Business Issues
Industry Description
Revolutionary advancements have continued to be experienced in technological inventions and innovations. When innovation is considered, the most significant part of revolutionary technological advancements can be observed in industries that deal with technology-based management. For instance, the rapid expansion in the video market has shown a rising trend due to technological innovation.
The current status of the video games industry highlights a significant degree of competition for the market share between top competitors in the entertainment industry. Prominent players in the market are vying to capture the largest market share through acquiring a competitive advantage. Competitors aim to win and retain more customers with the increased development of new games. On the other hand, software production for video games has evolved into a fascinating part of the entertainment industry.
Description of the Sega Company
SEGA Company is a multinational game developer based in Japan with several network branches across the globe. Sega began its journey in the production of video games in 1983, and it has reached out to many video game fans through its innovative strategies in exclusive software. Sega operates in the entertainment industry with greater degrees of competition and dynamism. The company understands the significance of keeping itself updated with changing interests, tastes, and developments in the potential markets and targets.
Organisation Life Cycle
Business entities and organizations go through four life cycles: startup, growth, maturity, and rebirth, also called decline or renewal. Organizations need to understand that they are needed to make effective differences in business operations and strategic planning. Sega is a perfect example of a company that has undergone a market rise, fall, and rebirth.
Sega immensely grew in the 1990s by challenging Nintendo’s dominance in the West. In 1991, Sega granted itself a synonym for video gaming due to its popularity amongst youngsters. However, the company was out of popularity due to self-inflicted weaknesses while still producing video games for other consoles. Nintendo became the market 1980 and controlled 90% of the domestic gaming market. SEGA Genesis became superior in the market in 1992, which helped the company gain 60% of the market share.
Unfortunately, Sega gradually began to lose market share shortly after it launched the SEGA CD as a Mega-CD in 1991. Further, completion intensified three years later due to the introduction of PlayStation as a new player in the market. Sega continued to lose billions annually between 1998 and 2002. Isao Okawa, the then-ill former Sega chairman, injected the company with ¥85 billion to keep it and its operations afloat. This funding to SEGA Company showed a slow growth in the subsequent two decades, and it raised a revenue of ¥250 billion and an operating income of ¥14.8 billion in 2020.
Sega has formulated strategies to restore its market share despite the challenges posed by the COVID-19 pandemic. Guinness World Records Gamer’s 2010 Edition showed that Sega is the leading producer of arcade games among other companies since 1981. Therefore, the company has focused on players and streamers who broadcast their games to the viewers throughout its life cycle. Strategically, Sega has evolved from pandemic restrictions and is now flourishing in the entertainment industry.
Business Rules of Thumb
The business rule of thumb is an essential instrument that helps businesses measure their operations in brief, based on particular parts of their operations. For instance, businesses can calculate income streams, earnings before interest, depreciation, amortization, and taxes (EBITDA). Thus, Sega’s business rule of thumb for earnings yield is between 5% and 11.8%. The gaming services have helped to propel SEGA Company through the challenging economic times of the pandemic, which has led to the accrual of ¥14.8 billion in operating income annually.
Cultural Issues
Culture Rules of Thumb and Consequences
Culture rules of thumb are the appropriate behaviors that businesses and organizations showcase in different operational environments. It is expected that businesses should adhere to the cultural rules of thumb through observing the establishment of trust, respect for customers, comprehension of the significance of language, and sharing of knowledge in a mindful, convincing, and calm manner. Sega has observed the cultural rules of thumb through its governance, establishing a significant culture of balanced treatment of all stakeholders and employees. Further, the company provides external expertise and knowledge that facilitates outside directors to counter insiders’ logic, and encourages appropriate debate on the issues that affect the organization.
Culture WEB
Culture WEB is vital in providing approaches for evaluation and changing an organization’s culture. Organizations that use the culture web can expose cultural practices and assumptions and adjust work, aligning organizational elements with the business strategy. The gaming industry market has become stiff, and companies strive to gain a competitive edge in their service provision.
Sega is no exception, maintaining its brand rating by enhancing a positive culture web for its customers and users. For example, the company has established a relationship of trust with its customers and employees. This culture has therefore promoted human resources in SEGA Company as a wellspring of value-creation.
Employees enjoy an environment where they can exercise their talents and continue to create moving experiences. The culture web at Sega has also promoted workstyle and balance reform that supports boosting employee creativity at the workplace. For this reason, the company bases its culture web on determining areas that need reform and improvement for the brand’s positive performance and public image.
Organisational Culture
Organizational culture of an organization or a company is the cumulative beliefs, attitudes, and values, and how they affect the behavior of the surrounding environment, such as employees and the community. Organizational culture gives a clear definition of the environment for all activities that take place within an organization. The combination of verbal and unspoken behaviors and mindset shows how an organization operates daily and codifies employees’ feelings about working in the company.
Sega understands the significance of an influential and effective organizational culture within the company and for its employees. The company has thus adhered to a critical organizational culture by facilitating various diversity initiatives and transparency in information and compensation. These practices have helped the company to satisfy its employees through its mission of captivating global customers by providing novel and moving experiences. Thus, a sound organizational culture at Sega has helped the enterprise to achieve the integral success of the business ideas and entrepreneurial spirit.
Changing Organizational Culture
Changes in the organizational culture occur when companies alter their values, processes, beliefs, and strategic goals. A cultural change in the activities of a business induces a change in an organization’s internal and external work environment. For instance, Sega has adjusted its products, brand, and business to fit the current era and become the future market leader in video gaming. The changing organizational culture at Sega has helped the company to achieve consistency and direction in business, guide decision-making actions, fuel the workforce, and attain the company’s potential objectives.
Political and Governance Issues
Haruki Satomi is the president, director representative, and group CEO at Sega, who is driven by empathy and captivating experiences outside the organization to provide lasting growth and sustainability. Stakeholders at Sega envision the enhancement of efficiency, operating more transparently, and maintaining sound management.
External
PEST Analysis
External Environment
Analysis of the external environment by a business involves the process by which organizations objectively assess changes in the operation and the broader market that might affect current business activities. Organizations use analysis obtained in the external environment to ensure that they adapt to changes and enhance their success within an industry. Sega has focused on the external environment by formulating strategies to outdo its competitors. As a result, the analysis has positively benefited the company by highlighting weaknesses in the supply chain. However, this analysis has cost the company billions since resources are needed to deploy teams and tools in the field and implement strategies.
Video game companies use plastic to manufacture their products, which could threaten the environment. However, Sega safeguards and takes precautions to avoid hazardous environmental outcomes. Sega has become a major player in the market in terms of protecting the environment. For instance, it has spearheaded the move to green energy, since most customers have migrated towards preferences for green products.
Opportunities
The opportunities that Sega can capitalize on include new products, strategy, embracing technology, and building relationships. Through the use of advanced and improved technology, such as Java, Sega will gain a competitive edge in the form of publishing channels. Hence, it will make it possible for Sega to offer its games to Palm™-handled electronic gadgets.
The first changing market shares prompted Sega to introduce new consoles and games to increase its market share. Sega needs to implement a new strategy to capitalize on its game content, which is the sector the company has dominated over the past four decades. Sega should also build relationships with Microsoft to explore the PC and virtual online market. Such affiliations will enable the company to pursue varied business opportunities.
Threats
Sega’s primary threats include piracy, competition, and products by competitors. The threat of piracy is a massive burden to the company because unlicensed downloads and distributions adversely affect the company’s revenues. As a result, the effects of diverted distribution led Sega to obtain lower profits in sales.
The competitive pressure is another threat that Sega faces due to rival companies such as Nintendo and Sony. These competitors are in the race to introduce new and better products than Sega, creating new games for their consoles, and continually updating them. Further, competitors’ products have begun to gain preference over competitors’ products.
The market dominator, such as Sony’s PlayStation, produces better games and consoles. A combination of these threats tends to minimize the expected profit margin from the sales of Sega’s products and reduce brand recognition. As a result, the Sega Company will enjoy a low competitive advantage.
Table 1 – Trends and Overcoming Strategies
Strategic Move for 1st Trend
The rapid growth and advancement in technological applications in the gaming industry are predicted to adversely impact Sega’s supply chain. Their intent, however, is to upgrade their machine, software, and technological integration. Therefore, the implied move could involve a number of different actions, including constant and continuous software upgrading, as competitors exist in the industry.
Strategic Move for 2nd Trend
The increased number of competitors in the video game industry with different services may negatively affect Sega. An alternative might be to lobby the market and seek experienced and skilled employees and technicians to work in production lines to produce quality products that match the market.
Strategic Move for 3rd Trend
The high rate of imitation and replication of products has been on the rise, propagated by technology, which could hurt Sega’s products. Their intent, however, is to involve government intervention, which will aid in licensing companies to own their property. Therefore, the implied move could include various actions, including strict adherence to copyright infringement laws and rules to prevent revenue loss due to piracy.
Segmentation Analysis
Geographic
Geographic segmentation uses location in terms of nations, regions, and cities to identify customer groups, but it could also use neighborhoods if the right data are available or criteria such as climate and population density. Sega has attained global expansion into the USA market, whereby the products have garnered profitable gains in market share.
Demographic
Demographic segmentation uses criteria such as age, gender, income, occupation, education, ethnicity, generation, and sexual orientation to distinguish between consumer groups. Sega produces products that suit every demographic bracket, considering income, occupation, gender, and age. This approach helps to capture all the market needs and demands.
Psychographic
Psychographic segmentation is an approach that uses lifestyle, personality, attitudes, values, and political persuasion. Sega understands that customers have different preferences and consumption behaviors. Thus, psychographic segmentation enables the company to match its video gaming products with the right lifestyle, personality, attitudes, values, and political persuasion.
Behavioral
Behavioral segmentation uses criteria such as benefits, user status, usage rate, and loyalty. Sega has adhered to segmentation and specialized in producing video games and products that are highly consumed by consumers in different demographic brackets.
Porter’s Five Forces Analysis
Table 2 – Porter’s Five Forces
Correlation with Industry Life Cycle Models
Porter’s five forces model strongly correlates with Industry Life Cycle models. Both models resemble factors of competitiveness and market rivalry that lead to reduced business flourishing. Both models prompt businesses to change their approach to conducting business operations. The rise of competitors and rivalries tends to affect the business negatively, such that organizations risk losing customers, which leads to less profitability.
Prediction of Effects
Porter’s five forces model will enable Sega to increase its competitive advantage in the future. There will be a resultant increased market share and profitability for Sega’s products.
Internal
Value Chain
The core practice of business entities is product productivity, which is achieved through different phases. A business’s value chain consists of a series of consecutive procedures involved in creating a finished product from the original design to customer delivery. Sega has a well-established value chain that ensures that customers are well served with its services. The existence of technical teams, sales, and advertising has helped Sega’s value chain meet customer satisfaction and gain customer loyalty.
The primary activities include operations, inbound logistics, services, marketing and sales, and outbound logistics. Primary activities are essential transformers of initiatives and strategies at work. For instance, operations are transformation practices that result in a change in products directly sold to customers.
The company’s support activities include procurement, infrastructure, technological development, and human resource management. Procurement defines what companies do to acquire the resources needed, such as negotiating the best prices and finding vendors. Sega uses human resource management to promote appropriate ways the company hires, recruits, motivates, and rewards people within the organization. Thus, Sega has created a significant advantage with good HR practices that improve productivity in video game production. Infrastructure and technological development are governed by support systems at Sega, including the processing and management of information and knowledge base.
The primary activities under Porter’s five forces model include direct and indirect activities that create value independently. Sega’s products have direct market consumption due to a large customer base and existing long-term loyalty. Sega ensures that quality is assured to meet the necessary standards that satisfy customers. The company has also boosted its support activities by linking and looking for opportunities that increase value creation. Sega aims to minimize the market’s cost and risk of insolvency through effective financial reporting.
The primary activities seem to work well with Sega because they comprise practices directly related to the physical creation, maintenance, support, sale, and support of services and products. A combination of support and primary activities helps promote business sustainability and best practices for everyone in the community. However, some linkages are required to promote the globalization of Sega worldwide.
Sega should adhere to Environment, Social, and Governance (ESG). ESG is aimed at maintaining sustainability and promoting ecologically friendly activities. This strategy is attractive to most conscious investors. Sega’s chain is not weak; it must improve its hiring practices to obtain skilled personnel. The company will operate at a lower cost and enjoy a competitive advantage over its rival.
Porter states that businesses use four competitive dimensions to achieve a favorable market environment while having a positive competitive advantage. Segment scope is a factor that helps companies to vary the product offering and the buyers served. Sega understands the segment scope in the video industry and focuses on producing varying products that fit all demographics.
Sega has also adhered to geographical segmentation by expanding internationally from Japan to the US and other countries, and the brand competes favorably. The industry scope for Sega is advantageous because the threat of new entrants is low due to the huge capital requirement. Thus, Sega can compete and acquire the largest market share.
Value System
A value system comprises the norms and culture of organizations and companies. It regulates employees and organizations to act within given limits based on the direction of upper management. Key value-creating activities include services, procurement, and logistics. These activities have extended upstream for Sega by putting its activities within the reach of every individual.
The industry extends to the downstream through engagement in synergies and mergers. Suppliers have built a positive relationship with Sega, which helps them acquire raw materials efficiently. Buyers have promoted value addition to the general performance of the company. This value chain is a sure way to show that Sega’s commitment and value chain are cohesive to promote profitability.
Table 3 – Value Chain Analysis of SEGA Company
Vertical Integration (VI)
Vertical integration is applied in microeconomics, internal political economy, and management to describe the arrangement in which businesses’ supply chains are integrated and owned by the business. Firms use vertical integration to extend their operations within their supply chain. An organization engages in vertical integration by acquiring or competing with a former supplier or moving from business-to-business selling to the end retail market. For instance, Sega and Microsoft have partnered to insulate themselves from the technical, economic, and business realities. Thus, the company has reduced manufacturing costs while developing technological consoles for video games.
VI can be categorized as having either a forward or a backward move in the operational processes of businesses and companies. Forward vertical integration is practiced by companies that advance along the supply chain. Such companies sell their products without going through sales and distribution, which are subject to controls and placement in the market. On the other hand, backward VI involves the acquisition of a company’s operations at the end of the supply chain. Companies that deploy backward vertical integration buy other businesses that make an input product in order to acquire the company’s product.
Sega follows a forward vertical integration because it has a license that provides sole ownership and distribution of its products. Thus, Sega’s operation along the supply chain enables it to avoid revenue loss that occurs through distribution and brokers before sales are made. As a result, the forward vertical integration strategy has helped Sega to achieve a competitive advantage and gain control of the video gaming industry market.
Issues of Vertical Moves
Even though moves observed in the forward and backward vertical integration impact companies based on different scales, there are existing issues underlying these moves. Comparative cost is an issue that prompts increased cost of production and supply. Sega experiences escalated costs in the input cost of producing goods and products, and transaction costs of the activities involved in the supply chain.
Vertical integration moves are affected by operating scope and complexity. Companies fail to achieve other competencies as unequivocally as they do in profit-making. However, vertical integration has other alternatives that Sega can deploy in its operations. These alternatives include joint ventures, corporate agreements upstream, franchising or licensing downstream, market purchases, and long-term contracts. Companies that use different alternatives benefit from the acquisition of value creation and profitability.
Financial analysis
Financial analysis helps businesses with an in-depth analysis of their internal operations. Sega Company’s financial analysis can be discussed in terms of its income statement, gross profit margin, operating profit margin, pre-tax margin, and after-tax profit margin. Further, the balance sheet calculates return on equity, return on capital employed, return on total assets, acid test, and gearing.
The gross profit margin is 48% from the valuation conducted for the fiscal year that ended in March 2022. The cash flow statement shows that Sega’s cash generated exceeds its cash used due to the high operating profit realized annually after the COVID-19 pandemic. However, compared to previous years, Sega could not raise any items in 2021/22.
Synergy
The primary objective of companies in today’s competitive market is value creation. One of the ways through which companies manage to create value in their operations includes a synergy framework. The existence of synergies between organizations and business entities enhances positive performance and value creation, whereby collaboration and cooperation between companies is more impulsive than individual organizations. Synergy enables companies to combine personnel, resources, and data that lead to effective marketing and operational efforts.
Therefore, Sega is no exception in deploying synergy throughout its operations. The company has well-established operational, financial, and international synergies to promote its value creation in the market. Sega has achieved operational synergy by partnering with investment firms in the video gaming industry and improved operational activities through reduced costs based on economies of scale. This synergy has allowed the companies to increase and achieve higher growth and operating income.
Sega has enhanced financial synergy due to its improved efficiency in financing operations, which is linked to reducing capital costs. Further, Sega stakeholders have supported internalization synergy by evaluating the capital market, market size, and diversification. Investors seek to evaluate diversification and the size of companies’ capital markets. For this reason, Sega Company’s efforts to maintain synergy at work have fueled its objectives for success.
Capabilities
Sega’s capabilities include people, contracts, physical assets, finances, technology, and history. A company’s capabilities help involved stakeholders identify weaknesses in the organization. As a result, managers and employees rely on capabilities to deliver competitive advantages over other companies.
Jay Barney – VRIN Analysis
Valuable
Sega is highly valuable and important to customers because it provides excellent processes, services, and gaming experiences to its customers. Besides, their services are licensed, hence, there are low chances of suffering infringement and violation of copyright by third parties.
Rare
Sega is rare because it provides an authentic and original user interface without alteration from external parties. The originality of the arcade game ports makes the video games attractive to customers.
Imperfectly Imitable
Even though several consoles have been produced and increased in the market, only twenty-three have been produced since Sega debuted in Japan as the Sega Mega Drive. Thus, it is difficult for a competitor to reproduce an exact game.
Non-Substitutable
Sega’s video games and experience interface are exceptional because it is not easy for customers to find other products with similar specifications and graphics that meet their needs. The company’s products are therefore non-substitutable due to quality features that the company has achieved through exclusivity.
Capability Statement
Our challenge is competition rivalry. Our strategy is to achieve a considerable market share by 2023 by using our superior ability to compete favorably to address the reduced competitive advantage in the market.
SWOT Analysis – Current Strengths
Our History
Sega has an excellent reputation with the public, giving the company the power to gain a considerable market share of its games and consoles in the target market. The strong customer relationship of trust has earned the company customer loyalty. Thus, Sega enjoys a firm base of loyal customers who believe and enjoy the services provided by the company’s video games they produce.
Further, the long history of Sega operations in the video game market and the growing interest in entertainment attracted a large customer base. A large customer provides the company with a ready market that guarantees profitability and a competitive advantage in the entertainment industry. A strong brand is another strength that Sega continues to enjoy as a favourable factor in the market. It has a strong brand image and reputation within the entertainment industry. The brand image and reputation have given the consumer an advantage over other brands, such as Sonic.
Our People
Experienced staff at Sega is a strong factor that has fueled the company’s operation while promoting organizational culture. The experienced staff offers the best customer services that meet the expectations and satisfaction of employees and consumers. The long experience, therefore, helps the company to easily depict market trends and predict future competitiveness and sales trends. The highly skilled staff provide efficient services that match the market era and updated technology in the gaming sector. Therefore, top-notch skills among employees facilitate fast and practical innovations for the company to remain competitive.
Moreover, Sega is trusted by its customers across the globe due to a clear impression of the gaming experience. Customer trust is a milestone that businesses and organizations aim to attain from customers to create a positive public image for their brand and services. Strong relations with customers and suppliers enable Sega to run its services smoothly and without constraints. A healthy relationship enhances efficiency in an organization’s production and supply of resources. For this reason, Sega’s strengths in good supplier and customer relationships ensure that resources are supplied while services are executed within a specified timeframe.
In addition, Sega has impressed with the daily advancement and improvement of technology in the entertainment industry to keep pace with other gaming companies. Stakeholders and employees in the company have embraced technology in the production of video games. Technical teams and staff have cultivated innovations in the company, which have improved the services offered to customers.
Our Technology
Strong technology installed in Sega’s software and hardware development has helped the company to reach greater heights, meeting the requirements and needs of profitability in the productivity of great products and services. The technology used by Sega has an effective customer interface and great reliability. Thus, customers do not experience a crash of programs while gaming. Further, the games’ features, such as graphics, are of good quality due to skilled teams of experts who enhance efficiency while creating consoles and programs. Excellent processes are a strength that has attracted a large customer base that enjoys a non-distractive experience while interacting with the company.
Our Contracts
Sega is a licensed company that enjoys the rights to produce and distribute its products and services in the market. This license gives the company an advantage in having full rights and ownership of its services and products. The company also holds patents for its operations with exclusive rights to invent new ways of solving technical problems. Sega is exclusive in ensuring it acquires full ownership of its games and services. This aspect is advantageous in avoiding piracy and copyright infringement.
Our Physical Assets
Location in business helps to reach target customers without accessibility constraints. Sega has a prime location that makes it easily accessible through the internet. The company owns valuable assets that act as securities in the market. Thus, the securitization of the company becomes easy during financial matters.
Excellent facilities promote good customer experience and comfort while enjoying the services offered by the company. Suitable facilities also promote an enabling business environment at Sega to promote maximum productivity.
Our Finances
Sega has financial reserves that help cushion its operational activities when the market is at its lowest. These reserves help restore the company’s regular business operations without cases of insolvency and bankruptcy. The high profit margins help the company remain competitive and attract potential investors. Furthermore, Sega has achieved efficiency in terms of scale and scope by diversifying its production and increasing production volumes with reduced per-unit costs and high efficiency.
Based on the data below, it sufficiently shows that Sega is measurably better than its competitors.
Articulating the Strategy
- Does our ability to maintain customer trust mean we do customer delivery services very well? Yes.
- Is this ability embedded in every part of our business? Yes.
- Is our ability to compete favorably demonstrably superior to that of our competitors? Yes.
- Does this specific ability result in outcomes that matter to our customers? Yes.
- Is our advantage here durable? Yes.
- Given our strategic intent, does our ability to remain competitive remain relevant? Yes.
The challenge Sega faces is competitive rivalry, and the company’s strategy is to secure a larger market share by 2023 through leveraging its strong competitive capabilities to overcome the declining advantage within the market.