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The Valve Corporation Challenges Case Study


Introduction

The Valve Corporation is a video game developer and a digital distributor. A number of computer games created by this enterprise, such as Half-Life, Counter-Strike, and Portal, are some of the most popular video games in the world. The Valve L.L.C. was created in 1996 in Kirkland, WA, by two former Microsoft employees, Mike Harrington and Gabe Newell. In 2003, it moved to Bellevue, WA, and was incorporated; the name of the organisation was changed to Valve Corporation.

Since its inception, the company managed to become one of the most well-known video game developers and earn tremendous revenues while retaining relatively small size; it is a medium business, consisting of only a few hundreds of employees. Further, the company became known for the creation of its digital platform for gaming called Steam; today it unites thousands of users from all around the world and a huge catalog of games.

These days, Valve’s leaders are focused on a set of new objectives concerning the expansion and development of their business. To be more precise, the company is looking to expand to the new niches of the gaming industry and add the gaming hardware and the supportive software to their line of products. These additions could help Valve strengthen their existing market presence and increase their revenues.

How was Valve able to achieve such success? An attempt to answer this question is made below.

The Challenge

The company, as was stressed, was started in 1996. Its first major game was released in 1998, which provided the enterprise with the recognition of the gaming public, as well as with large quantity of sales. However, it is stated that the organisation was still just one of the companies that produce video games, and it was needed to find a business model which would allow it to be different from its rivals and gain a sustainable competitive advantage. In addition, it was necessary for the company to address the problem of digital piracy, which posed a considerable threat to the profitability of the business.

There was also another issue. For any company, the organisation of the working process is of paramount importance if it is to be efficacious. While it is considered an obvious truth that an enterprise needs to have a hierarchical structure of leaders and subordinates in order to operate effectively, the creators of Valve decided to utilise a different way to organise the working process of its employees.

As for the organization of the working process, the members of the Valve enterprise disliked the idea of the traditional hierarchy in the company. Thus, it was decided to build a company in which there would be no traditional hierarchy. This turned out to be a highly effective solution for Valve. Instead of establishing a more traditional top-down system of management, supervision, and responsibility, the leaders of Valve made a risky and challenging decision to embrace the organizational structure without any strict supervision where the empowerment and inspiration are self-enforced by the developers.

The employees’ handbook of Valve describes the work process in the company as “A fearless adventure in knowing what to do when no one’s there telling you what to do”. This approach may be considered as controversial and highly impractical; however, it has proved effective for Valve. Also, the company structure is called Flatland due to its absence of hierarchy and superiority. Basically, the company operations and interactions are built based on absolute equality, and there is no manager or boss of any kind. The employees are provided with the unlimited freedom of how they want to work and where, they are free to move around the company space and choose the most convenient locations for work. The projects on which the workers decide to focus are also of their choice. No one reports to anyone at Valve.

In this way, the company operations are organized in a way as flexible as possible. In other words, the leaders decided to invest in the motivation strategies and the provision of free space for creativity for all the employees in return for cooperation based on inspiration. The workers of Valve are powered by positive motivation. They do not work under the fear of getting fined or fired; they are not pressured to fit into tight schedules and deadlines. Instead, the working process at Valve is free from stress and pressure. The empowerment comes from positive reinforcement, encouragement, mutual support, collaborative projects, and teamwork. The leaders and employees of Valve believe that being mutually invested in one another and working together on common creative projects is the key to success.

The approach practiced by Valve is cost-effective and helps the company invest their resources is the most efficient manner. To be more precise, the work the employees of Valve do on a daily basis is focused on creativity. The leaders are aware that creativity is only possible in a stress and pressure-free environment and a collaborative setting where everyone is interested that motivation and inspiration never end.

In comparison to the non-creative projects that can be speeded up through negative motivation such as a fear to lose the job or money, the creative projects cannot thrive under heavy supervision and tight schedules. This is why the leaders of Valve invested in as much freedom for their employees as possible. The workers are provided with the opportunities to be mobile, flexible, and creative – even the furniture in the office space is equipped with wheels so that the workers could move around without being limited.

The Journey

In order to become one of the leaders of the video games market, Valve took a risky step which would potentially differentiate it from most other computer games developers. Namely, the company decided to create a new digital distribution platform; this platform was named Steam. It was intended that Steam plays the role of a game update interface which would be user-friendly; but another aim of the project was to permit for considerably limiting the online piracy that Valve was suffering from. A significant problem related to this was that customers might have dislikes having to use the online platform in order to play the games; in addition, the whole model was new, and the clients were not accustomed to it.

The Steam platform was initially met with suspicion, for gamers do not usually like the necessity to register online in order to play a game. However, although this step was quite risky, it was hypothesised that the convenience of the platform would win the customers over, and that ultimately it would allow the company to win its battle with the online pirates while not losing a significant amount of clients.

In addition, as it was mentioned previously, the organisational structure of Valve is quite unusual. To be more precise, the company adopted a horizontal, hierarchy-free structure of its workforce from its very inception. Every worker of the enterprise is free to start their own project if they are able to find colleagues who would also become interested in that project. There are no managers or bosses in the company; the pay for a particular employee is decided by the whole collective, and is based upon one’s performance. In fact, there is virtually no structure; the company is anarchic. However, this company organization must not be perceived as chaotic and disintegrated.

Interestingly, some of the analysts theorize that Valve should not be a successful company when it comes to the creation of complex and long-term projects that require a lengthy focus and dedicated cooperation of many professionals. Practically, the employees of Valve are expected to abandon their jobs at some point in order to move on with their careers and start their own creative business projects.

However, in reality, this does not occur, on the contrary, the employees at Valve explain that the biggest and most serious projects appear due to the formation of what they call “critical mass”. In other words, in theory, this phenomenon is recognized as non-leadership, a form of organization that is based on the collective engagement. It is possible that Valve’s free company organization has been successful for such a long time because the company specifically targets only the highest performers and the best professionals in the field.

However, there is an interesting motivational aspect within the organization that may be responsible for the group effectiveness of the teams. To be more precise, the team members working on the same project are asked to rank one another’s performances according to technical skills, teamwork skills, productivity, and other types of contribution – these ratings and evaluations serve as the future basis for the payment allocation. This way of work assessment is rather effective because it works as a serious motivational factor and an accurate way to evaluate the talents, performance and contribution of different employees based on real-time experiences and unbiased characteristics.

Problems and Solutions

In the contemporary world where the industries are known to be driven by the forces of globalization, the best option for the companies and businesses to multiply their revenues is to expand. Since Steam is the platform that is based online, the expansion in terms of geography is not a challenging task.

Steam can go wherever there is the internet regardless of the countries and cultures. The other type of business expansion that Steam is more interested in is the expansion of the industry niche the company occupies currently. In other words, the business’s ultimate goal is to expand its line of products and services provided so that they could attract and retain as many consumers as possible. In a way, this strategy could be compared to the creation of a so-called business ecosystem where one company takes over as many roles and tasks as possible.

A good example of this type of business expansion is that of Apple. The business that initially focused on computer building took over the sales and marketing tasks. Further, their line of products expanded to a variety of other devices such as music players, smartphones, television sets. Apart from hardware, Apple began to produce software and provide maintenance for it. That way, becoming a user of one Apple device, a person automatically becomes the user of its software, service centers, online store, and multiple applications.

Valve’s leader Gabe Newell announced that the upcoming decade is going to be filled with innovative approaches and expansion strategies for Steam. To be more precise, Newell announced that Steam is going to attempt to cross the boundaries of a closed gaming platform and expand the user opportunities providing a service that would “provide that grand unification between mobile, the living room, and the desktop”. Putting this idea into practice would require an outstandingly creative approach and a lot of effort.

The solutions to the task the leaders of Valve have developed are visible today, but the paths towards the final results are rather vague and complicated. The current most visible solutions for Steam to move to the users’ living rooms is only possible with the help of a brand new technology – a device developed specifically for gaming that would be self-sufficient and able to carry out all the necessary functions for the transfer of the gaming experience from desktop computers to television sets. In our age of new technologies and rapid development of digital systems, a creation of this new device does not seem like a very complicated task. However, considering the multitude of challenges Valve developers would have to overcome building this device makes the path rather confusing and experimental.

Steam Machine and SteamOS

Steam Machine is a term created to refer to the future device that would enable gaming through the use of Steam platform but without the reliance on desktop computers. This device is also known as Steam Box. Based on its perceived future functions, Steam Box is likely to be very similar to the existing Xbox and PlayStation. As a result, it is possible that the new device is going to face serious difficulties attempting to compete with the well-known and very powerful rivals in an oligopolistic field.

Basically, the consumer base is already divided between the two existing products with powerful brand reputation and strong image. Finding its own niche and customer segment is going to be extremely difficult for Steam box. In that way, there is a chance that the costs of the product development may take the time to produce the return on investment. The production of new hardware is a great expansion solution, especially when it is supported by the specifically developed software such as SteamOS.

The Price

However, due to the fact that the new products would have to compete with rather popular and strong rivals such as Xbox and PlayStation, it is important to solve the issue of price – an expensive product would not be likely to find its customer base, so it would need to combine quality, relevance, and availability in order to win the consumers and start generating profit as soon as possible.

In the gaming industry, there exists the competition between the gaming consoles and the gaming PCs. Basically, the main competitive advantage of the consoles is the lower price. To be more precise, in order to build a good gaming PC, a user is to purchase multiple powerful and expensive items. Besides, because the technologies and game requirements change or develop quite often, it makes financial sense to buy the most recent items so that they remain usable and competitive for a longer while. In other words, an approximate price of a good gaming PC is about 700 dollars. At the same time, gaming consoles do not need to be built and have a price of about 400-500 dollars.

That way, in order to be competitive and win a segment of the gaming consumer base, the new Steam console is to fit within the price range or be cheaper. In case if the product turns out more expensive than the two rival consoles, its developers would have to offer significant improvements in a form of functions or characteristics that Xbox and PlayStation do not have. In terms of the competition between the two gaming consoles, a price gap as tight as 100 dollars is already a significant point of difference.

That way, if the Steam console’s price exceeds reaches 600 dollars – it would be extremely difficult to market. The fact that Steam machines are going to use a Linux-based operational system called SteamOS is likely to become a powerful advantage in terms of cost. To be more precise, Valve needs to offer a combination of a powerful hardware that in some aspects could outperform those of Xbox and PS4 and cheaper software that would also be either equal to OS Windows or more efficient in terms of productivity.

This is the only way for Steam machine to be able to compete with the famous and reliable brands on the market. In other words – the primary points of difference and sources of the competitive advantage of Steam machines are the positive correlation of the price and hardware quality, portability, and the claimed productivity of the operation system.

Games

Even though Windows 8 was widely recognized by the computer game developers as a ‘catastrophe’ for the game developing businesses in the PC space, the vast majority of product manufacturers still rely on this OS. As a result, the number of games that support OS Linux is limited. This issue is going to be one of the major concerns for the Steam machines aiming to win customers. After all, their target segment are the gamers who are interested in having access to as many games are possible and having such a serious limitation is going to slow down the marketing of Steam machines.

At the same time, Steam machines will be able to compete with PS4 and Xbox in this aspect. Currently, the two consoles have about 25-30 games in their lineups, whereas SteamOS can run natively several hundreds of different games. However, the Steam libraries that the game players would have to abandon include about three thousands of game titles, compared to that number, fully available on the Windows-based PCs, the hundreds of games that run natively on SteamOS lose their competitive advantage completely.

One of the most powerful solutions to the competitive advantage and marketing issues of Valve’s new products is the development of Half-Life 3 – the game that has been expected for many years. Creating a strong continuation of the Half-Life series could help Valve attract a huge number of game players to SteamOS and Steam machines. In addition to the Half-Life 3, Valve could use their existing games that are extremely popular (such as Left for Dead and Portal) and boost them by means of adding content or features.

The combined power of the three franchises is likely to create hype in the gaming industry massive enough to help Valve bit deeply into the gamer customer market and steal some clients from their powerful rivals with strong brand images and reputations.

Valve has the potential and resources for the creation of a successful new product and the expansion of their business to the new profitable niches in the oligopoly of computer and video gaming industry.

The Implementation

Therefore, Steam was made the basic platform for the games created by Valve. In spite of the fact that the clients had to register, it became widely liked by the clientele because of its convenience; it allowed for easy access to digital content, permitting the clients to download it without any problems, as well as providing the features of cloud storage, customer profiles, tracking of gamers’ achievements, and so on.

It is also important to stress that Valve provided its clients with high quality customer support. The enterprise participated in the creation of game mods, and made efforts aimed at incorporation of the mods created by fans into its games. This also considerably improved the favourable attitude of consumers towards the organisation.

The hierarchy-free structure that was implemented in Valve allowed for ensuring that workers only do what they want to do and what they consider interesting. The workers in Valve do not have to follow the directives of managers who, due to the fact that they do not possess an expertise in software development, often may not understand the nuances of the work. The projects which find not support do not waste the time of the employees, whereas interesting projects with great potential get much attention and interest, ensuring that the results of the collective’s efforts are of high quality.

Moreover, the development of a qualitatively new line of products that allow the company to expand to the new sphere and attract a huge segment of new customers is a significant change for Valve that is likely to either strengthen their business financially or stress it out and cause a serious financial crisis. In other words, the company is taking a serious risk while working on the new products. The projects very large and lengthy – it is expected to take several years to develop the new hardware and the supporting software. At the same time, the company game developers are focused on the work on the existing games and the support of Steam – the digital platform for gaming.

The competition is rather serious because the new Steam machine is going to be sold alongside its very powerful competitors – Xbox and PlayStation. Besides, the advantages of the machine are still unclearly defined, and it complicates its marketing and promotion. The development of Half-Life 3 could become a massive booster on the way to the promotion of Steam machine because if this legend of a game was released and made available only via the machines, the purchase of this hardware would not become a significant obstacle on game players’ way towards the desired third part.

In addition, according to one of the company’s leaders, Gabe Newell, none of the projects and choices of the business are based on the financial analysis. In fact, financial analysis is not even considered one of the primary strategies of project assessment and the future solutions and projects. This approach may seem risky from the practical and pragmatic perspective. However, it is perfectly aligned with the company’s philosophy and the leaders’ vision that is based on the unlimited creativity. In other words, as soon as the financial planning and assessment become the company’s basis for the future choices and decisions, this will serve as the ultimate limitation of the employees’ creativity and freedom to decide on which projects to work.

The Results

Therefore, it is possible to state that the steps taken by the company allowed it to become one of the most widely known game developers in the world. The profits of the company are also estimated to be very high. Unfortunately, Valve has always made a considerable effort in order to hide its revenues, so it is difficult to precisely assess its profitability. However, there exist numerous estimates of the company’s financial situation.

For instance, it is stated that in 2014, Valve made the revenue of approximately $730 million. Out of these, the revenue made from Steam were neatly $330 million, and the gross sales from Steam were equal to $1.5 billion. Simultaneously, it is claimed that in 2015, the gross earnings from Steam in 2015 were $3.5 billion. Here, it should be noted that the number of company’s employees is equal to only a few hundreds.

The anarchic structure of the organisation also proved to be extremely efficacious for Valve. In fact, it allowed for creation of a friendly and enthusiastic atmosphere where each employee is empowered to do what they are interested in, yielding high workforce output and permitting for creation of high-quality products only.

SWOT Analysis

Strengths

The Steam platform still remains the major strength of the Valve Corporation, allowing for profound and effective customer support, as well as safeguarding the company form the attacks of digital pirates. Clients are able to purchase games from their home, which provides them with additional ease. The company pays much attention to its clientele, taking into account the desires of their games’ fans. The company is looking to expand its product line and integrate itself in the new niches of the gaming industry by developing software and hardware. The organizational structure of the company ensures ongoing motivation and creativity and enforces an active and productive working process.

Weaknesses

The products created by Valve require their users to have the access to the Internet in order to enjoy full experience from gaming. In addition, this means that the clients cannot enjoy the games when the company’s servers are down.

Also, the company has only developed a relatively small number of original games. The company is relatively small with a limited number of employees, and it attempts to expand its business significantly which is likely to make its staff insufficient for all the operations and the maintenance with would be required in the future.

Opportunities

The enterprise has a variety of opportunities. In fact, numerous fans of their products are eagerly awaiting the creation of sequels to their favourite games. However, Valve makes no haste to create sequels or new games, probably due to the fact that the revenues of the enterprise are rather high even without them. In addition, because the Internet and computers become more and more widespread, Valve has all the chances to gain even more new customers in the future. Valve has a chance to launch its new products and promote them successfully thus encouraging the increase in revenues. It is possible that the Steam machine will attract a significant number of new customers and eventually grow into a powerful new branch of Valve’s business.

Threats

It is possible to hypothesize that most important threats for Valve come from other online gaming platforms, such as Battle.net, Windows Live, and EA Origin. However, the organisation has all the chances to deal with these threats, for, as it was stated, there are numerous fans awaiting the release of new games and sequels from Valve. The Steam machine will compete with two extremely powerful gaming consoles and also with the PC gaming that is majorly supported by Valve’s own digital platform that is suitable for the computers running on Windows. That is why it is possible that the new products would not have enough advantages to outperform the competitors that have been dominating the industry for many years.

Numbers to Support Solutions

Expansion of Product Line

The official launch of Steam machines as a product started at the beginning of November. Initially, the reports as of June 2016 said that about 500 000 Steam controllers had been sold by that time. This number may or may not include the controllers purchased by users who had not bought a machine, but who downloaded SteamOS on their PCs; also there may have been users who bought more than one controller.

Differently put, this number is rather low even though the console is a new product. For instance, its sales look very unsatisfactory compared to those of PS4 and Xbox who sold over 1 000 000 consoles in 2013 on their first day on the market.

Clean sales revenue from selling half a million Steam machines would comprise approximately 750 million US dollars for Valve, and that would have made them the top competitor in the gaming industry. However, even though Valve keeps their profit records undisclosed, it is possible to estimate that the actual number of items sold and the revenue are significantly lower that stated by the press. The actual number of machines sold by Valve fluctuates somewhere between 50 and 100 thousand only; which would stand for income of approximately 25 000 000 to 60 000 000 US dollars.

The main disadvantage of the machines is the lack of appeal to the consumers since they compete in the niche with a small consumer segment selling prebuilt gaming PCs that are not very popular because the users usually prefer building their own PCs or purchasing a standard console.

However, the solution to promote the sales of Steam machines regardless of the low popularity and insignificant revenue persists because this decision has a long-term goal. Linux-based Steam machines have never been expected to make strong competition against Windows. Steam machine’s manufacturer Alienware reports that Windows-based PCs comprise 99% of its sales revenue which leaves Steam machines only 1%.

The low numbers here are not the sign of a marketing failure but a predicted strategy that is oriented at the creation of a trend – the promotion of OS Linux for gaming purposes. From the investment standpoint, the scale of revenue of the machines is sufficient to attract the funding and investors and continue selling the product at low pace slowly winning a sufficient market segment step by step.

Hiring, Firing, and Salaries

Valve is a company with a very significant profit. Its main source of income is Steam – the online gaming platform that generates approximately 3 to 4 billion US dollars. At the same time, the number of employees at the company is small – less than 300 to 400 workers. Valve pursues the best performers in the field who are also capable of working without constant instruction, management, and supervision.

The salaries of the Valve employees are also kept undisclosed officially. However, the leaders of the company have explained how the salaries are determined. The primary point of difference between Valve and the other hirers such as Microsoft, for example, is that the latter reward the workers using bonuses that comprise 8 to 20% of the wage an employee has; whereas at Valve, the worker’s bonuses may exceed the basic wage by up to 10 times.

As a result, Valve is more attractive as a workplace for the high-performers. Their income allows paying very high salaries in order to attract and retain the best talent because it is one of the world’s leaders in profit per employee ratio. At the same time, expanding the salaries the company prevents the loss of talent that could be extremely costly knowing its profit to employee ratio

Withstanding the Competition

As it was mentioned previously, Steam (the online platform for gaming) is the primary source of income of Valve. It has 35 000 000 of active users and about 2000 games to offer. The platform is available worldwide in 237 countries and supports over 20 languages. Basically, Steam is the primary reason why Valve is involved in all the expansions and innovations of its product line. All of the new projects (Steam machines, Linux-based SteamOS, Steam controllers) have one ultimate goal – to promote the use and outreach of Steam.

The investment Valve makes in the manufacturing of the new hardware and software is long-term and is anticipated to come back in a few years when the number of gamers using Steam grows and they begin to purchase more games on Steam. For the same purpose, to retain the consumers, Steam has a system of discounts that keeps people buying games through lasting periods of time. For instance, the expensive games with big budgets are sold at full price for about 6 to 7 months, and then they get a rapid discount of 50%; discount period takes longer to come for the breakout indie games – over 9 months. Among the other games, the cheaper and less popular ones get discount prices sooner. The graphs below demonstrate the discount approach.

Popular High-Price Mid Sub-$30

The elasticity is higher for the games with lower popularity and, thus the users are encouraged to purchase both types of games; while the popularity of the expensive games creates a pressure for a sooner purchase (within the first 6 months of release). Due to this practice, Steam remains the main source of revenue for Valve (over 3 billion US dollars) that provides funding for all the side-projects and expansions (hardware and software that are sold at a slow pace for a purpose to increase the number of Steam users) and the budget for extremely high salaries due to great profit to employee ratio.

Conclusion

Thus, since its creation in 1996, Valve was able to become one of the leading game developers in the world. Its online gaming platform, Steam, was met with approval by its customers, simultaneously allowing for safety from piracy. At the same time, the horizontal, anarchic structure of the company permitted its employees to take great joy in their work, and ensured that only interesting and promising projects were developed, leading to high-quality product. In spite of the fact that the company is a medium-size business, its revenues are very high, and appear to be growing further from year to year.

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IvyPanda. (2020, October 14). The Valve Corporation Challenges. Retrieved from https://ivypanda.com/essays/the-valve-corporation-challenges/

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1. IvyPanda. "The Valve Corporation Challenges." October 14, 2020. https://ivypanda.com/essays/the-valve-corporation-challenges/.


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IvyPanda. 2020. "The Valve Corporation Challenges." October 14, 2020. https://ivypanda.com/essays/the-valve-corporation-challenges/.

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