorporating more elements) may have a good chance of being scaled-up and established as an analytical framework in strategic management. 9.6.6. Further Clarification Needed Some researchers try to solve the original tautology by defining DCs as the capacity to change resources, However, the capacity definition also causes confusion and lead to the second tautology DCs is the capacity to change

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This thesis, while being aware of these aforementioned confusions, tries to employ DCs as an analytical framework investigating processes of strategic management how competition strategies and innovations of VGD are conducted, and how the entire process proceeds. Through the theoretical lens of dynamic capabilities, this thesis intends to offer an ex-post/historical account of the strategic management of VGD companies but avoids claiming that capabilities (e.g. programming, game design, content creation, project management) found from our empirical cases are Dynamic Capabilities. To a minimum extent, this thesis only intends to state that these capabilities are crucial to VGD innovation and competition in the context of Taiwanese VGD sector over the last few years. In this research, as well as previous literature, capabilities for innovation and competition are defined in a broad sense and as part of the firm resource base. base. Or, to put it in another way, they are assumed to be immediately attached to the resource However, this research is aware that they cannot be directly observed. This research also understands that only when people are taking action, making decisions, learning etc. and then make changes to the resource base, can the so-called capabilities be demonstrated. Thus this research tries to identify capabilities shown in the process and find that they (as part of the resource base) can be created, improved and renewed when people are taking action. By the same token, these capabilities may also become obsolete and underperform in the market. To avoid further confusion and tautology, and make DCs a more useful concept in strategic management and innovation research, the following suggestions are worth further consideration: Capabilities and Dynamic Capabilities should be clearly demarcated. the DCs construct. construct itself. DCs

should be seen as a construct whereas Capabilities should be seen as the content of The content of a construct should not be equated with the Researchers should avoid claiming that all capabilities crucial for

competitive advantage in their empirical cases are Dynamic Capabilities. Dynamic Capabilities can be used as an analytical framework whereas Capabilities can be understood as the contents of the DC framework.

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 DCs should better be seen as a set of specific processes to change the resource base than the capacity to change the resource base. This is because, according to the empirical results, examples of strategic management found in VGD companies are actually long term- and multiple-processes which involve manifold innovative and competitive activities. Within these processes, capabilities (and Given the high level of the resource base) are created, modified and upgraded.

complexity of the phenomenon, all these processes are not suitable to be reduced and denoted just as the capacity. In addition, by conducting more empirical studies, such a set of processes probably can be further elaborated into a more complete and well-established analytical framework in the future. Before that happens, we should be careful to avoid making Dynamic Capabilities a fixed and rigid piece of terminology. We could also consider borrowing the existing concepts from the innovation literature (e.g. types of innovation and management of innovation) and integrating DCs with firm-level innovation studies. This is because we have already found that firm-level strategic management processes are also innovation processes. Despite the effort of trying to clarify and utilise Dynamic Capabilities, this thesis understands that above suggestions may still be questionable and are still far from being perfect. However, to the minimum extent, they are the results of the learning Among process of the thesis in which Dynamic Capabilities is applied as a template to compare the empirical results of VGD companies strategic management. many dynamic capabilities studies, this thesis is just one of them trying to understand the very nature of Dynamic Capabilities, to make an initial contribution to the DCA as a whole and to help it transforming into a more complete and non-tautological framework for competitive strategy analysis. 9.7. Conclusion In this chapter, the nature and characteristics of innovation in VGD, alongside the types of innovation and management of innovation have been synthesised and discussed in the context of different lines of literature. It is found that the nature of VGD innovation is contingent and its practices evolve over time. Thus VGD innovation should be understood from a multifaceted approach to reveal its hidden

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aspects.

This chapter also addresses the characteristics of strategic management of However, this construct needs some

Taiwanese VGD companies and suggests that Dynamic Capabilities is, to some extent, a useful construct in strategic management. modifications and clarifications in order to extend its applicability.

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Chapter 10. Thesis Conclusion

In this thesis, the object to the analysis is the videogame development (VGD) industry in Taiwan and the unit of analysis is the VGD firm. This thesis understands that the VGD industry in Taiwan is just one example within both the global VGD industry and the global creative industries. More generally, it is only one example within industry as a whole around the world. Thus this thesis has a certain scope of applicability and limitation. For the most part of this chapter (from section 10.1 to section 10.5), the immediate results and empirical contributions of this thesis will first be described in terms of the object to the analysis. Then the chapter (in section 10.6) will outline the theoretical contributions of this thesis before presenting the concluding remark. 10.1. Research Aims and Research Questions In order to fill the research gap the lack of understanding of creative industries in contemporary innovation research (as stated in section 1.1 and 1.2), this thesis intends to achieve three research aims: To find out the nature and characteristics of innovation in VGD industry; To find out the managerial practices of innovation in VGD industry; To find out the competitive strategies and strategic management practices of VGD industry. Based on literature review and empirical investigations, this thesis asks three research questions: Innovation Nature Question What is the nature and characteristics of VGD innovation in Taiwan? Over the last ten years or so, what transformation has taken How far can different views of innovation help us place in Taiwanese VGD?

understand the nature and characteristics of VGD innovation? Innovation Type and Management Question Over the last ten years or so, what innovations have been achieved by Taiwanese VGD companies and how have these innovative activities been managed? these cases? Strategic Management Question What are Taiwanese VGD companies How far can different innovation models/approaches/concepts inform the practices of innovation management in

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competitive strategies and how have they managed to survive in a highly competitive and uncertain business environment? management? 10.2. Answering Research Questions Based on our case studies in Chapter 5 to Chapter 8 and discussion in Chapter 9, the answers of the research questions will be recapped as follows: 10.2.1. Nature and Characteristics of Innovation This thesis finds that the nature of VGD innovation is contingent and varies from case to case. For example, VGD companies used as case studies in this thesis behave with their own idiosyncrasies because they originate from different starting points and evolve along different trajectories shaped by their specific sets of resources and capabilities. Thus, they also take different actions (and strategies) in a high-velocity environment. VGD innovation also concurrently reflects part of the key characteristics of manufacturing, services and Complex Product Systems, suggesting that VGD innovation is far more complicated than a specific line of literature can deal with single-handedly. However, VGD innovation across firms also shares some common features. For To what extent can Dynamic Capabilities be a useful concept to analyse these VGD companies strategic

instance, over the last ten years, they all have been engaging in similar activities, i.e. developing new videogames, changing company organisations and producing processes, strengthening and updating technology-related capabilities, and generating more sensational and appealing content. In general, Taiwans VGD industry has experienced a radical paradigm-shift, in which companies transform from making simple offline-PC games as boxed-product into supplying highly complex large online game systems. This radical structural change at the industry level is made up of numerous incremental innovations within these companies, where both videogames per se and videogame production processes both change profoundly. 10.2.2. Types and Management of Innovation Informed by literature review and empirical investigations, VGD innovation can be
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categorised into the following types: Technology-based Innovation; Process & Organisational Innovation; Product Innovation; Content Innovation; Marketing and Delivery Innovation; Revenue and Business Model Innovation. This taxonomy is convenient for analytical purposes. However, it is noteworthy that

all these types of innovation take place concurrently and are closely related to one another. For example, technology-based innovation is one of the most fundamental and essential types enabling other types of innovation in VGD. experiences which artists and designers aspire to offer. products in the online game era. New content and Technology-based game design require technology-based innovation to express the new effects and innovation also supports new marketing strategies and the new ways of delivering In the context of VGD, content innovation is Content innovation per se plays an internal tantamount to product innovation it self.

driving force to organisational and technological change. When the very nature of a product transforms radically from offline-PC game to MMOG, the revenue and business model also change profoundly. Regarding management of innovation, VGD is conducted by PBO (Project-Based Organisation) because it has better flexibility to manage heterogeneous inputs from various types of human resource and to deliver tailor-made videogames every time. PBO also has better flexibility to manage business risk and uncertainty because a project can be disbanded more easily than a department. videogame players. In terms of drivers of innovation, the case studies show that most developers are also enthusiastic This kind of enthusiasm plays a very significant role in the VGD innovation, because in order to fulfil that enthusiasm, developers have stronger internal tendency to produce higher quality, more emotionally touching and sensational videogames. This research also found that technology development and Instead, other cultural products, knowledge are not the only source for innovation. innovation.

e.g. films, books, TV and videogames, all provide important sources for VGD The direction of game design and content creation are very much

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subject to developers background and experiences.

However, these personal

attributes are all profoundly influenced by culture and cultural products. In addition, it is found that the skills and knowledge for VGD are largely tacit and difficult to codify and accumulate because most of the VGD innovative activities are ad-hoc one-shot-deals. However, developers do manage to codify parts of them and turn them into game engines and development tools for repeated use. 10.2.3. Strategic Management From the case studies, we found Taiwanese VGD companies were evolving along the following trajectories and competitive strategies (stated in section 9.6.1): scaling-up videogame from small/simple ones to big/complex ones; upgrading videogame graphics from 2D to 3D; transforming videogame from standalone ones to online ones; prolonging videogame title life span from few months to few years; diversifying videogame genres; alliancing with other companies. We also found that in order to survive and achieve these envisaged strategic goals Taiwanese VGD companies constantly conduct manifold innovation activities which require them to learn, develop and upgrade capabilities and resources. In another word, these companies were trying to survive through innovating and capacity/resource-building guided by a set of loosely coherent strategies. According to our case studies and discussion in section 9.6.4, we conclude that the DCA is a better analytical framework for strategy management of Taiwanese VGD companies, because the following reasons: Inward-looking perspective: Taiwanese VGD companies do not only strategise and compete at the macro-industry level, and mechanically react and follow other VGD companies strategic behaviour. Instead, as the DCA suggested, companies are also rather inward-looking in making strategies and much of their competitive advantages comes from inside of the companies. Path dependency: as the DCA suggested, we found companies growth, evolution and competition are very much path-dependent. New capabilities and resources (and corresponding competitive advantages) are always built on top of old ones.

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Value creation and innovation are always trial-and-error processes. Uncertainty: as the DCA suggested, we found that VGD companies strategic management, value creation and innovation are highly uncertain processes. Some turn out to be unexpectedly profitable whereas some end up in serious financial losses. Sources of competitive advantage: following the RBV, the DCA emphasises that the firms competitive advantages and economic benefits originate from the firms resource base - and its capabilities to change the resource base dynamically. case studies also reach a similar conclusion. Heterogeneous resource and capability-building: from our case studies, we found VGD companies need to build a wide range of capabilities and resources to innovate and compete. advantage. This finding conforms to the DCAs suggestion that technology is by no means the only or the most important source of competitive This finding also seems to assimilate innovation research which suggests that complementary assets play a crucial role in the success and failure of innovation. Observing and assessing dynamic capabilities at work: Capabilities are not an entity with physical presence, thus they are difficult to observe. However the DCA is useful because it suggests how we could go about assessing capabilities in the VCP. The case studies indeed observe capabilities at work in the VCP. Strategic Management Process and Innovation Process: after investigating our case companies innovative activities and competitive strategies, we found the DCA is not only a useful concept for analysing firm-level strategic management but also a useful one for capturing a picture of firm-level innovation processes. This is because the entire value creation and capability/resource building processes are also the firms innovation processes. Our case studies show that these processes are usually initiated after the top management decides the general direction of competition. Managers and staff members will then commence a series of activities encompassing various types and managerial practices of innovation as described in the preceding chapters. In the innovation process, by capitalising the firm resources and capabilities, a wide range of capabilities (stated in the four case report chapters) are created, modified and renewed by the management team, managers and project/department staff. Some of these capabilities then crystallise as the VRIN assets (e.g. game engines and tools, database, image library) and can Our

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be recombined and upgraded for the use in the future. Despite the usefulness of DCA, we also notice that Dynamic Capabilities definition still needs some clarification, and suggest that it is better defined as a strategic management-process overview than as the capacity (see section 9.6.5 and section 9.6.6 for more discussion) because the later may still cause some definitional confusion and risk a tautological problem. 10.3. Empirical Knowledge for Practitioners and Policy Makers Through in-depth, chronological and exploratory case studies, this thesis contributes empirical knowledge to the innovation and strategic management-related studies in the VGD industry in Taiwan. As the VGD industry by definition is part of the creative industries, the knowledge can also contribute to creative industry-related studies as a whole. 10.3.1. Content Innovation This thesis has added a new research dimension, Content Innovation, to innovation research as a whole by revealing the pivotal role that content innovation plays in VGD 72. This dimension does not exist in the conventional innovation view or the It does not receive adequate attention in the complex product systems perspective.

service innovation study either (den Hertog, 2000). That is because the former two approaches are basically manufacturing and/or technology/functionality-centric, whereas the so-called services can actually cover many heterogeneous industries and sectors. Although some recent studies on creative industries have touched on this dimension, the importance and function of content have not been fully exploited. revenues streams. the firm. This thesis also shows that content innovation leads the orientation of product and
Technological innovation within the organisation is necessary but insufficient in the entire innovation process. 235
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In the context

of online game development, delivering new content is the only way to generate Companies intentions to deliver more and better content are the major driving force behind the technological and organisational innovations within

technology innovation by profoundly affecting a products appearance, system architecture and component customisation. By revealing the importance of content innovation in the VGD process, this thesis has pointed out a new research dimension to content-based creative industries in general. 10.3.2. Sources for Innovation This thesis contributes to innovation research by showing that not only technology but also culture and history provide vital sources of VGD innovation. innovation. Technological skills and knowledge are extremely important but still far from sufficient to VGD In fact, non-technology sources of innovation are in most cases In these considered more important because consumers are basically attracted by the experiences and feeling offered by the games, not the technology itself. designers in VGD innovation. 10.3.3. Drivers for Innovation and Limitation of Conventional R&D The conventional R&D concept considers only engineering personnel to be R&D staff. However, this is not applicable to a VG developer or to VGD itself, because the entire VGD process per se is an R&D activity which encompasses a great deal of not-so-engineering and technological innovation. All the staff members, including designers and artists, are heavily involved in R&D, and in most cases, the artists and designers play the leading role in VGD. In their day to day roles they even have to solve various technical difficulties by themselves. In short, the management of innovation in VGD is not a simple linear process as suggested by conventional manufacturing innovation research. Policymakers responsible for planning the VGD sector support scheme must be aware of this crucial difference, and look beyond the conventional framework and take the contribution of non-engineering staff into consideration. 10.3.4. Strategic Management of CoPS Supplier CoPS as an emergent conceptual framework which has mostly been studied from the innovation research perspective. However, CoPS has rarely been studied in the area of strategic management. This thesis fulfils this research gap by demonstrating In addition, the
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circumstances, culture- and history-heritage can provide sparkling ideas to game

CoPS suppliers strategic management and value creation processes can be studied from the dynamic capabilities approach in a high-velocity market.

dynamic capabilities approach has long been criticised for its vagueness, tautology and lack of empirical evidence demonstrating that it is a useful construct in strategic management (Prieto and Easterby-Smith, 2006). However, by showing how capabilities (as a part of firm resource base) are built dynamically over time through learning processes within the firm and reframing the definition of dynamic capabilities as an analytical framework, this thesis not only refutes the aforementioned criticism but also strengthens the applicability of dynamic capabilities as a theoretical approach. 10.3.5. Knowledge Management of CoPS Supplier Tacit-knowledge transfer and organisational wide learning in the context of technology and management discontinuities have always been two of the greatest challenges for CoPS suppliers, because projects usually last for a shorter time than the firm/organisations. Once the projects are finished and the team is disbanded, tacit Thus, the valuable know-how obtained from However, this thesis makes a knowledge and skills also fade way.

one project is difficult to transfer to another, or to retain within the organisation and form part of the organisations long term capabilities. significant contribution to knowledge by demonstrating that VGD developers, as CoPS suppliers and knowledge creating companies, can retain the tacit knowledge by modularising their creativity, solutions and specific ways of doing things into various game engines, middleware, and designers and artists applications. These proprietary tools can be modified and upgraded by each internal user in accordance with internal and external stimuli, e.g. other projects requirements and computer hardware technology development. More importantly, they can be shared by the whole company as a common working platform while gradually accumulating more tacit knowledge and contributing to firm-specific assets. 10.3.6. Videogame-Related Innovation Studies Similar to conventional innovation research, most previous videogame-related innovation studies are game console hardware-centric and overlook the software domain. Although there are some recent studies on videogame software, they still do not offer sufficient insight to VGD innovation on PC-online platform as PC-online and videogame consoles which are in very different technology and business environments. To some extent, this thesis makes a contribution to videogame-related innovation studies by offering more empirical insights into the
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domain of VGD innovation on PC-online platform. 10.3.7. Policy Implications For decades, Taiwans economy has been heavily relying on OEM hi-tech mass-production. In order to diversify Taiwans economy base, in 2002, Taiwans However surprisingly government announced that the videogame industry would be one of the next-generation of star industries to be fully supported. little research has been done which relates to this high-priority industry in Taiwan. Before formulating an efficient and comprehensive policy to support this star industry in the future, it is imperative to be fully aware of what this industry has been through and the challenges it faces. This thesis is probably the first of its kind to contribute to a preliminary yet in-depth understanding of VGD innovation in Taiwan, showing that this industry is profoundly different from manufacturing as a whole. Hence, some policy recommendations are worth further consideration: In order to access a technology development loan or an R&D tax break, the measurement of R&D should be different in the VGD industry. companies innovativeness. The policymaking bodies may consider a different set of criteria for evaluating VGD The measurement of innovativeness should be extended to non-engineering elements and personnel such as artists and designers should be, to some extent, considered as R&D personnel. In comparison with other IT or manufacturing industries, VGD is a low-paid job. Many competent software programmers are attracted by the higher salaries but much easier jobs in other industries 73 . industry. As human resources are the most valuable assets to VGD companies, the policymaking bodies should help the industry to create a larger pool of talent by offering more training programmes and transferring more tacit knowledge and skills. These programmes should not only teach the techniques of game making. Instead, they should also equip trainees with more managerial capabilities (e.g. project management) since large complex software projects are always difficult to
All the interviewees with a software engineering background and experiences in other industries agreed that the game development industry is much tougher especially in the sense of 3D graphics and MMORPG design. This is because as well as systems and functionality, they also require a lot of aesthetic sense and artistic imagination. 238
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Thus, the policymaking bodies may

consider certain financial incentives to attract and retain software engineers in this

manage. 10.4. Limitations of This Research This innovation and strategic management research is based on evidence collected from Taiwans videogame industry as a whole and its four major videogame development companies experiences since the late 1990s. Thus, the findings and contributions are confined to the aforementioned empirical and theoretical scope. As a result of limited time and budget, and the qualitative nature of research questions, it was beyond the scope of this PhD project to conduct a large scale survey covering every single existing company. By the same token, a comprehensive industry-wide survey on every single individual within this industry was also unfeasible. In addition, it was not possible to access first-hand information of companies which had previously existed but already disappeared for whichever reasons during the last ten years. In other words, it is important to note the possibility of missing some information that could have provided insight for this research. To mitigate this potential hazard of research validity, this research attempted to collect as much evidence (in the forms of both first-hand information by interviewing and secondary data by internet/archive-searching) as possible, in the hope of delivering a robust contribution to knowledge. However, although it is impossible to collect every single piece of information from all the companies within the industry, the chance of reaching an entirely misleading conclusion or drawing a completely inaccurate picture of VGD innovation is extremely low. This is because the possibility of being unaware of the existence of a heavy-weight Taiwanese VGD company or a hundred micro Taiwanese VGD studios which may change the entire landscape of VGD innovation is extremely small. 10.5. Area of Future Research According to the research findings this thesis suggests the following areas for future research: Innovation of creative industries: Although creative industries are at the top of

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governments list of industries to support, both policy makers and academics still lack sufficient understanding of these newly emerging industries. In order to draft an efficient supporting scheme, creative industries are in need of further studies with regard to innovation processes, dynamics and challenges. It is also worth conducting further research on other creative sectors to see how far the findings of this thesis can be generalised. More importantly, Taiwans Standard Industry That results in an inaccurate estimation Classification (SIC) is currently unable to reflect the very nature and existence of creative industries and the VGD industry. of the size and production value of these industries. Thus the SIC code should be modified to some extent to allow accurate measurement of these industries. Innovation Survey: The Taiwan Government conducted the first Taiwan Technology Innovation Survey (TTSI1), the very first nation-wide innovation survey, in 2002. However, this survey only adopted the quantifiable indicators, i.e. R&D budget (inc. internal R&D, outsourced R&D, cost of patents and budget of staff training) and the technology innovations impact on market share, cost efficiency and quality improvement. innovative activities and elements. However, the measurement of this survey is Thus a tailored innovation survey either for unable to reflect the innovativeness of VGD as it has a great deal of unquantifiable the creative industries as a whole or the VGD industry should be considered in order to generate a detailed picture of these industries innovation status. Taiwanese VGD industry: The research findings of this thesis are based on what has happened in Taiwanese VGD industry over the past few years. MMOG business. In general, it is found that the sector has been radically transformed from PC game business into Alongside the transformation, many types of innovation and managerial practices take place. It would be worth conducting a further study on this sector in the near future to see whether, after entering the online game era, similar findings can still be found. UK VGD industry: At the initial stage of this research, some field work and background research had been conducted in the UK. It was found that the UK VGD industry is predominately made of consol videogame developers and that it is structured rather differently from Taiwans VGD industry. Thus it could possibly

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be an intriguing research project to see whether the UK VGD industry has different innovation practices and strategic management compared with Taiwan. Innovation and strategic management of CoPS suppliers: Given the importance of CoPS in our modern economic activities, CoPS is still a relatively under researched area, especially in the context of strategic management. Thus, this thesis suggests that issues related to CoPS suppliers strategic management, such as how they develop capabilities and how they overcome drastic discontinuities, are worth further study. Dynamic Capabilities: As an analytical framework in strategic management, more empirical studies from the Dynamic Capabilities perspective can be conducted in different contexts and sectors. applicability. This will enhance this frameworks credibility and However, to avoid the critique of being tautological, researchers

must be aware of the fundamental difference between Dynamic Capabilities and Capabilities, and prevent making a specific capability tantamount to the dynamic capability. 10.6. Theoretical Contributions Theoretical contributions can be achieved by two approaches: either by adding new academic knowledge to existing theories or generalising existing theories to the empirical cases (i.e. analytical generalisation). Based on the empirical results, this section will summarise this thesis theoretical contributions to the areas of dynamic capabilities, complex product systems, service innovation, innovation research in general and research methodology. 10.6.1. Dynamic Capabilities In an attempt of using the DCA as a theoretical lens to explore VGD companies strategic management, this thesis finds that the seemingly-sensible dynamic capabilities can not be used arbitrarily without further clarification. In terms of theoretical contribution, this thesis, by synthesising previous literature and empirical results, makes a negative contribution to the mainstream definition of dynamic capabilities by suggesting that dynamic capabilities are better not defined as the capacity of an organisation purposefully to change its resource base (Helfat et al., 2007). This is because no matter how much effort these authors trying to
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differentiate the meaning of the capacity and the capability, there is always a slippage in between (because these two words are synonymous to some extent) and this may cause confusion. In addition, because dynamic capabilities are the capacity, such a definition will lead researchers and readers intuitively to look for (or to expect that there are) dynamic capabilities of a company which enable it to compete dynamically, and end up in a tautology. Moreover, in comparison with other analytical frameworks in strategic management, the idea of dynamic capabilities has a more inward-looking origin, which implicitly encourages researchers to focus on individual-idiosyncrasy, firm-specificity and path-dependency. This origin is useful in its own right, but when it is combined with the capacity-definition, such an approach tends to lead researchers to find case-specific dynamic capabilities and to reach case-specific conclusions. If researchers continually use the concept of In the dynamic capabilities in this intuitive, arbitrary and case-by-case way, it seems unlikely that dynamic capabilities will become a grand theoretical framework. way that, the competitive forces framework and the SWOT analysis can be widely applied in different contexts without worrying too much about their basic definitions. For the above reasons, and in attempt to make the DCA a more useful framework, this thesis suggests that dynamic capabilities should combine the processes-definition proposed by Eisenhardt and Martin (2000) and the overview presented by Ambrosini and Bowman (2009) (see section 3.6.7.2, 9.6.4 and 9.6.5), and be redefined as: A framework to analyse the strategic processes within which managers and employees collectively conduct value-creation and innovative activities to change the resource base; along the value-creation and innovation processes, capabilities are created, modified and renewed, as part of the resource base, by managers and employees. This thesis understands that this new definition is not a perfect one and will not be the ultimate one either. However, to a minimum extent, this new definition demonstrates the result of this thesis learning process. This definition is just an initial effort which attempts to scale-up the DCA and make it a more robust analytical framework. In this sense, this thesis has made a contribution to the research on dynamic capabilities in general. In terms of analytical generalisation,

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the DCA has extended its scope of application.

Most previous dynamic

capabilities-related studies are carried out in technology-oriented industries. This thesis shows that the DCA can be extended to the VGD industry where the aspects of aesthetics and culture are to some extent considered more important than the technology aspect. Thus this thesis speculates that the DCA can also be applied to strategic management research in creative industries and suggests it is an area worth for further investigation. 10.6.2. Complex Product Systems This thesis enriches the detailed evidence with regard to the knowledge management (KM) of CoPS suppliers. KM has been a research gap and an innovation challenge in the area of CoPS innovation. VGD companies as multiple CoPS suppliers can convert personal, tacit, human-embodied know-how (basically obtained from the discreet and discontinued project processes) into organisational, codified, machine-embodied knowledge by modularising skills and know-how accumulated over time into proprietary game engines, development tools and common working platforms. These software packages and systems also crystallise the firms Based on them, VGD capabilities, routines and specific ways of doing things.

companies can continuously create, renew and modify the firm-specific capabilities and resource base; and facilitate the processes of long term organisational learning and knowledge sharing within the firm and across different projects. In terms of analytical generalisation, this thesis finds that online games, particularly MMOG, can be defined as CoPS. Thus the concept of CoPS is applicable to the VGD industry of In fact, based on empirical results, This finding creative services in the experience economy.

MMOG is highly interactive Complex Creative Service System.

augments the scope of CoPS, by not only appending one new conceptual category (i.e. complex creative service system) into the candidate list of CoPS (Hobday, 1998), but also adding new analytical dimensions (e.g. culture and aesthetics; content and experiences) to the innovation and production process of CoPS. cultural and aesthetic-driven as well. 10.6.3. Service Innovation The thesis finds that a complementary aspect of content innovation, should also be taken into account alongside the other four dimensions when evaluating the novelty of
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The original

innovation research on CoPS is largely SET-based but now it can also be highly

a new service (i.e. service concept; client interface; service delivery and organisation; technological options). By definition, a new service concept is broadly referred to as an abstract or general idea. However, before a concept is delivered by organisation and technology, it needs to be substantiated by a great deal of content (by definition, content is referred to something significant and meaningful that is contained). Particularly in the VGD industry, companies or individuals can have very similar game design concepts, but what makes the VGD process challenging and each new videogame different is the unique content (and the attached experiences) of each videogame. With regard to this finding, this thesis considers that when evaluating the novelty of a new service (particularly a creative one) in the future, this new dimension (content innovation) should also be applied alongside other four dimensions. Previous creative service innovation literature speculates that there are still many dimensions of innovation remained hidden. The empirical results of this thesis show that VGD requires a much wider range of knowledge sources and relevant skills than the conventional view suggested. VGD knowledge domains can range from fine-art to mathematics, literature to physics and economy to psychology. For example, some VGD developers use knowledge learnt from psychology to design more rewarding gaming experiences and to put the design idea into practice by coding a more appropriate AI engine. Some VGD developers have to learn knowledge from economic text books in order to keep the MMOGs virtual world and economic system in equilibrium. This is because if a MMOGs game-world and its economy system are unfair, crashed or frustrating, the MMOG will soon lose its user-base. Some VGD developers have to access a large number of artists (either by keeping them in-house or through outsourcing), who collectively can produce artworks or concept arts of a wide range of genres, and then to represent new design ideas, moods or feelings through these artists works in the new videogames. These are just three examples among many to demonstrate that in VGD there are still many unnoticed locus where innovations are taking place. In terms of theoretical contribution, on one hand, this thesis has provided a great deal of new evidence to the emergent research area of creative service innovation to deepen and augment the understanding of creative service industries. On the other, it also resonates and validates the suggestion of previous literature, and implies that creative service industries is a

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research area worth further studying to uncover more of their hidden innovations. 10.6.4. Innovation Research This thesis adds a new dimension, content innovation, to innovation research in general. Although content innovation has been mentioned in a few innovation studies on creative industries, the previous studies have not revealed the function of content innovation and its relationship with other types of innovation and organisational changes in-detail as this thesis has. This thesis finds that content innovation drives other types of innovation and organisational changes within the VGD firms, and is meant to offer new immersive and sensational experiences to consumers. firms. More importantly, contents are the ultimate source of revenue for VGD This implies, for innovation and competition, these firms should concentrate

efforts on developing content and experience generation capability. As VGD is part of creative industries, this thesis speculates that this finding can also be generalised to other parts of creative industries as well. In addition, by revealing new dimension and new sources for innovation in VGD, this thesis extends the scope of innovation research to the VGD industry of creative services and confirms that VGD is part of the experience economy as well. However, at the same time, this thesis also upsets the previous and wildly-accepted notions proposed by the conventional innovation view by pointing out its limitations in the context of VGD innovation. 10.6.5. Research Methodology The significance of history is widely recognised in various areas of social science and innovation studies. However, it was broadly undervalued in the filed of strategic management studies until the emergence of the DCA. This thesis adopts a detailed event-listing method to elucidate complicated phenomenon such as how firms evolve and how innovations and strategies are managed. the credibility of the DCA. processes and outcomes. By doing so, this thesis does not only support the view that innovation is an evolutionary process but also strengthens This is because the event-listing helps to identify discreet value creation processes and delineates the relationship between these Thus, this thesis makes a significant contribution to the It field of research methodology of strategic management, particularly to the DCA. and insights.

shows that chronological even-listing is a potential technique to yield fruitful results

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10.7. Concluding Remark Based on an in-depth, chronological and multiple-case study of Taiwans VGD industry, this thesis finds that the industry has experienced a radial paradigm-shift, transforming itself from making simple products into supplying CoPS. industry over time. This radical transformation constitutes numerous incremental innovations across the entire Despite evidence that VGD innovation varies from case to case Over the last few and firm to firm with a high degree of idiosyncrasy, content innovation is nevertheless one of the most note worthy aspects of the innovation process. years, when videogame per se has become more like CoPS, VGD in Taiwan has also quickly transformed into a service-oriented business. However, the production of VGD intriguingly follows the pattern of a traditional manufacturing business as a great deal of formalisation and modularisation of VGD processes take place within these multiple-project-based firms. The conventional wisdom of innovation research and strategic management can not offer satisfactory illustration to all these changes. Instead, a multifaceted view of innovation and the DCA perspective can better capture the salient features of the industrys status-quo and its strategic management over the last ten years or so. Beyond these findings, this thesis also has made some intriguing This contributions to the literature of innovation research and strategic management. thesis also outlines some areas for future research.

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Appendix A: An Example of Interview Guide

I am conducting a research of strategy and innovation management in Taiwanese videogame development companies. This research aims at investigating how your company manages innovation and competition strategy over the past few years, especially during the period of transforming from PC game development to online game development. This research does not seek for the commercially confidential information. The information you provide will remain strictly confidential and will be used only in this academic research. Part One: Types of Innovation 1. Could you describe for me, in the past few years (since 2000), the new things or changes have been done by your company in the following areas: technology capability, videogame development and firm organisation? 2. Could you describe the goal of competition strategy of your companies over the past few years? Part Two: Management of Innovation 3. Could you describe the process of videogame development? 4. Why does your company start to make MMOGs (online games)? 5. In terms of videogame development process, what is the difference between the PC game in the past and the MMOG (online game) nowadays? 6. What new capabilities does your company need to make MMOGs? 7. How does your company develop these new capabilities? 8. Where do creative ideas for videogame development come from? 9. Does your company develop game engines and tools by itself or acquire from third-party? 10. What are the difficulties of making new MMOGs? Part Three: Competitive Strategy 11. In your company, how is the competition strategy is formulated and implanted? 12. What impacts does the competition strategy bring about to the company? 13. Does your company always successfully achieve the goal of the strategy?

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