Assessment 2: Phase B

Kinect for Xbox 360

BHO 2259 PRODUCT & SERVICE INNOVATIONS


Names: Cheong Chee Wing 3902623
Aw Dee Ean 3928050
Lee Yi-En 4100331




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1.0 Present Scenario Summary ............................................................................................................... 2
Executive Summary ................................................................................................................................. 3
2.0 Technological viability ....................................................................................................................... 4
2.1 Firm Related Factors ..................................................................................................................... 4
2.1.1 Organisational Culture ........................................................................................................... 4
2.1.2 Organisational Structure ........................................................................................................ 4
2.1.3 Innovation Experience ........................................................................................................... 4
2.1.4 Research and Development (R&D) ........................................................................................ 5
2.1.4.1 R&D Team ....................................................................................................................... 5
2.1.4.2 R&D Intensity .................................................................................................................. 5
2.1.5 Strategy towards Innovation .................................................................................................. 5
2.2 Project Related Factors ................................................................................................................. 5
2.2.1 Complementarity ................................................................................................................... 5
2.2.2 Innovation Management Style ............................................................................................... 6
2.2.3 Top Management Support ..................................................................................................... 6
2.3 Summary Analysis of Technological Viability ................................................................................ 6
3.0 Commercial Viability ......................................................................................................................... 7
3.1 Product Related Factors ................................................................................................................ 7
3.1.1 Relative to Competitors ......................................................................................................... 7
3.1.1.1 Relative Pricing ................................................................................................................ 7
3.1.1.2 Relative Quality ............................................................................................................... 8
3.1.2 Uniqueness and Degree of Innovation .................................................................................. 8
3.1.3 Technological Advanced ........................................................................................................ 8
3.2 Market related Factors ................................................................................................................. 9
3.2.1 Concentration of Target Market ............................................................................................ 9
3.2.2 Timing of Market Entry .......................................................................................................... 9
3.2.3 Competitive Pressure ........................................................................................................... 10
3.2.4 Marketing ............................................................................................................................. 10
3.3 Summary Analysis of Commercial Viability ................................................................................. 11
4.0 Future Pathways ............................................................................................................................. 11
4.1 Opportunities .............................................................................................................................. 11
4.2 Challenges ................................................................................................................................... 12
4.3 Team Reflection .......................................................................................................................... 12
List of References .................................................................................................................................. 13

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1.0 Present Scenario Summary
The Kinect is a peripheral device for the Xbox 360, it features a motion sensing input system
for the console. The motion sensing technology of the Kinect is built upon three sensors
located at the front of the device. It has a depth sensor, infrared laser projector as well as a
RGB camera capable of tracking motion as well as facial recognition. The hardware runs on a
proprietary software that allows advanced gesture recognition and is able to track 6 people at
once with a motion analysis of up to 20 joints per person.
The Kinect is designed to appeal to a much larger market compared to the Xbox 360. Instead
of the hardcore gamers that the Xbox 360 is targeting, the Kinect enters the realm of the
casual gaming market following the success of the Wii. Within this casual gaming market
segment, the Kinect has targeted several of its sub-segments based on their demographics,
psychographics, consumption patterns, buying habits as well as hobbies and interests. The
segments are Family Timers market (Family size of 3-5 with young children or tweenagers),
Hyper Social female market (Social butterfly female aged 14-40) and the Hanging Out
market (Male and female age 13-40 that seeks social acceptance). The Kinect has positioned
itself as a system that facilitates social bonding between friends and family members.
The Kinect faces fierce competition with the market pioneer, Nintendo Wii and their fierce
rival, Sony Playstation Move. Both the Move and Kinect followed the Wii into the casual
gaming market after its incredible success. Before Sony and Microsoft launch the Move and
Kinect, the Wii was leading the sales chart by a very large margin and taking up the majority
of the market share within the industry. As of 2012, the market share of the three companies
has been somewhat equalise with no clear market leader. Besides that, the Kinect also faces
an indirect competition from smartphones and tablets as a platform for gaming as the trend in
the casual gaming market has been slowly shifting to mobile device due to convenience.
Microsoft has a large budget of US$500 million for the marketing campaign of the Kinect.
Within the campaign, Microsoft has used IMC campaign named You Are the Controller,
advertisements on television targeted at young children or tweenagers as well as
advertisements on cereal boxes, pepsi bottles and various magazines. Other than that,
Microsoft have also invited a number of celebrities to endorse in the Kinect as part of their
PR strategy. On the launch day of the Kinect in 2010, Microsoft has held a major event in the
Times Square, New York. During the event, free Kinects were given away to the attendees.

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Executive Summary
The success of a new innovation can be boiled down into how viable the product is in terms
of technology and commercial. A products technological and commercial viability can be
split up into 4 factors; firm related factors, project related factors, product related factors as
well as market related factors.
The technological viability of Microsofts Kinect for Xbox 360 is very good. It has a very
conducive organisational culture that encourages innovation due to its well managed
leadership and collaboration between employees. The organisational structure also supports
innovation as it encourages interdepartmental co-operations with its function based
departments. Microsoft has a long history of innovation experience through internal research
as well as getting knowledge and experience through acquiring other firms. Although its
R&D team lacks individuals that are extremely passionate on specific areas, Microsoft are
willing to spend a lot of money on R&D. Microsoft mainly adopts a fast follower strategy
towards innovation as this complements their resources in terms of marketing, research,
advertising, sales and distribution. Projects in Microsoft is managed with a sound
management plan of planning, brainstorming, phases of screening and evaluation,
development and market research and then finally the market introduction. The project also
receives a lot of top management backing as long as it has commercial results.
The commercial viability of the Kinect is good. Relative to its competitors, the Kinect has a
very good pricing for higher number of players as well as superior quality product with very
good technical specifications although it loses out on group related games. Among its
competitors, it is the only one using a controller free motion sensor. This is made possible by
its superior technological advancement. Due to the low concentration of their target markets,
communications to the target markets would be quite costly and difficult. The competitive
pressure in the market is very intense and competitive and although it entered the market
approximately 5 years after the Wii, but it did not suffer much financial loss because they
already have an established install base of Xbox 360.





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2.0 Technological viability
2.1 Firm Related Factors
2.1.1 Organisational Culture
Leadership and collaboration within a company are important aspect in an organisational
culture. Microsofts CEO, Satya Nadella, said in an interview that he places a higher
emphasis on the discovery muscle, the exploration and innovation of the company rather
than the delivery muscle, product development driven by market research (Bryant 2014). In
2013, Microsoft has abolished its stack ranking system where employee performance are
reviewed and poor performers will likely be sacked (Warren 2013). What used to happen was
employees are rewarded not just for good performance but also making sure their colleagues
failed (Hanft 2013). This is very conducive to innovation as it encourages collaboration rather
than innovation.
2.1.2 Organisational Structure
The departments in Microsoft used to be organized in product-based divisions where each
division will only take responsibility for their own products. Recently Microsoft has
reorganized its structure by function such as marketing, business development, finance, legal,
and HR (Bright 2013). This change meant that there would be much more co-operations
between department as there are much lesser interdepartmental competition for resources
such as budget and competencies. Since there are lesser competition and more co-operations
between departments, the interdepartmental communications will also likely to improve. This
organisational structure is highly conducive for innovation.
2.1.3 Innovation Experience
Since the launch of the first Xbox in 2001, Microsoft had formed its own video game
production and publishing studio, Microsoft Studios, for research and innovation. Microsoft
Studios has been acquiring various studios and companies such as Lionhead Studios(game
developer for Black & White and critically acclaimed Fable series), Massive Incorporate(in-
game advertising company) (Microsoft 2006) as well as forming new smaller studios focused
on specific product such as Good Science Studio(Kinect Software). This meant Microsoft
have bought large amount of their technology innovative personnel and while these
knowledge and experience are not inherently developed from the company, Microsoft has
possessed a vast amount of knowledge through vertical and lateral integrations.

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2.1.4 Research and Development (R&D)
Microsofts own research and development department, Microsoft Research was founded in
1991 and has laboratory all over the world. It doesnt focus on specific research but on broad
categorized areas such as hardware and software (Microsoft Research n.d.).
2.1.4.1 R&D Team
A product champion is a key characteristic that would greatly affect the R&D team. A
product champion is the key individual that would play the dominant role in a specific
research and are greatly passionate about the project (Chakrabarti 1974). Due to how the
R&D department is structure, Microsoft do not possess such an individual. The research are
sparse across multiple areas with no focus on the video game industry or any sector of
technology.
2.1.4.2 R&D Intensity
The amount of financial resource spent on R&D is a great indication of the research intensity
a firms dedication on innovation (Panne et al. 2003). Studies have shown that substantial
financial resources are needed for success (Page 1993). In 2011, Microsoft has reported spent
up to $9 billion on R&D, second highest only behind Samsung (Schofield 2011). Microsoft
Research has hired up to over 850 PhD-level researchers as well as over 40,000 developers
for product developments that year. With so much spent on R&D, Microsoft wants to keep
themselves on the forefront of technology. In 2013, Microsoft has reported spent $10.6
billion on R&D (Pepitone 2013).
2.1.5 Strategy towards Innovation
The four main innovation strategies are market leader, fast follower, cost minimisation and
market segmentation (Trott 2012). Microsoft is a huge company with multiple products and
hence they would have different innovation strategy with different products. However, a large
percentage of their products are developed as a result of a fast follower strategy (Enright
2013). For example, Windows Phone 7 followed iOs into the smartphone market and Xbox
was a result of Playstation and Nintendo (Forbes 2012). A fast follower strategy requires the
firm to quick to response to competitors and Microsoft has the appropriate resources such as
capital, R&D and marketing to achieve that.
2.2 Project Related Factors
2.2.1 Complementarity
A project needs to be compatible with a firms resource such as marketing, distribution, and
production (Panne et al. 2013). Overall, the project of Kinect complements very well in terms

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of distribution and sales. Firstly, the distribution channels used to distribute Xbox 360s are
also compatible with distributing Kinects. They have partners such as DHL for international
logistics and Toys R Us and Best Buy for retailing that could easily distributes Kinects as
well (Howard 2010). Secondly, due to the nature of Kinect being a peripheral to the Xbox
360, sales strategies such as bundled promotions would fit well. The Kinect would not only
complement but also enhance the sales strategy.
2.2.2 Innovation Management Style
The success of a project is often very heavily influence by its management style. Well
managed projects are mainly split into 6 phases of planning, brainstorming, phases of
screening and evaluation, development and market research and finally market introduction.
As previously mentioned, Microsoft is a very big companies that works on multiple projects
with multiple different teams, thus the management style will vary upon different projects. In
the case of the Kinect, the management style of it very closely resembles the one above
where Xbox lead designer, Don Mattrick, starts off with the planning on a new way of
playing games (Business Insider 2014). They later came up with motion sensors based on
market research after brainstorming and screening ideas.
2.2.3 Top Management Support
Innovative projects demands a long-term commitment from the top managements to prevent
viable projects to be aborted prematurely (Brenner 1994). Microsofts top management has
always been very supportive of their innovation projects that have seen commercial success,
such as the Kinect, with a much higher risk tolerance for these projects during innovations of
new features (MacCormack 2009). In January 2014, there has been reports of shareholders
within Microsoft wanting to sell off its Xbox division, however CEO Satya Nadella has come
out and said that Microsoft is very committed to the business and a good supporter of
Microsoft Studios and the Xbox division (Makuch 2014).
2.3 Summary Analysis of Technological Viability
Overall, the firm and project related factors affecting the technological viability are very
good. Microsoft has a very good organisation culture and structure that is very technological
viable. They have vast amount of innovation experience by acquiring other studios. A slight
downside is that they do not possess strong R&D in a specific segment but on the flipside
they are spending over $9 billion on R&D each year. This reflects their innovation strategy to
be a market follower. The Kinect is very complementarity to the firms distribution and sales
and the project receives good top management support and a sound management style.

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3.0 Commercial Viability
3.1 Product Related Factors
3.1.1 Relative to Competitors
The two main competitors to the Kinect are the Nintendo Wii and Sony Playstation Move.
This section will discuss about the relative price and relative quality of the Kinect in
comparison with its 2 main competitors.
3.1.1.1 Relative Pricing

Figure 1: Price comparison of Kinect, Wii and Move among existing console owners
(Examiner n.d.)

Figure 2: Price comparison of Kinect, Wii and Move among new console owners (Examiner
n.d.)
The figure on the left represents the number of player controller offerings. Since the Kinect
doesnt utilise any controllers, its price will be flat across all player offerings. Looking at the
price comparisons for existing console owners in Figure 1, the Kinect has the advantage of
having a static long-run cost at $149.99 while the Wii (comes with the console) and Move
($99.99) has the advantage in lower entry fee (1 player). In terms of selling the motion
controller with the consoles, Figure 2 shows that the Kinect lies in the middle in terms of
entry fee but also much cheaper than the other two when player counts goes up.

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3.1.1.2 Relative Quality
Product Technology Group Play Precision and
Response
Kinect A C B+
Move B+ B A
Wii B A C
Figure 3: Results of Sung (2010) Analysis of Kinect, Move and Wii
Some of the few determinants of product quality in motion sensing controllers are the
technology motion sensors, group play, precision and response of controller. According to
Sung (2010), the Kinects motion sensor technology is the best among its competitors while
scoring the lowest in group play and mediocre in terms of precision and response. One of the
main reasons Kinect has scored the lowest in terms of group play is because the Kinects
sensors is limited to only 2 players at once despite being able to track up to 6 people while
the other 2 utilises controllers and are able to have up to 4 players at once. Group play is an
important aspect with regards to the target market as this segments consumption pattern of
games usually consists of party games where multiplayer is necessary.
3.1.2 Uniqueness and Degree of Innovation
Although Microsoft is the first company to bring the technology of body tracking motion
sensing to the video game industry, this technology is not new and has been use in other
technology industry. As previously mentioned, Microsoft is predominantly a fast follower in
the market and the Kinect is the result of such strategy following the Nintendo Wii. If the
metric degree of innovation is measured by how much a company invents new technology,
then the Kinect would be considered low innovative. However Microsoft has never really
been the company that invents new cutting edge technology but rather the one that innovates
through the application of existing technology into different industry or market. As of today,
the Kinect is still the only one that is capable of being controller-free.
3.1.3 Technological Advanced
Despite being group into the same category as the Nintendo Wii and Playstation Move as an
interactive motion sensing peripheral, the technology used in the Kinect is far more advanced
than its peers. While all three achieves the ability to interact with motion as the end result, the
technology used is actually quite different (Fleming 2014). Firstly, the Kinect is the only one
with a 3D depth sensor which can tell how far away things are in a 3D environment while the
other two only projects images into a 2D plane (Microsoft n.d.). Secondly, the Kinect is also

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the only one that uses infrared projector to calculate angle for 3D imaging by stereo
triangulation (Future Piece 2010). These two technology advancement enables the Kinect to
be used controller-free.
3.2 Market related Factors
3.2.1 Concentration of Target Market
As previously mentioned, the Kinect is targeted at the Family Timers segment, Hyper Social
Female segment and Hanging Out segment (Holmes Report 2011). These are all highly
specified target markets varying in age groups, psychographics tendencies, consumption
patterns, buying habits as well as interests and hobbies. Although all of these segments falls
into the casual gaming market, the market itself is very large. Hence, there is a very low
concentration of target market. The implication of this is that Microsoft has to spend much
more on marketing communication with different advertising strategy to target the different
segments. The communication message as well as media strategy needs to cater to the
specific segments.
3.2.2 Timing of Market Entry

Figure 4: Kinect install base (Bishop 2012)
The Kinect and Move was launched in 2010 on the 4
th
of November and 15
th
of September
respectively while the Playstation Move and Nintendo Wii was launched on 19
th
of
November 2006 (Lowensohn 2011, Hachman 2010, Rudden 2006). Although the Kinect was
launched slightly later than the Move and almost 5 year later than the Wii, Microsoft did not

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suffer much financially as the Xbox 360 itself was launch way back in 2005 (Surette 2005).
As shown in Figure 4, it already has an established install base of Xbox 360 users which
enables the Kinect to quickly regain back some of the market share that the Wii has held for
the 5 years.
3.2.3 Competitive Pressure

Figure 5: Worldwide console market share from 2005 to 2012 (Hollensen 2013)
As shown in Figure 5, the market share of all three Xboxs Kinect, Playstations Move and
Nintendos Wii are all competing fiercely with no more than 40% market share each. The
Kinect is operating in a highly competitive industry. In markets with such intense
competition, Panne et al. (2003) has stated that would discourage radical innovations and
instead encourage incremental innovations due to the higher risk factor. This is actually
complementary to Microsofts strategy as a market follower as they prefer to others take the
risk and then quickly reacting to it.
3.2.4 Marketing
Although the research for the market interest in motion sensing device has been paved by
Nintendo, Microsoft has done a very thorough market research to ensure for the success of
the Kinect. Microsoft has used both primary and secondary research to garner insights to
consumers technology space as well as researching on its target markets media consumption
habits (Holmes 2011). These researches are normally conducted in focus groups and in-depth
interviews.

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3.3 Summary Analysis of Commercial Viability
Among its competitors, the Kinect has a good pricing strategy for consumers with high
amount of players. In terms of quality, it has the superior technical specifications but suffer in
terms of group play. It is unique in the sense that none of its competitors are using controller
free technology and it is the controller-free technology that makes them technological
advance compared to its competitors.
As for market related factors, most of its target market are not concentrated which makes it
difficult and costly for communication purposes. The Kinect is launched about 5 years after
the Wii but they already have a good install base of Xbox 360 to reduce financial loss. It is in
a very intense and fierce competition with both Nintendo Wii and Sony Playstation. Overall,
Kinects commercial viability is good.
4.0 Future Pathways
4.1 Opportunities
One of the biggest opportunities for the success of Kinect would be its application to systems
outside of the gaming industry (Campbell 2010). This is a mostly unintended as the Microsoft
developers has never planned for such applications of the product. Ever since the release of
Kinects SDK (Software Development Kit), people have been building systems for non-
gaming applications using its motion sensing technology. For example, the Kinect has been
rapidly adopted within the medical sector for medical uses (Gilpin 2014). Examples of
current usage are cognitive rehabilitation exercises, Parkinsons disease function retraining,
and autism screening and therapy (Ortega et al. 2014, Galna et al 2014, Comstock 2013).
Hence the biggest opportunity for Kinect would be expanding its market beyond the gaming
industry. If it manages to establish its position in this new market, it would be very tough for
competitors to remove its first-movers advantage. Similar to how Windows dominated the PC
OS market, the applications built will be using Kinects SDK. Hence the developers are
already familiar with the kit and have not much incentive to change. Furthermore,
applications rarely stay the same and would have frequent updates and new features built into
it over time. It would be very costly to suddenly abandon everything and use a new hardware
even if the technology is slightly superior.

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4.2 Challenges
Recently in the USA, there has been a large scandal involving the NSA (National Security
Agency) Surveillance and issues of privacy invasion. Basically the gist of it is that the NSA
has been using the PRISM program to spy on its citizens by collecting electronic data from
Internet companies such as Google (Kurtz 2014). There have been leaks reporting that the
NSA has been considering of using Kinects camera to spy on its users. Microsoft has been
trying to distant itself from such accusations as well as trying to reassure its users that their
Kinect is not secretly recording them, storing, and sending any information over the internet
to the NSA (Langley 2013). Although this is largely just a USA scandal, it realization that the
Kinect is capable of such feat will have negative implications to its users worldwide.
Another possible challenges is that the target market of the Kinect, casual gamers, are starting
to shift to mobile gaming. In the USA alone, mobile gaming is growing incredibly quickly
with market penetration is very close to 80% with almost $24 billion revenue (Galarneau
2014). This is simply a change in consumer preferences and there is not much the Kinect can
do about it.
4.3 Team Reflection
Over the course of this research, the group have learned a lot on the business side of the
Kinect especially the internal aspect. As consumers of the product itself, we often are only
exposed to the marketing side of it. The group has also learned about the critical factors for
innovation success based on Panne, Beers & Kleinknechts model of technological viability
and commercial viability. Like I mentioned earlier, the product and market related factors are
rather easy to research on while the firm related and project related factors are considerably
harder to research.

Word Count: 2744





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