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Video Game Industry Analysis Case Study


Nintendo History, Development, and Growth

In 1989, Fusajiro Yamauchi launched a small company called Marufuku Corporation in Kyoto Japan. The founded corporation later on turned to be Nintendo Company. Before turning into the renowned Nintendo, Marufuku was popular for the playing cards the firm produced to be used when participating in the Hanafuda, the Japanese game.

The company solidified its playing card business position between 1907 and WWII. Marufuku started to supply the Japanese communities with Hanafuda cards in 1925.

The Japanese amusement market was greatly devastated by WWII, though Marufuku and the playing card industry advanced more than any other corporations. Whereas the manufacturing plant for Marufuku was damaged during the war, the corporation succeeded to forge ahead in the following periods.

In 1950, Yamauchi assumed the position of the president in the firm and got on a variety of strategies with the purpose of rationalizing and modernizing the way the firm was controlled. Marufuku factories were consolidated by Yamauchi who then altered its name to Nintendo in 1951.

In the postwar era when Yamauchi realized that the playing cards business boomed and there were shortages, he reacted by inspiring the corporation to produce quality plastic playing cards. While challenges were encountered in the preliminary plastic cards production, the firm began its mass assembly in 1953.

Nintendo was able to sell playing cards that had the imprints of animation characters after completing a business agreement with Disney in 1959 whereby the firm had to share some profits acquired from selling the advanced cards. Nintendo opted to become public in 1962 when the company realized that the business was remarkably successful.

1960s to 1980s diversifications

Nintendo pursued its drive to innovate and diversify in 1960s and this helped the company to become common name in 1980s. The glowing company developed most of its new product lines in 1963. The game department was successful and in 1969, it built a unique game manufacturing plant in Uji Town. The first electronic technology was introduced by Nintendo in 1970.

An example of the Beam Gun Series technology produced by Nintendo was the shooting system called laser-clay pigeon. This company expanded its business of projection based games to the western markets. The arcade game technologies prospered in the subsequent periods and Nintendo was in the frontline.

For instance, Nintendo cooperated with Mitsubishi Electric in 1975 to develop filmed game systems via the use of video player technology. The technology emerged as the first artless home video game in 1977.

Nintendo also started to feature some of its high-tech amusement arcade games. In 1978, the company produced and used microcomputers to sell coin operated video games. Such innovations led to the emergence of Donkey Kong in 1981 giving the video games (arcade) its stereo sound and complex graphics.

Nintendo similarly sold watch line and game products including football with digital quartz micro hardware in 1980s. The company was able to expand its markets to the US in 1982 as it focused on the marketing and developing household video technologies. Nintendo built new production plants in 1983 to meet Famicom production requirements in Uji town.

Despite the reported losses in the video game industry in the late 1985, Nintendo used the swift selling Famicom to enter the US market. It however seized the US market by redesigning the Famicom to produce Nintendo Entertainment System. Nintendo Company became widely recognized for the numerous Pokemon pocket monster, Luigi, Zelda, Mario and other characters.

The firm’s handheld gaming system also known as Game Boy has dominated the market from the time when it made its first debut. In fact, the Game Boy advanced to give the cutting-edge play station version while the Game Cube which materialized as its gaming console overhauled the Xbox. The latter product was deemed as the most prevalent and succeeding console to the PlayStation 2 that Sony tendered to the market.

Although the console market has been ruled by Sony, the novel Nintendo DS and Game Boy Advance have continuously steered the market for the handhelds despite the introduction of the PlayStation Portable (PSP) by Sony.

As Nintendo’s consoles gained a bigger market share, the firm has maintained to be the most interactive market game pioneer as a result of its continuous innovations, Silicon graphics and animated characters presently designed by Shigeru Miyamoto.

After the stepping down of Hiroshi Yamauchi in 2002, Nintendo appeared to have taken a new turn. The corporation assumed business as usual but offered low priced GameCube version to the Chinese market. Besides, Nintendo purchased 3% stake of the toy producer Bandai Corporation and Japanese software developer.

Internal strengths

Human resources capabilities

Nintendo is capable of hiring employees with rare talents in building both software and hardware that supports video games. Moreover, the company has one of the few talents that can design and develop rare video games that attract large clientele not only in Japan, but also in other parts of the world.

Having such rare talents within the workforce provides the firm with internal capability and increased competitive advantage. Investment in human capital has enabled the company to be more competitive through the value that the workforce creates for its customers.

Financial resources capabilities

With increased sales, Nintendo has accumulated enough financial resources that enable it to expand and finance its operations effectively. These financial resources have also enabled the company to enhance its research and development activities.

As a result, the company has remained ahead in developing new products that are oriented to the market. Introduction of new products in the market has led to increased sales and revenue adding to the benefits of the firm. Besides, increased financial capability is the strength behind hiring highly talented and experienced workforce which has generally contributed to the value addition.

Organization structure of the company

The way the company is organized and managed has also increased its efficiency and effectiveness. The company has adopted the less bureaucratic structure that leads to efficiency in decision making. Even though the company has been divided into various branches, the line between the management and the bottom employees is extremely thin.

This has increased employee attachment not only to the business, but also to their working environment. Such a structure leads to effective and efficient management processes. Ultimately, the internal structural organization and effective management processes enhance the competitive advantage of the company and keeps it ahead of other firms in the industry.

Technological capabilities

Nintendo has technological capabilities that enable it to develop new game consoles. These technological capabilities have made the firm to lead in the video game market by introducing new products as soon as the popularity of one game diminishes.

Besides developing new software and hardware, Nintendo is capable of developing security codes for its consoles and avoids counterfeit products. This internal technological capability has enabled the company to monopolize the Japanese and US markets for a very long time.

Internal weaknesses

Top Management

Nintendo top management comprises of individuals from one family. Although the family is the founder of the company and the major decision maker, some individuals might lack the ability to manage the company effectively. As a result, the company performance may decrease leading to the loss in revenue and market share.

Nintendo has not moved away from the old Japanese business models where the company is managed by family members despite incompetence. Such incompetence in the management may destroy the company reputation resulting into a profound reduction in the market performance.

Distribution channels

Although distribution channels that Nintendo uses to sell its products may be seen as strength, they may also be disadvantageous in terms of management. Managing such fragmented distribution channels may be cumbersome especially in a wide geographical location of US. Moreover, some of the channels may be less productive thereby increasing the cost of operations.

Besides difficulties in managing distribution channels, the company also faces difficulties in expanding to newer markets. This is primarily due to cultural differences. Most of its products are designed according to Japanese cultural aspects which might not fit well in other cultures.

Porter’s five force analysis

Rival sellers

Nintendo has been a very strong player in the game console industry. The company competed with Sony in terms of unit sales of game consoles from 1995 to 2000. The GameCube released about the same time as Xbox cost $199 which was approximately $100 below Playstation 2 and Xbox’s prices (Sterman, Jekarl and Reavis, 13).

Such a big difference in price permits the company to target at the low segment of the market; young people from 7 to 20 years of age who cannot afford to buy more expensive consoles and do not require more features as compared to mature age groups.

Microsoft is also one of the leaders in game console market. The company’s Xbox has taken a big share of the market. This makes Microsoft a household name in the industry. Xbox with its sequel is on top of the wave and has been competing with Sonny fiercely.

The firm’s strong brand name in home electronics, software and game consoles makes it a big threat in the market, especially for future game consoles (all-in-one electronic devices supporting home entertainment, gaming and web browsing). The Xbox is Microsoft’s first entry into the market but aggressive marketing by the company has resulted in much awareness of the product among the gamers.

Xbox attempts to beat Playstation in almost every feature, hoping to compensate for its late arrival and grab some market share. Moreover, Microsoft is notorious for overusing hardware resources for its operating systems and this leads to gamers suspecting that the use of more advanced hardware enhances the features of Xbox.

Buyer bargaining power

Since the game console is a consumer product, it is good to depend highly on sales. Thus, the consumer has a high bargaining power on the Nintendo gaming consoles. The market according to the case has increased heavily because of Nintendo’s sport and fun games. Sales also increased after lowering the price of the game consoles.

Suppliers bargaining power

There is high bargaining power of suppliers in regard to hardware. Therefore, it becomes necessary to calculate the product prices regarding to the price of the hardware units used. Prices for preceding game consoles were high because the output of microprocessors was generally lower than expected. Again, there were shortages of inputs like blue Light Emitting Diodes required for the BruRay Drives.

Game publishers and developers provide the games for Nintendo’s consoles thus the company has to listen to their demands and needs. The company is therefore compelled to have more games developed for the newer consoles than for the earlier version because of the complicated architecture.

Threat of new entrants

There is a very low risk of new entrants because of the development phase which has to be completed to successfully release a new gaming console. That is, a lot of money is required to enter the gaming market. Already, market saturation has been reached with only three key console providers.

Moreover, the key problem is that those who develop games would not create games for a new, unpopular and inexperienced platform when they are not sure how the new platform will sell. However, PC and home electronics manufacturers, software developers and handset makers may decide to enter the gaming market as they have the full potential in terms of resources and coverage.

Substitutes

The very threatening substitute is the upcoming Cloud Gaming Service commonly referred to as OnLive.com. There is a big potential that this expectation is not measurable yet because it is still in beta status. Other substitutes include PCs, calculators, game machines and cellular phones all of which have built-in games.

SWOT analysis

Strengths
Established and give a competitive advantage
Robust revenue growth provides greater stability
Weaknesses
Dependence on suppliers
Declining cash position
Opportunities
Positive outlook for entertainment industry
Changing and positive trends in consumption patterns
Threats
Short product lifecycle
Shift in consumer preference
Currency exchange fluctuation

Evaluation of Nintendo’s corporate strategy

Nintendo Corporation created a strong brand name through innovation and licensing, although, this legend seems to fall apart as profits decline. The reasons for this decline are affected by crucial strategic issues which become the main disadvantage to the company.

The first issue is associated with the company’s inefficient manufacturing structures that decrease the quality of products which affects the reputation badly and decrease the product competitiveness. The heart of most distinct management practice in Japan is their productivity improvement, quality control (QC) circles, total quality control (TQM) activities or the labor relation-collectively termed as “Kaizen” (DeWit and Meyer 156).

It is argued that the implication of companywide quality control or TQC have been that the concepts have assisted Japanese organizations to build a way of thinking that is process-oriented and come up with strategies that ensure continuous improvement.

In Nintendo however, the company failed to perform well or make improvement in Kaizen or develop an efficient manufacturing structure to ensure high quality products thus causing an enormous damage to the business.

Nintendo’s failure to sustain an efficient manufacturing structure or implement Kaizen effectively to ensure high quality products damaged their reputation and incredible brand name causing them to lose their competitive advantage in the market. In building competitive advantage, an organization must meet the expectations and needs of its customers.

The failure for Nintendo’s product qualities to meet the expectations and needs of customers completely swiped away the company’s reputation and decreased the confidence in the market. It is also pointed that, good reputation is what all businesses would wish to have, yet it is more valuable in some cases than in others.

Good reputation is among the intangible resources for Nintendo which differentiates the firm from other competitors, enabling them to charge their excellent quality and product a premium price.

Hence, the diminishing reputation of Nintendo weakens core competencies and creates a negative prejudice which affects its competitive advantage directly and thus becomes a significant threat to the business.

Besides the reputation and quality issues, Nintendo is not swift in responding to market shift in demand and thus weakens its competitive advantage. For instance, the delays in launching of many consoles in Europe due to problems in manufacturing caused the company failure in fulfilling the market demands.

This increasingly put Nintendo at stake since other strong competitors like Sony and Microsoft were swift in gaining a share in those markets. It enabled them to enjoy the first-mover advantages. First-movers may gain competitive advantages in creating distribution channels, gaining the consumer attention or linking with the specialized suppliers.

Any product of class advertised first tends to impress more strongly in the minds of consumers than the ones that follow. As a result, Nintendo lost a large share of the market and its competitive advantage in the gaming industry; they did not benefit from first mover advantages leaving them behind other competitors in markets outside US and Japan.

Business level strategy

Since Nintendo’s conception, the business strategy was based on developing video game machines. The company focused all its strengths in innovating gaming consoles progressively. As the pioneer in the industry, the company developed a coin-operated video game machine called Famicom in the 80s which surpassed other competing products in terms of technology.

The company focused on developing gaming machines that could support several games unlike the machines offered by competitors. Through licensing, the company was able to expand in Japan and the United States.

As time went by, the company enhanced its innovation to capture the differing needs of consumers. For the United States, the firm redesigned the Fomicom to develop Nintendo Entertainment System that could fit and compete in the market. The company also opened new channels that would be more close to consumers.

Through retailers, the business was able to expand to all major cities of the United States. This expansion and business monotony was also enhanced by the strategy of securing their gaming machines such that other games could not be played in them.

With increasing competition, Nintendo’s business strategy focused more on innovation. The company led competitors in terms of product research and development. It was the first to introduce the 8-bit systems, 16-bit systems and 64-bit systems.

These in particular made the company to succeed year after year and by 1992, the firm had acquired 60% of the market share. The company was already established well in Japan and US thus dropped licensing as the supportive business strategy.

When Sony and other competitors penetrated the market with new products, Nintendo’s market share and profitability dropped significantly. The company responded by changing its business strategy and focusing on developing gaming machines using plug-in cartridges in conjunction with Silicon Graphics. This product which was targeted to children and young teenagers boosted sales until Sony introduced the Playstation.

Nintendo could no longer compete effectively as more competitors such as Microsoft introduced more advanced technology in the market. As a result, the company’s GamaCube was not successful as expected. However, the company reinvented its business strategy and developed Wii. The strategy was to use off-the-shelf components to assemble a much cheaper gaming machine that could be offered at a cheaper price.

The product was also targeted to a much wider audience through innovation that enabled motion sensitivity, wireless control that gave way to interactive games. This new innovation became the core competitive strength and brought back Nintendo to the leading position in the industry.

Nintendo structure and control systems

The strategic organizational structure of Nintendo is such that the decisions stems from the higher levels of management and flows down the ladder. It is a kind of centralized structure in which strategic decisions are closely held by middle and lower level managers.

While the licensing and merging decisions are made solely by the management, product development decisions are a combined effort of both the managers and the developing teams. The managers trigger the product strategy when competition becomes too stiff and sales decline. The design and development ideas are the ingenuity of the research and development teams.

Notably, strategy achievement and decisions incorporation are assessed through two mechanisms. First, the managers consider the operation measures in which they measure customer satisfaction and retention levels. The reason is that the major objective of the strategic decision is to capture a larger market and eventually increase sales. Therefore, customer perspective becomes a major control system.

Secondly, the company is sales-driven. Competitive pressure is determined by the company sales as compared to other competitors. Therefore, innovation and learning are also control systems used in the company where sales growth is the measure. Throughout, the company has referred its success to sales growth of each product launched.

Recommendations

For the company to succeed in the future, it must invest in technological advancement. Technology will enable the company to remain at the elevated competitive edge. Also, the company will continue to use its technological advancement to introduce new products into the market ahead of its competitors.

This capability will provide the company with a stronger competitive advantage. In addition, the company must produce games or items portraying the global outlook to attract as many markets as possible.

The future of Nintendo does not necessarily depend on innovation alone. There are other elements to consider in order for the firm to capture a royal market share and drive sales. Target markets should comprise of consumers with the ability to sustain a high financial status, not just young kids. After all, the success of the business depends on the ability of the customers to make repeated purchases.

As other competitors focus on innovation, Nintendo should differentiate by aiming to market its products in the untapped markets such as the emerging economies. Its financial position and brand name can act as the effective marketing strengths for this expansion.

Given the level of competition in the gaming industry, Nintendo needs to offer unlimited interactive entertainment to all the consumers at average prices to enable it capture dominant market share. To realize this, the company must focus in the production of a product that it feels to have higher competitive advantage over other market rivals such as Sony and Microsoft.

Works Cited

DeWit, Bob and R. Meyer. Strategy: Process, Content, Context. New York, NY: Thomson International Business Press, 2004. Print.

Sterman, John, Jekarl Kahn and Reavis Cate. 2008. Sony’s Battle for Video Game Supremacy. 2008. Web.

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IvyPanda. (2019, August 28). Video Game Industry Analysis. Retrieved from https://ivypanda.com/essays/video-game-industry-analysis/

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IvyPanda. (2019) 'Video Game Industry Analysis'. 28 August.

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