Sonys Business Strategy for the PlayStation Portable - Case Study Example

Business Economics Microeconomics Assignment With the launch of PlayStation Portable (PSP) in September 2005, Sony has reaped enormous gains as it sold more than 185,000 units in UK shops just four days after its release (Sony's PSP breaks sales records 2005). The huge success of PSP is owed to the fact that the product, aside from the usual game features, also plays films, music and surfs the internet through wi-fi technology. In view of the continuous surge in demand, Sony plans to increase its PSP supply to one million units in order to address the prevailing shortage, which would be further aggravated with the upcoming Christmas season (Wray 2005). Truly, Sony's PSP has effectively captured market interest and managed to gain competitive edge over its closest rival in the portable game segment, Nintendo's GameBoy. This paper provides an overview regarding Sony's business strategy for PSP by using fundamental microeconomic concepts. The company's strategy is evaluated relative to monopolistic competition, product differentiation and competitive pricing. Moreover, this paper discusses how critical it is for companies to primarily consider factors of demand such as consumers' preference and production of complement products. Monopolistic Competition Similar to a perfect competition, a market characterized by monopolistic competition features multiple producers and buyers with low barriers to entry or exit. However, this market structure is distinguished as the sellers attempt to differentiate their product relative to those offered by their competitors. In differentiating their products, sellers keep in mind the consumers' defined preferences and taste. (Samuelson and Nordhaus 1993) In this regard, Sony has taken advantage of its technological expertise and released a product, the PSP, which remains unmatched hitherto. As mentioned, Sony differentiated its product by including features that allow playing of music or film and wireless web browsing apart from the games commonly offered by hand-held gaming gadgets. As such, the product has no direct substitute. In light of the uniqueness of PSP, Sony somehow is able to exert a certain degree of influence over its target market (Gans, King, Stonecash and Mankiw 2003). It is also argued that a monopolistically competitive market fosters advertising and creation of brand names (Gans, King, Stonecash and Mankiw 2003). These facets of monopolistic competition played a vital role in Sony's business strategy for PSP. With the reputation it has built as a reliable manufacturer, Sony has banked on its brand equity in marketing the product. Furthermore, Sony's PlayStation product line remains the top product in the console gaming industry. The carry over of the Sony's brand equity coupled with its aggressive advertising and promotional scheme has resulted in the company's apparent success with PSP. Based on the above, Sony has some degree of control over the market. Thus, the company has the ability to set the price of PSP higher without any adverse effects on its income. This point would be further elaborated in the section on Elasticity of Demand and Supply. Factors of Demand Choice of consumers and the utility they derive in using a product have direct influence on demand. Consumer behavior is substantially dependent on the premise that people are inclined to choose goods and services they highly value (Mankiw 2004). Given this factor, Sony has incorporated the features it deems are valuable to gamers. Gamers are usually "techies," who also enjoy other high-tech features of a gadget apart from the games. To be the choice gaming gadget, Sony has added important facets to the PSP that will appeal to its intended market and make them prefer this product to other gadgets. In addition, gamers would opt for the PSP since they derive higher consumer surplus from using this product. This means that the value and utility of PSP to gamers is relatively higher over the price they paid to purchase the product (Varian 2003). With the variety in features, consumers obtain greater satisfaction in using the PSP as compared to the competition such as GameBoy. As evidenced by market's response, addressing consumer preference and taste is the main demand driver for Sony's PSP. Another factor of demand taken into account by Sony is the season or time of product launch. Given that the company's primary target market for the PSP is the younger generation, Sony opted for a pre-Christmas product launch. Since PSP is most likely included in young people's wish list this Christmas, escalation in demand is expected as parents and relatives scramble to purchase the product as Christmas gifts. Elasticity of Demand and Supply Elasticity of demand indicates how demand would be respond to a given change in price (Pindyck and Rubinfeld 2004). The concept of elasticity also provides sellers with a view on how their revenues would be affected by a price change. For instance, should demand for a product proved to be inelastic, sellers are better off increasing the price since such would enable them to maximize profits (Samuelson and Nordhaus 1993). In the case of PSP, it may be inferred that, at this point, demand for the product is relatively inelastic. Due to the observed hype, increase in the price of PSP may not have a negative effect on demand as well as Sony's profits. As such, it is reasonable to assume that Sony would soon increase the price of PSP in order to maximize earnings. On the aspect of supply, Sony is considered to be playing its cards well as it recognizes the current inelasticity of demand for PSP. According to Begg and Ward (2004), if a profit-maximizing company is confronted with inelastic demand for its product or service, it should opt not to increase production capacity. This is because such action would result in the increase in supply that would put downward pressure on price. Therefore, increasing the supply would bring about plummeting revenues. Upon initial product launch, Sony only supplied a limited number of PSP units, way below its sales projection and at a price below the projected equilibrium price. In doing so, the company has created a market shortage condition. As more people continuously demand the product, the company gains competitive edge when the news or press release spread that stocks are running low. (Begg and Ward 2004) The shortage in stocks creates a market perception that the product is a hit, thus, more people would want to have it. With this, gamers may even begin to bid up the price of PSP to enable them to own the much-coveted product. The perceived hype would make consumers reckon that PSP is the "it" product despite Sony's explicit warning regarding the missing or "stuck pixel" problem which is a characteristic of LCD technology (Sony's PSP breaks sales record 2005). In view of the above, we may expect an increase in the price of PSP in the upcoming holidays as Sony takes advantage of forecasted peak sales by Christmas. The company may attribute this to the increase in production capacity required to meet the demand upswing. On the other hand, the company may opt to still impose limits on supply in order to create a supply shortage under the expectation that queuing would further bid up the price of PSP in the market. Complement Goods When it released the PSP in September, Sony also introduced 24 PSP games, which like the gadget itself, were instant hits. It was reported that 9 out of the 24 PSP games launched entered the top 10 official UK games chart about a month following the initial release. In addition, Sony offered various movie titles at its European launch. The company would soon release new films in the UMD format, the film disc specifically for PSP. (Sony's PSP breaks sales record 2005) The simultaneous market launch of PSP and its complement goods, the PSP games and movies, is an optimal strategy by Sony. Given that the purchase of PSP would necessarily entail the purchase of games and films compatible with the device, the company has created synergy. This enables Sony to exponentially increase its earnings as it fully controls the production of PSP, PSP games and UMDs. To date, no other manufacturer has replicated or matched Sony's PSP and complement goods. Diminishing Marginal Utility The law of diminishing marginal utility states that as more and more of any one commodity is consumed, its marginal utility declines (Samuelson and Nordhaus 1993). This means that as one uses a product more and more times, his/her satisfaction increases at a diminishing rate until nil utility is derived. This is currently exhibited by the game consoles segment of the computer games industry. It may be concluded that the marginal utility derived by consumers in using the current generation of game consoles including the PlayStation 2 is diminishing. As such the demand for these products is declining. (Wray 2005) In a way, the current generation of game consoles has reached its maturity phase. For Sony to sustain its market momentum, the company launched the PSP, a part of the new gaming platform. This effectively shifted market interest to the newly launched handheld console. This innovation would ensure continues growth in Sony's profits. Conclusion In view of the above discussion, we can see how the interplay of microeconomic concepts played a crucial role in formulation an effective business strategy. In the case of Sony and PSP, market structure was considered in order for the company to differentiate its product by addressing consumer taste and preferences. Furthermore, it is evident that the company's awareness of elasticity of demand for its product is critical in determining the optimal pricing scheme and level of supply. Other concepts such as synergistic production and marketing of a product and its complement goods as well as sustaining market momentum by launching new products to eclipse existing products at the maturity phase are also vital for a company to consider in maximizing profits. References Begg, D. and Ward, D. (2004). Economics for Business, McGraw-Hill Publishing. Gans, J., King, S., Stonecash, R. and Mankiw, G. (2003). Principles of Economics, Thomson Learning, Melbourne. Mankiw, G. (2004). Principles of Microeconomics, Thomson/South-Western. Pindyck, R. and Rubinfeld, D. (2004). Microeconomics, Prentice Hall. Samuelson, P. and Nordhaus, W. (1993). Economics, McGraw-Hill Publishing. "Sony's PSP breaks sales records", (06 September 2005), (BBC News), Available: http://news.bbc.co.uk/1/hi/technology/4218320.stm (Accessed: 12 November 2005) Varian, H. (2003). Intermediate Microeconomics: A Modern Approach, Norton. Wray, R. "Sony console flies off shelves despite retail malaise", (06 September 2005), (Guardian), Available: http://technology.guardian.co.uk/news/story/0,16559,1579850,00.html (Accessed: 12 November 2005) Read More