Tag Archives: strategy

Review – Deep Value Investing (#contrarian, #investing, @HarrimanHouse)

Deep Value Investing: Finding bargain shares with big potential (buy on Amazon.com)

by Jeroen Bos, published 2013

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library. Please note, I received a copy of this book for review from the publisher, Harriman House, on a complimentary basis.

Benjamin Graham’s Principles Applied

Although it provides a summary introduction to the theory of Benjamin Graham’s classic deep value (net-net and discount-to-book value) strategy, Bos’s “Deep Value Investing” is decidedly a practitioner’s guide, not a philosophical work. More accurately, it’s a collection of case studies for observation and analysis– what did and didn’t work in various key examples from Bos’s own investment portfolio.

This is the book’s strength, and weakness. It is a strength because any opportunity to peer into the portfolio of a working money manager and see not only what he’s done, but why he has done it, is often worth the price of admission. Bos gets hands on with the reader and provides the relevant information in each case study, including the start and end date and price of each trade, the relevant balance sheet information and per share calculations and a helpful chart of price movements over time to put it in perspective.

Most importantly, though, Bos provides a lot of qualitative detail that helps to flesh out the simple quantitative analysis. Many curious students of value investing will be happy to see Bos not only explains what piqued his initial interest in each security, but that he also talks about how long and why he waited to get involved in each opportunity and how he interpreted business developments in each case (positive and negative) along the way. He also provides an explanation as to why and how he exited each investment, whether it was a winner or a loser.

This is something that’s missing in most investment case study discussions and it’s a real value add with this book. Another value add is the online support materials for the book, including a record of all relevant publicly available information for each investment that Bos used in his analysis (so you can follow along and see if you can see what he saw), as well as a free eBook version of the title accessible with a special link.

As mentioned, the weakness of the book lies in the fact that it’s mostly a collection of case studies with little else to structure it. In that sense, while the material is approachable and certainly not technical or difficult by any means to comprehend, this is not a “beginner’s book” but better for a reader who has already read a more philosophical work such as Graham’s “The Intelligent Investor” or “Security Analysis”. After reading those, revisiting Bos’s “Deep Value Investing” should yield many profitable insights and appreciation for what he has managed to accomplish.

Additionally, a bit of information that is normally found in these “how I do what I do” guides, that being whether or not the author supports diversification or concentration of portfolio positions and how he sizes his positions and manages his portfolio as a whole in general, are noticeably absent. The mere addition of this insightful information might have pushed this book into the “4-star” range in terms of usefulness and candor. As it is, it’s a “3-star”, though a strong 3-star candidate. A good read, but not essential in any library and by no means a classic like “Security Analysis”, though of course it has no pretensions of being so.

If you’re “deep” into deep value strategies, or want to watch over the shoulder of a talented operator, Jeroen Bos’s “Deep Value Investing” is well worth picking up! Even veteran value guys have something to learn from Bos’s “qualitative-quantitative” combined approach and especially his criteria for exiting a successful investment as it “transforms” over time from a balance sheet to earnings play.

Other Notes

Some of my other favorite observations worth noting:

1.) Liquid assets are what we’re really interested in, for the strongest margin of safety

2.) Share prices tend to be volatile, but book values tend to be stable over time

3.) Service companies tend to offer good value opportunities because they’re light on fixed assets and heavy on current assets; they also have flexible business models that can quickly scale up or down depending on business conditions

4.) Cyclical stocks always look cheapest on an earnings basis at the top of their cycle and most expensive at the bottom of their cycle (which is ironically when they’e a best buy)

5.) To better understanding accounting statement terms, compare treatment of confusing items across different companies in the same industry

6.) When evaluating trade receivables, it’s important to understand who the company’s clients are

7.) Check lists of new 52-week lows for good value investment candidates

Review – Repeatability (#strategy, #business, @HarvardBiz)

Repeatability: Build Enduring Businesses for a World of Constant Change (buy on Amazon.com)

by Chris Zook, James Allen, published 2012

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library. Please note, I received a copy of this book for review from the publisher, Harvard Business Review Press, on a complimentary basis.

What’s this book about?

I finished reading this book over three weeks ago. Since then, I have struggled to get myself to sit down and write a review. The primary reason I’ve struggled is because I am not sure I can say with confidence what this book is about, or to which genre it belongs. Is it about strategy? Business management? Business planning? Organizational theory? Something else?

“Repeatability” chants about simplicity, but it’s full of so many buzzwords, different-but-related ideas and proprietary-sounding business catchphrases that it’s hard at times to keep up. And perhaps I’ve dropped into the late middle of an earlier conversation, as the book references a “focus-expand-redefine” growth cycle elaborated upon in three earlier works known as “the trilogy”.

A more charitable explanation of my confusion might place the blame with the authors themselves. Take the way in which they describe the main shifts in strategy they say they are witnessing, which led them to write the book:

  1. less about a detailed plan and more about general direction and critical initiatives
  2. less about anticipating how change will occur, more about having rapid testing and learning processes to accelerate adaptation to change
  3. effective strategy increasingly indistinguishable from effective organization

The central insight from their research, the authors claim, is that,

complexity has become the silent killer of growth strategies

Why? The authors don’t take pains to explain or justify the assumption that the world is more complex and that “traditional” strategic notions no longer work in this new world order. They just accept it as common wisdom and run with solutions for responding to it.

Building “Great Repeatable Models”

The next several chapters detail what Zook and Allen call “Great Repeatable Models”, which are businesses defined by the following three principles:

  1. a strong, well-differentiated core
  2. clear nonnegotiables
  3. systems for closed-loop learning

According to the authors, GRMs (germs?) were

sharply, almost obviously, differentiated relative to competitors along a dimension that also allowed for differential profitability

which I think is another way of saying they have a lucrative competitive advantage.

Similarly, the authors suggest that nonnegotiables are a company’s

core values and the key criteria used to make trade-offs in decision making

while systems for closed-loop learning enabled GRMs to

drive continuous improvement across the business, leveraging transparency and consistency of their repeatable model

which I understood to mean that the businesses had a culture and process for improving their practices over time.

The Cult of the CEO

Chapter 5 of “Repeatability” seeks to demonstrate how the CEO is the guardian of the three principles of GRMs. While it clearly makes sense that the CEO, as the chief strategiest and top of the organizational pyramid would have a role in implementing and enforcing a GRM, the authors offer little here to help other than numerous examples of success and failure in following the three principles followed by a hopeful conclusion that the “right leadership” will be in place to manage the delicate balancing act they specify as ideal. It seems to place the book in the Cult of the CEO genre (idealizing the role and superhuman nature of corporate chief executives) while simultaneously causing much of their writing up to that point to seem extemporaneous.

It’s almost as if the presence of the “right leadership” implies the presence of a GRM, and the absence of a GRM implies the absence of the “right leadership.” The book suffers from hindsight bias and tautological reasoning like this in numerous areas.

My own simple interpretation

The central tenets of this book are confusing, poorly defined and at times self-contradictory. Its research methodology (inductive empirical study to explain complex social phenomena) is frowned on by this Austrian economist. Ironically, it is the occasional element touched upon at the periphery of the book’s argument, rather than its core, where the authors manage to share something meaningful to solving the dilemmas of business people.

Unfortunately, the encouragement to keep the distance between the CEO and the customer minimal and to articulate a simple vision that even lower-level employees can grasp and rally behind, for example, is rather intuitive and obvious. Why would adding layers of bureaucracy and arbitrary decision-making, or creating a business plan so elaborate your employees don’t understand it, ever be a sound practice?

There’s a lot here including many case studies and other reference materials, but not all of it is useful or makes sense when viewed through the prism of the Great Repeatable Model. For some the digging required to find the occasional nugget of wisdom may be worth it but I can’t recommend such exertion for everybody.

Notes – Nintendo Back In The Saddle? ($NTDOY, @ActiveInvesting, @NintendoAmerica)

On January 23rd, 2013, Nintendo pushed out another “Nintendo Direct” communication from the company to the gaming public, discussing their upcoming plans and vision for the newly released Wii U home console. The reaction of one major gaming media outfit, IGN, was telling:

Finally.

That’s really the only word that comes to mind after watching Nintendo’s new ‘Direct’ broadcast. In just over 30 minutes, the game publishing giant not only made a better case for the future of Wii U than in the previous 12 months, it managed to surpass the hype it generated at its past two E3 outings – combined.

[…]

Today Nintendo did something remarkable, in a way that puts most other developers and publishers to shame. Though the Big N is often quiet and secretive, it has managed to find a modern, progressive format to deliver its news directly to its fans, while retaining its trademark sense of humility. In 30 minutes, over a dozen games were showcased, some coming in mere months, others perhaps years away. Regardless, the message was clear – Wii U is not only home to innovative new play styles for families, but epic, core experiences that rival the grandest, most ambitious endeavors available elsewhere.

And these games are entirely, completely exclusive, all tied to Nintendo directly as a software publisher, not as a licensor. The sheer glee of Wonderful 101 won’t be coming to Xbox 360. The visual brilliance of Yoshi’s Island won’t be appearing on a phone with loads of in-app purchases. PlayStation 3 will never get a HD remake of the timeless, gorgeous Wind Waker.

That’s what made today so remarkably potent – for any gamer who actually cares about games instead of arbitrary, meaningless console supremacy. Nintendo has started to provide a real sense of strategy for Wii U. The GamePad’s much-hyped innovation doesn’t matter without games. Neither does Miiverse’s social connectivity. Nor the fact that all those Wii remotes and games will still work. None of that matters without compelling games. But those features and ideas, once combined with software we can’t get anywhere else, collectively start to say something powerful. Something special. At the end of the day, gamers care about games. That’s what they want, and nothing else matters. [emphasis added]

What’s worth noting here is that the editors at IGN seem to have gotten a clear sense of Nintendo’s overarching strategy in this latest “Nintendo Direct”, a strategy which was laid bare in the book on the company I reviewed late last year called Nintendo Magic:

For some reason, Nintendo observers and critics don’t get this– why isn’t the company doing what everyone else is doing? Why are they making a console with a TV remote instead of HD graphics (the Wii)?

To Nintendo, the risk is in not trying these things and trying to do what everyone else does.

The guys at the top of the company and most responsible for its current development (Iwata and Miyamoto) are software guys at the end of the day, and the hardware innovations in the Wii U and predecessor systems were all about driving unique software experiences. Those software experiences are now being divulged en masse, to early critical acclaim.

There’s more in the original IGN.com article worth reading for the curious. And if you missed the review of Nintendo Magic, this is a good opportunity to go back and check it out, then compare those notes with how Nintendo has handled the Wii U rollout and how it comported itself in this latest “Nintendo Direct.”

Perhaps one might not agree with their direction and strategy, but at this point I think it’s hard to argue there is no consistency. And to a long-term investor who understands the strengths and success of this strategy in the past, I find that comforting.

(Click here for all coverage of $NTDOY on valueprax.)

Review – Losing My Virginity (Richard Branson Autobiography) (@richardbranson, #entrepreneurship)

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way (buy on Amazon.com)

by Richard Branson, published 2011

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

I felt I had to put “(Richard Branson Autobiography)” in the title of this post lest I tittilate my audience too much. No, this is not the story of how I first had intercourse. This is an autobiographical work about parts of Richard Branson’s personal and business life. However, yes, there is quite a bit of sex and other raunchiness to it, as Branson was quite the stallion in his day and seems eager to share that fact with his readers.

Anyway, I read this book over a year ago, took a few notes on it and then never got to actually posting them until now, unfortunately. Spring cleaning in October, as it were. Which I think is appropriate as it seems we won’t be having a winter this year, where I live– so if the seasons want to do whatever they want than I’m going to do whatever I want and go through my old WordPress drafts right now in the middle of the fall.

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Viriginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

  • the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
  • the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
  • the group focused on serving customers but equally saw treating its employees with concern as an important value
  • the group consciously created a brand that could be applied to diverse businesses (see point #1)
  • the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle first brought to my attention in a book I had reviewed on the blog awhile back, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

Review – Nintendo Magic ($NTDOY, #videogames, #business)

Nintendo Magic: Winning the Videogame Wars (buy on Amazon.com)

by Osamu Inoue, published 2009, 2010 (translated from Japanese)

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer.

Two Nintendo legends no one seems to know about

The original Nintendo started out as a manufacturer of playing cards and other toys, games and trinkets near the end of the Shogunate era in Japan, but the modern company we know today which gave the world the Nintendo Entertainment System, the Game Boy, the Wii and characters like Mario & Luigi and Pokemon, was primarily shaped by four men: former president Hiroshi Yamauchi, lead designer Gunpei Yokoi, the firm’s first software designer Shigeru Miyamoto and the first “outside hire” executive and former software developer, Satoru Iwata.

A family member of the then privately-held Nintendo, Yamauchi took the presidency in 1949 when his grandfather passed away. He tried adding a number of different businesses (taxis, foodstuffs, copiers) to Nintendo in true conglomerate fashion, managing in one 12 year period to grow sales by a factor of 27 and operating profits by a factor of 37.

But his most influential mark on Nintendo’s business came with his fortuitous hiring of Gunpei Yokoi, an engineer, who would head up hardware development for Nintendo’s game division. It was this strategic decision to concentrate Nintendo’s efforts on game development that would lead to the modern purveyor of hardware and software known around the world today.

Hardware engineer Gunpei Yokoi is not a well-known name outside the world of hardcore Nintendo fandom, which is not altogether surprising because most Nintendo fans alive today were not users of some of his first toy gadgets such as the “Love Detector” and the “Game & Watch” handheld mini-game consoles. On the other hand, it’s a shock that the man’s reputation is not larger than it is because he essentially single-handedly created the company’s hardware development philosophy in the 1960s which has remained with it today and continues to influence Nintendo’s strategic vision within the video game industry.

That hardware philosophy was summed up by Nintendo’s first head of its hardware development section as “Lateral thinking with seasoned technology”. In concrete terms, it is the idea of using widely available, off-the-shelf technology that is unrelated to gaming in new and exciting ways of play, for example:

  • Yokoi’s “Love Detector” game, which used simple circuitry and electrical sensors to create an instrument that could supposedly detect romantic chemistry between two users when they held hands and held the machine
  • A blaster rifle toy that used common light-sensing equipment to deliver accuracy readings of the users target shots to the rifle, registering hits and points
  • More recently, the Nintendo “Wiimote” concept, which was simply the idea of repurposing the common household TV remote into a tool for play

Yokoi’s lasting impact on the hardware (and software) philosophy at Nintendo is best captured by current president Satoru Iwata who once said,

It’s not a matter of whether or not the tech is cutting egde, but whether or not people think it’s fun

Similarly, this focus on repurposing existing technology for fun rather than investing in brand new technology helps to explain why many of Nintendo’s systems have been knocked for their not-so-hardcore hardware (think non-HD Wii vs. HD-enabled Sony PS3 and Microsoft Xbox 360) but nonetheless became massive consumer hits– the focus was on fun, not flash.

The Wii particularly was the response to the failure of two systems which preceded it (Gamecube and N64), which were extremely technologically advanced for their era and which departed as swiftly from Yokoi’s philosophy as they posed monumental development challenges for software developers due to their complex, proprietary nature. Instead of creating yet another whizbang console, Nintendo decided that if Wii’s costs were kept down and developers were free to focus on things like a new, intuitive controller and built-in connectivity functions, fun and market success would follow.

Essentially, the game hardware is a commodity with zero barriers to entry. Anyone can have the latest, greatest technology if they’re willing to pay for it. There is no way to establish a competitive advantage on the basis for hardware sophistication alone. It must come from design, or, as Yokoi put it,

In videogames, these is always an easy way out if you don’t have any good ideas. That’s what the CPU competition and color competition are about

Nintendo’s two leading lights: Satoru Iwata and Shigeru Miyamoto

Rounding out the Fantastic Four are Satoru Iwata, the company’s current president, and Shigeru Miyamoto, the star software developer.

Iwata came from relative privilege and studied computer programming in school. He had a passion for making and playing games from an early age. He joined a software developer, HAL Laboratory, early on. He successfully turned around the flagging HAL Lab before it was acquired by Nintendo.

Meanwhile, Miyamoto first came to fame through development of his Donkey Kong arcade game, which introduced the characters Donkey Kong and Mario and which was originally based off of Popeye until the IP could not be acquired for licensing. As a small boy he spent hours running around the hills, forests and mountains outside his home, which inspired many of his later game creations such as Pikmin, Animal Crossing, The Legend of Zelda, etc. He was the first designer Nintendo had ever hired. Miyamoto often utilizes his “Wife-o-meter” to help him understand how to make games that are more broadly appealing.

Miyamoto’s design ethic is best synthesized as populist-perfectionist:

When creating a game, Miyamoto will occasionally find employees from, say, general affairs who aren’t gamers and put a controller in their hands, looking over their shoulder and watching them play without saying anything

He creates game characters, game designs and immersive environments that appeal to everyone, not just the archetypical “hardcore gamer.” But this desire to serve a mass, unsophisticated audience does not mean that Miyamoto considers quality as an afterthought. Miyamoto will “polish [an idea] for years, if he has to, until it satisfies him” and “shelving an idea does not mean throwing it away. Those huge storehouses are full of precious treasure that will someday see the light of day.”

This is part of the value of Nintendo– they have many unrealized ideas waiting to be turned into hardware and games and the only thing preventing them from seeing the light of day is someone like Miyamoto who wants to make sure that when they eventually emerge into the light, they don’t just shine but sparkle.

And this thinking carries over to the company’s hardware efforts, as well. According to a lead engineer, the DS

had to work consistently after being dropped ten times from a height of 1.5 meters, higher than an adult’s breast pocket

Nintendo is “obsessed about the durability of their systems due to an overriding fear that a customer who gets upset over a broken system might never give them another chance.”

“Nintendo-ness”: how Nintendo competes by not competing

In 1999, then-president Yamauchi saw a crisis brewing for video game developers:

If we continue to pursue this kind of large-scale software development, costs will pile up and it will no longer be a viable business. The true nature of the videogame business is developing new kinds of fun and constantly working to achieve perfection

The solution was to adhere ever more closely to “Nintendo-ness”. Nintendo picks people with a “software orientation.”

“Nintendo-ness” is the company’s DNA, once someone has grasped Nintendo-ness, it is rare for them to leave the company. That tendency protects and strengthens the company’s lineage and makes employees feel at home

Manufacturing companies create hardware which are daily necessities, which compete based on being better, cheaper products. Nintendo is in an industry of fun and games, software, where polished content is the goal. Compare this to rival Sony, where hardware specs are key and the software is to follow.

According to Iwata,

Do something different from the other guy is deeply engrained in our DNA

Similarly, Nintendo-ness means delighting customers through creation of new experiences because

if you’re always following a mission statement, your customers are going to get bored with you

This way of thinking goes back to Hiroshi Yamauchi, president of Nintendo for 50 years, according to Iwata:

He couldn’t stand making the same kind of toy the other guy was making, so whatever you showed him, you knew he was going to ask, ‘How is this different from what everybody else is doing?’

For some reason, Nintendo observers and critics don’t get this– why isn’t the company doing what everyone else is doing? Why are they making a console with a TV remote instead of HD graphics (the Wii)?

To Nintendo, the risk is in not trying these things and trying to do what everyone else does. Iwata sums it up nicely:

Creators only improve themselves by taking risks

Of course, not all risks are worth taking. Iwata as a representative of Nintendo’s strategic mind makes it clear that the company is keenly aware of its strategic and financial risks:

The things Nintendo does should be limited to the areas where we can display our greatest strengths. It’s because we’re good at throwing things away that we can fight these large battles using so few people. We can’t afford to diversify. We have overwhelmingly more ideas than we have people to implement them

For example, Nintendo considers the manufacturing of game consoles to be outside its purview, a “fabless” company.

Then there’s the reason for the huge amount of cash on the balance sheet:

The game platform business runs on momentum. When you fail, you can take serious damage. The risks are very high. And in that domain, Nintendo is making products that are totally unprecedented. Nobody can guarantee they won’t fail. One big failure and boom– you’re out two hundred, three hundred billion yen. In a business where a single flop can bankrupt you, you don’t want to be set up like that… To be completely honest, I don’t think that even now we have enough [savings]… That’s why IBM, or NEC, or any number of other companies are willing to go along with us. We’d never be able to do what we do without being cash-rich

That being said, Iwata has not been shy about his policy toward dividends and acquisitions. He has stated that assuming Nintendo’s savings continue to accumulate, passing 1.5T or 2T yen, a large merger or acquisition may become a possibility. Otherwise, excess capital will be distributed as dividends.

The next level

Nintendo’s philosophy is to avoid competition. It sees the hardware arms race as an irrelevant dead-end. The key is to create new ways to interact with game consoles and software that keeps game players on their toes and brings smiles to their faces. According to Iwata,

We’d like to avoid having players think they’ve gotten a game completely figured out

Thus, for Nintendo the next level logically is integration of  User-Generated Content into their software environments, which would have inexhaustible longevity. First they sought to increase the gaming population, now they’re looking at how to increase the game-creating population.

The company’s true enemy is boredom. Whatever surprise you create today becomes your enemy tomorrow.

In the end, Iwata says,

Our goal is always to make our customers glad. We’re a manufacturer of smiles

This is what the company calls “amusement fundamentalism” and it’s what sets them apart from their perceived competition, especially comparisons or criticisms aimed at the company in terms of how it stacks up against a company like Apple. To Iwata, this just doesn’t make sense:

We’re an amusement company and Apple’s a tech company