Sony Play Station- Advanced Management Accounting in Digital Gaming Industry - Case Study Example

Advanced Management Accounting Digital Gaming Industry: A Case of Sony Play Station 2/2/13 Introduction The digital gaming revolution has transformed the entire structure of the digital gaming industry. The technologically rich and advanced gaming consoles have replaced the older ones completely. The digital gaming revolution has brought forward more competition than ever. The competition has made it more complex to satisfy the customer demands along with meeting the fierce price competition. Managers are burdened with the responsibility to reduce costs; and value the consoles/games at a level that is either equal to or below the market price. Managers, as a result, are employed with the various costing and pricing methods to identify a suitable price for the products they offer. In the industries and businesses where innovation, uniqueness and transformation is found on a higher level, costing and pricing issues become more complex and complicated to manage. The products under such industries like fashion products, clothing, technologically rich industries like video gaming, computers etc. have shorter life and the costs incurred need to be realized and profits earned within the limited time frames before a new product hits the market. The products are highly susceptible to be devalued once a competitor launches a new product or modifies an existing one significantly. This paper aims at discussing the use of target costing and life cycle coting in the ever-changing and developing digital gaming industry. Life Cycle Costing Life-cycle costing aims at calculating the approximate costs of a product and spreading them over the life of that product in order to keep a track and balance of profits and escape any losses that may arise. The various life-cycle stages are Introduction, Growth, Maturity and Decline. The expenses related to each product life-cycle phase differ. The product Research and Development costs are high in the introduction phase, for instance. The video gaming industry requires much input to understand the consumers’ demands, technological inputs required, design of the new game console and so on. Such costs are relatively lower in the growth phase where only modification to the production processes is being analyzed to cut production costs. In the maturity and decline phase, the Research and development costs are lower as the product has reached a standardized production mechanism and no further advancements are possible or needed keeping the stable or declining trends in sales volume in view. The production and advertising costs, on the other hand, are either low or moderate in the introduction phase for a competitive and technologically rich industry like digital video gaming. These costs are at its peak during the growth phase and are reduced to a moderate level during maturity when the market is captured and sales are quite stable. The costs are fairly low in the declining phase as the product is abandoned or transformed into a new product which is modified and starts up with its own product lifecycle (Hansen, Mowen & Guan, 2009: pp. 389-92). (Sony Computer Entertainment Inc.) The above data of Sony PS3 sales is further a proof of product lifecycle sales trends. The recent drop in sales, up till now, shows that the product has moved towards its decline phase and we may reasonably assume that the major costs incurred have been recovered by the company. The play station 3 consoles have given Sony an enormous on each unit sold. As per the life cycle pricing technique, the company lowered the price now at the end of its maturity and beginning of its declining stage. Sony is not producing play station 4 up till now and gaining time to let the market expand with new trends. The opening price was high like any other product within the digital video gaming industry. However, due to fierce competition, Sony reduced the price to $500 in order to increase the sales. This, indeed, worked out for Sony as seen in the year 2007 (Wisner, 2008: p. 141). After the advent of 3D games and new gaming consoles, there was a unique trend in the market to release new gaming consoles and set the prices high in order to get the competitive advantage. (Us.playstation,2013) Sony announced a 10 year lifecycle at the release of PS3 and we are now in the 7th year of the official economic lifecycle of PS3 that means that within 3 years there will be no new console launch from the Sony and the pricing strategy have to be such that the sales are not affected. Target Pricing The target price means that intended price that is calculated after the subtraction of the proposed profit on a unit items from the set or standard market price (Drury, 2005: p. 451). In case of Play Station 3 gaming console, a lot of research is necessary in order to calculate the target price because the concentration of the competitors in the market is much greater as compared to the past and the profit margins are needed to be set with great homework and planning. There are numerous gaming console competitors for Sony but some of the prominent ones are Xbox and Nintendo. Nintendo Wii is in the market and costs around $299; similarly, the Xbox 360 gaming console is also in the market with exquisite features attracting the customers and it also costs around $299. Let’s suppose that the devised profit rate is taken to be around 50%. According to this profit rate the target cost should be Proposed Market price of Play station 3 = $299 Profit rate = 50%/unit Target Cost = 299 – 149 =$150/console This target cost will give the Sony Company around 50% of profit on each unit of the console and it is enough in the 7th year of the production gap. In order to meet the competitive edges and profit margins, the current and trending price of the play station 3 must be lowered so that the attraction of the customers can be taken immediately. At this stage of PS3 sales trends, the costs may be lowered by value engineering or functional analysis. Recommended Pricing Strategies The cost plus pricing strategy argue that the company should estimate the costing price of the product and should add the profit keeping in view the market pricing trends and then unit price will be labeled after that. This is the simpler method and can be used where the competitors are not much and market diversity is also not very high. Skimming is another pricing strategy that is somewhat more relevant to the Sony Company for their launch of new gaming console. Skimming pricing strategy is more relevant to the electronics market. There are brand loyal people in the youth and when the new gaming console of the Sony Company named Play station 4 will be launched, the people who are low sensitive to the pricing will run to buy the console irrespective of the price of the console. This pricing strategy will not only be able to get new rates of profits, it will also help to increase the production gap in the next ten years because using the skimming strategy at the start, lowering the price of the product after the market climax time will not affect the sales graph of the company. Lowering the price at later times rather increase the sales of the product because people will think that they are getting a very good product in low cost and thus the sales will never be effected and the company will have a competitive advantage over the other companies who are releasing the new gaming consoles in the market from time to time in a periodic fashion. (Learnmarketing,2013) Premium pricing and market oriented pricing is also a practical approach for the Sony company. Premium pricing is applicable in the case of Sony because of the fact that the addressed company enjoys the brand loyalty of millions of customers around the world. No matter what price the company sets for play station 4, the customers will rush to buy it because they know that the quality of the features and utility is very high. Similarly the market oriented pricing is good for the companies whose competitors are great in number and are producing the products with great frequency. Above all the methods, skimming pricing strategy is considered to be the most productive of all for Sony. Xbox360 elite model with Kinect facility is costing around $299 and this price should be the target for the Play station console. Because of Xbox, the main competitor of Sony consoles, the latest price of Sony (PS3) console should never be less than the latest console of Xbox in order to gain the psychological advantage of the masses (Markedbyteachers, 2013). Issues/Stages The production of the gaming consoles in the modern world requires state of the art system specifications and future trend inculcation. The gaming consoles should be light in weight and small in size in order to add the feature of portability. Because the youth is the primary target market of the gaming industry, the proposed gaming console should be made in such a way that it can support not only the games but other features as well for example the internet surfing (Wi-fi) and most importantly multi-player online gaming is a must feature for all the gaming consoles that are coming in future. The management of the gaming console production company, which is Sony in this case, should keep an eye on the released games and should also makes some pact with the game production companies so that the game production companies produce the games that are run only on their consoles. There are many incidents in history which show that there were some games produced by the production houses of gaming which did not run on specific consoles and other gaming console company had to bear huge losses in the monetary terms. The Sony Company should make sure that they take the respective gaming feature in account before launching any gaming console. There are number of other factors which should be taken in to account for example the outlook of the gaming console. The weight of the gaming console and the color is also very important. The play station four must have some artificial intelligence features because it will give it a competitive edge. The new product should have some peculiar features that make them special in comparison with the other gaming consoles. These features include the online gaming facilities, the remote sense gaming and artificial intelligence gaming. Similarly there is a new concept that must be added in the gaming console in order to gain the financial advantage in sales and that is human computer interaction. The introduction phase of the new gaming console must involve costs related to Research and Development of the new design and features. These costs may be high but since the overall life and profitability of the new console (i.e. PS4 in this case) depend on research and planning, there is a need to incur them with special attention given to the pricing trends. The highly unstable markets like gaming industry require the reinstatement of major costs during the growth phase. In order to accomplish this goal, the prices are set higher in the start as the new product usually proposes a competitive advantage for the company. Until the competitors produce a similar or better product, the company must be able to unburden itself form the Research and development and major production costs. The management must, hence, keep a better track of prior products’ sales trends and competitors actions. The time elapsed between launch of the new products and competitors’ action to compete is the gap that is available to pay for the major expenses of the product till the end of the product life cycle. Management must keep in view that the sales decline after the maturity phase and the costs may not be restored if the plan does not incorporate these declining sales trends in the beginning. Poor management of costs and restoration of costs result in greater losses for the companies affecting their operative and competitive efficiencies. References HANSEN, D. R., MOWEN, M. M., & GUAN, L. (2009). Cost management: accounting and control. Mason, Ohio, South-Western. Sony Computer Entertainment Inc.. (n.d.). Unit Sales of Hardware (since April 2006). Available: http://www.scei.co.jp/corporate/data/bizdataps3_sale_e.html. Last accessed 2nd Feb 2013. WISNER, J. D., LEONG, G. K., & TAN, K.-C. (2008). Principles of supply chain management: a balanced approach. Mason, Ohio, South-Western. DRURY, C., & DRURY, C. (2005). Management accounting for business. London, Thomson. Learnmarketing.net. "Pricing Strategies (4 ps) - The Marketing Mix." n.d.. http://www.learnmarketing.net/price.htm (accessed 31 Jan 2013). Markedbyteachers.com. "Game Console Industry Analysis-Nintendo. The purpose of this paper is to provide a brief overview for the game console industry by discussing the attractiveness of this industry based on Porters five forces model. Also, after carefully analyzing Degree Essay and Coursework Help from Marked By Teachers.com." n.d.. http://www.markedbyteachers.com/university-degree/business-and-administrative-studies/game-console-industry-analysis-nintendo-the-purpose-of-this-paper-is-to-provide-a-brief-overview-for-the-game-console-industry-by-discussing-the-attractiveness-of-this-industry-based-on-.html (accessed 31 Jan 2013). Us.playstation.com. "PlayStation® : PS3™, PS2™, PSP®, PSP®go, PS Vita, Featured Games, Media & Events - PlayStation®Network." n.d.. http://us.playstation.com/ (accessed 31 Jan 2013). Read More