In this report, our group has decided to choose Nintendo to investigate.

We are going to
analyze Nintendos profit-making performance in two different aspects: ethical and
behavioral issue. However, first, we would like to provide some basic background about
Nintendo and what Nintendo is now competing in present years.

Background

Nintendo is a Japanese multinational consumer electronics company whose

headquarter is in Kyoto, Japan. At the establishment in 1889, it is only a small size card
company named Nintendo Koppai. However, currently Nintendo is the biggest video game
company in the world by revenue. Since 1983, Nintendo has focused on the industry of
video games by launching the family home video game console in Japan. It proved to have
a great success and gained reputation across regions in Asia and North America. Almost 30
years later, Nintendo had become Japans third most valuable listed company with a market
value of over US $85 billion. Then, as of December 2013, Nintendo had sold over 670
millions hardware units and 4.2 billion software units respectively ( Wikipedia, 2014).
These statistics all showed that Nintendo has competitive advantage among other
competitors in the video game industry because of their success during these 30 years.

Products

However, this competitive advantage is continuing to slip away by the fact that its
market shares had slipped to rivals. Although there are many products which are quite
innovative, they didnt contribute too much on increasing the market shares of Nintendo.
For example, Wii U was the successor of Wii which was Nintendos best sold video game
console since its release in 2006 with a particularly new feature to support high definition
graphics. However, even with this new feature, severe competition in video game industry
with Sonys Playstation 4 and Microsofts Xbox One has caused the video game market to
question whether Wii U has the long term viability to compete with other competitors.

Another famous product made by Nintendo is 3DS. 3DS is a portable game console
which is capable of projecting stereoscopic 3D effects without the use of 3D glasses.
Unlike Wii U, although it has fierce rivalry with Sonys PS Vita, 3DS was well-accepted by
teenagers and adults with the fact that it has achieved its six consecutive month as the
best-selling video game console in US. To conclude, we can say that the successful of
Nintendo is stemmed on the sales and profits of these two famous products.

Target Customers

Nintendo is currently focusing on adolescents and adults as two main targets. For
example, with the launch of multiplayer function of home game console like Wii U,
adolescents or adults may have the opportunity to play together and talk to each other.

This would be great for people which dont have any time to talk with others during their
working days and Wii U can provide this opportunity for them.

Financial Analysis
(All information is retrieved from http://www.nintendo.co.jp/ir/en/index.html)

(All figures in million yen)

Through 3rd quarter of FY3/2010 FY3/2011 FY3/2012 FY3/2013 FY3/2014

Net sales

1,182,177 807,990 556,166 543,033 499,120

Gross profit

466,602 320,415 131,101 127,251 149,294

Operating income

296,656 158,795 -16,408

-5,857

-1,578

As shown in the line chart, from fiscal year ended 2010 to 2012, operating income
through the third quarter continuously dropped along with the decreasing net sales,
even to a negative number in fiscal year ended 2012. However, from fiscal year ended
2012 to 2014, operating loss slightly decreased each year, while corresponding net
sales continued decreasing. Actually, there is the same trend in operating income/loss
through the first quarter and through the second quarter from fiscal year ended 2010 to
2014, as well as through the full year from fiscal year ended 2010 to 2013, referring to

Nintendos financial highlights. Even though the annual report of the year ended on
March of 2014 has not been released yet, it can almost be reasonably estimated that
operating loss as well as net sales will be less than last year. Here such a trend is
explained based on the operating income formula.
The chart displays the gross profit through the third quarter of fiscal year ended
2014 is higher than that of 2013 even though the net sales is lower. It is mainly because
the sales of hardwares (that have low profit margins has declined) even more than the
sales of softwares (that have relatively high profit margins). As a result, softwares
occupied a relatively larger part of total net sales than before. In fact, such a
phenomenon has been revealed in quarterly reports since fiscal year ended 2012 began.
Furthermore, according to the note extracted from Nintendo Annual Report 2013
below, Nintendo has tried to cut down most of Selling, General and Administrative
Expenses except Research and Development expenses. A explanation of the trend in
operating income/loss, combining this with the above analysis of gross profit, can be

reasonable.

It is also found that inventories had been rising quarter by quarter from 73,290
million yen on 30 June 2012, to 217,778 million yen on 30 September 2013 by 197%.
Nintendo has stated that it outsources the manufacture and assembly of all Nintendo
products to their production partners, which means it does have a degree of flexibility to
adjust production. Therefore, inventories piling up may be due to excessive forecast of
sales units, if the published forecast and the internal one is similar. Nintendo had to
modify this forecast every quarter during fiscal year ended 2013, but it still did not
managed to achieve the expected sales units of several segments when the year was
over. On 31 December 2013, Nintendo had to slash the previous forecast of fiscal year
2014 especially Wii U section (hardware from 38,000,000 to 19,000,000 units,
software from 9,000,000 to 2,800,000 units).
In addition, the following table shows that Nintendos inventory turnover has
fallen sharply. A lower inventory turnover ratio means inefficiency in controlling

inventory levels and may be an indication of over-stocking which may pose a risk of
obsolescence and increased inventory holding costs. If it is hard to recover from the
stagnant business within a few years, Nintendo will need to consider further reducing
the production or even directly dealing with the piled inventories.

COGS

FY3/2012

FY3/2013

Through 3rd quarter of FY3/2014

493,997

495,068

349,825

128,594

178,831

Average inventory 85,589.50

Inventory turnover 5.771700968 3.849853026 1.956176502

Behavior of Nintendo

Four recent behaviors of Nintendo related to reasons of poor profit will be discussed:

Sold the product poorly

In the past, Nintendo did a great job of launching Wii. The reaction of the market was
quite well. In order to increase its market share, Nintendo started to sell their
subsequent new product Will U since 2012. In the past 9 months, Nintendo sold over
2.4million units of Will U (cnBeta, 2014). Although Nintendo made an effort on selling
their new product, the sales target still fell behind of the similar product of Sony or
Microsoft.

Neglected the target customer

Nintendo had analyzed the reason of Wii U failure. The representative of Nintendo,
Satoru Iwata, admitted that the requirement of target customer is neglected, and it is one
of the reasons that Will U fail (cnBeta, 2014). He also claimed that the company didnt
do well to fulfill the requirement of children.

Refused to accept opinions

Nintendo also refused to accept critics opinion. Some past users criticized that the
main reasons of failure are due to the limited variety of game choices, and similarity of
Will U to the version Wii (Peter Suciu,2014). It lowered the intention of customer to
purchase a new Wii U. Moreover, the critics stated that another reason - a lack of
corporate software which can increase the diversity of the Wii U (Hket,2014) .
Although the sale of first versions Wii was quite well, Nintendo didnt continue the
development of subsequent software. Many people bought the product and discovered
that they can only play one game, which is initially installed. Therefore, the critic, Piers
Harding-Rolls, advised that Nintendo is better to develop more software to catch up the
growth of hardware development, and develop its mobile business under this global
trend (Peter Suciu,2014). However, Nintendo didnt admit that these are the main
reasons of its failure, and it chose other approaches.

Sticked to its core strategy

Nintendo refused to change its original development, therefore it chose to stick to its
core strategy instead. On January, the representative of Nintendo declaimed that they
are not interested to develop their games in the mobile business (Peter Suciu,2014).
Actually, the strategy of Nintendo is similar to the strategy of Apple. Nintendo prefers
to use its long-term goal strategy which follows its own product development path and
refuses to follow the market trend to increase its short term profit for development
(Peter Suciu,2014). For example, Nintendo refused to lower their price to increase the
purchasing intention of customer. Moreover, Nintendo wanted to be the sole agency to
earn profit by itself. It did a lot effort to keep the values of the game characters, such as
Mario. To stick to its core strategy, it refused to sell the copyright of Mario to other
companies and cooperate with other companies to launch new product. As a result,
Nintendo has not created a compelling business opportunity for third party to cooperate
the development.

Ethics
Regarding to ethical aspect of Nintendo, it did less satisfactory throughout these
recent years which negatively influences the sales performance. Nintendo, as an
enormous multinational corporation, has a few key aspects that they are supposed to
concern

including

consumers,

employees,

shareholders,

business

partners,

environment and community. In the part of business partners, one of the main focuses
in Nintendos Corporate Social Responsibility is the raw material procurement
inspection. However, the news of Washington Post in 2013 reported that Nintendo
indeed is using conflict minerals for producing their consoles while Nintendo is
claiming that they commit a great effort to prevent this in their CSR statement (Hayley
Tsukayama, 2013). Conflict minerals are minerals mined in conditions of armed
conflict and human rights abuses.

According to 2012 Conflict Mineral Company Rankings by third party inspector

Enough Project, Nintendo is ranked in the bottom of the list with zero score while
Microsoft ranked at 10 scoring 38 and Sony ranked at 17 out of 24 related companies
scoring 27 (Enough Project, 2012). Nintendo is investigated and denounced to have
not undertaken any known efforts to investigate its supply chains and did not include
conflict minerals in its audit policy.

However, with regards to Nintendo 2013 CSR report, they clearly stated their
rejection in using conflict minerals. First, they investigated the source of materials in
their products by requesting their production partners to complete a conflict minerals
questionnaire. Second, they required disclosure of the procedures they used to trace
minerals within their supply chain. Third, they personally visited the facilities of their
production partners to conduct onsite inspections. On the surface, Nintendo seems to
commit a great effort and conduct a detailed procedure on avoidance of using conflict
minerals. However, in reality, the contradictory facts of using conflict minerals might
reveal the dark side of this corporation whitewashing. Whitewashing means to
conceal vice by means of perfunctory investigation or biased presentation of data.

It is true that conducting CSR is conducive for building companys branding

and heightening sales. Nevertheless, it will also destroy the reputation and cause sales
drop once the stakeholders especially the customers discover that the company is
actually whitewashing. A research analysis commissioned by the BrandZ revealed
from 2005 to 2011 that almost 20 percent of sales from companies are directly linked to
corporate reputation (BART K. ,2011). In the case of Nintendo using conflict minerals
as raw materials for their consoles, it has already grasped the public attention. It is also
not difficult to discover their actual contribution to conflict mineral prevention from the
third party inspection like Enough Project and Walk Free, an anti-slavery group. It is

apparent that customers show their disappointment and mistrust on Nintendo for
deceiving. Even though Nintendos ultimate consumers are mainly kids, their parents
with more analytical and independent mindset are still the target buyers who finish the
transaction. Therefore, it is logical to infer the revealment of Nintendos whitewashing
results in sales drop and, hence, poor performance in profit.

Suggestion:
As we have mentioned before, Nintendo admitted that wrong target customer is one of
the reasons Will U fail. Therefore, we suggested that they should target on "family and
kids" this theme of marketing. It means that they need to create some funny and more
interactive games in order to fulfill the requirement of child.

Moreover, another reason of failure is that Nintendo refused to accept critics opinion.
This is not a good behavior of Nintendo, we suggest that they should create customer
opinion zone and network service opinion zone for subscriber and also non subscriber
on their website in order to adjust their policy or improve their products to delight the
customers and fulfill their needs.

Due to a lack of choice of games, customers interest toward Wii U is decreased. In

order to catch customers attention and increase their interest, Nintendo should

diversify their game choices and create more corporated software to provide more
alternatives for customers to choose.

Besides, Nintendo should adjust the forecast of the sale accurately and reduce the
production, so that the over-stocking problem can be avoided.

Furthermore, we do not suggest them to give up their core strategy. Although the risk is
high, the return of long term development is irresistible. Therefore they need to put
efforts and do more promotions on their own product. For instance, they can run a
competition asking fans to make advertisement, and then choose the best one and
reward the fans. As a result, they will have the best advertisement to promote their own
products, so that they will have a better product development and the sales will be
improved and solve the problem of over-stocking.

For the ethical aspect, Nintendo can gain confidence of customers back by taking the
first step to determine the materials in its supply chain, engage with necessary
stakeholders, require its suppliers to use only audited conflict-free materials and
enforce this policy through audits.

Reference:
BART. K. (2011),Reuters, Retrieved on 26.03.2014 from

http://www.reuters.com/article/2011/03/25/idUS297296127920110325
Cnbeta, 2014, Retrieved on 26.03.2014 from
http://www.cnbeta.com/articles/270942.htm
Enough Project, 2012 , Retrieved on 23.03.2014 from
http://www.raisehopeforcongo.org/content/conflict-minerals-company-ranking
s
HKet, 2014 , Retrieved on 23.03.2014 from
http://hk.news.yahoo.com/wii-u%E6%BB%AF%E9%8A%B7-%E4%BB%BB
%E5%A4%A9%E5%A0%82%E7%B4%94%E5%88%A9%E8%B7%8C3%E
6%88%90-225723303.html
Hayley Tsukayama, 2013, The WashingtonPost , Retrieved on 23.03.2014 from
http://www.washingtonpost.com/business/technology/nintendo-faces-questions-o
ver-conflict-mineral-policy/2013/06/19/3f841654-d8e2-11e2-a016-92547bf094cc_s
tory.html
Peter Suciu, 2014, CnnMoney, Retrieved on 23.03.2014 from
http://tech.fortune.cnn.com/2014/02/11/is-it-game-over-for-nintendo/
Wikipedia, 2014, Retrieved on 26.03.2014 from
http://en.wikipedia.org/wiki/Nintendo