The following is an essay on Valve, a gaming company, and how commercialisation is reflected in the way they organise their activity. This is a piece I did for my Masters of Commercialisation and Entrepreneurship and has been written to show that not all innovations need to be widgets and apps…
Essay on research commercialisation motives, pathways and organisation.
With current market valuations in excess of 70 billion US dollars, the global video gaming market has exploded in the last 20 years with revenues that now consistently rival or exceed that of the established industries of both music and movies (Laporte, 2013; Burk, 2013). Constantly fed by innovations in accessibility, distribution, hardware and software, the result has been the development of a thriving digital media sector, with about a half-billion people regularly engaging in PC gaming alone. This makes gaming an attractive market, with a number of businesses entering the sector and many others considering gamers in their product design and marketing (Computer Graphics World, 2012). Within the games industry operates Valve Corporation, developer of such games as Counter Strike, Portal 2 and Team Fortress 2, some of the most popular and lucrative games ever. Valves consistent record of success in this highly completive and increasingly capital intensive industry has, in part been driven by its approach to innovation; an approach that has allowed it to commercialise products from what would seem like techniques that would only foster chaos (Newbry, 2013).
Based on public sources of information about Valve Corporation (typically called Valve), this essay will firstly explain the role research commercialisation is playing for this American video game development and distribution company, then secondly discuss which pathways for commercialisation are most important to them and how this is reflected in the way they organise their activity.
Even from its initial stages it was clear that Valve and its owners placed high importance on the role of research commercialisation, and in particular the use of a model of open innovation to generate products and revenue. After having spent more than a decade at Microsoft working on early versions of the Windows operating system, former Harvard University dropout Gabe Newell and fellow co-worker Mike Harrington took their earnings and used them to start their own gaming company, naming it Valve, LLC in 1996 (Dunn, 2013). Once started, Valve used a series of strategic acquisitions and partnerships, coupled with internal research and tacit knowledge, to create what is regarded as one of the greatest video games ever made, Half-Life. Released through a partnership with gaming publishing company Sierra On-Line in 1998, the game picked up 51 Game of the Year awards while selling 2.5 million copies in its first year (Capriole & Phillips, 2008). Key to this success was not only finding a publishing company willing to taking a chance on the new business and its IP, but also the licensing of another gaming companies source code, in this case Id software, to build the game (Abrash, 2012; Dunn, 2013). This clearly highlights how Valve leveraged the power of an open innovation approach, by being able to commercialise the innovations and research from another company through the licencing of its IP, as without the source code the company would have had to develop the software on their own in-house, sinking massive funds and time into the project (Chesbrough, 2003).
Another example of how Valve uses research to its commercial advantage, is in the encouragement of a modding community around its developed games with the release of its game software development kit (SDK) for free. Again this actively mirrors the open innovation approach that Chesbrough (2003) describes in his open innovation model, but in particular where he mentions “no longer should a company lock up its IP, but instead it should find ways to profit from others use of that technology through licencing agreements, joint ventures and other arrangements” (p37). In this case, Valve is efficiently using the creative power of its fan base for the creation of modifications in its products, which Valve then helps move into more polished releases for the production of revenue. The best example of this is Counter-Strike, a ‘mod’ developed by Minh Le and Jess Cliffe in 1999. Valve hired these mod developers, gained access to the IP and released Counter-Strike 1.0 in an official capacity a year later. The game gained huge popularity, becoming one of the most popular multiplayer first person shooters ever (“the creators of counter-strike”, 2003; Dunn, 2013).
The two examples above clearly show that Valve is dedicated to research commercialisation, and operation of an open innovation model which leverages innovations from not only internal but also external sources for business success. The role of research and its commercialisation has been critical to the development of Valve and has played a significant part in a business that in 2011 analysts conservatively valued at 1.5 billion US dollars, with owner Gabe Newell saying that, on a per-employee basis Valve is more profitable than Google and Apple (Chiang, 2011).
While there is clearly a commitment to the commercialisation of ideas and research, Valve, like any other business must have clear pathways that take these ideas, new technologies and products to their customers and market. The examples above show Valve operating as an innovation one-stop centre, in a way that Chesbrough (2003) describes as a company that “take the best ideas (from whatever source) and deliver those offerings to their customers” (p40). This is certainly the case, but overarching this is a radical, system level process innovation that appears to have been the driving factor in Valves continued success; a business design innovation that sees Valve have a primarily flat organisational structure and completely non-typical practices in hiring, time allocation, compensation, performance review, and even workspace design when compared to other game development companies (Newbry, 2013).
It was Gabe Newell’s experience at Microsoft where he noticed that managerial structure often institutionalised workflows and stifled innovation. This experience made Newell think about what would be required to make an improved system for his own business (Newbry, 2013). Newell saw how the nature of productivity had changed and believed that hierarchical management was obsolete. To him it appeared that the old paradigm of productivity produced bottlenecks at the top of the organisational hierarchy and focused on doing the same thing over and over again, with only small increments of change (Gopaladesikan, 2013). As Newell said, “When we started Valve [in 1996], we thought about what the company needed to be good at. We realized that here, our job was to create things that hadn’t existed before. Managers are good at institutionalizing procedures, but in our line of work that’s not always good. Sometimes the skills in one generation of product are irrelevant to the skills in another generation”. (Suddath, 2012)
This reframing of the organisation and its associated methods of work showed a process based innovation that sat on the racial end of the dimensions for innovation, and given its scope was more system level in its effect. (Tidd & Bessant, 2013). The creation of this structure and its associated processes enables the entire organisation to more effectively function as an open business and operate closer to the innovative end of what Chesbrough (2003) proposes in his Business Model Framework (BMF). In Valves case a mix between ‘Type 5’ organisations, companies that integrate their innovation process within their business model, and ‘Type 6’ organisations, where the company’s business model is an adaptive platform (Wang, Jaring, & Wallin, 2009). Valve is typical of Type 5, in that it is focused on new markets and new businesses, as well as their current businesses, with the company pushing to align customers and suppliers with its business model (Chesbrough, 2003); but it is different in the creation and management of its IP, in that it is not managed as an individual financial asset within one business unit.
As Valve has no hierarchy, with no one operating as a designated supervisor or manager, and with all employees having the complete autonomy to choose what they work on one hundred percent of the time, the value creation approach would move between all four vectors of business model innovation, that being design and dominate, acquire and adapt, connect and create, and explore and exploit. It would move like this because like a Type 6 company, the management of innovation and IP is involved in every business unit of the company. You could go one step further and say that Valve is even more progressive than this, as it is not just the responsibility of the business unit but the individual employee. Thus, the company itself organises its activity organically to adapt to the newly created pathways for commercialisation that individuals and project groups within the organisation create themselves, be they external or internal pathways. (Wang, Jaring, & Wallin, 2009; Suddath, 2012). It also means that regardless of a projects confirmed pathway for commercialisation (selling or assigning ownership of technology, licensing technology, starting a spinoff company etc.) the onus is on the individual Valve employee or associated project group to drive the pathway, meaning any number of pathways could be operating within Valve at any one time, all of which having equal importance due to the flat nature of the organisational structure (“Commercialisation Handbook”, n.d., p. 17-24; “HANDBOOK FOR NEW EMPLOYEES”, 2012, p. 2-54).
In summary, the business prosperity of Valve is undeniable. It uses research commercialisation as one of its foundation approaches and uses it to leverage innovations from not only internal but also external sources for business success. Its pathways for commercialisation are driven organically, with the process being up to the individual Valve employee and associated groups to manage. This may seem like a technique that would only foster chaos, but it is this self-organisation that has actually helped drive more innovations to the market than normal, and with a 2011 valuation of 1.5 billion dollars it seems to be working very well for Valve.
*Please note that the included images were not part of the original essay
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