The Nature of Nintendos Competitive Forces - Assignment Example

Strategic Management: The Nintendo Company 2. What is the nature of Nintendo’s competitive forces? In the 1990s, Nintendo’s success with its video game console rested on the strategy of correctly identifying the key to the success of complementary products inherent in video game consoles which also relies on developers of software that go with the console. Nintendo realized that consumers of close complement products do not distinguish between the different complements but see the product in its entirety. With this knowledge, Nintendo focused on the bargaining power and development of its complementors under the principle of the Five Forces of Competition. It proceeded to establish a close relationship with the different game developers with it as the dominant partner. Nintendo controlled the operating system; issued licenses to game developers and producers of games software, and; controlled the manufacture and distribution of game cartridges and imposed royalty. The result was that it raked in most of the potential profit of the whole system although consumer value originally lay in the software (Grant 1104-1105). With the recent release of Nintendo’s latest video game console, the Wii, it was able to maintain its contending position in the industry through the use of reverse positioning strategy, taking advantage, in effect of the rush to outdo competitors through the use of newest state-of-the-art micro-components. This strategy took into consideration the disruptive forces brought about by new technology that changed the video game console industry value driver of profitability: as newer, cutting-edge game console microchips were invented, older ones became passé and their prices rapidly dropped. Nintendo took an opposing approach by using instead older chips to minimize production costs. The result allows the company to sell at a much lower price per unit than its main competitors and higher profitability return for each of the Wii sold. On the other hand, its competitors Sony (for PS3) and Microsoft (for Xbox 360) which tried to outdo each other by using state-of-the-art chips both lost money (Afuah 215). The success of the Wii launch is underpinned by the bargaining power of buyers that is naturally inclined to lower-priced products which also offer competitive quality. Q3. How have competitive dynamics evolved in the video games industry? With the launch of the Microsoft Xbox 360 in late 2005, the Nintendo Wii in late 2006 and the Sony PS3 in early 2007, it is evident that a perceptible change in the competitive dynamics of the industry is taking shape. In the past, the winner-take-all characteristic of the video game industry had been shown with the domination of Nintendo in the 8-bit generation and Sony in both the 16-bit and 32-bit generations. The domination of the industry used to be underpinned by the ability to offer the most technological advanced product, the most number of software choices and the most successful launchings. The recent developments however in the industry reveal that the dominant player syndrome is fast vanishing and the possibility of market sharing by two or even three players at the same time is emerging (199). The success of Nintendo’s launch of Wii, at a price way below that of the other contenders with backward compatibility to GameCube, proves that it cannot be crossed out as a serious contender in the video game console industry. On the other hand, Microsoft which launched ahead of both Nintendo and Sony was able to unseat the previous domination of Sony through the introduction of a more versatile, online-friendly and home entertainment-compatible player and a long list of software titles. Yet, the integration of the Blue-ray technology to the Sony PS3 is definitely technology advanced making the PS3 still a very strong contender. At present however, none of the three has clearly dominated the market and shown the winner-takes-all advantage of past dominant players leading many to believe that a change in the competitive forces in the industry is at work which may eventually lead to a shift in the industry domination from hardware manufacturers to software developers like Electronic Arts, Activision and Take Two (199-201) Q4. What are the key factors for competitive success? According to Melissa Schilling of the University of New York, there are three factors that can spell the success or failure in the video game industry: “technological functionality; availability and quality of game titles, and; the ability to manage network externalities” (85). To be able to penetrate the video game console industry, an entrant must be able to top the technological advantage being offered by the current dominant player in the market. This means, for example, offering three times the clock speed of the current fastest system. The incumbent, on the other hand, must play successful defense by continuously strive to offer new innovations including the “cannibalization of its current product platform,” as well as constantly pressure customers, through incentives, to upgrade their systems. A concrete example of a new entrant gaining foothold in the market and establishing dominance over an established player is the Nintendo-Sega case in the 1980s. Nintendo had monopolized the industry with its 8-bit system in most of the 1980s and although it has already the 16-bit system in the works, it was in no hurry to introduce the latter to the market because it felt that the 8-bit system has not yet realized its full potential. Sega came into the market with its 16-bit system and successfully took over the market as customers realized the faster, and higher graphics-processing capability of its more advanced system than the older 8-bit of Nintendo (Schilling 84-85). Game developers naturally swarmed to Sega and Nintendo was forced to loosen its hold on game developers it earlier controlled through licensing restrictions to be able to contract with third-party developers. Thus, by the end of January 1993, Sega offered 320 game titles and Nintendo 130, bolstering the former’s foothold in the market. In addition to deeper choices of game software, the games themselves must have compelling creative content to attract the gamers (Schilling 87-8). Finally, competitive success can also be traced to the ability of a market player to manage network externalities: aggressive discounting; backward compatibility; relationship with distributors; reducing resistance; advertising; reputation, and; credible commitments. Successful companies, for example, employ a strategy called rapid deployment of products through selling below profit costs after the product has been established in the market. Nintendo, Sega, Microsoft and Sony use this strategy often to gain from subsequent sales of games and accompanying licensing royalties. Backward compatibility, on the other hand, allows complementarities usable in an older version also playable in the upgraded version and therefore is additional persuasive reason for a customer to upgrade. Nintendo, however, failed to use this advantage when it introduced its 16-bit and later its 64-bit to the market thinking that it could profit more if customers buy new games for the upgraded version. This lessened incentives for older Nintendo users to buy the new system. As earlier discussed, Nintendo exhibited how establishing closer relationships with complementarities like game developers can help a company corner the market (Schilling 95-99). 5. What strategic capabilities provide a competitive advantage for the company? In the video game industry, control of the creative resources provides the competitive advantage of a player over others in the market. The current breed of dominant players in the market, for example, all have their own in-house game developers tied to them by long-term contracts. Game developers normally sign up with a particular company (like Nintendo) to develop projects based on their own original creative works. This way, the game developers attain job security and the companies have the advantage of obtaining exclusivity of work from very talented developers, precluding them from sharing their talents with other game houses. The present trend however, in the video game industry reveals a shifting paradigm from control of creative resources to access to creative resources as game developers are emboldened, day by day, to strike out on their own and contracting only with game houses on a project basis to take more advantage of economic possibilities that stiff competition in the industry brings (Lampel & Shamsie 279). Works Cited Afuah, Allan. Strategic Innovation: New Game Strategies for Competitive Advantage, edition, illustrated. Taylor & Francis, 2009 Grant, Robert. Contemporary Strategy Analysis. Edition5, illustrated. Wiley-Blackwell, 2005. Grant, R.M. “Rivalry in Video Games” 2008 Cases to Accompany Contemporary Strategy Analysis, 6th edn, Blackwell. Lampel, Joseph & Jamal Shamsie. “Uncertain Globalization: Evolutionary Scenarios for the Future Development of Cultural Industries” The Business of Culture: Strategic Perspectives on Entertainment and Media Organization and management by Joseph Lampel, Jamal Shamsie, Theresa Lant. Routledge, 2006. Schilling, Melissa. “Game Not Over: Competitive Dynamics in the Video Game Industry.” The Business of Culture: Strategic Perspectives on Entertainment and Media Organization and Management by Joseph Lampel, Jamal Shamsie, Theresa Lant. Routledge, 2006. Read More