Case study: Nintendo disruptive strategy implications for

the video game industry

Nintendo Co., Ltd. develops and markets interactive entertainment products. It manufactures
and markets hardware and software for its home video game systems. The company also
produces playing cards, Karuta and other products. The company has a strong brand name,
which gives it an edge over its competitors. However, fluctuation in foreign exchange could
prove to be a threat to the company as it could lead to a decline in its top line growth and put
pressure on its margins.

1. External Analysis

PESTLE Analysis

 Target of political activist concerning

controversy about violence in gamers.
Political factors  Entertainment Software Rating Board
(ESRB) that assigns ratings for
gaming content
 Purchasing behaviour is influenced by
consumer purchasing power.
 Console development cycle follows
Economic factors roughly the general computer industry
cycle
 Consoles are not upgradeable,
consumer has to buy complete new
system.
 Video games are played
predominantly by young males.
 The current social trend on the rise are
non gamers who have no prior
Social factors experience or interest in video games.
 The number of female gamers are also
on the rise. Digital downloads and in-
game purchasing is gradually
becoming the norm.
 Technology has improved processor
speed, visuals and memory capacity
for gaming consoles.
Technological factors  Disruptive innovation in the form of
smart phones and tablets have
significantly altered consumer
lifestyles.
 The legal issues faced by the industry
Legal factors are trademarks, copyrights, licensing,
online ownership and demands of
intellectual property.

Environmental factors
 The video game industry uses a lot of
plastic and metal resources for its
hardware.
 In the current era majority people are
environmentally aware.
 Manufacturing game consoles creates
non-biodegradable waste which is the
byproduct of this industry.

PORTER 5 Forces Model

Forces Pre Wii Post Wii

Entrants Low (High Investment) Moderate (Product

Differentiation)
Substitutes High (Sony, Microsoft) High (Computer Games)
Suppliers High (3rd party making Low (Own games launched
games) by Nintendo but 3rd party
suppliers for the competitors)
Buyers Low (Restricted to a Low (Restricted to a
particular segment of young particular segment of young
people only) people only)
Rivalry High (Sony, Microsoft and High (Sony, Microsoft and
Nintendo) Nintendo)

Based upon above models, following opportunities and threats have been found:

OPPORTUNITIES:

*Increasing demand for online gaming: Demand for online gaming is increasing in line with
the growing number of broadband connections. Nintendo has created a distinctive
environment for online gaming and services.

*Changing, and positive, trends in gaming patterns: The US video games industry is
witnessing a change in demography like the increase in age band of players and number of
female players. Video games, which previously attracted children and teens, have begun to
appeal to adults and women as well.

* Nintendo being a major player in video game industry is introducing products with a
strategy of expanding the gaming audience. The company's is encouraging video games
through its unique hardware and software offerings to customers regardless of their age,
gender, language, cultural background and game experience (expert or novice). The
company's major product Wii features a user friendly remote which enables the elderly people
and women to play.
THREATS:

*Currency exchange fluctuations could affect operating results: Foreign exchange fluctuations
could adversely affect the company's earnings. Nintendo operates its businesses in foreign
currencies but publishes its financial statements and measures its performance in Japanese
currency. The company's exposure to currency fluctuations could have serious affect on its
operating results.

* Short products lifecycle: The interactive entertainment software market is characterized by

short product life cycles and frequent introductions of new products. New products introduced
by Nintendo may not achieve significant market acceptance or achieve sufficient sales to
recover development, manufacturing, and marketing costs. Such rapid changes in the gaming
industry could therefore have an adverse affect on company's revenues.

* Shift in consumer preferences: The company's business is engaged broadly in the

entertainment segment. However, its business could be affected with the changing trends in
other entertainment fields. Although, the company continues to develop innovative and
attractive products in the field of computer entertainment, there is no guarantee that all new
products will be accepted by consumersdue to shift in consumer preferences. The shift in
consumer preferences could have unfavorable impact on the company's operations and results.

2. Internal Analysis

Value Chain Model

All of the functions of a company such as production, marketing, information, systems, HR

etc have a role in lowering the cost structure and increasing the utility of products, thus adding
to internal strengths of the company.

Primary Activities

 Research and Development

o Nintendo first developed a nano held gaming device called the DS i.e double
screening. This innovative design enabled games to play without using
complicated set of buttons or a joystick.
o Nintendo also launched WI Fi connection, an innovative service that allowed
DS systems players to play with other users through a wireless network.
o It also launched Wii, an impressive, well designed, tiny machine that was
controlled with a wand like controller using technology motion detectors.
 Production
o Nintendo outsourced nearly all production of Wii and DS . This arrangement
of having more than one supplier got the parts cheaper leading to cost
reduction.
o This also helped in increasing the production level without investing heavily.
 Marketing and sales
o Nintendo targeted all customers irrespective of age, gender or gaming
experience across different cultures.
 o It targeted novice and non gamers by introducing easy to use and less
complicated controllers and games. This strategy worked wonders in the
shrinking video game industry.
o Nintendo positioned Wii as a machine that puts smiles on surrounding people’s
faces encouraging and influencing every member of a family.
o Nintendo adopted (word of mouth) strategy for promoting DS and recruited a
handful of carefully chosen sub urban housewives to spread the word among
their friends.
o Nintendo also adopted unique advertisement by getting Wii featured in gamers
self made video which was shared through You tube and social networking
sites.

Support Activities

 Material Management
o Nintendo focused on characters rather than special affects thus reaping benefits
of low cost hardware.
 Human Resource
o Nintendo appointed Satoru Iwata as president of the company which reaped
company develop a brand nero vision.
o Iwata saw that the video game industry had largely ignored non gamers and
keeping this in mind developed new simpler games targeting non gamers.
 Information systems
o Nintendo acquired a 3% stake of convenience store operator Lawson in order
to leverage their online operations.

Based upon above model, following strengths and weaknesses have been found:

STRENGHTS:

* Established brand gives a competitive advantage: Brand Nintendo is widely associated with
video games. Nintendo has been operating in the video game console market since 1977 with
color television games, and is considered to be the oldest company in this market. It is one of
the largest console manufacturers in the world, and a leader in the handheld console market.
The company had released four generations of gaming devices over the past two decades,
which include Nintendo Entertainment System; Super Nintendo Entertainment System;
Nintendo 64; GameCube; Nintendo DS, Nintendo DSi and Wii.

* Nintendo's well established brand name gives it a first mover advantage over its competitors
and provides it with a strong bargaining power apart from facilitating easy customer recall.

* Global presence and geographical diversification reduces the business risk : The company
has a relatively diverse geographic presence. Nintendo operates in Japan, the America, and
Europe. The company's manufacturing plants are located in Japan and it operates through
subsidiaries in the US, Canada, the UK, Spain, Germany, France, Italy, and Australia.

* The geographical diversification provides Nintendo with a wide scope of increasing its
revenues by utilizing its global presence and thereby reducing its business risk.
WEAKNESSES:

*Declining margins and cash flows from operations

* Declining operating profit margins have impacted the company's profit making capacity,
which in turn tends to negatively impact investor confidence.

* Dependency on suppliers: Nintendo depends on outside manufactures for supply of key

components or assemble finished products. Many of these suppliers are located in overseas
and any potential production interruptions would have a negative impact on the company's
business. The company may face difficulty in procuring key components or products from
these suppliers in case of any business disagreements. In an event of supplier’s failure to
provide necessary components on a timely basis, the shortage of key components could cause
margin decline due to higher costs. The lack of integration in producing certain key
components or assemble finished products puts the company at a competitive disadvantage as
compared to its peers.

3. SWOT Analysis

OPPORTUNITIES:

 Increasing demand for online gaming

 Changing, and positive, trends in gaming patterns
 Expend demographics
 A large number of current Wii owners
o backwards compatibility of the new game will promote adoption by these users
 Get the infrastructure better
o Home networking
o Entertainment delivery technologies
 Increase video game technology
o Brain wave technology
o holography

THREATS:

 Currency exchange fluctuations could affect operating results

 Short products lifecycle
 Shift in consumer preferences
 Online gaming continues to expand and Nintendo isn’t part of it
 Competition: Some projects are going to cut into wii’s market share.
o Social networking games
o Project Natal (Microsoft): Same technology / Same concept
 Substitutes:
o Popular devices like the iPad are migrating gaming away from consoles and
computers
 The console market is approaching saturation
o 60 million units of the current generation sold (Xbox 360, PS3, Wii)
Actions based on Opportunities & Threats

 Cater to a wider public

 Focus on Online gaming segment
 Incorporate Social Networking games
 Target ‘mobile’ gaming segment
 Integrate Wii with basic activities (Extend offering like Wii Fit)
 Manage shorter product lifecycle efficiency

STRENGHS:

 Established brand gives a competitive advantage

 Global presence and geographical diversification reduces the business risk
 Currently has the lion’s share of the market in consoles
o 48% of the market
o Software market
 Owns popular properties
o Super Mario Bros. and Donkey kong
 History of innovative gaming technology
o First in the market
o Created a new way of gaming
 Built a lot of brand equity over the past 30 years
o Sold more than 300 Million consoles
o Sold 2.2 billion games
o Captures a broader public
 Gaming focus

WEAKNESSES:

 Declining margins and cash flows from operations

 Dependency on suppliers
 Popularity of the Wii seems to have peaked
 Doesn’t appeal to serious gamers
o Considered as a toy
o Not known for sophisticated graphics
o Not technologically good enough compared to competition

 The hierarchical nature of the company may cause it to not respond quickly enough to
the threats
o Too hierarchical
o Limited options in online gaming
o Sony and Microsoft have created an online hub

Capabilities based on Strengths & Weaknesses

 Wii + Internet
  Reduce business risk
› Use global presence and geographical diversification
› Reduce dependency on suppliers
 Balance hardware and software focus
 Appeal to serious gamers
› Diversify range
› Sophisticated graphics

Recommendations

Nintendo’s current strategy

 Spread consoles
o Even if it’s for a low price
o Will earn on games
 Low communication
o Strength of brand
o Half the price of Microsoft
 No subcontractor
o Trust it’s own creativity

Recommendations

 The dependency of suppliers is the most important weaknesses to be resolved. So

Nintendo has US$2,393.3 million of net income, they can buy his biggest supplier to
reduce cost of production of each product and even if the supplier is in overseas if it’s
Nintendo property there is no interruptions problems.

 Innovate in the distribution channel

 Build a strong community: create a system that encourages purchases of game and
accessories.

 The video game product has a weak lifecycle, so Nintendo has to innovate more and
more and to stay on the top of the best video game company they have to put invest in
R&D more often.

 Cater to a wider public

 Focus on Online gaming segment

 Develop partnerships to introduce the next generation