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Nintendo Co. Ltd.: Creating Frameworks for Understanding Nintendo's use of

its resources and how it implemented its strategies

Technical Report · April 2016

DOI: 10.13140/RG.2.1.2869.5449

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 Group 2:
Boccanera Vittorio
Cobio Nicola
Comi Jasmine
Marconi Sara
Venegoni Davide
Zocchi Stefano

NINTENDO Co., Ltd.

Creating Frameworks for understanding Nintendo’s use of its
resources and how it implemented its strategies

Video games are bad for

you? That's what they
said about rock-n-roll
 Group 2:
Boccanera Vittorio
Cobio Nicola
Comi Jasmine
Marconi Sara
Venegoni Davide
Zocchi Stefano

ORGANISATION THEORY
ASSIGNMENT 2
GROUP 2
CONTENTS

REPORT 1:Company Analysis

Part 1: Introducing Nintendo

0 Company Overview

0 The Video-Gaming Market Situation

0 Nintendo’s Organisation

0 The Main Competitors

Part 2: Strategy
0 The evolution of Strategy over time

0 Strategic Resources

Part 3: Structure and Strategy

0 Governance Decisions

0 Nintendo’s Alliances and Flexibility

REPORT 2: Recommendations
0 How Nintendo should have used resources

0 Forseeable changes to remain competitive

01
REPORT 1
COMPANY ANALYSIS

PART 1: INTRODUCING NINTENDO

Company Overview
Nintendo is a multinational Japanese video gaming company in the Entertainment Indus-
try, headquartered in Kyoto, Japan. The company acts as a parent company to three
different continental Headquarters, most specifically in Europe, North America and Oce-
ania. The geographical location of productive capacities is predominantly concentrated in
Japan, yet minor divisions outside Asia, such as the U.S.’s Redmond facilities (as seen in
Appendix 2).

Originally founded in 1889 by Fusajiro Yamauchi as a family-owned Japanese Cards pro-

ducer, it soon expanded its product mix to include Love Hotel chains, food products and
other SBUs, which however failed to flourish and were subsequently sold.

Having gone public in 1962, thanks to its core business reaching a dominant position,
Nintendo started to develop electronic toys in 1970, thanks to their CEO’s engineering
experience, and as a result of the strenuous card market condition. This introduction of
technology in its business frame grew into what we associate Nintendo with today, a
video-gaming company. Their first video game, Donkey Kong, was developed in 1975, and
its worldwide joint success along with the launch of Nintendo’s innovative Famicom con-
sole projected Nintendo’s prominence in the industry to become the Third Generation’s
market leader, with 81 million global sales (Table 1.1). Nintendo’s dominance and profit-
ability were due to their meticulous control of the supply chain, coordinating and manag-
ing the product’s quality and releases, but also to the success of further global successes
such as Super Mario Bros. This was reflected through their focus on their product func-
tionality i.e. preventing their console to run low-quality games, as Atari had previously
done.

The Video-Gaming Market Situation

As a result of the recent birth of the video gaming industry in 1970, the market has been
experiencing fluctuations regarding having a stable market leader, most notably amongst
the industry pillars; Nintendo, Sega, Sony and the more recent Microsoft.

Second Third Fourth Fifth Sixth Seventh

Generation (1978- (1985- (1991- (1995- (1999- (2006-
1985) 1990) 1995) 1998) 2005) 2007)

Leaders Atari Nintendo Nintendo Sony Sony Nintendo

Global 42m 81m 105m 147m 207m 227m

Sales

02
Nintendo’s Organisation
As Nintendo’s Mission Statement suggests, the company heavily focuses on not only their
products, but also its product through their belief that it is their “duty to treat every cus-
tomer with attention, consideration and respect. “ Their focus on teamwork creates a
feeling of trust and community where both the formal and especially informal ties can be
seen as the foundations of the internal business structure.

Nintendo’s organisational structure is to this day designed to preserve the Yamauchi

culture that initially established the company’s philosophy. Inspired by Fusajiro
Yamauchi’s corporate strategy, Hiroshi Yamauchi (his descendant) preserved the flat
organisation, directing employees to focus on the customer, and wiping away any bureau-
cratic rigidity. Consequently his successor Iwata’s entrance in the firm was well aligned in
keeping pace with the fast moving industry. Iwata represented a fresh perspective for Nin-
tendo, and actively changed the key managerial components, which formed the TMT.
Having been a former president of a gaming studio, his expertise was well perceived.
Iwata focused on Nintendo’s inter-departmental communication ability, seeking execu-
tives’ observations as to what worked, and what did not. His most influential change how-
ever, was to change from a flat top-down organisational structure to an increased discus-
sion based community, increasing coordination within the company software/ hardware
divisions.

The Main Competitors

The video-gaming industry is heavily loaded with struggling companies seeking a dominant
position within the market. With each new generation, a new leader would systematically
emerge. The first Generation was clearly dominated by Atari, with its launch of Atari 2600.
However, opportunistic behaviour on behalf of its suppliers gave Nintendo the chance to
seize the market with its Famicom console. Between 1991 and 1995 however, Sega’s launch
of ‘Genesis’ threatened Nintendo’s leadership due to the bigger library of games. Their sub-
sequent issue of the ‘Saturn’ console also created turmoil in Nintendo’s dominance. The
largest obstacle however came with Sony’s ‘PlayStation’. It used cheaper CD-ROMs rather
than cartridges and had a strong distribution network, seizing dominion in the market
sector by 1998. With Sega’s subsequent market exit, Microsoft saw an opportunity to tap the
market in 2002 with its ‘Xbox’, facing clashing competition by Nintendo’s ‘Game Cube’ and
Sony’s PlayStation 2. By the Seventh Generation, the Xbox 360 was the customers’ primary
console for choice, topping PlayStation 3’s new multicore-cell processor, developed in
alliance with IBM and Toshiba. Nintendo’s Wii console, with advanced controller sensitivity
permitted it to be elected as a premier choice for sports games. By 2007-2008, it was at the
frontier of market leadership, maintaining sales high n the two subsequent years. This is
clearly seen through Figures 1.2, 1.3, 1.4 and 1.5)

PART 2: STRATEGY
The evolution of Strategy over time
As previously mentioned, Nintendo has always covered a major role in the interactive enter-
tainment environment, sometimes as a prominent leader and sometimes as a secondary
player. However, even during those moments when it did not take the industry’s guidance
and was somewhat shadowed by the magnitude of its rivals, it has always been at the centre
of public attention. This may be due to the organization strategy, which endowed it with the

03
capacity to overcome the problems of such an innovative and fast-paced industry and let it
become the company that we know today. Although it underwent some modifications in
the course of time, it is interesting to see how the company has maintained some peculiar
strategic features from its birth.

Firstly, Nintendo has always followed a strict no-tolerance policy towards emulation, i.e.
towards the use of unofficial hardware and software systems upon which the company’s
video games could be played. The issue has dramatically increased since the illegal diffu-
sion on the Internet of the so called ROM (Read Only Memory) image files i.e. game data
directly copied from original cartridges and made freely available to the final users without
the company’s approval. This is emphasized on the company website, where extracts such
as ‘emulators created to play illegally copied Nintendo software represents the greatest
threat to date to the intellectual property rights of video game developers. As is the case
with any business or industry, when its products become available for free, the revenue
stream supporting that industry is threatened,’ or at the question ‘Why Nintendo is not
taking any steps towards the legitimization of the aforementioned emulators?’ their reply
is “Emulators developed to play illegally copied Nintendo software promote piracy. That's
like asking why doesn't Nintendo legitimize piracy. It doesn't make any business sense.
It's that simple and not open to debate”. Nintendo has however thus far been the sole
modern console manufacturer that has not sued any emulator manufacturer. Further-
more, the company has been exploiting emulators' capabilities as a means to re-release
older games.

Obviously, such stance is more referable to today’s scenario than to what the situation
used to be even not so many years ago, due to the enormous development in IT proce-
dures, the expansion of Internet accessibility and the increased diffusion of Internet-
enabled devices. In any case, it possesses some similarities with the policy Nintendo
already had in place at the end of the ‘80sthe, such as the insertion of a CIC (Checking
Integrated Circuit, patented in 1985) in all its cartridges. Thanks to such lockout chip, the
Japanese giant has been able to have complete control over its game software and pre-
vent unlicensed cartridges from running. This, together with a highly-selective product
development policy, bolstered the quality of its first video games and explains how Nin-
tendo revitalized an industry which was considered by many observers as good as dead,
since the adoption of rather loosened security measures by previous players, like Atari,
had led to a market saturation with products of dubious and often low standards.

It is not that surprising that Nintendo showed the market for a second time that it was able
to profit from an environment which, once again, was at a stalemate (or at least was head-
ing in that direction). Both Microsoft and Sony, in fact, after establishing their position as
unquestioned market leaders for video game consoles thanks to their Xbox 360 and Play-
Station 3, respectively, were entrenched in a furious struggle to achieve the necessary
technological supremacy to overwhelm the other. They had already excluded Nintendo
from the game, since its GameCube had lost the 128-Bit systems battle of 2001, and were
focusing solely on the continuous amelioration of their devices. Their primary goal can be
well resumed by stating that they were trying to win the rival only by convincing hard-core
gamers of the goodness of their product, i.e. by investing only on the satisfaction of
already-existing customer base’s needs. They utterly ignored those segments composed
by occasional or potentially new gamers, who saw those breath-taking games with
Hollywood-like special effects and plots as too complicated to learn or too time-
consuming to play. This is encouraged in their company’s 2011 statements:

04
“Our basic strategy is the expansion of the gaming population, which is to encourage as many
people as possible, regardless of age, gender or gaming experience, to embrace and enjoy playing
videogames“ or “Has been expanding the diversity of consumers who enjoy videogames by releas-
ing applicable software titles in a range of genres that went beyond the then-current definition of
games.”

Nintendo had the brilliant idea to target exactly those individuals: in other words, instead
of joining Microsoft and Sony in an expensive and resource-greedy technological arms
race, it changed the rules of the game with the introduction of the Wii. This platform
embodied exactly what those customers were looking for, notably opportunities of amuse-
ment at low cost, without unwanted complicacies in usage and having fun with other
people especially family or firends. Furthermore many titles offered the chance to perform
physical exercise in-house combined with on-screen action (exer-gaming) and the console
was backward compatible with GameCube's video games. What the Wii lacked in terms of
graphical performance and power was balanced in simplicity and familiarity of settings.
Nintendo’s global president and chairman, Satoru Iwata, who strove for less complex
games targeting all clients, irrespective of gender, age or prior gaming experience specifi-
cally desired the latter issue.

The strategic focus and targeting commitment have deep ramifications in the products
that the company produces. The development and type of games are toward a “casual
gamer” (as opposed to a “hard-core gamer”). This could be a reason why most of the
games are produced by “veteran developers” of Nintendo in charge of entire teams (just to
mention that the current president of Nintendo, Satoru Iwata, was a former president of
HAL division). The fact that most of the rest of the industry targets the other segment with
a different type of product (mostly FPS and RPG) while Nintendo targets a totally different
consumer (or even new, potential ones), which they almost dominate because of block-
buster brands such as Mario, The Legend of Zelda, Resident Evil and the great library that
has built in all these past years.

The company history however was not always fruitful: as previously mentioned, in fact, the
GameCube, Nintendo's first optical-disc based console, didn’t succeed in effectively com-
peting against Microsoft and Sony. Even though it could rely on a vast library of games, it
entered the market late, when most users had already come up with a choice of prefer-
ence. The high switching cost in this ‘razor-blade’ situation resulted in an opportunity cost
for Nintendo. Moreover, it was defined as family-friendly. Although such a feature would
not apparently harm the image of the console itself, the design of the latter was all but
innovative (while the Wii, on the other hand, was so), suggesting that it had nothing new to
add with respect to the other existing platforms and failing to communicate such an idea
to the end user.

Another potential failure for the company can be found in the ‘90s, i.e. Nintendo 64. It was
developed and sold after Sony’s PlayStation One, which at those times had already con-
quered the hearts and the minds of millions of consumers. In any case, the N64 can be
viewed as its primary antagonist, and for a brief period it gave PlayStation a hard time.
Other gaming consoles, in fact, like Atari Jaguar, 3DO Interactive Multiplayer,
Commodore’s Amiga CD32 and Phillips CD-I, had already been kicked out of the market,
either because of their complexity of use and minute title portfolios or their prohibitive
development and selling costs. Nintendo 64 had also better technical features than its
competing products under many aspects and benefitted from the second-player advan-
tage, so what did go wrong? The answer lies in the supports the two platforms chose:

05
while PlayStation adopted the CD-ROM as game-storage medium, Nintendo was held
back by its typical cartridges that, although more robust, had limited capacity and made
the system challenging to develop for. Last but not least, cartridges were basically more
expensive to produce than CDs, causing in the long run a non-ignorable increase in over-
all manufacturing costs with respect to Sony. A strategy that Nintendo has always tried
to pursue is the tight control over it video games' content, both to safeguard their quality
and the company's public image. In fact, since former president Hiroshi Yamauchi firmly
believed that nudity and sexuality would have dramatically ruined the organization's
reputation, pornographic content is strictly prohibited in

the organization's reputation, pornographic content is strictly prohibited in all the

releases. Moreover, the presence of strong contents in a more general sense like
violence, gore, drugs, racism and discrimination has been contained, if we take as com-
parison what the other companies have been implementing in the last years. The com-
pany has also limited the appearance of political and religious symbols and concepts (a
part from those faiths that are no more or minimally practiced, like the Greek pantheon).
Of course differences do exist among the different markets, in order to comply with
different regulations, norms and personal tastes of the public: for instance, Nintendo of
America (NOA) has been historically more restrictive than its European counterpart
(NOE). A note should be made, though, to emphasize the fact that this last attitude has
been loosened in recent times: the release of the Wii has been in fact accompanied by
several controversial mature titles, like MadWorld and Manhunt 2, which differ from
most of the contents the console has been traditionally associated with.

Such a trend inversion, though not drastic, can be interpreted as a potential solution the
company found to limit the episodes in which its tight content-screening policy would
eventually harm its profitability. A relevant example was Sega Genesis version of the
1992 video game Mortal Kombat. While Nintendo opted to delete most of the bloody
details from its Super NES version of the same title, SEGA maintained them integrally,
although they had to be unlocked by the player through a code. As a consequence, the
latter sold more than twice the quantity of Nintendo, which a year later chose to distrib-
ute the game uncensored, reporting at the same time a content warning on the packag-
ing. Furthermore, the censorship that the Japanese company exerted in the past con-
tributed to the shift of game developers towards other systems, like Square Co. (now
Square Enix) did with its successful Final Fantasy series.

Strategic Resources
SCARCE RESOURCES
A question spontaneously arises: what were or what are the sources of competitive
advantage that Nintendo has or used to have? First and foremost, the innate acumen
that some of the major figures inside the organization seem to have, which were essen-
tial in leading Nintendo to the top market position, eventually declined, mainly caused by
the intervention of fearsome rivals such as Microsoft and Sony. Due to its intrinsic
nature, such an asset is obviously valuable and hardly inimitable. It is also scarce, where
not every person involved in the video game industry possesses the necessary intuition
as many high-level Nintendo employees do. Needless to say, the decennial activity of the
organization has provided it with a vast background of expertise that others, on the other
hand, lack, like for instance Microsoft. Consequently the company had the opportunity to
build over time an exceptional brand image in the eyes of the final consumer.

06
PRODUCT PATENTS

Internal know-how can be considered as the primary basis from where the other
resources branch. In fact, both the broad network of relationships and the invaluable
portfolio of appreciated titles are the result of the company's capability to profit from
an industry, which was considered to be theoretically dead on two occasions. Gaming
characters such as Super Mario, Link and Donkey Kong have influenced the life of
infinite players and continue to do so: they are renown practically worldwide and even
non-players recognize the figure. Due to the extreme software protection, such a
resource is of course scarce and inimitable. It is logical to assume that, whoever will
ever manage to copy them into ones own surrogates, would experience an incredible
hard time, since the market perceives them as absolute standards and, at the same
time, as unique, and would not defy them in favour of some low-quality substitutes.
The value of such a property is reflected by the success, measured in terms of sales
generation, that the video games based on them have always had.

Nintendo has always been able to exploit its dominant position in the handheld system
market. Since the creation in 1989 of the first Game Boy, the best-selling gaming
device of all time, nobody has demonstrated to have the necessary capabilities to over-
throw the Japanese colossus, even though many have tried. Competitors such as
Nokia with its N-Gage in 2003, and others with better outcomes, like Sony and its PSP,
firstly released in Japan in 2004 underwent their own experiences in trying to compete
with the Game Boy. The exclusive right to milk such a reliable cash cow has provided
Nintendo with the appropriate liquidity to invest in the innovation and development of
the other main sector in which the company is involved, which is the console market.
The uniqueness and value of this resource are given by the strength of the position
itself, supported by the width of the supported video games, the practicality of the com-
mands and the great customers' brand loyalty.

07
PART 3: STRUCTURE AND STRATEGY
Governance Decisions
TMT
Under Yamauchi, Nintendo went into toys and the coin-op business
before entering the home consoles market and revitalizing the video
game industry in the US. Yamauchi was known for being a ruthless
and intimidating leader. Yamauchi was also known in the years of NES
and SNES for being able to predict the twists and turns of the video
game market, even though he himself only played a video game once
in his life and hated it. Satoru on the other hand was promoted as the
Fusajiro Yamauchi
Founder (1889-
president of HAL Laboratory (inside team developing and promo-
1929) tions). In NOA however, separate identifiable CEOs are in charge of the
firms’ function and operations, signifying the disparity and vast coor-
dination which is required for the different HQ. (Figure 1.1)
DIVISIONS and GENERAL STRUCTURE
Nintendo's internal research & development operations are divided
into four main divisions: the Nintendo Entertainment Analysis &
Sekiryo Yamauchi Development (or EAD), which is the main software development
The second division, as the name itself suggests, focused on internal-only activ-
president of
Nintendo. (1929-
ity; the Nintendo Software Planning & Development (or SPD), which
1949) primary objective is overseeing second and third-party licensing and
development; the Nintendo Integrated Research & Development (or
IRD), the main hardware development division of Nintendo, which
field of competence on home and handheld video game console
development; and, last but not least, the Nintendo System Develop-
ment (or SDD), which focuses on developing Nintendo Network ser-
vices and Software Development Kits (SDK's) for Nintendo consoles
Hiroshi Yamauchi and other experimental technology. All of these groups work con-
Third president; currently on different projects with functional teams specialized in
brought the
company into the some areas supporting all the others. The group managers are
video game responsible of most of the development teams, at the head of which,
however, there is still a separate individual figure. Each develop-
ment group has certain functions and as it is presumable the gen-
eral managers are mostly responsible for more than one group and
each group has more than one project. In this case the hierarchy is
predominantly vertical, with members reporting to their general
Satoru Iwata manager. The functions performed by this organization are mostly
Fourth and current
global president. research involving hardware technology and development teams
(2002-) creating and enhancing different software, which in turn, accommo-
dates the hardware in development phases. (Figure 1.6)
GOVERNANCE DECISIONS AND ALLIANCES
The past generation of consoles has seen a major shift in the balance of power between
console makers and game publishers. In earlier generations, the first were clearly domi-
nant, enforcing exclusivity and imposing heavy royalty payments on the latter. Consolida-
tion among publishers, caused, among other factors, by rising development costs, and
increased competition from different types of hardware platform had changed all that.
Exclusivity ties had disappeared from most licensing contracts; most leading games
titles were in fact cross-platform. The only popular games exclusive to a single platform
were typically those developed in-house directly by console makers. A point of strength
and, therefore, of competitive advantage for the company and also through a concept of
leverage towards third parties, is the humongous library of games and learning knowl-
edge deriving from the long history of Nintendo in the industry. 08
Being one of the world's biggest video game developing companies, Nintendo has
created multiple successful franchises in the course of time. Because of its history, the
company employs a methodical system of software and hardware development that is
mainly centralized within its offices in Kyoto and Tokyo (Japan), in cooperation with
Redmond (Washington, USA). The company also owns several worldwide subsidiaries
and funds partner affiliates that contribute technology and software for the Nintendo
brand (what the company refers to as second party and third party developers although
they are not one strictly speaking). The fact that there is a big diffidence towards exter-
nal contribution of software may create problems such as the Not-Invented-Here (NIH)
syndrome when dealing with acquired divisions, such as the N.E.R.D. in Europe
(acquired in 2011 after a long partnership) or the Retro Studios in the United States. It
basically depicts the tendency, proper of employees involved in human-capital-
intensive tasks, to reject or, at least, not to accept without problems those ideas or
innovations originated out of their department or division. The latter, in fact, are viewed
as qualitatively inferior or even harmful.

The fact that the department in Redmond was almost made up of transferred design-
ers and engineers from Japan may emphasizes the expansion strategy of Nintendo,
based on the abilities of “veterans” and already established developers. This does not
necessarily mean that the company is entrenched in the old organization, since every
5-6 years there is an injection of new staff both to replace and expand existing teams
and division members.

Nintendo possesses one of the biggest R&D in the console industry, whereas it out-
sources most of the construction of the hardware part (considering the duality of
visible-invisible architecture) to many different manufacturers producing key compo-
nents or assembling the finished products.

Most of the hit games of Nintendo are developed within (first party development) and
most of the most famous brand and series have their own specific team (with support
teams working along the whole horizontal structure) creating this way a modular spe-
cialization in the design. Regarding the third party companies, use of modular compo-
nents in the software development, such as component-based software engineering (a
reuse-based approach to defining, implementing and composing loosely coupled inde-
pendent components into systems) is believed to boost the design process as it
improves the efficiency and the quality of developing custom applications then used in
many different projects.
EXPLORING DIVISIONS
The Nintendo Entertainment Analysis & Development (or EAD) division is the largest
one inside Nintendo. It was preceded by the Creative Department, a team of designers
with an artistic background and responsible of many different tasks. Most of the early
developers currently serve as managers of the EAD studios and are credited in each
game developed by the division, with varying degrees of involvement.

The department was initially created in 1983 when Hiroshi Yamauchi decided to build a
new creative division focused around star designer Shigeru Miyamoto. Hiroshi Ikeda,
former head of Toei Animation (an anime company), served as General Manager with
Shigeru Miyamoto acting as chief producer. The phenomenal overall sales of the sagas
of Super Mario Bros. and The Legend of Zelda fuelled the expansion of the department
with young apprentices and several designers who would go on to become producers .

09
themselves. The department also began creating separate programming team called
EAD Technology. EAD Technology was born out of several R&D2 engineers that were
assisting SRD Co., Ltd with software libraries. EAD Technology became the team that
helped Argonaut Inc. develop the FX technology for the Super NES. This venture
allowed EAD Technology to become more prominent in the 3D era, where they pro-
grammed and co-programmed several of EAD’s big 3D games.

In 1997, Miyamoto explained that twenty to thirty employees were devoted to each EAD
title during the course of its development. He also disclosed the existence of a pro-
gramming group within the company called SRD (formally Nintendo IRD's software
unit), a group of about two hundred individuals with remarkable proficiency in software
development. In the early 2000s the old hierarchy of EAD began welcoming a new class
of managers. Most of the star developers became project managers of their own sub-
groups within the EAD Department. In 2004, Nintendo underwent a corporate restruc-
turing, in which several members of the Nintendo Research & Development 1 and Nin-
tendo Research & Development 2 were reassigned under the EAD banner.

The Nintendo Software Development & Design department is as well an experimental

software development team assembled by Nintendo Co., Ltd. President Satoru Iwata.
The team was originally intended as a System Service Task Force that would develop
all the unique internal system software for the Nintendo DS and Nintendo Wii. It was
responsible for all the additional Wii Channels, the Nintendo DS system software and,
more recently, the Nintendo 3DS system software. Nintendo SDD also went on to
develop several innovative retail games. The philosophy behind that was to think out of
the box and create unique software in a timely manner with smaller development
resources.

Nintendo’s Flexibility and Alliances

Nintendo Integrated Research & Development (or IRD) division handles everything
related to the production of Nintendo's console hardware and associated peripherals.
The department is the oldest development faction of Nintendo and so far has vastly
avoided restructuring plan, thus maintaining under most aspects its original charac-
teristics.

In 2013, Nintendo announced that the Nintendo Research & Engineering Department
(or RED). The former hardware group specialized in all engineering and technological
aspects of Nintendo's handheld development, was absorbed into Nintendo IRD Divi-
sion. Unlike the software departments, the hardware groups generally work together
on most projects. The key difference is that each group generally focuses on a different
aspect of the technology o hand. With smaller peripherals and accessories, it is possi-
ble for development to be exclusive to an individual group. The third-party software
component market thrives because many programmers Common third party software
include macros, bots, software/scripts to be run as add-on for popular developing soft-
ware.

10
REPORT 2
Recommendations

How Nintendo should have used resources

In the period between 1985 and 1990 Nintendo NES owned around 80% of the all US
video game industry valued at the time $ 2.3 billion. That great success was due to
games Nintendo developed In-house. Nintendo’s market dominance based on its
meticulous administration of the relationships between the software and hardware:
Nintendo kept strict control on the supply of games, by managing their quality and
releases and imposing firm rules on developers to obey for the issues of games for the
NES. We have to point out that NES console, as the next generation of Nintendo’s con-
sole, used cartridge instead of CD-ROM, this was due to the fact Nintendo thought it
was a distinctive feature of its company in the consumers' eyes. One of Nintendo stra-
tegic resources were cartridges, as aforementioned they were thought to be a distinc-
tive characteristic of the company, in fact Nintendo was able to defeat the fierce com-
petition with Sega and become the market leader in 1991. The peculiarity of those car-
tridges was a security chip, which enabled the company to manage new releases of
games. Unfortunately, the dominance that Nintendo managed to create was lost with
the introduction of a new revolutionary console by Sony, i.e. PlayStation console. This
new Sony console changed completely the rules of the game, with the introduction of
CD-ROMs instead of cartridges and the outstanding feature to be multifunctional,
something that Nintendo did not take into account .Moreover Sony had been able to
exploit the Know-how acquired thanks to the collaboration with Nintendo itself. What
allowed Sony to conquer the market leadership was the fact that the company entered
the market with a huge array of strategic resources that allowed the company to imple-
ment value-creation strategy through which has built its competitive advantage neces-
sary to achieve a dominant position. Such strategic resources that Sony used to catch
up Nintendo were its brand reputation, a well-functioning global distribution capacity
and a huge amount of contents available, taken from its movie division. On top of this,
Sony, conscious of the importance of the creation of a large installed base for the suc-
cess of a console and how a vast library of videogames was propaedeutic to the forma-
tion of a huge base of customer, so invested a lot to hire top game developers for pro-
ducing new and very interactive videogames, in a way to enlarge its installed base and
create a new segment of the market, that of Hard-core players.

The first response by Nintendo to the gone market dominance in favour of Sony was an
attempt to recapture it through leapfrogging the other company in technology: Nin-
tendo released the 64-bit N-64 console This new console was a success in many coun-
tries, especially in Japan, with more than 30 million pieces sold. A significant problem
was its archaic concept. Nintendo kept on using cartridges instead of introducing CD-
ROMs, in that the company thought their installed base were attracted by the usage of
cartridges, thought to be reliable. The major disadvantage that came up from this stra-
tegic choice was the huge costs incurred, but also the effects it had on developers. The
latter were less and less willing to implement new software for the N-64 console, so
the range of videogames available decreased consequently. It must not forgotten also
that Nintendo covered the second player role in this match, with all the disadvantages
that this issue implies in terms of already-established standards and loss of consum-
ers' attraction.
11
Moreover, it must be stated that to compete in this battle Sony employed larger
amounts of resources in marketing activities, seizing great end-users' interest and
assuring this way wider sources of revenues.

Further reasons why Nintendo lost its competitive advantage in the market with the
N-64 were related to the work of the Top management team. The TMT had not been
able to understand that having a vast range of videogames available was essential, in
order to capture the new niche of players. Developers, in fact, did not show much
enthusiasm towards the company's decision of retaining its cartridges. These latter
had fewer storing capacity than CD-ROMs and therefore could not support complex
and memory-hungry games. Due to such issues, managers’ decisions proved to be
maladaptive for the company as they did not allow a better fit fit with the external envi-
ronment and so didn’t allow the company to increase its congruence and so to improve
its performance. In 2001, Nintendo launched its new console, Game Cube. The com-
pany expected it to be a great success, especially during Christmas time, but it turned
out to be a complete failure with only 20 million copies sold all over the world. The con-
sole was far more powerful than the N-64 one, in fact the processor performances
were double that of the PlayStation console, but far lower than those of the Microsoft
Xbox. Moreover, it was the first Nintendo console not using cartridges, but optical discs
instead. The reasons why the Nintendo Game Cube was not successful were its low
level of innovation compared to the other consoles in the market, it went out too last,
in fact the PlayStation 2 and Xbox went out at least 4/5 months before the release of
Game cube. The latter had not a revolutionary design, it was thought to be a copy of the
others and, in addition, Nintendo wanted to transmit a different message with that
console, i.e. a family gaming platform. Of course, this new concept did not reflect what
the external market wanted at the time. With the growing demand by the hard-core
gamers, Nintendo lost even more its market dominance.

Having Nintendo lots of software developers inside the company, it could have
exploited them in a way to pull in more and more hard-core gamers. By doing that, the
company could have been more congruent with the market and regain the lost market
dominance. The major problem of its defeat was the late arrival in the market; the
company should have used its brand name in order to make more advertising to attract
more costumers. Finally, Nintendo should have created a new console design in a way
to differentiate itself from the other big players’ consoles.

Fortunately for the company, in 2002, a new CEO was appointed: Satoru Iwata. TMT was
led to think about its past successes and failures. The new CEO wanted to improve the
level of communication among departments and increase the coordination between
the hardware and software divisions. Shifting from a top-down system to a bottom-up
helped to increase the level of autonomy and the company decentralisation. The new
CEO thought the internal informal networks were very important for Nintendo, since
the coordination and collaboration among employees were fundamental for the com-
pany itself. In order to increase the firm’s internal informal networks, the CEO
appointed one head for each division who had many tights with the other employees of
its own department.

After Nintendo big failures, the company came out in 2006 with a new revolutionary
console, the Wii, which was consistent with the company’s own philosophy. Nintendo
wanted to create a console that was suitable to everybody around the world, to every
age and gender. The new console was intended to attract more and more “new”

12
gamers, and the company did reach the targets. Nevertheless, on the other hand, the
Wii console was still a step backward with respect to the other companies’ consoles. It
lacked a hard drive, a DVD player and an Ethernet port and it was underpowered in
terms of both speed and graphics, but, at the same time, it was very innovative due to
its remote wand-like controller sensitive to a range of hand movements.

Nintendo used a very simple strategy, which helped to perform brilliantly, the so-called
Blue Ocean strategy. This is a strategy whose aim is not to compete with others, but on
the contrary it is focused on the exploration and analysis of new markets. Therefore,
Nintendo did not look at its installed base, but to new potential video gamers. Since the
company understood that the hard-core gamers were now loyal either to other con-
soles or to home computers specifically designed for videogames, it had to expand in
order to get what and how the external market was changing and to elaborate a deci-
sion that was congruent with the consumers’ needs: so Nintendo individuated that
there were changes in the external environment represented by the fact that now the
demography of the video-game users was evolving and so the potential customer of the
industry were much more and much different from the core customers that the industry
had exclusively served up to that point. By analysing more deeply the Blue Ocean strat-
egy, we can see that it is based on the value innovation; the latter refers to two different
aspects; 1) search of value and 2) search of innovation. Nintendo was trying to get out
from the exploitation phase in which it continued to use its own existing the technology,
and it started to enter into the exploration phase in which the company tried to make
the most out of it. The innovation should be strictly correlated to the usage, the price
and the costs incurred, in a way to increase the product value added. The result has
been a simpler concept of videogame and control system usable by everybody in the
family, it came out with a very innovative product, it exploited the first mover advantage
and it is very competitive in term of costs and selling price.

Nintendo, with the Wii console, was able to regain its market dominance; the great suc-
cess of the Wii is due also to the well-coordinated job done by the TMT. The CEO was
able to understand the internal difficulties of the company and come up with an out-
standing solution.

13
APPENDIX

Report 1
Tables & Exhbitis

Corporate Governance Structure

General Meeting of Shareholders

Election/Dismissal Election/Dismissal

Board of Directors Board of Auditors

Appointment/ Auditing
Dismissal and supervision Coordination Office of Auditors
President
Accounting Auditor
Executive Management Committee
Compliance Hotline

Internal Control
Coordination Auditing
Command/Supervision System Committee

Product Safety Committee Compliance Committee Internal Auditing Department

Product Safety Assurance System Promotion and enhancement

Promoting compliance Internal auditing
maintenance and management of internal control

Each Division (Departments/Offices) Subsidiaries

Figure 1.1 Corporate Governance Structure

Generation Specific Market Share for Dominant Competitors

+!"#

74.1%
69.4% 72.5%
*!"#

)!"#

53.3%
(!"#

42.3%
'!"# 46.7%

29.5%
&!"#

22.4% 28.2%
25.9%
%!"#
11.6%

$!"# 8.2%
10.6%

5.3%
!"#
Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation

Nintendo Sony Microsoft Others (Sega)

Figure 1.2 Competitor Market Share through Generations

14
Figure 1.3 Console Market Share

Console Market Share

Others (Sega) Microsoft Sony Nintendo
100%
5.3%
8.2%

90% 11.6%
25.9%
29.5%
80%

53.3%
70%

60%
69.4%
28.2%
50%
72.5%

40%

30% 74.1%

46.7%
20%
42.3%

10% 22.4%

10.6%
0%
Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation

Figure 1.4 Company ROE

Company ROE
25%

19.90%
20%
16.80% 16.80%

15%
12% 12% 11%
10.40%
9.60%
10%
7% 10.80%
5.70%

5% 3.70%
6.30%
4.80%
3.60% 4.10% 3.90%
0.10% 0.10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-1.40%
-5% -3.10%
-4.20%

-10%
-9.40%

-15%
-15.60%

-20% Nintendo Sony

Figure 1.5 Competitor Market Share Software

Market Share
100.0%

90.0%

80.0%

70.0%

60.0%
Atari
Microsoft
50.0%
Nintendo
Sony
40.0% Sega

30.0%

20.0%

10.0%

0.0%
1979-1985 1986 - 1990 1991 - 1995 1996 - 1998 1999 - 2005 2006 - 2012 15
Figure 1.6 Console Consumer Perception

a. b.
PS1 N64
Games portfolio Games portfolio
dimension dimension

Multitasking Games portfolio Multitasking Games portfolio

capabilities quality capabilities quality
PS1 N64

Appeal to end Technical Appeal to end Technical

users standards users standards

c. d.

PS2 XBOX
Games portfolio Games portfolio
dimension dimension

Multitasking Games portfolio Multitasking Games portfolio

capabilities quality capabilities quality
PS2 XBOX

Appeal to end Technical Appeal to end Technical

users standards users standards

e. f.
GAMECUBE Wii
Games
portfolio Games portfolio
dimension dimension

Games
Multitasking Multitasking Games portfolio
portfolio
capabilities capabilities quality
quality
GAMECUBE Wii

Appeal to end Technical Appeal to end Technical

users standards users standards

16
Figure 1.7 HW vs. SW
Nintendo 64-Software
20000

15000

units
10000
Japan
5000
Americas and others

0
1998 1999 2000 2001 2002 2003 2004
year

Game Cube- Hardware

2500
2000
u
n 1500
i
ts 1000
Japan
500
Americas and others
0
2002 2003 2004 2005 2006 2007 2008 2009
year

Game Cube-Software
20000

15000
units

10000
Japan

5000 Americas and others

0
2002 2003 2004 2005 2006 2007 2008 2009
year

Wii-Hardware

3000
2500
2000
units

1500
Japan
1000
Americas and others
500
0
2007 2008 2009 2010
year

Wii-Software
20000

15000
units

10000
Japan

5000 Americas and others

0
2007 2008
year
2009 2010 17
Nintendo’s Global
Operations 2013

APPENDIX 2
Nintendo Co., Ltd.

Europe
Nintendo of Europe GmbH (Germany) 1,744 employees
656 employees
The Americas
Nintendo France S.A.R.L.
Nintendo of America Inc.
53 employees
Nintendo Ibérica, S.A. (Spain, Portugal)
1,204 employees
Japan Nintendo of Canada Ltd.
89 employees
Nintendo Benelux B.V. (Netherlands, Belgium)
70 employees
43 employees
Nintendo of Europe GmbH, UK Branch

36 employees
Nintendo of Europe GmbH, Italy Branch

39 employees Nintendo Australia Pty. Ltd.

97 employees

THE VIDEO GAME ENVIRONMENT IN 2013

Nowadays, the video game industry is slightly changed. Each big player in the market has
its own segment, for example, Sony and Microsoft compete in the niche of hard-core
gamers, and instead Nintendo has expanded its business towards family games. We can
observe a shift in the composition of the market, now Nintendo does not compete
anymore with Sony and Microsoft, since it has its own market in which the other two com-
Oceania
panies are not powerful. As we analysed in the previous years, Nintendo does leg behind
Sony and Microsoft in terms of innovation and aggressive advertising. In December 2013,
NINTENDO’S GLOBALISATION we had two new releases of consoles, that is Play Station 4 and Xbox one which are
pushed very much by the two companies and they try to offer some games that not only
attract hard-core gamers, but also some video games which you can easily use with your
EUROPE ASIA family alike. The rivalry between the Xbox one and Play Station 4 might be intense, and by
Italy now it has been compared to the competition there was between Sega and Nintendo in
Japan the 80’s and 90’s. It would be interesting to observe the evolution after these new releases
Germany and see how Nintendo is going to evolve with its Wii U. From our point of view, Nintendo
United Kingdom OCEANIA will continue to stick to its path, by enlarging more and more towards the family concept.
France This can be considered the right strategy, because thanks to its lower price and new-born
Germany Australia digitalised children, their market will certainly expand. Fortunately for Nintendo, now, is
Portugal not facing any competition, even though Sony and Microsoft are not intended to move to
other segments of the market, Nintendo should try to reinforce customer loyalty and
Spain NORTH AMERICA create some games that are unique and inimitable.
USA

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