Case study: Nintendo disruptive strategy implications for the video game industry

Nintendo Co., Ltd. develops and markets interactive entertainment products. It manufactures and markets hardware and software for its home video game systems. The company also produces playing cards, Karuta and other products. The company has a strong brand name, which gives it an edge over its competitors. However, fluctuation in foreign exchange could prove to be a threat to the company as it could lead to a decline in its top line growth and put pressure on its margins. 1. External Analysis PESTLE Analysis Political factors Economic factors Social factors Target of political activist concerning controversy about violence in gamers. Entertainment Software Rating Board (ESRB) that assigns ratings for gaming content Purchasing behaviour is influenced by consumer purchasing power. Console development cycle follows roughly the general computer industry cycle Consoles are not upgradeable, consumer has to buy complete new system. Video games are played predominantly by young males. The current social trend on the rise are non gamers who have no prior experience or interest in video games. The number of female gamers are also on the rise. Digital downloads and ingame purchasing is gradually becoming the norm. Technology has improved processor speed, visuals and memory capacity for gaming consoles. Disruptive innovation in the form of smart phones and tablets have significantly altered consumer lifestyles. The legal issues faced by the industry are trademarks, copyrights, licensing, online ownership and demands of intellectual property.

Technological factors

Legal factors

 Environmental factors

The video game industry uses a lot of plastic and metal resources for its hardware. In the current era majority people are environmentally aware. Manufacturing game consoles creates non-biodegradable waste which is the byproduct of this industry.

PORTER 5 Forces Model Forces Entrants Substitutes Suppliers Pre Wii Low (High Investment) High (Sony, Microsoft) High (3rd party making games) Low (Restricted to a particular segment of young people only) High (Sony, Microsoft and Nintendo) Post Wii Moderate (Product Differentiation) High (Computer Games) Low (Own games launched by Nintendo but 3rd party suppliers for the competitors) Low (Restricted to a particular segment of young people only) High (Sony, Microsoft and Nintendo)

Buyers

Rivalry

Based upon above models, following opportunities and threats have been found: OPPORTUNITIES: *Increasing demand for online gaming: Demand for online gaming is increasing in line with the growing number of broadband connections. Nintendo has created a distinctive environment for online gaming and services. *Changing, and positive, trends in gaming patterns: The US video games industry is witnessing a change in demography like the increase in age band of players and number of female players. Video games, which previously attracted children and teens, have begun to appeal to adults and women as well. * Nintendo being a major player in video game industry is introducing products with a strategy of expanding the gaming audience. The company's is encouraging video games through its unique hardware and software offerings to customers regardless of their age, gender, language, cultural background and game experience (expert or novice). The company's major product Wii features a user friendly remote which enables the elderly people and women to play.

THREATS: *Currency exchange fluctuations could affect operating results: Foreign exchange fluctuations could adversely affect the company's earnings. Nintendo operates its businesses in foreign currencies but publishes its financial statements and measures its performance in Japanese currency. The company's exposure to currency fluctuations could have serious affect on its operating results. * Short products lifecycle: The interactive entertainment software market is characterized by short product life cycles and frequent introductions of new products. New products introduced by Nintendo may not achieve significant market acceptance or achieve sufficient sales to recover development, manufacturing, and marketing costs. Such rapid changes in the gaming industry could therefore have an adverse affect on company's revenues. * Shift in consumer preferences: The company's business is engaged broadly in the entertainment segment. However, its business could be affected with the changing trends in other entertainment fields. Although, the company continues to develop innovative and attractive products in the field of computer entertainment, there is no guarantee that all new products will be accepted by consumersdue to shift in consumer preferences. The shift in consumer preferences could have unfavorable impact on the company's operations and results.

2. Internal Analysis Value Chain Model All of the functions of a company such as production, marketing, information, systems, HR etc have a role in lowering the cost structure and increasing the utility of products, thus adding to internal strengths of the company. Primary Activities Research and Development o Nintendo first developed a nano held gaming device called the DS i.e double screening. This innovative design enabled games to play without using complicated set of buttons or a joystick. o Nintendo also launched WI Fi connection, an innovative service that allowed DS systems players to play with other users through a wireless network. o It also launched Wii, an impressive, well designed, tiny machine that was controlled with a wand like controller using technology motion detectors. Production o Nintendo outsourced nearly all production of Wii and DS . This arrangement of having more than one supplier got the parts cheaper leading to cost reduction. o This also helped in increasing the production level without investing heavily. Marketing and sales o Nintendo targeted all customers irrespective of age, gender or gaming experience across different cultures.

o It targeted novice and non gamers by introducing easy to use and less complicated controllers and games. This strategy worked wonders in the shrinking video game industry. o Nintendo positioned Wii as a machine that puts smiles on surrounding peoples faces encouraging and influencing every member of a family. o Nintendo adopted (word of mouth) strategy for promoting DS and recruited a handful of carefully chosen sub urban housewives to spread the word among their friends. o Nintendo also adopted unique advertisement by getting Wii featured in gamers self made video which was shared through You tube and social networking sites. Support Activities Material Management o Nintendo focused on characters rather than special affects thus reaping benefits of low cost hardware. Human Resource o Nintendo appointed Satoru Iwata as president of the company which reaped company develop a brand nero vision. o Iwata saw that the video game industry had largely ignored non gamers and keeping this in mind developed new simpler games targeting non gamers. Information systems o Nintendo acquired a 3% stake of convenience store operator Lawson in order to leverage their online operations.

Based upon above model, following strengths and weaknesses have been found: STRENGHTS: * Established brand gives a competitive advantage: Brand Nintendo is widely associated with video games. Nintendo has been operating in the video game console market since 1977 with color television games, and is considered to be the oldest company in this market. It is one of the largest console manufacturers in the world, and a leader in the handheld console market. The company had released four generations of gaming devices over the past two decades, which include Nintendo Entertainment System; Super Nintendo Entertainment System; Nintendo 64; GameCube; Nintendo DS, Nintendo DSi and Wii. * Nintendo's well established brand name gives it a first mover advantage over its competitors and provides it with a strong bargaining power apart from facilitating easy customer recall. * Global presence and geographical diversification reduces the business risk : The company has a relatively diverse geographic presence. Nintendo operates in Japan, the America, and Europe. The company's manufacturing plants are located in Japan and it operates through subsidiaries in the US, Canada, the UK, Spain, Germany, France, Italy, and Australia. * The geographical diversification provides Nintendo with a wide scope of increasing its revenues by utilizing its global presence and thereby reducing its business risk.

WEAKNESSES: *Declining margins and cash flows from operations * Declining operating profit margins have impacted the company's profit making capacity, which in turn tends to negatively impact investor confidence. * Dependency on suppliers: Nintendo depends on outside manufactures for supply of key components or assemble finished products. Many of these suppliers are located in overseas and any potential production interruptions would have a negative impact on the company's business. The company may face difficulty in procuring key components or products from these suppliers in case of any business disagreements. In an event of suppliers failure to provide necessary components on a timely basis, the shortage of key components could cause margin decline due to higher costs. The lack of integration in producing certain key components or assemble finished products puts the company at a competitive disadvantage as compared to its peers.

3. SWOT Analysis OPPORTUNITIES: Increasing demand for online gaming Changing, and positive, trends in gaming patterns Expend demographics A large number of current Wii owners o backwards compatibility of the new game will promote adoption by these users Get the infrastructure better o Home networking o Entertainment delivery technologies Increase video game technology o Brain wave technology o holography

THREATS: Currency exchange fluctuations could affect operating results Short products lifecycle Shift in consumer preferences Online gaming continues to expand and Nintendo isnt part of it Competition: Some projects are going to cut into wiis market share. o Social networking games o Project Natal (Microsoft): Same technology / Same concept Substitutes: o Popular devices like the iPad are migrating gaming away from consoles and computers The console market is approaching saturation o 60 million units of the current generation sold (Xbox 360, PS3, Wii)

Actions based on Opportunities & Threats Cater to a wider public Focus on Online gaming segment Incorporate Social Networking games Target mobile gaming segment Integrate Wii with basic activities (Extend offering like Wii Fit) Manage shorter product lifecycle efficiency

STRENGHS: Established brand gives a competitive advantage Global presence and geographical diversification reduces the business risk Currently has the lions share of the market in consoles o 48% of the market o Software market Owns popular properties o Super Mario Bros. and Donkey kong History of innovative gaming technology o First in the market o Created a new way of gaming Built a lot of brand equity over the past 30 years o Sold more than 300 Million consoles o Sold 2.2 billion games o Captures a broader public Gaming focus

WEAKNESSES: Declining margins and cash flows from operations Dependency on suppliers Popularity of the Wii seems to have peaked Doesnt appeal to serious gamers o Considered as a toy o Not known for sophisticated graphics o Not technologically good enough compared to competition The hierarchical nature of the company may cause it to not respond quickly enough to the threats o Too hierarchical o Limited options in online gaming o Sony and Microsoft have created an online hub

Capabilities based on Strengths & Weaknesses Wii + Internet Reduce business risk Use global presence and geographical diversification

 Reduce dependency on suppliers Balance hardware and software focus Appeal to serious gamers Diversify range Sophisticated graphics Recommendations Nintendos current strategy Spread consoles o Even if its for a low price o Will earn on games Low communication o Strength of brand o Half the price of Microsoft No subcontractor o Trust its own creativity

Recommendations The dependency of suppliers is the most important weaknesses to be resolved. So Nintendo has US$2,393.3 million of net income, they can buy his biggest supplier to reduce cost of production of each product and even if the supplier is in overseas if its Nintendo property there is no interruptions problems. Innovate in the distribution channel Build a strong community: create a system that encourages purchases of game and accessories. The video game product has a weak lifecycle, so Nintendo has to innovate more and more and to stay on the top of the best video game company they have to put invest in R&D more often. Cater to a wider public Focus on Online gaming segment Develop partnerships to introduce the next generation