Mario and Maginot

The console war between Nintendo, Sony, and Microsoft demonstrates that winning doesn't have to mean being the biggest, baddest or most burnt-out. The Mario Generals have out-strategized their competitors. Not outworked, outgunned, or outfought, but outflanked and outthought in a way that is reminiscent of one of the more famous fiascos of World War II.

In 2006, each of Nintendo's employees generated $2.5 million in revenue and $442,000 in profits for their company and its shareholders. This compares rather impressively, if you are on the Mario team. It is more than Microsoft ($624,000 revenue and $177,000 profit per employee) or Google ($994,000 revenue and $288,000 per employee), leading to the obvious question, "how did they do it?".

In a word: strategy. In four words: they outstrategized their competitors. Not outworked, outgunned, or outfought but outstrategized and outthought. They made less obvious choices that took them away from the attrition of hand-to-hand direct assaults and allowed them to outflank traditional rivals.

Outflanking can be both a tactic and strategy depending on scale and duration, turning an enemy's strength into weakness by not attacking their well-fortified front-line and instead assaulting them at the sides, the rear - or simply bypassing them altogether.

The Maginot line provides a useful example for understanding competitive strategy in general and the success of Nintendo in particular.

The defender invests hugely in massive fortifications. For France prior to the Second World War, this meant constructing a 15 mile-deep line of fortified concrete bunkers, barracks and machine gun posts along its border with Germany in the hope of avoiding a repetition of what happened in 1914. For Sony, it meant rolling-out a massively powerful new games console, the PlayStation 3.

Both were designed to ensure that if attacks do come, they are not a surprise. Thus Sony goaded Microsoft into engaging in the console wars head-on, fighting on terms that Sony understands better than anyone – that the most muscular, technologically- advanced console (made at a loss of maybe $200 each), wins the biggest market share, ultimately becoming the only profitable game in town.

So if France had faced Microsoft generals in 1940, the outcome might have been different, as Microsoft would have attacked head-on in the most obvious place.

Unfortunately for France, Germany's military had learnt effectively from the past. On May 10 1940, after deploying a decoy force opposite the Line, Hitler sent his main force speeding through Belgium, the Netherlands and the Ardennes, reaching the English Channel at Dunkirk by May 24, capturing Paris by June 14, and obtaining the surrender of France on June 25.

Ironically, the Maginot line had done what it was designed to do - deter direct assaults - but it failed hopelessly because in the era of Blitzkrieg, direct assaults were no longer the only strategic option.

And just as the Maginot Line failed because it was rooted so deeply in France's experience of World War I, so Sony made the error of looking back to Playstation I and II when it embarked on developing Playstation 3 and assuming that competitors would be unable to find new response to old strategies.

Satoru Iwata, who joined Nintendo's in 2000 as the head of its corporate planning division, was one of those who had grasped the need for new responses. By 2002, he was CEO and understood that competing directly with bigger, richer rivals would only result in third place, no profits and eventual ruin – just what had happened to companies such as Atari and Commodore.

So instead of competing against Sony and Microsoft, he decided that Nintendo would "battle the indifference of people who have no interest in video games", design only what those people cared about and produce hardware that (shock!) would be profitable from day one.

The first fruit of this strategy was the Nintendo DS, a wireless hand-held gaming machine launched in 2004 to compete with Sony's bigger, more expensive more powerful – but less fun – PSP.

The DS came with wireless, two screens (one a touch-screen), as well as voice recognition. And it spawned software that stretched the boundaries of what games were all about and who played them.

Thanks to "games" like Brain Age, a series of brain-training exercises, Nintendo hooked a whole new audience of hitherto-non-gamers who started to chat to their friends in cartoon virtual worlds or play golf during their lunch breaks. Nintendo sold 40 million DS units. Sony shipped just 25 million PSPs.

In 2006, Nintendo launched the Wii, outflanking its competitors once again by doing the opposite of almost everything in the console manual. Wii used off-the-shelf bargain basement parts. It bundled functionality for free. It focused on fun, not computing power. So while you can create uncannily accurate cartoon characters (Miis) of yourself, friends and family - my children have created a Mii for every person who regularly visits our home – it has no high definition display. But do my kids care?

And that's all before the Wii Remote, which comes with a microphone, speakers, nunchucks, and an amazing accelerometer chip (sourced for only $2.50 each from a company in Massachusetts who invented it without a client in mind) that lets you to swing a baseball bat, tennis racket or scimitar, or throw that ball or hand grenade. It's like being there - all for less than the price of a top-of-the-range iPod.

Results? In two-and-a-half years, Microsoft has shifted 11 million X-boxes. But in less than a year, 8 million Wiis have been sold – compared to just 3 million Playstation 3s over the same period. (See http://nexgenwars.com for sales updates).

What's more, whereas Sony and Microsoft have lost money on each unit sold, Nintendo make a profit. It's proving to be a billion dollar illustration of the lessons learned by France all those years ago. First, defensive strategic lines waste vital resources will eventually be outflanked by a clever opponent. Second, they over-commit people to 'one best way' that slows down reactions to the new strategies of clever opponents.

So if you are number one in your industry remember to do more than just bunkering down, and if you are number two, three or below, start outflanking. Or as Mario might say, "Okey dokey!", "Woohoo!", and "Letsa go-go!".