Economy

Stefan Lacher / Florian Roth / David Schumacher

/ Florian Keller

Analysis of the Marketing Environment for

Microsoft Xbox

Seminar paper
 Deakin University
Faculty of Business and Law
MMK277 Marketing Management

Assignment 1 - Report

Analysis of the Marketing Environment for Microsoft Xbox

Group members:

Florian ROTH Stefan LACHER

David SCHUMACHER Florian KELLER

Due date: 5th April 2004

 Contents

1 Introduction...................................................................................................................... 4
2 Environmental Analysis................................................................................................... 4
2.1 External Analysis........................................................................................................ 4
2.2 Internal Analysis ........................................................................................................ 5
3 SWOT Analysis ................................................................................................................ 5
3.1 Strengths..................................................................................................................... 6
3.2 Weaknesses................................................................................................................. 6
3.3 Opportunities.............................................................................................................. 7
3.4 Threats........................................................................................................................ 7
4 Conclusion......................................................................................................................... 7
5 Reference List................................................................................................................... 8
 1 Introduction

What comes first to your mind when you hear the names Sony and Nintendo? Maybe you
associate them as the two huge players on the video console market which dominate this
segment. So what happens if the giant of the software industry, Microsoft, steps into a so far
protected territory and introduces a perfect planned marketing campaign that brings the green
Xbox-logo in everybodys mind? Considering that Microsoft is a very aggressive and well
financially equipped company, therefore one of the most successful in the world, you can
expect a major showdown. But what will happen to the customer who should be the driving
force of the ma rketing effort of those players?

2 Environmental Analysis
Microsoft like any large company is exposed and heavily influenced by the industrial
environment. This environment can be analysed both externally and internally.

2.1 External Analysis

The external analysis is determined by various factors, which affect companies from the
outside and can not directly be influenced by them (Thompson & Strickland 2003, pp.72-
112). The external analysis can be divided into a closer (industry-) and a broader (macro-)
environment (see figure 1).

MACROENVIRONMENT

The Economy
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c Suppliers Substitutes
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COMPANY
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Figure 1: External Environment (Thompson & Strickland 2003, p. 74)

The industry environment includes customers and competitors (compare 5- forces-modell by
Porter) which are specific for the industry sector. The macro-environment includes political,
legal, ecological, technological and social conditions which are mainly the same for all
companies, regardless of their sector (Baker 2000, pp.171-187).

2.2 Internal Analysis

Through the external analysis which is described in section 2.1 of this report it is possible to
identify opportunities and threats. The extent to which these chances and risks can be
managed depends on the companys preparation for challenges on the market: its strengths
and weaknesses. The ultimate cause of those strengths and weaknesses are the special
competences of a company its resources and capabilities, which can be contributed to the
competition (Aaker 1998, pp. 114-128). The value chain by Porter is one model to classify
the different resources and capabilities (see figure 2).

Firm infrastructure

Human Resource Management

M
ar
gin

Technology Development

Procurement
M

Inbound Opera- Out - Marketing Service

arg

logistics tions bound and Sales

in

logistics

Figure 2: Porters value chain (Michael J. Baker 2000, p. 203)

3 SWOT Analysis

A SWOT analysis is advantageous for presenting the database derived from the internal and
external analysis in a systematic and concise manner (Kotabe & Helsen 1998, pp. 236-237).
SWOT analysis is grounded in the basic principle that strategy- making efforts must aim at
producing a good fit between a companys resource capability (as reflected by its balance of
resources strengths and weaknesses) and its external situation (as reflected by industry and
competitive conditions, the companys own market opportunities, and specific external threats
to the company profitability and market standing) (Thompson & Strickland 2003, p. 117).

3.1 Strengths

One of Microsofts main strengths is definitely its financial power. If you compare the
operating income to sales of the year 2003 Sony achieved a ratio of 3.31% (Sony Corp. 2003,
p. 63) which is almost 14 times lower than the Microsoft figure of 45.75% (Microsoft Corp.
2003, ) and Nintendo has at least a ratio of 22,50% (Nintendo Co. Ltd 2003, p. 48).
Such dominance allowed for the $500m investment in marketing the Xbox and
corresponding loss of $100 - $150 per machine sold (Anon 2001).
Although Microsoft was entering a new market they did not have to face the problem that
the company was not known by customers. Microsoft is the second most famous and
valuable brand name in the world (Business week 08/04/2003, pp. 72-78). Therefore it could
use the advantage of being associated with high quality and perfect performance to achieve
the customers trust.
Compared to the already existing game consoles, Xbox is seen to the most powerful machine
due to its technical features which deliver a new gaming experience, a powerful processor,
high end graphic card and the Xbox communicator tool with voice communication (Goodale
2001 / http://news.bbc.co.uk).

3.2 Weaknesses

A major weakness of the Xbox is attributed to the low accumulated number of consoles sold,
which has less economies of scale in comparison to Sony. Up until the end of 2003 Sony had
sold in the US market 22.3m consoles in contrast to 7.8m sales of Microsoft (Gaudiosi 2004,
p. 17).
Good technology is not the only factor for success seemingly customers prefer to buy
consoles which offer a high range of games. In order to take second position after Sony
which has the most popular games on the market, Microsoft will have to improve its range of
new games (www.gamemarketwatch.com).
The announcement of Microsofts development of a new cheaper Xbox, but incompatible
with games of the first edition may prevent customers from purchasing a Xbox as the
competitors offer compatible games and machines (www.gamemarketwatch.com).
3.3 Opportunities

The continuous strong market growth of about 84% in 2002 is one of the key factors for
Microsoft to gain long term profitability (Stegemann 2004, pp.104-106). Due to strong
financial power, Microsoft has the ability to either build up a strategic alliance, like Sony and
AOL Time Warner, or takeover a game producer (backward integration) (Goodale 2001).
Another improvement to Microsofts market share would be a merger with Nintendo. This
step would be advantageous to both companies because they could bundle their resources and
abilities to invent a new corporate system. As a result they could optimise their market power
and minimise the market leadership of Sony (Win- win situation).

3.4 Threats

As an effect of the strong market growth, other global players including IBM and Dell might
decide to enter the market, creating more competition and internal strains. In conjunction with
such threats for existing companies is the very fast and dynamic changing market. Due to this
fact they must be up to date and ahead with the development of new technologies (virtual
reality) and features like online gaming. General problems for global playing companies are
the predictions in the different expectations and consumer behaviours in products and features
in various countries.

4 Conclusion

It must have been a disappointment for success spoilt Microsoft that following their $500m
marketing investment they only managed to catch up with Nintendo and experienc ing being
only number two in the market after Sony. Maybe Microsoft lost this battle but the war is still
going on and so the following generations of game consoles could bring the final decision.
But no matter what the future will bring we already have one winner! As result of the
tremendous competition between those giants, the customers received more features, better
quality and all at a lower price.
Gaining competitive advantage, the opponents fulfilled the basic marketing principle: Look
at the customers needs and satisfy them by giving them what they really want.
5. Reference List

Kotabe M. & Helsen K. 1998, Global Marketing Management, John Wiley & Sons, New
York, pp. 236-237

Baker, M. J. 2000, Marketing Strategy and Management, 3rd edn, Macmillan Press Ltd,
Houndsmills, pp.171-187

Thompson A. A. & Strickland A. J. 2003, Strategic Management: Concept and Cases, 13th
edn, Mc Graw Hill, New York, pp. 72-112

Aaker, D. A. 1998, Strategic Market Management, 5th edn, John Wiley & Sons, New York,
pp. 114-128

Goodale, G. 2001, Games Ready for Console Wars, Christian Science Monitor, vol. 93,
No. 126

Stegemann, N. 2004, Microsoft Xbox making a dent in the market -, Marketing: Creating
and Delivering Value, 4th edition, pp 104 106

No author 2003, The 100 top brands, Business Week, 08/04/2003, 3844, pp. 72-78

Sony Corp. 2003, Annual Report 2002-03, Sony, Tokyo (p. 63)

Microsoft Corp. 2003, Annual Report 2002-03, Microsoft, Redmond (p. 33)

Nintendo Co. Ltd 2003, Annual Report 2002-03, Nintendo, Kyoto (p. 48)

Gaudiosi J. in Video Store, 02/15/2004, Vol. 26, Issue 7, p.17

www.gamemarketwatch.com/news/item.asp?nid=2856 accessed 28 March 2004

www.gamemarketwatch.com/news/item.asp?nid=2635 accessed 28 March 2004

http://news.bbc.co.uk/2/hi/sience/nature/11822834.stm, accessed 28 March 2004