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Executive Summary

Responding to Wii

The 128-bit console generation is in the battle for supremacy with three major players at the helm- Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wii. Surprisingly, Nintendo Wii is leaping ahead, with its unit sales almost as much as the combined sales of PlayStation 3 and Xbox 360. This puts tremendous pressure on Sony to respond quickly and regain its position as the industry leader. I recommend that Sony continues with its current strategy of targeting traditional gamers with technologically advanced system while tweaking its positioning to capture Wii’s market share in the future.

How attractive does the video game industry look in late 2008?

Based on Porter’s Five Forces analysis (Refer Exhibit A), the video game industry appeared quite

lucrative in 2008. High capital investments in manufacturing a new console and established fan following of existing ones implied low threat of entry from a new player. There were no viable substitutes at the time. While suppliers had some leverage, it was not impactful enough to effect the console companies significantly. There were however two major issues

  • 1. Intense rivalry between the 3 major players. On the positive side, this rivalry was not on price but on product differentiation (technology, features and games), which implied that there was no downward spiral into market failure

  • 2. Low/Negative profit margins (Refer Exhibit 2b: Responding to Wii case). This was specific to higher priced console producers (Sony & Microsoft) implying that either consumers were willing to pay less or that sales of one console heavily cannibalized sales of other consoles

Why did Nintendo delay introducing its 16 bit video game system?

Since its release, Nintendo’s 8-bit NES was enjoying robust sales. Hence, to avoid cannibalizing sales of

8 bit- NES, Nintendo delayed introducing 16-bit video game system even though it had already developed the system.

Did Sega use any elements of Judo Strategy?

Sega used the below two elements of Judo Strategy. (Refer Appendix B)

  • 1. Leverage your opponent’s asset: Nintendo delayed the launch of 16-bit game system to avoid cannibalizing on sales of 8-bit system. Sega leveraged this by launching a faster 16 bit system and captured significant market share. It also leveraged Nintendo’s brand equity and allowed games containing adult content (violence, sex, gore) on Sega Genesis system. This helped Sega to target older, hipper audience and further increase its market share.

  • 2. Follow-through fast- Sega used this window of opportunity (delay in launch of Nintendo’s 16 bit system) and strengthened its position in the console market via continuous attacks. Sega set the price of its game system slightly below Nintendo (Genesis retailed at $190 vs. $200 for Super NES; games at $40-70 vs. Nintendo’s $50-80). Additionally, Sega promoted its console with a cool image among teenagers. This fast attack on multiple fronts ensured that Sega’s Genesis outsold Nintendo (22.8 Million vs. 21.3 Million Nintendo’s Super NES)

How did PlayStation and PlayStation 2 win in their respective generations?

Several factors contributed to success of PlayStation and PlayStation 2. Some of the major one’s are:

  • 1. Premium product with better technology than ever seen before

  • 2. Targeted at mature audience (18-34 year old male) implying more spending power both in the present and in the future

Responding to Wii

  • 3. No restriction on video game content. This gels well with the mature audience

  • 4. Significant number of third party game developers ensured there was no dearth of new games for PlayStation and PlayStation 2

  • 5. Use of CD-ROMs as distribution media allowed for more storage and easy scalability. However, more importantly, it allowed for easy sharing and sometimes copying of games (although illegal- this practice helped continued popularity of the game system)

All the above factors worked really well together as a product differentiation strategy. This set Sony PlayStation apart from the existing players in the market and led to success of PlayStation and PlayStation 2.

Why did Microsoft get into the game?

Microsoft was concerned by the rise in popularity of console games vs. PC games. Additionally, PlayStation 2 multimedia capabilities posed the threat of replacing PC as the platform of choice for homes. Microsoft did not have any product to compete or substitute the consoles and hence, to remain relevant in the ‘battle for the living room’, Microsoft decided to launch its own console.

How was Nintendo able to regain the lead in videogames?

Nintendo used some of the Judo strategy techniques to regain its lead in console war. (Refer Appendix B) Essentially, Nintendo decided not to compete head on with PlayStation or Xbox in their domain (Superior graphics, mature games, multimedia capabilities). Instead, it targeted a completely new market of casual gamers or even first time gamers. Wii was designed to appeal to all demographics, 9- 65 year old, with lot of family fun time thrown in for good measures. Also Wii’s ease of use focused on the fun aspect of video games rather than intense story telling style of more mature games. Combined with the low price point ($250 vs. $299 for basic Xbox vs. $499 for PlayStation 3), Wii became the first choice of people looking to foray into the world of video games. Wii was able to achieve product differentiation by focusing on aspects not satisfied by its competitors’ products and ushered the console industry in the era of casual gamers.

Recommendations

I recommend that Sony should stay with the current strategy of creating a technologically superior console with multimedia capabilities focused on mature and intense games. Sony has been using the product differentiation strategy and PlayStation has a completely different brand equity than Wii. Trying to emulate Wii will dilute this brand equity. Also, this will alienate PlayStations’ most loyal fan base. To respond to Wii, Sony can leverage Wii’s popularity and position PlayStation as an evolutionary step from being a casual gamer to an actual gamer. There are several other reasons for Sony to continue with current strategy. (Refer Appendix C) However, Sony should embrace the technological innovation of motion sensing controllers and incorporate the same in its console. Additionally, Sony can add more multimedia capabilities. This will ensure that PlayStation capitalizes on being the most technologically advanced gaming machine and the choice of multimedia device for the home.

Appendix

Appending A: Porter’s Five Forces Analysis

Responding to Wii

Responding to Wii Threat of New Entrants- Low High capital investments (Hardware, software & technical know-how)
   

Threat of New Entrants- Low

 

High capital investments (Hardware, software & technical know-how)

 

Game Developers relationships

Customer fan following for specific products/games

     

Supplier Power- Medium

 

Rivalry- High

 

Buyer Power- Low

3 major players => intense competition but not on price.

End consumer does not have much say in sp

Loads of competition in

All players have significant resources at their disposal and good fan following

retail space ensures no power concentration for any retailer. Also

Threat of New Entrants- Low High capital investments (Hardware, software & technical know-how) Game Developers relationships
 

Threat of Substitute Products or Services-

Low

A whole generation had grown up with consoles and not likely to give them up

Internet not evolved enough to offer play on demand for high end games

urers (IBM, Toshiba, etc.) Both Microsoft and Sony used IBM to develop their processors

e publishing studios can use some leverage based on popularity of games

CDs, cartridges, DVDs, Blue-Rays) were not always under direct control of console companies

While PC was initially seen as a substitute, by 2008, consoles had established their own separate market and fan

Responding to Wii

Appendix B: Judo Strategies use by Console Companies (Pass and Fail)

Judo Strategy

Sega

Nintendo

Sony

Microsoft

The puppy dog play

     
The puppy dog play

Define the competitive space

Define the competitive space

Follow-through fast

Follow-through fast
Follow-through fast

Grip your Opponent

Avoid Tit for Tat

     
Avoid Tit for Tat

Push when pulled

Practice Ukemi

Leverage your opponents asset

Leverage your opponents asset
Leverage your opponents asset

Leverage your opponent’s partners

Leverage your opponent’s partners

Leverage your opponent’s competitors

Appendix C: Why should Sony follow the current strategy?

S.N

Reasons

o

1

Loyal fan base

2

PlayStation brand equity

3

Spending power of traditional gamers. (Sony is already operating at negative profit margin. It

cannot afford to lower prices and hence, needs consumers with significant disposable income)

4

Growing popularity of video games- video games are fast becoming part of everyday life and Sony can capitalize on this opportunity by integrating additional features in PlayStation

console. This will however imply high cost and technological superiority

5

Demographics- As the Wii generation gets older, Sony can convert them to hard core gamers if

positioned correctly

Responding to Wii