WORLDWIDE GAME CONSOLE SALES
Source: adapted from VGChartz. Retrieved October 4, 2011, from
NINTENDO RELEASE HISTORY
Source: adapted from unplggd.com. Retrieved October 4, 2011, from http://www.unplggd.com/unplggd/video-game-console-life-cycle-buying-your-next-one-151785
Threat of New Entrants
Since the game console market was dominated by Microsoft, Nintendo and Sony, each of these companies had dramatically developed its brand loyalty to protect its market share over the past decade although the switching cost was relatively low. The three companies had established well their online and retail distributors to ensure sufficient market exposure. Also, manufacturing consoles could be costly without large economies scale. In the game console industry, it would take a long time for new competitors to achieve superior low cost because of the down trend of experience curve. Moreover, patented technological methods about how to produce a game console could be a technology barrier. Most importantly, a company that wanted to enter this market had to develop software to support its game console. According to Wanda Meloni (2010), recent development costs for Play Station 3 and Xbox 360 had soared, with the average costs running $10 million for one platform and $18-$28 million for multiple platforms. For this reason, it would be difficult for a company which did not have a large market share to gain support from developers. Nevertheless, large companies could successfully enter this market by developing software and games independently like the launch of Xbox by Microsoft in 2005. Thus, considering that the three current competitors had a strong hold on this industry, the threat of new entrants was weak.
Threat of Substitution
Although customers had negligible bargaining power in terms of the price of game consoles, they demand a wide range of substitutes including all sorts of entertainment such as movies, PC games, sports etc. Also, there was no likelihood of switching cost. Thus, the threat of substitution was high. Companies should strive to reduce this threat by providing exclusive titles and experiences to drive up the switching cost.
Customers
The game console market was almost exclusively dominated by Microsoft, Sony and Nintendo. Fewer competitors being in this market restricted the buyer power and limited their choices only among these three companies. Also, these companies developed their own software to use with their own console, which caused a relatively high switching cost. For example, Sony’s software could not be used by Xbox or Wii. These customers were significant to game console industry but generally had no bargaining power over the retail price of game consoles because of the large demand and extremely low elasticity. Overall, the buyer power was moderate in the game console industry.
Hardware and Software Suppliers
The game console companies designed the game consoles and some of the core components while the manufacturing and assembling were usually outsourced. Most of the non-core components trended to be similar and there was no advanced manufacturing technology required. Therefore, the switching cost was negligible and competitions among suppliers drove down the cost and their bargaining power as well. However, the suppliers of the core components might still have maintained relatively strong bargaining power as they owned patented technology. Also, some core components of a game console might have been customized, which might have further strengthened supplier power due to the high switching cost. For example, Sony, Toshiba, and IBM collectively designed and manufactured “Cell” processor specifically for Sony’s Play Station 3 (IBM, 2005). Overall, the bargaining power of suppliers was moderate.
Most games were developed by outside game developers. For example, Final Fantasy, one of the most popular games on the Play Station platform, was designed by Square Enix. Companies that had developed successful games in the past may had have some bargaining power as game console companies needed their products to build brand loyalty (Datamonitor, 2008).
Rivalry among Competitors
Generally, the rivalry among competitors was intensely fierce because console game companies had similar target groups. Product diversity was relatively low since consoles tended to have similar functions and game console companies were capable of developing similar complements. The most significant assets for game console companies were the games available for each and brand loyalty. Overall, the rivalry among competitors was strong.
Overall Attractiveness of the Industry
The overall attractiveness of the game console industry was low, largely because of the significant barrier to entry. Although the new entrants was unlikely to occur, but as game consoles emerges as a device that had similar functions with other entertainment devices, leading companies of those industries might move into this industry as Microsoft have done. For example, Apple might release its game console combined with its Apple TV.
NINTENDO
Nintendo has been a major competitor in the video game industry for the past several decades, and has faced the challenge of developing and maintaining competitive advantage over the years. The release of the Wii in 2006 secured Nintendo’s competitive advantage with a market share of 54% (Datamonitor, 2008).
Brands
The prestigious reputation of Nintendo allowed the company to utilize its resources to gain brand loyalty and strengthen its brand awareness in both local and global markets.
Financial Resources
A Nintendo policy required the company to keep at least 67% retained earing for future expansion. This profit retention enabled Nintendo to maintain a strong and liquid financial position to prosper in this competitive industry. Also, Nintendo’s liability was only 24.1% of their total assets compared with 31.7% for Sony and 30.3% for Microsoft (Nintendo, 2010). Its low liability ratio indicated that the company could finance its operations efficiently. However, since Nintendo distributed its products globally with overseas sales accounting for approximately 80% of total sales, Nintendo faced the risk of currency fluctuation and the deflation of Yen. Also, the company faced disadvantages from inconsistency of multilateral taxation systems and diversity of tax law interpretation (Nintendo, 2010).
Physical Resources
Nintendo’s hardware development was mainly centralized within its offices in Kyoto and Tokyo. Also, Nintendo had several of its first-party software developers located in America (Wiki, 2011). According to David Radd (2010), Nintendo first party titles dominated on the Wii. In general, the company had assets of 16 billion yen of the modern machinery and equipment, and 30 billion yen of land ((Datamonitor, 2008). These resources provided great efficiency in production and were considered as its most valuable physical assets in the long term.
Supply Chain
Nintendo suffered from supply issues in its first few years of the launch of Wii. The Wii had been a sellout virtually everywhere in America from 2007 to 2009 (Reisinger, 2009). This could reflect that the company was lacking of supply from manufacturers overseas and was undergoing certain supply chain issues. The reason might be that Nintendo had been reluctant to employ a second or third contract manufacturer to get it out of the supply jam (Edward, 2007). Outsourcing the manufacturing and assembling had the advantage of lowering the cost while it also led to a longer term response for the market demand. One break of the supply chain would bring about the delay of all deliveries and distributions.
Human Resources
Nintendo had talented R&D teams and employees. The group’s employee efficiency, measured as total revenue generated per employee, had been higher compared to its industry peers. Revenue per employee of the group was $206,960 in fiscal year 2007, significantly higher compared to the industry average of $3,684 during the same period. The group’s net income per employee of $8,463.3 was also significantly higher than the industry average of $833.4 in the same period (Datamonitor, 2008). The company’s policy and effective human resource strategy directly contributed to its high employee productivity. Besides financial incentives, Nintendo offered various non-financial incentives such as healthcare, pensions and family insurance for innovative ideas. Also, motivated employees who had great contribution to the development of new products were considered the most valuable resource of the company (Nintendo, 2010).
Technological Assets
Nintendo had entered game console industry for decades ago and had gained valuable experience on both software and hardware. The company had 766 patents and popular intellectual property such as Mario (Nintendo, 2010). These technological assets directly devoted to the Wii’s innovative gaming concepts and greatly increased Nintendo’s market share. Also, the company consistently planned innovative ideas for the expansion of their Wii hardware, which further built up its technological assets. For example, Nintendo filed a number of interesting ideas such as a bicycle which could attach Wiimote to the peddle (CVG.com, 2008).
Superior Quality
Nintendo focused on safety and reliability in manufacturing products with highest quality. To ensure that products were safe for everyone, especially young children, Nintendo had established its own Product Safety Committee, under direct supervision of the Executive Management Committee, to ensure employees' understanding of the Product Safety Principle and the Quality Principle (Nintendo, 2011). According to Tor Thorsen (2009), Wii had a significant lower failure rate of 2.7% compared with 10% for PS3 and 23.7% for Xbox.
Superior Efficiency
Superior efficient manufacturing processes allowed Nintendo to reach large economies of scale and produce the Wii console at a profit. According to FIA.com (2010), Nintendo was the only company that earned a profit on selling its consoles among the three current three dominant competitors.
Analysis of Distinctive Advantages
According to Charles Hill (2010), valuable resources were more likely to lead to a sustainable competitive advantage if they were rare and difficult for rivals to imitate. Considering the company’s resources and capabilities, Nintendo had distinctive competencies in financial resources, brands, human resources and technology assets due to high barriers to imitate these valuable resources. These distinctive competencies helped Nintendo shape its functional strategies. Healthy financial statue encouraged Nintendo’s profit retention policy, allowing the company to keep sufficient liquidity to support R&D and generate capital internally to maintain a liability ratio lower than other competitors. Its talented R&D team enabled the company to predict gaming trends, develop innovative technology and eventually bring about Wii that expanded the range of potential gamers to almost everyone. The low manufacturing costs gave Nintendo the capability of implementing an aggressive market strategy by consistently charging a relatively low price for its consoles.
These competitive strategies, coupled with Nintendo’s superior quality, efficiency and innovation, led to the company’s sustainable competitive advantage, allowing the company to earn an above average profit. Nintendo’s average return on investment for the five year period 2003-2007 was 9.8%, significantly higher than the industry average of 4.2% (Datamonitor, 2008).
OUTLOOK
Having been on the market for more than three years now, the Nintendo Wii had become an old favorite. The company’s rivals Sony and Microsoft had both released motion-control systems, negating some of the innovation advantage that Nintendo has enjoyed (Workman, 2010). In order to maintain competitive advantage, Nintendo should continue investigating the future of video gaming and innovative gaming experiences. In the next 5 years, innovation of gaming concepts will be an important factor for companies to achieve superior profitability.
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