Case 5 - Valve - Case Study PDF

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Valve Case Study Although Valve’s unique organizational structure is a powerful recruiting tool and undoubtedly a major force behind its meteoric rise as a software company, it is not apparent that these benefits would aid in a pivot towards the hardware market. Because successful software development is likened to a creative process, a management structure that promotes the flow of ideas allows Valve to distinguish itself as a leader among game developers and digital distributors. This organizational model cannot be readily applied to the uncompromising demands of hardware manufacturing processes. The best computer hardware must adhere to strict tolerances that are best accomplished through a mass manufacturing process, in direct contrast to the production processes of software development that allows for many iterations of the same product and rapid responses to any problems that may arise. That being said, 51% of American families own at least one dedicated gaming console in their homes, while PC gaming platform currently exists largely at an enthusiast level. Although Steam currently leads the market in digital distribution of PC games, the console platform currently makes up 31% of the gaming market (or $33.5 billion) growing at 3.6% year over year, while gaming on the PC platform represents only 27% (or $29.4 billion) and is decreasing at a rate of 2.6% year over year (Appendix 1). Despite the potential risks associated with entering an unfamiliar market, the market for dedicated casual gaming machines represents a large segment currently untapped by Valve. Short of radically altering company culture, licensing the design of a Valve PC and its peripherals to an outside manufacturer, rather than developing a system in house, is the best option for the company to make an entrance in the living room gaming market. Existing projects at Valve such as Steam and Source Engine demonstrate the efficacy of the current organizational model in the creative design and development of unique and high-quality products. Furthermore, a similar strategy of licensing hardware designs to outside manufacturers has been employed by Google with its entry into the premium smartphone market with the Pixel line, which is able to compete directly with established industry flagships such as Apple’s iPhone and Samsung’s Galaxy. If Valve decides to pursue an entrance into the living room gaming console market, a Valve PC must be accompanied by a proprietary controller for the system. The integration of first-party gaming peripherals into the console creates a positive experience for the end user, which is vital to translating Valve’s reputation for quality software into the hardware space. In addition, console systems themselves are often sold on very thin margins, with games and peripherals driving a significant portion of profits. By designing a proprietary controller for its gaming console, Valve can create a “walled garden” ecosystem (much like Apple’s philosophy with its own products) seamlessly integrating its digital game library with quality hardware and peripherals, while charging a premium for the ease of use and preventing competitors from capitalizing on the success of a Valve PC. The strategy of developing a system in partnership with a contracted manufacturer is not without its risks. In order to deliver a superior product to the market, Valve must partner with one of the established leaders in hardware manufacturing, such as Foxconn, Nvidia, and Intel. This exposes Valve’s efficient development process to the lumbering bureaucracies of large corporations. In addition, quality control is difficult to maintain with outside production. The Pixel 2 XL had significant screen defects arising from weak quality control from manufacturer LG, which reflected poorly on the Pixel brand (Savov, 2017). To capture any significant amount of market share from competitors, Valve must not cut corners when selecting a partner to manufacture its system.

Appendix 1: Market Share and Growth Rates of Gaming Platforms and Segments

References: McDonald, Emma. “The Global Games Market 2017 | Per Region & Segment.” Newzoo, https://newzoo.com/insights/articles/the-global-games-market-will-reach-108-9-billion-in-2017with-mobile-taking-42/ Savov, Vlad. “The Pixel 2 XL Drama Is Undermining Google’s Entire Pixel Project.” The Verge, 24 Oct. 2017, https://www.theverge.com/2017/10/24/16519530/google-pixel-2xl-screen-issuesdeep-and-unfixable....