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Strategic Analysis for Nintendo Co. Ltd. Essay

Executive Summary

Nintendo Co. Ltd. is a longstanding member of the home entertainment software industry that has embarked on a mission to offer the highest quality products and services while treating their customers with attention, consideration and respect. Nintendo’s strategy thus far has been to take advantage of their video game development capabilities; nearly 60% of games sold by Nintendo are self developed. The innovative capabilities derived from various gaming platforms have allowed Nintendo to capitalize off of a series of attachment control devices. The biggest strength that Nintendo has is a strong brand name along with high returns. A well established brand name gives Nintendo an edge over its competitors. Nintendo is the only company that has managed to capitalize on both hardware and software components. The biggest opportunity for Nintendo is to incorporate themselves into the online gaming market due to short product life cycles.

Nintendo maintains their competitive advantage through superior game and character development, for which it often owns the legal rights. In a technical comparison of the Wii against its major competitors, it is substantially outperformed in speed processing, memory, storage, networking, video output and multimedia output. If Nintendo wishes to maintain a competitive advantage, the niche market must be penetrated while maintaining the integrity of the Nintendo brand image. Nintendo Black would become a subsidiary company of Nintendo Co. Ltd. that will operate with a mission to specialize in advanced technological specifications to consoles that will compete with Microsoft and Sony. If the proper measures are taken then Nintendo has the opportunity to continue to position itself as an alternative to the gaming experience while increasing the level of competition for its rival companies with its subsidiary company.

Mission and Strategic Development

Nintendo Co. Ltd. is a longstanding member of the home entertainment software industry that has embarked on a mission to offer the highest quality products and services while treating their customers with attention, consideration and respect (Nintendo, 2009). In doing so, Nintendo Co. Ltd. has developed a strategy that has allowed them to offer a unique gaming experience which appeals to a larger consumer base, while maintaining competitive affordable prices. Unlike its competitors, Nintendo Co. Ltd. has earned consumer confidence in its industry through an established brand name known for inventing the video game console. Competitors such as Sony and Microsoft have entered the industry after finding success in the electronic hardware and software industries respectively. Despite opportunities for entry into the industry, Nintendo Co. Ltd. is the only company that has managed to capitalize on both hardware and software components. This is due in part to a strategy that focuses on the purchase of inexpensive components rather than making them in-house (Schoenberger, 2008).

Sony’s Playstation 3 retails for $300, which is less than the actual cost, thus causing Sony to lose money on each console sale. Nintendo however is able to offer the Wii Console for $260 and has managed to earn a $6 profit on each unit sold (Schoenberger, 2008). In comparison, Microsoft’s Xbox 360 is sold at cost, equal to that of the Playstation 3 at $300 per unit (Schoenberger, 2008). Aside from earning revenues from the sale of hardware systems, Nintendo Co. Ltd. has also found a way to compete with the pricing of games. The average cost for a Wii game is $50 compared to $60 for games by each of Nintendo’s competitors (Schoenberger, 2008). The competition is able to afford losses on their consoles by earning revenues in the form of licensing fees from third-party developers (Schoenberger, 2008). Nintendo’s strategy thus far has been to take advantage of their video game development capabilities that were first introduced alongside their first Game & Watch system in 1980.

Nearly 60% of games sold by Nintendo Co. Ltd. are self developed in comparison to 30% for Microsoft and 15% for Sony (Schoenberger, 2008). While this has resulted in fewer titles released, a competitive advantage is maintained by creating franchise characters and game titles that are exclusively created for their products. As a result, the three top selling games for the Wii system are “Wii Play,” “Super Smash Brothers Brawl” and “Super Mario Galaxy,” each of which is available exclusively for the Wii console (Schoenberger, 2008). By maintaining the control of development, Nintendo Co. Ltd. has been able to produce these games without deadline constraints, ensuring the highest quality game play which allows the company to live up to its mission requirements.

Current worldwide sales figures as of November 14, 2009 list the Wii as having sold over 56.5 million units while the Xbox 360 is a distant second at 33 million units sold and Playstation 3 with only 26.5 million (VGChartz, 2009). During 2006, Nintendo Co. Ltd. recorded net income of $840 million, just before the release of the Wii system (Annual, 2006). As of 2008, that figure has increased to $2.5 billion, a nearly 300% increase in two years (Annual, 2008). Alongside the Wii, Nintendo Co. Ltd. also maintains an advantage in handheld systems with the Nintendo DS. Sony has unsuccessfully attempted to penetrate the market with the PSP handheld system, however sales have only reached 52.8 million in comparison to the 114 million units sold by the DS and upgraded DSi systems (VGChartz, 2009).

According to their 2008 annual report, the Wii had sold 148 million games for the system while the DS had sold 369 million titles (Annual, 2008). The DS has proved to be yet another competitive advantage for Nintendo Co. Ltd. as the software sales in 2006 were at 60 million, which is a 515% increase in just two years (VGChartz, 2009). Much of Nintendo Co. Ltd.’s success may also be attributed to the differentiation of their product lines. While the DS faces little competition, the Wii’s internal capabilities were considered inferior to existing consoles upon its inception (Schoenberger, 2008). Microsoft and Sony marketed systems based on technological superiority while the Wii is the first system to focus solely on interactive game play. Motion sensor technology allows for physical movement by the consumers to control the games in which they play.

The innovative capabilities derived from various game platforms have allowed Nintendo Co. Ltd. to capitalize off of a series of attachment control devices. Sales of these devices have been packaged together with games to provoke interest additional purchases of games compatible to the attachments. In an attempt to counter the unsuspected success of the Wii, motion sensor attachments are planned to be released by competitors. Microsoft is expected to release Project Natal, which performs a full body scan for remote free game play, while Sony will release a motion controller; both expected to hit the market in 2010 (Whitney, 2009).

Nintendo of America’s Executive Vice President of Sales and Marketing, Cammie Dunaway, is not worried, suggesting “what people are doing with the remote and what’s happening on the screen isn’t something that people have to wait for or is just being talked about in a PowerPoint presentation. But it’s something that’s in stores today and that people are already enjoying (Whitney, 2009). Wii sales are expected to continue to be strong, though 2009 has experienced a dramatic decline in sales a year after the most successful sales figures in Nintendo Co. Ltd.’s history (Whitney, 2009).

SWOT
Strengths

The biggest strength that Nintendo has is a strong brand name, along with high returns, debt free status, and strong marketing techniques. Having such a strong brand name, Nintendo has become the most dominant company in the video game industry. Nintendo has been around since 1889 and developed their first home video game machine in 1977 and ever since has been known for their electronic gaming devices (Annual, 2008). As for high returns, the Nintendo DS alone has made a huge profit for them selling 70.6 million hardware units and 369.6 million software units as of March 2008 (Annual, 2008).

Also, Nintendo is one of the few gaming consoles that have a debt free status unlike Microsoft who can’t seem to earn any profit due to high costs. Nintendo has thought outside of the box with their latest marketing strategy of targeting markets other than the traditional “gamer”. They have marketed their newest console, the Wii, to everyone as a family console, with games varying from healthy exercise to interactive sports. They have also found a way to simplify gaming by making it as easy as point and click. One example of this is the Mario-Kart game that is played using a steering wheel. Additionally, games that require extra attachments like the crossbow for the Legend of Zelda requires customers to spend more money, earning Nintendo supplementary profits (IBISWorld, 2009).

Weaknesses

Nintendo’s weaknesses are the dependence on contract manufacturers, having low earnings per share in addition to the lack of games produced for Nintendo consoles. Even though Nintendo Co. Ltd. makes their own games and trademark characters; for instance Mario and company, they still rely on manufacturers such as Electronic Arts, Acti-Vision and others for games that more experienced consumers would prefer to play. Despite an attempt to simplify gaming, this convenience may have negative repercussions for the experienced consumer market. Recent game developments attempt to be as realistic as possible, thus the graphics on the Nintendo systems are not as sophisticated and are lacking in comparison to that of the Playstation 3 and Xbox 360 with 1080p resolution that reads high-definition graphics. Nintendo Co. Ltd.’s competitors also offer technologies not found on the Wii such as HDMI outputs or Blue-Ray DVD (Video, 2007).

Opportunities

The biggest opportunity for Nintendo is to incorporate the online gaming market. Most of the new games are designed for multiplayer gaming through server networks. Nintendo benefits from the interactive gaming business and these benefits can continue to grow. When the first video game consoles started to emerge, many people thought it was a short-term fad. However, fast-forward two decades and it has become more than just a trend. Adolescents who played 25 years ago have yet to grow out of the gaming trend and today’s youths have taken on next-generation consoles with even greater passion than their parents did as children. Growth has remained unexpectedly high for over two decades, including above 10% per year in 2009, despite the national recession (Annual, 2008).

Today the video game industry, including development, production and retailing, is worth over $44 billion, with over 40 million consoles sold in the US in 2008 alone (IBISWorld, 2009). Video games and consoles are among the highest demand predominantly during the holiday season due to price cuts and the convenience of gift giving. Another opportunity for Nintendo is the fact that it remains the leading console maker, giving the company a better opportunity to improve upon itself. In October, Nintendo Co. Ltd. sold 506,900 units of the Wii system in the United States. The second best selling console was Sony’s Playstation 3 having sold 320,600 units (Taub, 2009).

Threats

Nintendo’s threats include short product life cycles, and online gaming. The main threat to Nintendo Co. Ltd. is the software/games limited lifespan. Most games take about 48-60 hours to complete and more people have time to sit at home and play video games rather than recreational spending. Online gaming allows people to connect and play with other people as long as they own the same game and same console in each house. Due to the limitations of the internal hardware of the Wii, Nintendo Co. Ltd. has a severe disadvantage in a network that provides inadequate performance in relation to competing system networks (Thurrott, 2007).

Strategic Competitive Advantage and Major Problems

The first word that comes to mind with Nintendo is games. Microsoft and Sony do not have that advantage. Nintendo has been a household name since its first electronic game release in 1977 and is considered to be the oldest company in this market. It is one of the largest console manufacturers in the world, and a leader in the handheld console market. The company has released five generations of consoles over the past 20 years. A well established brand name gives the company an edge over its competitors (Nintendo Co., 2009). In recent years, Nintendo Co. Ltd. has achieved strong growth in its operating results. In FY2008, revenues increased by 73% over FY2007 reaching JPY1,672,423 million (approximately $14,683.9 million) owing to the launch of Nintendo DS Lite and Wii, and their related software (Nintendo Co., 2009). In the Gaming Industry, Games/Software account for 67.6% of sales while Consoles account for 18%. Games are an inevitable focus of the industry (IBISWorld, 2009).

Wii users are expected to buy the most games this year, 220 million, compared with 120 million PS3 games and 125 million Xbox 360 games. 62% of games sold by Nintendo Co. Ltd. are their own titles in comparison to 30% for Microsoft and 15% for Sony (Top, 2006). The top three Wii games are all made by Nintendo Co. Ltd., thus maintaining a higher gross margin on game software than competitors at 65%. Also, Nintendo Co. Ltd. is able to price their games lower than competitors at approximately $50 per game versus $60 (Schoenberger, 2009). Nintendo Co. Ltd. maintains their competitive advantage through superior game and character development, for which it often owns the legal rights. Nintendo Co. Ltd. has leveraged its legacy characters to maintain a viable competitive position in the market (Harmsen, 2009). The new Wii Fit exercise game is targeting women and older people concentrating on “adding value for the late adopter,” said Nintendo of America’s President, Reggie Fils-Aime. “This has given us the unparalleled ability to bring in new consumers, especially females” (Taub, 2009).

The Wii Fit software alone has sold more than 20 million copies as of September 2009, and cost the consumer $90 to purchase. Half of the retail price results in profit for Nintendo Co. Ltd. because the company developed both the console and the game, avoiding software licensing fees. Manufacturing of the balance board, an accessory that is included with the Wii Fit software, costs the company roughly $19 each, while the software averages $1 (Crews, 2009). Retailers typically buy the software games for 80% of the retail price, thus earning them $18 per game sold. Marketing of the software costs an average of $5 per unit, while research & development is roughly $2. A $45 profit goes directly to Nintendo Co. Ltd for each Wii Fit game sold (Crews, 2009). Unlike its competitors, Nintendo Co. Ltd. has figured out a way to profit from its console sales. For every Wii sold, Nintendo nets $6. Microsoft just breaks even while Sony actually loses money on each console sale (Sherwood, 2008).

As of November 14, 2009 the Wii is being reported as having sold over 56.5 million consoles. That equals to $339 million in profit for Nintendo Co. Ltd. based only on console unit sales. Nintendo Co. Ltd. relies on third-party manufacturers to produce key components or assemble finished products in order to keep costs low. Nintendo Co. Ltd. could have difficulty procuring key components or manufacturing its products in the event one or more of these third-party businesses fail or are unable to provide necessary components on a timely basis. Shortages of key components may cause margin decline due to higher costs, lack of products, and quality control issues (Annual, 2008).

The interactive entertainment software market is characterized by short product life cycles and frequent introductions of new products (Nintendo Co., 2009). Since the Wii console has unique features such as the motion sensor remote, it makes the software difficult to translate into other systems. Developers that wish to create games for the Wii need a dedicated Wii team to code the Nintendo Co. Ltd. software so that it may be compatible with the Wii console (Schoenberger, 2009). For that reason, the Wii has fewer games available than its competitors. As a result, Nintendo may be forced to create a new console that adds the cutting-edge graphics the Wii lacks, analysts say (Edwards, 2009).

Strategic Recommendations

Nintendo Co. Ltd. has found success in implementing a family oriented strategy that generates consumer interests of multiple generations, genders and cultures by creating a user friendly platform with a minimal learning curve to ensure an enjoyable gaming experience. In order to meet the high expectations that Nintendo Co. Ltd. has set for itself, the products developed are limited in their ability to adapt to the niche markets that competitive companies have catered to. In a technical comparison of the Wii against its major competitors, it is substantially outperformed in speed processing, memory, storage, networking, video output and multimedia output (Thurrott, 2007). In order to maintain an advantage in low cost pricing, the Wii is forced to neglect these features causing tech conscious consumers to invest in competing consoles. Lacking the capabilities to process more popular teenage and adult games that have been released on other supporting formats, Nintendo Co. Ltd. is restricted in their ability to garner interest in their products from this niche market without altering not only their system specifications, but the family brand image that has established their success.

If Nintendo Co. Ltd. wishes to maintain a competitive advantage, the niche market must be penetrated while maintaining the integrity of the Nintendo brand image. As these are two conflicting interests, it is recommended that Nintendo Co. Ltd. create a new subsidiary company that continues in the traditional spirit of Nintendo’s penchant for quality, while integrating the non-traditional components that cater to the niche market. Nintendo Black would become a subsidiary company of Nintendo Co. Ltd. that will operate with a mission to specialize in advanced technological specifications to consoles that will compete with Microsoft and Sony. The emergence of this company will allow for more flexibility from restrictions that limit Nintendo in competing for a mature consumer base. Nintendo Black will use the internal knowledge garnered throughout years of experience to continue developing games in-house, but will break away from the traditional franchise characters of the Nintendo universe.

A number of opportunities arise to develop a series of successful franchise games that will appeal to the mature consumer that may continue to build upon the exclusivity of Nintendo produced games. This will also allow for a stronger focus on third-party developers to license games for distribution on Nintendo Black consoles that require advanced system specifications generating revenues that are currently unavailable to Nintendo and the Wii system. By embarking on a saturation of third-party game releases as the Xbox 360 and Playstation 3 have done, Nintendo Black has the opportunity to cut into the game sale profits of its competition. In order to develop interest in a new system that is similar to the competition, the inaugural console release should provide online downloads for videogames that are released in stores.

Though the Wii has downloadable content, none of the three competing systems offer full downloads of newly released titles. By offering this option, costs may be reduced from packaging, while ensuring the on demand availability of products anytime. A major concern regarding the exclusivity of Nintendo Co. Ltd. franchise characters and related games is that consumers in the niche market may have interest in purchasing a game, but not the console. By making Wii games compatible to the Nintendo Black console release, niche consumers would be free to purchase Wii games that would have otherwise been disregarded, thus increasing game sales for Wii and subsequent console releases by Nintendo Co. Ltd.

Justification of Strategy

Nintendo Co. Ltd. lists only 7 M-rated games available for the DS system and is in consideration of releasing another from one of the most popular M-rated franchises in Grand Theft Auto (Graft, 2009). The controversy surrounding the release of this game for the Nintendo system alludes to the desire to break into a market that could potentially jeopardize the Nintendo Co. Ltd. mission. In 2008, Nintendo Co. Ltd. recorded $2.5 billion in net income, despite spending $103 million on research and development in 2006 when the Wii was released (Annual, 2008), (Davison, 2008). The fiscal resources available to develop a product that expands upon existing models should be financially plausible. Nintendo Co. Ltd.’s current profitability is based on a family oriented consumer market that neither Microsoft nor Sony have attempted to endeavor; however if either company were inclined to expand an existing strategy to include a line of family concentrated product lines, it would attempt to differentiate itself into both markets which neither of its competitors has yet to achieve.

As the intensity of competition increases, it is in the best interest of Nintendo Co. Ltd. to become the first to break ground in penetrating both consumer markets. A Nintendo Subsidiary should not affect the current profitability of Nintendo Co. Ltd. with the exception of an increase in sales for a select number of Wii games released that appeal to a mass audience. It is possible that the Wii may sell fewer consoles due to the advanced capabilities of the upgraded console release, but there is a greater opportunity to convert niche market users to become Nintendo users due to the availability of not only third-party games released on all consoles, but the franchise games sold exclusively for Nintendo consoles. As the companies operate with two distinctly different missions, the Nintendo Co. Ltd. brand should maintain its profitability as the initial strategy will not be altered, while the Nintendo Black subsidiary has the opportunity to become profitable by taking more risks with its system capabilities and game play modes.

These risks have the potential to unveil a number of concepts that Nintendo Co. Ltd. may have not felt comfortable implementing on its signature consoles, thus providing input as to which successful features may be utilized and expanded upon for all future gaming platforms. The assumption that the new subsidiary will attract new consumers lies in the convenience created by the initial console release. Nintendo will now be capable of offering games that not only require more advanced processing, but games that are too mature to be released by the parent company. If a consumer can buy a Nintendo system that offers the same games and capabilities as an Xbox 360 or Playstation 3 at a similar cost, but also offers Nintendo exclusive games, then it adds to the consumer benefit creating interest in the Nintendo product.

Additionally, with limited marketing it is possible for Nintendo Black products to differentiate themselves from those of the parent company. This supplementary convenience provides additional consumer confidence for the initial family oriented market by indicating that any games released by Nintendo Co. Ltd. are suitable for children or else they would be released under the Nintendo Black product line. This will alleviate any concern for parents that are unfamiliar with newly released games as to the content involved. Nintendo Co. Ltd. spent $370 million on research and development in 2007 and is expected to release the next installment of the Wii in 2011 (Davison, 2008).

This would be ample time to develop a subsidiary company that will focus on research and development throughout 2010 with plans for a console release in 2013. After nearly two years, the sales for the Wii console have begun to decline and if this trend continues in the future, in 2013 the subsidiary console may be released without damaging initial sales for the parent company release (Satariano, 2009). As a result, the Nintendo Black consoles my act as a buffer for additional sales during a down time while Nintendo Co. Ltd. begins development on yet another generation console.

Fall-out and Summary

The recommendations suggested create several risks that may have negative repercussions to Nintendo Co. Ltd.’s existing operations. Creating a subsidiary company would require an increase in personnel costs as each company would be required to operate separately. As a result, a new headquarters may need to be purchased in order to house accounting, finance and marketing departments as well as research and development. However, without a release for several years, the company would earn no income and may generate a number of tax benefits. Nintendo Co. Ltd. initially planned on creating a more advanced system that would be comparable to that of the Xbox 360 and Playstation 3. However, as the General Manager of Research and Development, Genyo Takeda, suggests “During development, we came to realize the sheer inefficiency of this path when we compared the hardships and costs of development against any new experiences that might be had by our customers.” (Iwata, 2009)

With both the Xbox 360 and Playstation 3 generating no profits from sales, it is likely that in order to create a competing system, Nintendo Black may be forced to accept a similar position (Schoenberger, 2008). What may help Nintendo Black avoid this scenario is a continued focus on purchasing inexpensive parts rather than making them in-house (Schoenberger, 2008). Though the price range for a new niche market console may be higher than that of the Wii, it will still be competitive for the market that it is attempting to pursue. Creating a subsidiary company with a strategy to develop more adult games may have an effect on the parent company that maintains a strong focus on a family friendly experience. There is an unknown risk involved with regard to consumer response of a new line that could be damaging to the mission of the parent company.

A marketing plan must be developed that distinguishes the two companies and their products. It must reassure the target market that they will receive the gaming experience they look for in competing consoles, while also ensuring that Nintendo Co. Ltd. will be unaffected and continue with their family friendly mission. It is advised that staple characters of the Nintendo universe are not used to market the product lines of Nintendo Black, but rather focus on the development of new characters with the possibility of introducing the staple characters as unlockable content. If the proper measures are taken then Nintendo Co. Ltd. has the opportunity to continue to position itself as an alternative to the gaming experience while increasing the level of competition for its rival companies with its subsidiary company. This will make it more difficult for rivals to compete for their own target market and force them to shift focus away from competing with Nintendo Co. Ltd.’s motion capture product line.


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