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Creative Strategy

Creative Strategy

With Skylanders: Swap Force, veteran video game studio Vicarious Visions took on its most complex, challenging, and creative product to date. How co-founders Guha and Karthik Bala used the MIT Executive MBA program to steer their company to massive critical and commercial success.

Guha and Karthik Bala entered the MIT Executive MBA program in the fall of 2011, just as Skylanders: Spyro’s Adventure was hitting shelves.

Spyro’s Adventure, a video game in which players use toys to connect with the game, was a smash among children ages 6-12. The brothers’ video game studio, Vicarious Visions, collaborated with Skylanders’ creators to develop the game for the Nintendo 3DS.

Vicarious Visions’ parent company, Activision, followed up with a sequel in 2012. And Vicarious Visions led the series’ 2013 release, Skylanders: Swap Force. Earlier this year, Activision announced the Skylanders franchise had earned $2 billion and sold more than 175 million toys.

All the while, the Bala brothers were traveling back and forth from their upstate New York offices to Cambridge for the MIT Executive MBA program. There, they developed a cohort of peers and faculty as well as the business and leadership acumen they needed to build on Skylanders’ incredible success.

“For me, it was this notion that I’m getting really good at what I know, but is that all I should be thinking about?” Guha Bala says. “We set a mission for ourselves. It’s about becoming a great entertainment company by shaping popular culture through games. And to be able to reshape popular culture requires a much greater awareness than just the creative product. How do you think about the creative idea, but also your organization and the firm relative to the industry and relative to the world as well? For me, it was clear that I didn’t have that perspective yet.”

The 20-month MIT Executive MBA program is designed for mid-career executives at pivotal junctures in their careers. Students visit MIT every third Friday and Saturday and for four weeklong modules. The curriculum runs the gamut from applied economics to competitive strategy to operations management, negotiations, and system dynamics. There are two Action Learning projects: Operations Lab (O-Lab), in which students use their new skills and knowledge to undertake change at their organizations; and Global Organizations Lab (GO-Lab), in which teams of students advise a global firm on a challenging project or decision.

Most of the approximately 70 students in each class take on the executive MBA with little to no decrease in their work responsibilities. The Bala brothers didn’t have the luxury of handing off Vicarious Visions while they attended school.

Skylanders: Swap Force is by far the biggest, most complex product we’ve ever built,” Karthik says. “It’s had the largest success of any single product in our studio’s history. And it’s one of the highest-rated games. And I think it’s in part because we stepped back. We could be a lot more strategic in thinking about the business, allowing people to grow in terms of talent development. And this is after 20 years of making games. I think the [EMBA] program really allowed us to take that step back.”

Time Away

Vicarious Visions was founded in Guha and Karthik Bala’s parents’ Rochester, N.Y. basement in 1991, while the brothers were still in high school. Eventually, Karthik would attend Rensselaer Polytechnic Institute (RPI) in Troy, N.Y. Vicarious Visions would grow there, residing first in an on-campus business incubator and later in a building owned by RPI. Michael Marvin, an entrepreneur and investor who worked with RPI startups, invested in the company with a “handshake deal,” stipulating that Vicarious Visions would stay in New York State’s Capital District, Karthik Bala said.

In 1999, the Bala brothers assembled a board that included Marvin and S.P. Kothari, who today is deputy dean and an accounting professor at MIT Sloan. The board pushed the two young developers to build a foundation for their company, schooling the pair on accounting, organizational structure, and cultural development. In 2005, they sold the company to Activision, where it is now a wholly owned subsidiary. The next year Vicarious Visions set up shop in a 40,000 square foot former Montgomery Ward building in Menands, N.Y., just down the Hudson River from Troy. Today, the company employs about 200 people, a mix of full-time employees and some contractors.

“It was a garage operation initially, but to some extent they were looking forward and they were thoughtful about it,” says Kothari, who lived next door to the Bala family while he taught at the University of Rochester, and Guha and Karthik were still teenagers. “And to some extent, they got lucky in getting Mike Marvin.”

Kothari served on the Vicarious Visions board until the 2005 sale. But the three stayed in touch and as Vicarious Visions grew, Kothari thought the brothers (who were “precocious from the outset”) would benefit from formal, high-level business training. He suggested they apply to the MIT Executive MBA program.

Guha and Karthik Bala, both EMBA ’13

“If you want to innovate, if you want to do something big, you have to make yourself idle,” Kothari says. “To think of a big idea, to do something innovative, something new, something dramatic, you need to spend time thinking, reflecting, investing in understanding technology, understanding markets. Whatever it is, different people might do it differently, but nonetheless an essential element is to set aside some time, have some different views to soak into your mind.”

“I said ‘You are too busy doing it on a day-to-day basis. You need some time away.’”

As the stakes were raised for Vicarious Visions, Kothari thought it was important that the brothers step away from the video game industry and out of the relatively small Capital District business community.

“They had colleagues [at Activision and Vicarious Visions], but really they had subordinates most of the time. And in a true sense of the word, they had colleagues at the executive MBA program who were comparably bright and came from a variety of disciplines,” Kothari says. “And that give and take, I think, sharpened their thinking. It also gave them confidence. There was a sense of a ‘You have arrived’ type of feeling that they had at the end of it.”

Karthik agrees. In his Executive MBA classmates, he found a new network of peers from leading companies in a diverse set of industries.

“We’ve got folks at Activision who are our peers, but it’s a different kind of relationship,” he says. “Here, you’ve got an actual peer network that’s not in your business. You can get advice and support, and you’ve got confidants there where you can really lay it out. ‘These are problems I’ve been having. These are issues that we’re facing organizationally. These are personal challenges that I have, balancing family and work and school.’ That support system was crucial. As we stay in touch with each other, we continue to rely on that. I’m talking to classmates almost every week.”

At MIT Sloan, the brothers learned from and worked with faculty whose guidance had an immediate impact on their business and the development of Skylanders: Swap Force .

Review sessions with Professor Scott Stern helped them to develop their mobile strategy. In Professor Retsef Levi’s operations management class, they crafted a plan to streamline the creative process for the development of Swap Force’s unique characters. At the time, only about 10 percent of character ideas developed in the Skylanders franchise were being approved, an understandably low number given the high creative standards of the project and the central role that characters play to the game. But those high standards were creating a bottleneck.

“[Approving characters] just wasn’t possible given the resources and time frames we were working on,” Guha says. “In Retsef’s ops class, we went through process flow, and in O-Lab we looked at the process.”

“We were able to reconfigure the work, so we had an entirely different approach to how we were conceptualizing how we processed characters,” he says. The brothers were able to increase throughput and significantly reduce lag on character creation and approval.

The Action Learning portion of the program had an immediate impact on Vicarious Visions as well. Karthik says he used stakeholder mapping and analysis he learned in O-Lab to fix a problem that left one of his lead creative directors unreasonably charged with managing development schedules along with the expectations of Activision’s top executives.

“It used to be a much more implicit approach to strategy where through know-how and experience we learned how to do things that would deliver a result,” Guha says. “But it’s really hard to build an organization that consistently does that.” The MIT Executive MBA program, he says, “really highlights the importance of working on the business, not just working in the business. And that sometimes your proximity to it can be negative.” In their GO-Lab projects working with global companies, the brothers said they saw qualities in themselves that don’t normally appear in day-today work at Vicarious Visions, a powerful learning experience for the pair.

“GO-Lab gives you a different way of solving these problems,” Guha says.

Enter Disney

It’s rare to make $2 billion without someone else looking for a piece of the action. In August of 2013, just after the Bala brothers finished the MIT Executive MBA program, Disney released Disney Infinity, a game similar to Skylanders. Where
Skylanders had original characters like Wash Buckler, a squid-pirate hybrid, and Rattle Shake, a Cajun rattlesnake, Disney had familiar characters like Woody and Buzz Lightyear from Toy Story.

Despite being first to the field in what is known as the toys-to-life category, Vicarious Visions and Activision “have a formidable challenge ahead of them to be able to maintain that market position,” says Stern, who taught the Bala brothers in the executive MBA program’s competitive strategy course.

For Stern’s class, Guha Bala developed a Porter five forces analysis—a competitive strategy model developed by Harvard Business School professor Michael E. Porter—of the video game industry that laid out the stakes: “The top 10 titles account for 60 percent of revenue. Ultimately, the top few releases make the lion’s share of profits and the rest are forgotten.”

The cost of video game development is notoriously hard to pin down, but it has increased remarkably in the past 20 years. Mid-90s hits may have cost as little as $5-$10 million to make. Today, big games are estimated to cost more than $60 million to develop. The Wall Street Journal reported last year that Disney Infinity development and toy production costs topped $100 million.

Meanwhile, mobile and web games, free and low-price games, and the relatively slow development timelines for home console games have made the market an even more challenging place to turn a profit. (The advent of downloadable content, known as DLC in the industry, offers a bright spot for profits. Game publishers can sell add-ons such as new characters or tools that don’t come with the original game.)

In his five forces analysis, Guha concluded that publishers and developers must constantly innovate, not only by developing new and popular creative games, but also by reexamining the video game market.

Market leaders like Activision must “focus on making distinctive products not easily substituted by other media,” Guha wrote, and expand “the scope of the business model to experiment with alternative means of bundling and monetizing entertainment experiences to reduce the cost to produce and the entry price for consumers.”

Skylanders does all of that. The central innovation—that gamers buy toys to access new characters and areas of the game—raised the ceiling on revenue per customer and helped Activision enter the action figure market. Today, Skylanders figures sell better than both Star Wars figures and Transformers figures combined, Karthik Bala says.

With Skylanders: Swap Force, the toys became two toys. That is, a toy’s top half can now be swapped onto another toy’s bottom half. Mix Wash Buckler with Rattle Shake and you get Wash Shake, or Rattle Buckler, or both. The toy halves connect through magnets, which also amplify the RFID signal that allows the game to send information back to each half of the toy.

There are 16 Swap Force characters so far. That’s 256 swapping combinations. There are also retailer-specific figures. Dark Wash Buckler, for example, is a GameStop exclusive available as part of a Sony PlayStation 3 starter pack. The Skylanders video games are not just video games. They are also personalized toy collections. There is a lot of money in the toys-to-life industry, so it is no surprise that Disney came calling.

Stern found Vicarious Visions’ Disney problem so compelling that he developed it—along with RJ Andrews, MBA ’13, and lecturer Don Sull—as a case study for students in MIT Sloan’s MBA and Executive MBA programs. The case, “Activision Defends the Skylands,” was a hit with students, many of whom undertook detailed game theory analysis when developing answers. The Balas visited the competitive strategy MBA class last year to discuss the case with students and examine the best solutions.

Stern credits the Bala brothers with a willingness to incorporate insights from others into their work on Skylanders. He also says they were intent on using quantitative analysis to inform their decision-making and on integrating their competitive strategy with the management and organization of Vicarious Visions, positioning the company for success as the market for Skylanders evolves.

At MIT Sloan, the pair “were developing the capabilities that allowed them to make strategic choices that allowed them to manage the competition and manage the growth of the market around the toys-to-life category,” Stern says.

“One thing that they’ve been very smart about is choosing their battles with Disney wisely,” he says. “An instinct that you might have is that they have to beat Disney head-to-head. Another is that, as we teach in cases like Coke/Pepsi, there’s probably room in the market for more than one toys-to-life platform.”

“We’re about telling good stories and presentation, and all that goes with having a good feeling, family experience.
Skylanders was such a perfect fit for us. There’s something there for someone who really wants to create a really immersive and engaging experience that feels like a big cinematic, Pixar-type production.”
– Jennifer O’Neal, Executive Producer

“[Hyper-realistic violence] doesn’t always feel that creative anymore. I love when I see footage of our games in between all these other games that are dark and sort of black and gray and all of a sudden you have these bursts of color. We can still treat it with the same reverence and respect as we would with an adult game. We still feel that we push the envelope with the way the underlying technology works.”
– Jan-Erik Steel, Lead Engineer

Family Business

Just over 10 years ago, Vicarious Visions was given the opportunity to develop the Xbox version of Doom 3, the latest game in the landmark, violent first-person shooter franchise. It did, and with good reason: many people at the company had grown up playing the Doom franchise and it was an opportunity to showcase the company’s talent on a big stage.

But it didn’t come without some hand wringing. “That was something we talked about,” says Jan-Erik Steel, a 12-year veteran of Vicarious Visions. “We weren’t strictly all kids games, but we didn’t want to be doing overly violent games. There’s always an opportunity to say, ‘How do we feel about music games? How do we feel about kids games?’ It can be hard for some people to do a kids game for that young of a demographic, 6 to 12. I know for me and a lot of other people, it’s amazing.”

The Xbox version of Doom 3 garnered strong reviews, especially for the visual effects and audio work Vicarious Visions brought to the game. But the company has swung away from blazing guns and gory monsters. It’s not prudishness. (“I play everything,” Guha says.) With game development costs skyrocketing along with advances in technology, video game publishers and developers seek to stake out ground in a particular game vertical and use that space to build a brand and set a high barrier to entry for competitors, Guha wrote in his five forces analysis.

And in Skylanders the company has found a good cultural fit, one that builds on Vicarious Visions’ historical emphasis on creativity and technological innovation as well as the experience of its team and leaders. Both Guha and Karthik Bala are in their late-30s. Between them, they have five children ranging in age from 2 to 8. Even its location informs the company’s culture. The Capital District, as the cities and suburbs around Albany, N.Y. are known, offers everything large cities offer: education, culture, a relatively stable economy, all at a scaled-back pace. It’s a good place to raise a family.

“When we look at the top companies that are sustainable over time, they’re all over in random places,” Guha says.“ They’re just great companies that do great creative work and provide a creative environment to their employees.” The brothers are keeping details of their next projects under wraps for now, but the mission is to “shape popular culture by impacting millions of consumers around the world in a positive way through games,” Guha says. With Activision’s Skylanders revenue in the billions, thinking big is only the starting point. He notes that only about 5 percent of global entertainment spending is on interactive media like video games. So expansion to other markets, such as the action figure market Activision stormed with Skylanders, is a possibility. The Bala brothers say their job is to constantly innovate and iterate to develop creative products that will delight their customers. At first, they did that alone in their parents’ basement. Today, they do it with the weight of Activision behind them and a new outlook on how to grow, change, and lead in their markets.

“How do you become a globally integrated firm, still retaining that independence and autonomy…but be able to produce products, franchises that endure, stuff that’s going to have a legacy and lasting impact across millions and millions of consumers worldwide?” Karthik asks. “That’s the big shift in terms of the kind of business that we’re building.”