Tough Economic Environment of Nintendo Company Limited - Assignment Example

Tough Economic Environment of Nintendo Company Limited Executive Summary: Nintendo Company Limited is currently engulfed in a tough economic environment. This economic environment is attributed to the World Recession of 2007. Although, the company is having a strong financial position in this situation, but the company’s revenues are declining at an exponential rate and its operating margins are shrinking continuously. Most importantly, this trend is arising out of the newly discovered customer segment of the company. Since, the company’s products are not compatible with the needs of savvy gamers; therefore, it is of utmost importance for the company to somehow stimulate demand in its new market segment. After conducting an analysis of the situation surrounding the company, it is firmly recommended that the company utilizes its strong liquidity position to further penetrate into this market segment (by means of an extended marketing program) and also search for additional avenues where it can sell its products (offer its products in the Asian markets). Introduction: The company came into being in 1889 in the city of Kyoto, Japan. It was initially a playing cards manufacturer, but in 1963 it evolved into the Nintendo Company Limited when it decided to enter other gaming segments. In 1970’s, the company introduced electronic toys, but the first major land mark for the company came in the year of 1981, when it introduced the coin-operated video games. This product transformed the company into a household thing. With the passage of time, the company introduced the family home video gaming system, handheld gaming devices and many other products. Since its inception the company has been inspirational in attracting casual gamers. The products and especially the video games of the company attract people who have never played video games. The company’s focus has always been on enhancing user- interface and by means of its latest controller it hopes to do exactly that. Recently, the company has decided to serve a marketplace that is more suited to its product offerings. However, this endeavor of the company has faced a serious setback because of the world recession (Marino and Sarrett, 369-381). Strategic Issue: Nintendo Company Limited is currently operating in a very hostile industry. This industry is characterized by intense technological innovation and unpredictable consumer attitude and behavior. The industry has been saturated by large number of competitors, who are competing to increase their current market share. All the companies of this industry are fixated with satisfying the needs of a specific customer segment. None of the companies are thinking about adding new customers into their existing customer base, except Nintendo. These companies are investing more and more resources in technological innovation and product features, so that they could come up with a competitive advantage that would allow them to triumph the competitive environment. Recently, it seems as if companies in this industry have finally reached the optimal point of innovation. As a result of this, the innovative product features that have been produced by the industry, have now become a generic feature of the product offering. This in turn is leading to a form of competition where pricing of the company’s product plays a major role. Companies in this industry are now engaging in a price war, that has lead to the shrinkage of profit margins. Complicating this situation is the industry’s operating environment. This environment is characterized by recession, which is leading to a decline in demand for the industry’s product offerings. In this situation, it has become imperative upon companies to look for new customer segments and minimize their research and development expenditure. None of the companies of this industry have realized this so far, except for Nintendo, which has shifted its focus from this saturated customer segment to a new customer segment. It is targeting this new customer segment with a totally new out of the box product. In this way, the company is following the strategy of differentiation. The company is following this strategy in a very unprecedented way. Current gaming industry comprises of fanatic gamers, who want high quality and complex gaming experience. These gamers want technological innovations in their gaming devices, which are of extremely high quality. On the contrary, Nintendo has come up with a product that is totally opposite this requirement. Moreover, the company with its new product is not aiming to target this customer segment. Instead, it is targeting a segment that can be characterized as totally oblivion to video gaming. This customer segment consists of individuals from old age and mid age household ladies. The fundamental similarity between both these customer groups is that both are averse to video gaming. The reason behind this attitude of this customer segment is that current video games are extremely complex and tedious for these new comers. Thus in order to bring this customer segment into the video game playing market, Nintendo has introduced a gaming console that consists of less tedious, less complex games, which are less intimidating for these new comers. This has allowed Nintendo to add new customers in to its customer base rather than fighting over the share of an over served market. External Environment: The industry is characterized as one which is under a constant state of flux. Rate of innovation in the industry is very high and competition between rivals is cut throat. Moreover, the industry is now engulfed in an economic crisis, which has turned up due to the world recession of 2007. Initially at the start the industry looked immune to recessionary impacts, but in late 2009 the industry started to feel the pinch. The industry was confronted by demand withdrawal and declining profit margins. Moreover, social welfare organizations are also raising concerns regarding the content of these video games and the negative impact these games are having on young gamers. Interest groups are lobbying for the imposition of regulations on this industry. Parents are being advised to restrict the gaming hours of their child. Experts are also raising concerns about the negative impact these games have on the health of the gamer, due to reduced physical activity. Expert gamers are always demanding more features in their consoles and games. This demand is making it imperative for industry participants to keep raising the bar of innovation. The current growth rate as of 2012 of the gaming industry is 10.3 percent, this figure reflects the fact that the industry is in its “Innovation phase” of industry lifecycle. This is also consistent from the fact that recessionary pressures have made industry participants to move from product innovation to process innovation. Recession is the most troubling of all changes in this industry. All factors are finding their roots in recession. The recession has lead consumers to curtail their nonessential consumer goods items purchasing. As a result of this families are not spending on their child’s gaming habit. Moreover, families are becoming more sensitive to the negative impact of games on their child’s mental development. This also is leading families to deny their child of console games. Companies in order to stimulate demand are lowering their prices, which in turn is leading to a declining profit margin for these companies. In order for these companies to sustain their operations, they need to seek process innovation that will reduce their production cost. To augment this, a company needs to discover new customer segments so that these customer segments can be added to the company’s current customer base. Industry Analysis: There are two driving forces of this industry. These driving forces are technology and social trends. Technology has the most profound impact on this industry, the changes that are resulting in this field are occurring at an unprecedented scale. These innovations are making companies to continuously develop new products which beat the marketplace with superior technology. The industry is engulfed in a technology fever and as a result every company in the industry is trying to triumph the competitive landscape with superior technology. However, the problem in this entire scenario is that the customer segment that is asking for such technology intensive products is very small and is very disloyal. Serving this customer segment is very costly for the companies. However, majority of the companies in this industry are bringing out products which are aimed at this customer segment. Thus this customer segment is heavily saturated by large number companies. Companies are fighting over an increased share of this customer market; as a result of this profit margins of the companies are declining. Recessionary environment has further placed more pressure on these profit margins and thus companies are finding it hard to sustain their operations in this market segment. The other force that is driving this industry is the social trends. This force professes itself in the form of inclination towards certain mode of entertainment. Sometimes societal trends encourage outdoor activities while at other times this trend encourages indoor activities. Current societal trends are encouraging indoor activities, because consumers are restricted by excess amount of disposable income. Moreover, recession is playing a major role in shaping this trend. Therefore, companies need to come up with products which allow indoor family entertainment. Gaming consoles are one such product, which allow indoor family entertainment. These consoles also need to make sure that they are close to reality. This means that the games played by the family should give the family a feeling of real life situation. These consoles need to have a user-friendly interface, so that the families do not feel intimidated by the complexity of these games. This social trend offers companies of this industry an opportunity to serve a market that can be easily satisfied. This market does not require exuberant product features and designs nor do they seek costly consoles. So the companies, who decide to serve this market segment, can easily bring down their manufacturing cost. The picture given off by the Porter’s model for this industry is very discouraging for any new entrant. The analysis done by means of this tool is very clear in concluding that this industry is very competitive. The dimensions which make up an industry are looking extremely volatile and hard to predict. Moreover, the dynamics of this industry are such that both new and existing companies have to bring something new in order to sustain in this industry. The video gaming industry can be characterized as one that has intense competition between existing companies. There are few quality suppliers in this industry and therefore these suppliers take full advantage of their superior quality when it comes to negotiating the price of their product offering. To add to this supplier power is the high power of the customers. Since recession is restricting the spending of these consumers, therefore these consumers are asking for additional value from the companies, in order for these companies to make these consumers spend. Moreover, this is augmented by the presence of multiple companies offering the same product to the same customer. Thus consumers have a high bargaining power in this industry. When it comes to the threat of substitute, this industry is facing one such threat but this threat has got some time to profess itself. Thus, it can be concluded that the treat of substitute is moderate for this industry. By combining all these dimensions, it can be concluded that this industry presents a terrifying picture for any new entrant. This makes this dimension fall on the lower end of the spectrum. Ratio Analysis: From the above ratio analysis, it can be concluded that the company is possessing strong liquidity position. This liquidity position has continued to improve over the period of time for the company. Maintaining of such a good liquidity position, has allowed the company to fight off the recessionary phase of the economy. The fundamental reason behind this good liquidity position is that the company has kept its liabilities figure down. Since the company has not taken any debt or is not using any kind of debt to finance its operations, therefore, the calculation of leverage ratios is not possible. This has been another reason behind the company’s strong liquidity position. And most importantly, this ability of the company to avoid debt financing has allowed it to position itself strongly at the time of recession, whereas, majority of the companies in this industry are finding themselves in a very tight spot just because they used debt financing to finance their operations. The figures of the activity ratios are a clear depiction of the impact of recession on the company’s operations. A decline in the ratio of inventory turnover and fixed asset turnover is a clear indication that recessionary effects are being felt by the company. As the case also tells us that the impact of recession professed itself on the company’s operations completely during 2009. This fact is illustrated by the company’s performance on these ratios. However, the ratio of total asset turnover has increased; but unfortunately explaining this increase is beyond the scope of this case. Although the profitability ratios are not giving off any major deviations, but these ratios are also depicting a downwards trend. Operating profit margins are declining, which is a reflection of the impact of recession on company’s profit margins. This margin seems to be eroding due to the impact of inflation and high cost of operation. Last but not the least the growth ratio, this ratio is a clear indication of the negative impact of recession on company’s operations. As mentioned earlier, the company continued to do well when recession came on the world. But it was in 2009 when the company got serious dented by the world recession. This is evident from the drastic decline in the net income figures of the company. SWOT Analysis: Strength Market leader of the 7th generation video game console segment. New Wii console is generating strong sales figure. This fact is having both monetary and nonmonetary benefits. Monetary benefit is that the revenue generated by this console is helping the company to support its other product lines. The company’s cost of production is very low as compared to its competitors. This is allowing the company to cut down its operating cost and offer product that is affordable to majority of the customers. The company is having a diverse supplier base, which is allowing it to maintain high product quality. This can have a positive impact on the company’s image in the marketplace. The company is following an innovative customer segmentation strategy. This strategy is allowing it to exit a saturated segment and enter a fresh one. The profile of this new segment is also consistent with the product offering of the company. The company is effective in coming up with differentiated product offerings. The controller developed by the company has allowed a user-friendly interface with the game to the gamer. This has enhanced the gaming experience of the gamer. The company is having a strong liquidity position at the time of recession. This is attributed to the use of equity financing to finance the company’s operations. As a result of this the company possesses more flexibility. The company’s revenues and net income are increasing. The company’s product offerings have a user-friendly interface. Weakness: The company’s technology vision is very weak, which is leading to a strong criticism by the critics. Company’s consoles, software’s and games are weak in functionality as compared to competitors. As a result of this these products are not favored by savvy gamers. The company has given up on serving fanatic gamers. Many products in the company’s product portfolio are either outdated or have run their course. The company’s IT department is not performing as efficiently and effectively as compared to competitors IT department. Opportunity: Presence of an un-served market provides an opportunity for the company to design products for this market. Company can use its low prices to attract income constrained individuals towards its products. The company by means of its strong liquidity position can buy distressed companies of this industry The company can expand its market by entering low income regions like Asia. The company can develop products that can lead to cross-selling. The company can also build an online forum, just like Microsoft, to bring its new customer segment together to share their experiences with Nintendo’s product offerings. Threats: Tough economic climate surrounding the industry. Competitors are continuing to develop new features in the console segment. Competitors are designing new products to target Nintendo’s newly discovered customer segment. Social trends are in a state of flux which is leading to uncertainty in product designing. Strong competitors are working in the industry. These competitors possess effective competitive advantages. The company’s main markets are experiencing high rate of inflation. Consumers are curtailing their expenditure on nonessential goods. Social groups are raising voice against the negative impact of video games. Critics are commenting against the company’s products. From the SWOT analysis, it can be concluded that the company is surrounded by many serious threats; however, it does possess reasonable strengths to counter these threats. Moreover, the opportunities available to the companies are very promising. These opportunities are also consistent with the company’s product offerings. The effects of weaknesses which are prevalent in the company can be minimized if it concentrates on its strengths and utilize them to exploit opportunities in its environment. The company by using its strong liquidity position can embark upon a two-pronged strategy. One aspect of this strategy will deal with the launching of the company’s product in the Asian markets, which have somehow remained insulated from the negative effects of recession and most importantly the consumer profile of this region also matches the company’s product offerings. The other aspect of this strategy has to do with further penetration into the new market of the company that is the market of teens, grandparents and urban families. The company can add more attractive features with the console to bring more families towards it. However, the company needs to take decisive measures in order to proactively deal with this environment. Failing to do so will further lead to the declining of profit margins. These measures are also important from the fact that the company is able to differentiate its product offering from its competitors and avoid over reliance on a single customer segment. Recommendations: Situational Profile and Prospects: Nintendo is currently facing a situation in which it is overseeing a decline in sales in its newly discovered market. Although initially the company was doing very well but since the recessionary effects started to profess themselves in the marketplace, since than the company is overseeing a declining sales figure. The company in such situation can use its strong liquidity position to increase its marketing effort and penetrate (market penetration) further into this marketplace before competitors enter this marketplace. Moreover, the company can also decide to enter into international markets such as the Asian markets. These markets have remained somewhat unaffected by the recession and most importantly the consumer profile of these markets matches very strongly with the company’s product offerings (market development). Strategic Problem: Nintendo’s revenues from is newly discovered customer segment have received a serious setback as a result of the World Recession. The company has no means (product offering) by which it can go back to its earlier customer segment. Being in a tight spot, can the company prevent its profit margins from eroding and provide its stockholders the kind of returns they are expecting? Recommended Strategy: Nintendo can utilize its strong liquidity position to finance either an extended marketing program or an entry into a new marketplace that matches in profile to its products. The company can also decide to undertake both these strategies. Objectives: These two strategies should yield higher revenues and profit margins. The sales volume should enable the company to achieve economies of scale in its operations. Moreover, the company shall gain all those benefits which are associated with first mover advantage. Strategic Justification: Since the company’s products are far from meeting the needs of the savvy gamer segment, therefore, the only way available for the company is to identify a niche that is well suited for its product offerings. This niche should be big enough to generate a demand that is sizable enough to serve profitably. Work Cited Marino, Lou, and Sally Sarrett. Nintendo’s strategy in 2009: the ongoing battle with Microsoft and Sony. (2009): 369-381. 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