Valve Corporation: business model and industry impact

Valve Corp

The central problem is to determine a strategy going forward for Valve Corporation. The company is the market leader in its space, but needs to consider how to either expand this business or enter new ones. Growth is the major strategic objective for Valve at present. The company can also place emphasis on reinforcing its competitive advantages, but this leaves it vulnerable to changes in its industry space, and given the size of some of the competitors such changes could ultimately be unfavorable to Valve. So expanding the business and building out new opportunities seems like it should be the main strategic priority for Valve.

There are two central opportunities for Valve. The first is international expansion, bringing its platform to audiences around the world. Predominantly a U.S.-based business, Valve can grow quickly if it is able to establish its business either in Asia or in Europe. The other major strategic option that the company is looking at is to expand the product range. This option emphasizes maximizing revenue from existing customers, and squeezing EA and other competitors out of the market.

2. The key objective for Valve right now is growth. The key measures for any strategy will be how that strategy contributes to the growth objective. There are a few good growth measures. One is market share, both domestic and international. Revenue, profit, total and concurrent customer bases, and the number of countries in which Valve operates. Number of titles is another growth measure. The company will need to look at how changes in strategy will affect all of these measures, not just a few. It is important to realize that revenue and net income -- along with the valuation of the company -- and customer numbers are probably the most important of the growth measures. Thus, the evaluation should come down to finding the strategy that brings about the most total growth, focusing on the most important measures first.

There are two core processes that define success for Valve. Technological innovation is one of them, either in game development or platform development. The other is market development. The strategic choice the company faces is essentially between these two core processes, and which one the company should emphasize. Both can serve to bring about competitive advantage as well. Technological and creative innovation are both key in the video game industry. The pace of change is moderately fast, and with respect to the digital distribution aspect of the business technological innovation is a necessary component of competitive advantage. There are many firms operating in peripheral industries that have much more capital than Valve, meaning that the company must work hard to maintain this competitive advantage.

The other core process is market development. This is a source of competitive advantage because having an installed base of customers -- and a large number of concurrent users -- is critical to success. The more people are using Valve, the more people will be attracted to Valve, especially in the case of MMORPGs. It is entirely possible that only one or two companies will be able to exist in this space in the long run, given that revenue is needed to invest in technology, and technological leadership is a key success factor. Thus, building out the market supports everything else the company does. There are tremendous opportunities overseas, but there are also major competitive threats. Valve might be established as the leader in North America, but a company that establishes a similar position in the massive Asian market could easily challenge Valve for global dominance.

3. The two alternatives have been laid out: Market expansion or product expansion. One involves getting more customers; the other involves getting more out of existing customers. Market expansion requires significant investment in infrastructure and human resources, the other more investment in technology and games. In terms of benefits, there is a bigger upside ceiling to market expansion. Moreover, market expansion cuts off potential threats down the road, making it harder for new companies to enter the market. Product expansion might increase revenue in the short run, and come with a lower cost, but it does not have the same long-run upside because there is only so much additional revenue to be squeezed out of the existing customer base.