“Case study of the business model – Nintendo”

Elaborated by: Coordinator:

Cătălina Plămădeală Ing. Hana Stojanová Ph.D.
The company introduction – Nintendo

Nintendo is a Japanese company that produces video games and consoles. It was founded in Kyoto
in 1889 by Fusojiro Yamauchi. The headquarters of Nintendo is located in Kyoto in Japan and they
also have branches in America and Germany. The revenue of the company was around 1,2 billion
US dollars in 2018 and they employee approximately 6000 people worldwide. Since 1983 the
Nintendo has sold more than 4.7 billion video games and more than 750 million hardware units
globally, company has created industry icons that have become well-known, household names such
as Mario™, Donkey Kong™, Metroid™, Zelda™ and ‘Pokémon™. Most famous consoles are
Nintendo Entertainment System (NES), Game Boy, Nintendo Wii and Nintendo Switch. (Nintendo,
2019)

History of Nintendo

Initially the main activity of this company was the production of playing cards called Nintendo
Koppai. The business of the company went rather well and in 1929 Yamuchi left the management
of the business to his son Sekiryo, who expanded the production to other card games with excellent
results. In 1953 the company known as "Nintendo Playing Card Co. Ltd.” was the leader in the
playing card sector. When the guide passed to Fusajiro's nephew, Hiroshi Yamauchi, Nintendo
makes an agreement with “The Walt Disney Company” to market cards that include Disney
characters (Nintendo, 2019; BBC, 2019). In 1962 Nintendo was listed at the stock market and with
the new investments gathered, the entrepreneur Hiroshi decided to try new business activities such
as taxi service, a chain of hotels and food markets. However, all of these attempts failed and
Nintendo lost a lot of its capital because the stock price (one share) dropped from 900 yen to 60 yen
(Sheff, 2011).

Among the various failures there was also a success story when Nintendo started to the create toys.
In the 60's, the company was led by the engineer Gunpei Yokoi who started the production of
electronic toys. Toys turned out to be a great novelty for that period and generated considerable
profits for the company. In 1971 Nintendo produced the toy gun for the first console in the history.
In the following years Yokoi decided to hire Shigeru Miyamoto, still one of the most important
pioneers of Nintendo, who launched the famous games as Radar Scope and Donkey Kong (Mariani,
2009).

The toy trade works and in 1980 the company arrived to the United States and opens there a new
factory in New York, the “Nintendo of America”. In 1983, when the first Nintendo console came to
Japan it turned out to be a great success. Two years later the console was also launched in the
United States with the name "Nintendo Entertainment System" (NES) and about a million pieces of
them were sold. (MITSUFUJI, 1993) Nintendo has created more than 500 games and probably the
most famous games are Super Mario Bros and The Legend of Zelda.

In 1989 Yokoi invented the first portable console in the history called the “Game Boy”. In 1990
with the Super Nintendo the company established the basic concepts of controller as we all know
today, consisting of the 4 action buttons and a d-pad. In 1995, the Nintendo 64 was launched but it
wasn’t very successful. However, it introduced important innovations to the gaming sector. During
the 90's Nintendo loses the challenge with new entrants “Sony” and “Microsoft”. Between 2004 and
2006 the company got up with the Sataru Iwata project that launched “Nintendo DS” and “Nintendo
Wii” on the market and more than 101 million units were sold. Nintendo was again able to bring
innovations to the gaming sector and be successful by the new Wii Moto controller, a remote
control capable of detecting movements and allowing the user to interact with the screen. In 2012
Wii-U arrives on the market but that fails to be successful. Thus, Nintendo lost around 335 million
dollars, registering the third consecutive year of losses.

2015 Nintendo entered the mobile market and in 2016 released Pokémon Go, an app that
revolutionized the way people play on smartphones and ended up as being a worldwide
phenomenon. In fact, Pokémon Go increased the gains of Nintendo by 50%. Nintendo Switch
console appeared at 2017, a console which allows you to play at home or on the move. Switch
achieved great success and helped Nintendo to become the undisputed world leader in the creation
and development of interactive entertainment (Ventrella, 2018). Today the phrase that describes
Nintendo is “Innovate without losing sight of the fact that a game must always be a game”.

Nintendo strategy
Nintendo and its marketing approach has always been unique in the genre. While all the other
companies focused on the graphic power and crossovers of their video games, Nintendo has always
presented its video games as if they were toys. Nintendo marketing has always been "look at what
YOU can do with our console" as opposed to other companies that say "See what OUR console
does". We can say that Nintendo has marketed its video games as if it sold children's toys, but in its
products there has always been something unique that makes them Nintendo products. (Rodricks,
2017). Moreover, Nintendo differed from Sony and Microsoft with its collaboration competencies.
Nintendo relied on parts and components created by other companies. This outsourcing strategy
provided Nintendo the opportunity to push their partners to be more innovative, they wanted them
to think in” Nintendo-style”. Nintendo managed to get new ideas and technologies this way from
their partners. Another asset for Nintendo was the fact that they were good at exploring new
partners from the market because of their outsourcing strategy. (Subramanian et al., 2011)

Nintendo has never tried to sell other consoles on the market as a competitor because they believe
they are in a market where only Nintendo exists. "Super
Mario Brothers " creator Shigeru Miyamoto said "We try not to sell competition; we're just worried
about the quality of our video games." The strategy used by Nintendo, the "Nintendo Difference",
seeks to offer fun and engaging experiences for its consumers. Obviously not only the presentation
of the product is important, but also its hardware quality. Nintendo indeed has the
best intellectual property (IP) in the industry and is aware of this. (Rodricks, 2017). Nintendo is also
differed from its competitors like Sony and Microsoft with its collaboration competencies. Nintendo
relied on parts and components created by other companies. This outsourcing strategy provided
Nintendo the opportunity to push their partners to be more innovative, they wanted them to think
in” Nintendo-style”. Nintendo managed to get new ideas and technologies this way from their
partners. Another asset for Nintendo was the fact that they were good at exploring new partners
from the market because of their outsourcing strategy. (Subramanian et al., 2011)

Another strategy adopted by Nintendo is to use consoles and portable games together to strengthen
their IP. For example, if someone owned a Game Boy and played "Super Mario" he could discover
the world of Mario "Super Mario Series Land " only through the "Super Nintendo" console and this
led the consumer to want the console too. Or those who owned the "Super Nintendo" Console could
access certain content only on the Game Boy, so the consumer was invocated to buy the portable
console as well. In this case the strategy adopted has built the brand loyalty and also the excellent
quality of both Nintendo products to market its games and its products with merchandising, TV
shows and advertising and in addition in 2020 Nintendo intends to open a park to Nintendo theme
in Japan, on the occasion of the Olympics and the character "Mario" will be the protagonist of this
event. Thus, Nintendo demonstrates by this how it has now become an International brand, loved in
the world by adults and children. Nintendo is also present today on smartphones with the
famous "Pokémon Go" app which in 2017 had a great success together with the new
"Nintendo Switch " console. Today the company focuses on the use of smartphones as a marketing
platform and is achieving great results in recent years. (Rodricks, 2017)

Blue ocean the Nintendo way

What does it mean, blue ocean strategy? Blue ocean strategy refers to simultaneous interest to being
different and to avoid high costs to create new demand and open new market space. It´s about
creating uncontested markets and capturing them. Thus, the competition will be irrelevant. Blue
ocean strategy bases on to non-existing market boundaries and industry structures which can be
reconstructed. Red ocean refers to existing industries with already known market space. Boundaries
for industries are already defined and accepted. Moreover, the rules for competition in the market
are already known. (Blue Ocean, 2019) Figure 1 demonstrated the differences between these two
strategies.

Figure 1. Differences between red and blue ocean strategies.

Before Nintendo Wii launched, the gaming industry was locked into Red Ocean. Competitors were
focusing on winning the competition, getting more market share, stealing consumers from each
other but also attracting new ones and to outsell the competition. (O’Gorman, 2008) Nintendo
changed their strategy by not offering any upgrade for their previous products but they wanted to
create a new option to enjoy the games in a different way compared to its competitors. Nintendo
Wii was the first home console which created players a new way to play the games and Nintendo
was able to disrupt the market with their new console. (Hollensen, 2013) Nintendo had to do
something, but it had to be radical. Nintendo had too much to catch up because the competition
gained too much attention on the technological area (O’Gorman, 2008). Nintendo sales from 2003
to 2008 are presented in the next Figure (2).
Figure 2. Nintendo sales after the Wii console.

Nintendo was willing to create a so called Blue Ocean by delivering a unique gaming experience for
the players. The company launched Wii in November 2006. (Hollensen, 2013) In the Blue Ocean
strategy Nintendo focused on creating new demands in places where there is hardly no competition
at all instead of trying to fight against Sony and Microsoft who would get the biggest slice of the pie
(O’Gorman, 2008). Nintendo branded their new product in very innovative way for three reasons.
First, the Wii sounds like” we”. This creates an image for the players that the console was created
for everyone. Second, the name Wii is easily remembered. It didn´t matter what language the
customers speak; it was always easy to remember. Third, the Wii has a symbol for unique
controllers and created an image of people gathering to play based on the name and distinctive” ii”.
However, the most genius part of this console was the fact that it completely changed the rules and
type of gaming. Nintendo Wii provided the players an enhanced interaction with the game.
(Hollensen, 2013) Nintendo managed to use in-depth information gathered from customers and to
understand the information by creating a totally new kind of experience what comes to playing
games. Based on previous literature this is typical for Japanese companies. They are willing to
understand their customers and aiming to provide better quality products for them. (Pontiskoski &
Asakawa, 2009).

After the Wii was launched, only a few analysts would think that Nintendo Wii would actually be
the market leader in gaming industry (console market), especially against the new PlayStation 3 and
Xbox. Nintendo Wii was the number one at games console market in the beginning of 2008. But
why Nintendo Wii was such a success? One factor that helped Wii to become the market leader was
that it was created for all the people, across all age groups, countries and demographics. (Hollensen,
2013) Moreover, Nintendo found themselves in the top 10 of the ranking in most innovative
companies. Apple and Google was leading, but Nintendo placed 7th in the ranking. (O’Gorman,
2008)

How Nintendo changed their strategy and why did it work?

It can be clearly said that Nintendo was fighting the wrong battle up to until 2006 because Sony and
Microsoft (PlayStation and Xbox) were beating Nintendo in the technological area. Nintendo was
only focusing on very narrow customer segment with its GameCube, it was only aimed for gamers
between 7-16 years. GameCube had no such attributes than Xbox and PlayStation had, it had no
DVD players or early internet connections. (O’Gorman, 2008) When Sony and Xbox were aiming
for highly advanced graphics engines, Nintendo did the opposite. They aimed to go against the
traditional industry by questioning how people actually want to play (Pontiskoski & Asakawa,
2009) Nintendo wanted to create a new market and introduce the concept of video gaming to new
customers. Nintendo’s new value proposition was unique, a design that was accessible for everyone.
Even though Sony and Microsoft were quite new companies in the gaming industry, their longer
history in different product lines and technological portfolio provided them the opportunity to offer
gamers products that are superior in their primary features such as sound, speed, graphics, memory,
media etc. This is the reason why Nintendo had to drastically change the company`s strategy in the
industry. (Subramanian et al., 2011) Still, the biggest mistake for Nintendo was that it only focused
at the under-18 market and this area only represented 33% of the gamers. Nintendo was cheaper
than the other consoles but it´s clear that the older audience has more buying power what comes to
money. (O’Gorman, 2008)

Nintendo recognized its mistakes and created a new strategy how to approach the market. They
wanted to change the game-play by improving the game play by giving gamers a wireless controller
that opens endless options. Because Nintendo´s customer segment with GameCube was too narrow,
they decided to target whole new dimension of customers. Nintendo wanted to encourage people all
over the world to play video games, capturing young and old people from all genders and cultural
backgrounds. Nintendo also provided a new approach for gaming with Wii Sports package. This
game pack allows hours of fun and entertainment with fitness-oriented environment. Now gamers
were playing with their families and friends instead of playing alone in the dark. (O’Gorman, 2008)
Figure 3 illustrates how the sales of Wii and its games shifted in the next years when the console
was launched.

Figure 3. Sales of the Wii -console.

Indeed, Nintendo was able to create something new into casual gaming. The company was able to
attract other people than just the hardcore gamers, like females and families but also teenagers and
younger men. Nintendo successfully offered unique gaming experience to their customers.
(Pontiskoski & Asakawa, 2009) Moreover, Nintendo created a strategy canvas the depicts the on-
going market space but also the attributes that companies compete on. Nintendo focus providing a
cheaper product for the market with less attributes such as CPU Power, video or DVD options,
online connectivity. Instead they focused on unique game playing and motion controllability for
family oriented people. (Hollensen, 2013) Thus, Nintendo decided to focus at secondary features of
consoles such as controllers, online features, connectivity and backwards compatibility because it
was so far away from Sony and Microsoft at the primary features. Their software-driven mindset
was the key asset for the success with consoles that relied on the secondary features. (Subramanian
et al., 2011) Value curve of Wii vs PS3 and Xbox is presented in the next Figure (4).

Figure 4. Value curve – Wii vs Xbox and PS3

Another great example of Nintendo´s ability to react to current market situation is Pokémon Go.
Based on the article written by Zott & Amit (2017) value drivers for business model consists four
aspects, novelty, complementarities, efficiency and novelty. They use Nintendo as an example of
novelty like Airbnb, Nintendo managed to create totally new business move by creating something
as remarkable as Pokémon Go.

When Pokémon Go was launched, Nintendo that to replace the virtual world with physical which
was extremely hard to execute and the whole business model of Nintendo had to be reinvented.
Nintendo´s own consoles did not exist in this game, they were created to mobile devices with
Google maps and the real world. Everything had to be changed; structures, governance but also
revenue creating systems. Co-developer was changed and distribution systems were changed
because of the application. However, Pokémon Go created opportunity for Nintendo to gather
revenues from virtual goods that players could buy from the application. Moreover, players had to
travel to specific locations after the Pokémon which allows specific sponsored locations to become
a revenue channel for Nintendo. Local business could pay Nintendo to become a sponsored place
where people could find e.g. rare Pokémon. (Zott & Amit, 2017)

Nintendo generation

The term "Nintendo Generation" brings together all the people, born between the eighties and mid-
nineties, who suffered the full war for the supremacy of the consoles between Nintendo and Sega
and the success of Nintendo, from the 2000s onwards, in the period of childhood and adolescence.
It is the first generation to interface with the technological revolution, characterized by a broader
and more extensive communication and interaction. Video games aim to entertain children and
adolescents, helping them to strengthen logic and problem solving skills (e.g. Super Mario Bros).
(Ellmore et al., 1995) It is called "Nintendo Generation" because with the sale of the console
"SNES", Nintendo's supremacy in the playful video market was established, which overshadowed
the success of the console "Dreamcast" by SEGA, which decided to withdraw from the market as a
console developer, and then adopt a neutral policy as a "developer" of video games for third
consoles).(Nichols, 2014) This period is also characterized by the enormous success of the saga
"Pokémon" of "The Pokémon Company", which since 1996 has published up to 30 titles related to
the saga, which helped create the Nintendo Generation. (Shahed, 2001) Nintendo has created this
strong sense of belonging, maintaining the ideal of remaining a console for families, of which
President Satoru Iwata has always made a point of it, not including sexually explicit or violent
content such as its rivals in the market. (Orland, 2015) To carry out retro marketing strategies
efficiently, it is necessary at least to have entered, in the past, into the minds of consumers, so as to
have created a sense of security and a sense of belonging. (Kalman, 2009)

New retro strategy

Taking advantage of the strong nostalgia of these times and the high influx of streaming and illegal
downloading of old games of the nineties, Nintendo has found a way to be able to please all those
who wish to replay titles that have marked an era, proposing a legal way to be able to download the
latter Through access to the Nintendo e-Shop platform, Nintendo has made available the purchase
and download of old video games from its old-generation consoles and from the consoles of SEGA,
in a specific section called "Virtual Console". This "Virtual Console" platform was born first on Wii
in 2006, before appearing on Nintendo 3DS in 2011, Wii U in 2013 and in the future will be
available on Nintendo Switch under another name and will offer free video game titles that made
history, for those who purchase a monthly or annual subscription. With the Virtual Console,
Nintendo has launched into the retro gaming market, exploiting and capitalizing on consumers'
nostalgia, evidenced by the existence of an increasingly present "Nintendo Generation". In fact,
from the report of the Entertainment Software Association (2015), it appears that it is not only
children and adolescents who play video games, but that there is also a large share of players aged
up to thirty.

The virtual console preserves digital copies of "retro games" that would otherwise be impossible to
play on modern consoles (in a legal manner). By offering video games from the past, emulated on
modern consoles, Nintendo is not only aiming to exploit the lever of nostalgia for “bigger”
consumers, but wants to convince the younger consumers to play these titles, taking advantage of
their highly competitive price and taking advantage of the fact that many of the titles featured on
virtual consoles are older versions (prequels) of contemporary titles, such as Super Mario Bros or
The legend of Zelda. (Whalen & Taylor, 2008)

Through this technique, Nintendo is able to feed even more the hunger for nostalgia, proposing a
"taste" of the past, both to older consumers, and to the younger ones who live nostalgia for times
that they have never lived. Moreover, the fact that behind every Amiibo there may be a different
demo, encourages not only the purchase of Amiibo themselves and video games sponsored by
demo, but also the desire to exchange them among friends to find out what new "old" gift there is
will be behind, fueling the brand community (Chou, 2017)

The NES and SNES Mini case

The revival of past titles, has fueled the demand for an increasingly strong authenticity of the
product by consumers who wanted to relive those video games, just like they used to. Nintendo's
retro marketing strategy was to get those fans who wanted an increasingly original product out of
the state of dissatisfaction by offering the new (old) NES and SNES Mini consoles on the market,
just as recommended by the circumscribed model of Watson and Andtellegen: to fill the void
caused by nostalgia you have to change things to return to a stage of inner pleasantness. (Watson,
D., Andtellegen, A., 1985) Although these are products with a limited number of games, NES and
SNES Mini have been widely loved by fans. Recently, Nintendo announced the release of the NES
Mini during the summer of 2018. The revival of two older generation consoles has proven to be
highly effective, so much so that Nintendo itself is now considering reproducing its other Mini
console consoles annually.

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