Even though I believe in groundbreaking innovation, in a lot of cases, investing in a company that is working on expensive and not-so-profitable (yet) cutting-edge technologies doesn’t always make much strategic or financial sense for someone who has a very low-risk tolerance from an investment standpoint.

If you are an angel investor or venture capitalist who is betting that at least a few companies from your portfolio will triumph in the long run, it makes sense for you. The same can be said even for institutional investors like private equity firms. 

However, regardless of who you are, it is often useful to take a step back and assess a company’s products or services using a different lens to predict its future success. One such lens could be contemplating “Lateral Thinking with Withered Technology” in a particular business’s innovation context.

This is simply a product design philosophy that I often use as a mental model to evaluate the financial viability and scalability of a company’s technology and make investment decisions. In this newsletter, we are going to take a quick look at this philosophy.

In the second part of this series, I will dive deep into how I use this philosophy as a mental model to not only make investment decisions but also to build and scale my ventures 📡 

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Story of Nintendo and Gunpei Yokoi

In 1965, a Japanese man named Gunpei Yokoi started working at a playing card company after his poor performance in his university’s electronics exams. So, he had to opt for a job as a machine maintenance worker in this playing card company that we know as Nintendo $NTDOY ( ▼ 3.73% ).

Back in that time, Nintendo was struggling financially and was trying very hard to survive. Nintendo’s success with the playing card business was no longer adequate to keep the company going as Japanese society was gradually shifting its interest from playing cards to other forms of entertainment, such as pachinko and bowling. This led to the decline in sales, and eventually, Nintendo’s stock price plummeted after the 1964 Tokyo Olympics.

Nintendo attempted to diversify its business by experimenting with other ventures. This gaming giant once tried to operate a taxi company, love hotels, and even tried to produce instant rice. They even experimented with selling vacuum cleaners. But it didn’t work out well.

One day, during a factory visit, the then-president of Nintendo, Hiroshi Yamauchi, saw Gunpei Yokoi playing with a toy extending arm that Yokoi had created for his own amusement during his spare time while working as a maintenance personnel. This device that Yokoi built could grab distant objects with suction cups.

For someone like Yamauchi who was trying to turn his company around, Yokoi’s extended arm invention called the Ultra Hand caught Yamauchi’s attention. Yamauchi instructed Yokoi to develop his Ultra Hand prototype into a proper product. Yamauchi said,

As it turns out, the Ultra Hand sold over 1.2 million units and became a huge success for Nintendo. The impressed Yamauchi then invited Yokoi to start the game and toy operation of Nintendo.

$NTDOY ( ▼ 3.73% ) 

Product Development Philosophy

What made Yokoi particularly brilliant was his ability to identify withered technologies and implement them in a new context in a way that no one thought of before.

What did Yokoi mean by withered technology here? Withered technology refers to mature technology that is well understood, readily available, cost-effective, and typically has a stable and predictable development lifecycle.

“Withered” in this context does not necessarily imply that the technology is old or obsolete in the common sense of the word. Instead, it describes technologies that have been around long enough to be thoroughly vetted and refined and whose limitations and capabilities are deeply understood.

Key characteristics of withered technology include established and efficient manufacturing processes, widespread availability of components due to mass production, significantly lower costs compared to cutting-edge alternatives, and a deep collective understanding of how the technology functions and can be applied.

“Lateral Thinking” involves using these mature technologies in new, unexpected, and creative ways to create novel experiences. It’s about applying existing knowledge from one area to another to generate innovation.

Case Studies

Game & Watch Series (1980)

Observing bored businessmen on trains playing with their LCD calculators, Yokoi recognized an opportunity to leverage the readily available and inexpensive LCD technology from the fiercely competitive calculator market. He applied lateral thinking to create simple, addictive games integrated into watch-like devices. This technology was mature, cheap to mass produce, and power-efficient.

Yokoi took this basic display technology and applied it to create simple, self-contained handheld electronic games. Instead of aiming for complex graphics or processing power, the focus was on engaging gameplay within the limitations of the hardware. This innovative use of LCD screens for dedicated games paved the way for the handheld gaming market.

Game Boy (1989)

In 1989, while competitors like Atari $PONGF ( ▲ 29.6% ) and Sega $SGAMY ( ▼ 6.73% ) were focused on handheld consoles with color screens and more powerful processors, Nintendo opted for a mature, cost-effective 8-bit processor and a monochrome LCD screen. 

This seemingly outdated technology allowed Nintendo to prioritize gameplay, portability, and exceptionally long battery life using readily available and cheap AA batteries.

By focusing on these core elements and offering the console at an affordable price, Nintendo made the Game Boy accessible to a vast audience.

The monochrome screen, while technically less advanced, was power-efficient and allowed players to easily discern gameplay elements. The lower cost made it accessible to more consumers and developers, leading to a vast library of games.

The result was a phenomenal market success, with over 118 million units sold, making it the best-selling console of the 20th century.