Competitive Strategy in Game Consoles
Jay Conrod, Klimka Szwaykowska; Mar 7, 2007
The interactive entertainment industry has grown remarkably quickly in recent years. Since 2001, the market has been dominated by three major players: Sony, Microsoft, and Nintendo. Of these, Nintendo had the smallest market share, even though the company had historically dominated the market. In 2004, faced with strong competition from larger and wealthier rivals, Nintendo had to come up with an innovative strategy to maintain profitability. At that time, the optimal strategy was differentiation into a neglected segment of the market: casual gamers who wanted a simpler, more intuitive gaming experience.
Nintendo's status in 2004
Unlike its competitors, both of which are powerful players in consumer electronics and business software, Nintendo is primarily a video game company. Nintendo has three main products: consoles, handhelds, and software (games).
Typically, only one console product is sold at a time; production of one generation ceases shortly after the next generation is released. Nintendo's console in 2004 was the GameCube, which had been on the market for three years. The competitors' products (Sony's PlayStation 2 (PS2) and Microsoft's Xbox) were approximately the same age, but had several advantages over the GameCube. Though they cost a little more ($150 for the Xbox and $130 for the PS2, compared to $100 for the GameCube), they had more advanced networking and media-playback features. By March 31, 2004, only 14.6 million GameCubes had been sold worldwide (Nintendo 2004 Annual Report).
Nintendo's position was stronger in the handheld gaming market. The handheld Game Boy Advance (GBA) was introduced at roughly the same time as the GameCube, and sold 51.4 million units by March 2004.
Nintendo develops software for all of its gaming systems. Although software is expensive to develop, it can be sold at a high margin. Nintendo has a wide variety of recognizable franchises such as Mario and Pokémon that keep sales strong. However, most of the software developed by Nintendo was targeted at a younger audience and does not appeal to older gamers.
Porter Forces in the game console market
The customers in this market are almost all individuals or families who purchase consoles from Nintendo through retailers. Customers tend to buy only one console at a time. Since console manufacturers suggest retail prices over entire countries or regions, individual customers have no bargaining power. Software purchased for one console cannot be played on other consoles so switching costs are high; if an individual wants to play a particular game, he or she is usually locked into the console that plays it.
By 2004, there was a tendency for console games to be increasingly complicated. Becoming involved in a game required a significant time investment to learn how to play. Game companies aimed mainly at servicing the "hard-core" demographic which enjoyed this kind of game. Relatively few games were produced for the larger demographic of "casual gamers". Suppliers
Suppliers are companies which make hardware and games for the consoles. Nintendo designs some of the hardware components for its consoles, but manufacturing and assembly are often outsourced, and many components are purchased "off the shelf" from large companies. This keeps costs higher than competitors like Sony and creates a threat of forward integration by parts suppliers, who could potentially manufacture their own consoles. Switching costs are also high, as Nintendo software is made to be compatible with technologies supplied by the outside companies.
The situation is different for software. Nintendo does much of the game development for its consoles, though most of its games are made for a fairly young audience. It also licenses a software development kit (SDK) to outside game developers. In a manner, these firms are Nintendo's customers. Firms which have made...
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