Strategy Management Essay
1. Current situation overview
Nowadays, the world video games market has become conspicuous and profitable, resulted by rapid increase of amount by video games players. The key assessment for winning in video games market is to attract the consumers to buy and focus. Meanwhile, the current situation of video games industry has become more competitive, which dominated by Nintendo Wii, Microsoft Xbox 360 and Sony PlayStation 3. This case sketches a framework of video games historical development for past a few decades and the future strategic prospection by Nintendo Wii, Microsoft Xbox 360 and Sony PlayStation 3. In addition, this case also describes the innovations and course of actions for broadening the market share holding by Nintendo, Microsoft and Sony. Moreover, those companies have renewed their own console generation and technology in order to gain competitive advantages in the video games market. During the recent stage of video games development, the players are not only focusing on ‘just playing a game’, but also they will consider the games’ design, art, animation and quality assurance.
2. Summary of macro environment analysis
The macro environment analysis is relevant to the long-term strategic thinking which focus on the factors in the wider environment, those factors include economic, political, social, demographic, international, sustainability and technological. The purpose of the macro-environment analysis is to summarize the complex and uncertain information in particular the company impact by macro-environment to figure out the demand for products and service in the market. Determining the macro-environment is the way that firms in an industry produce and distribute their outputs, and the way in which organizations are able to compete with one another (Hubbard, Rice & Beamish 2008 p. 76). In addition, macro-environment analysis is also able to distribute the product and service and establish the trends for the future development of the industry (Haberberg and Rieple 2008, p.105). Those factors concerned have been analyzed in appendix 1, also including the determent of effects on the industry growth (positive or negative).
2.1 Economic factor
By viewing the analyzed contents in appendix 1, overall information analyzed has been demonstrated that the current economic situation for the video games industry is definitely seems to be worse because of the economic recession worldwide. The trend of the purchasing power for video games console seems to be downwards by recent years because of the decrease of people’s disposable income. Furthermore, generally considering the reasonable inflation of raw material and hardware accessories is getting higher and higher, which may result to the cost for consoles is increasing.
2.2 Political/legal factor
“Political factors define the legal and regulatory parameters within which firms must operate (Pearce & Robinson 2009, p.97). These affect the business and its managers to a great extent. As the political factors analyzed in contents of appendix 1, it is expected to have a negative effect on future industry growth. For instance in China, the government has issued the regulation on video and online games, which has limitation for playing by 4 hours per day which people who under 18. People must make a registration via internet by updating their identification card number, real names and address who under 18. Considering most of the customers with video games are 17 to 33, this regulation may have negative impacts on the video games industry. Additionally, the government also issued the violence restriction in the video games market, which classifies the violence level to the games, in order to protect the children to avoid aggression and violence.
However, as the fact that, according to the evidence showed by Dietz (1998, p.425), nearly 80% of the video games includes aggression or violence as part of the strategy or object. While 27% of the games contained socially acceptable aggression, nearly half included violence directed specifically at others and 21% depicted violence directed at women. According to the establishment showed as above, most video games contains huge amount of aggression and violence contents, the government regulation should have negative impact on video games industry growth beyond reasonable concerns of mental protection for children.
2.3 Social/cultural factor
As this part of factors impact by social and cultural, this part probably does not have too much impacts whether positive or negative on industry growth. Accomplishing with the globalization over the world, video games are hot and popular in current stage of period in development. Focusing on this circumstance, the video game industry tends to design the games with cultural diversity and culture preference. For instance by Xbox 360, has designed some games which suitable for some countries under preference, such as some sports games like NFL in US, AFL in Australia. Furthermore, Sony also designed a game ‘Dynasty Warriors’, which describes a real history in ancient China, a dynasty with disorder. Moreover, some cultural factor by religion difference must be also concerned for the industry growth. Actually in some countries, such as some mid-east countries, the violence games are banned under religion efforts.
2.4 Demographic factor
By reviewing this part of analysis, the demographic factor should be considered with population, gender and age, and indeed have positive effect on the industry growth. The video game industry is now attempting to look for their ‘new’ players belonged. The industry has been designed more different types of games which suitable for women and even the elder. The trend of impact by demographic factor is rapidly increasing by recent years in particular with the demand by women and the elder for video games. As the fact that has been mentioned before, the most video game consumers is 18-44, now, the new strategy for broadening the consumer base is now expected and being concerned by the video game industry. This may contribute to increase the population by playing video games, which may result to increase the sales of consoles. In fact, Nintendo, Microsoft and Sony have also focused on difference breakdown by gender and age, which means that to make the games be varied and multi-suitable for people.
2.5 International factor
Globalization has been contributed to the success for video game industry, which breakdown the trade barriers between countries. In fact, according to Consalvo (2006), the video game industry and culture can be recognized in the transnational corporations that contribute to its formation and development, which contribute to the cultural exchange between countries. This also advantages to the video games industry which has positive effects on industry growth because the games may become more acceptable for the people who under different cultural background.
2.6 Sustainability factor
This factor is considering the sustainability of the video game industry in future. In fact, the video game entertainment absolutely has many substitutes. Therefore, the trend for the industry development maybe seems to downward in future depend on the changing and unpredictable people’s favors. People have rights to select their own favors to entertain as they want, such as sports, karaoke, twitter, and facebook. Moreover, the current video game market situation is likely to be saturated, which Grand (2010, p.687) states that, almost 40% of the US households have their own consoles, which means that the industry must spend huge amount of money to renew the consoles annually to keep their products be competitive and preferable in order to make the console be ‘sustainable’.
2.7 Technological factor
Technology is the most significant factor which must be considered by the video games industry. From the evaluation by the appendix 1, the industry growth displayed an overall negative effort on the video game industry. In fact, a console generation renewing must spend nearly a decade period from structuring to publishing, which spend too much time and money to renew. Despite the huge cost and longtime preparing on console renewing, even the games titles also must be spend a lot of time. Actually, according to the study by Grant, (2010, p685) there are some evidences to show that a new title game which from designing to publishing, approximately taking 18-36 months to complete based on a new platform.
Comparing with the ‘big 3’ in this case, they have their own advantaged areas in technology development. For instance, PS3 has Blu-ray DVD strategy on their consoles, which have fantastic game’s feature, Xbox 360’s positioning eschewed technology in favor of versatility, design and hardware’s multifunctionality, Wii even lacked the advanced features of either the Xbox 360 or PS3, but its remote wand-like controller is innovative and easy learning, which can concludes that overall the advantaged area by the ‘big 3’, is based on the technology support, which means that the technology factor is quite significant to the video game industry. Therefore, the trend of impacting power by technology is increasing.
3. Summary of industry environment analysis
Michael Porter claims that the five competitive forces influence the state of competition in any industry, and collectively determine the profit potential of the industry as whole (Hubbard, Rice & Beamish 2008). The purpose of the industry analysis is to determine the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.
3.1 Threats of new entrants
There are some sufficient evidences which demonstrate that the threats of new entrants are extremely low. In fact, the video games industry is dominated by the ‘big 3’ in this current stage of period. PS3, Microsoft and Nintendo have their own loyalty with the brand, which ensures the consumers’ confidence on their product. On the contrary, the new entrants do not have such brand loyalty as the ‘big 3’ does. Consumers maybe have less confidence rather than PS3 or Xbox 360 on the product quality. In addition, the ‘big 3’ has incomparable advantages, which leading in technology and experience on software development. Furthermore, the capital of equipment and technology cost huge amount of money, the ‘big 3’ have their own experienced and professional designing team for innovation and technological development. New entrants are difficult to maintain and develop their business unless sufficient finance supports.
3.2 Bargaining power of suppliers
The overall impact raking for bargaining power by the suppliers is high, based on the appendix 2 bargaining power of suppliers’ analysis. In fact, the supplier also called publisher is few and monopoly in the video game market, which result to the profitability with the supplier. The publishers are responsible for financing, manufacturing, marketing and distributing video games. Grant (2010, p.688) also states that video game publishing is increasingly dominated by a few companies, such as electronic Arts, Konami, take-two Interactive and Activision. This may contribute to the suppliers have more powerful bargaining power to the industry. In addition, the supplier has low switching cost in the market.
3.3 Bargaining power of buyers
The consumers have low switching cost on the products, which depends on the product’s quality, price and product preference by the consumers. Moreover, the video game industry must also be aware the other entertainment, which have possibility to substitutes the video game industry. Furthermore, the buyer profitability factor is considering with the buyers’ disposable income, if the income is high, the bargaining power by the consumers is high, otherwise is low. As the fact that, the current situation for the economy is worse and unemployment rate is getting higher, thus the buyers are seem to be unprofitable, indeed the bargaining power for buyers is low.
3.4 Power of substitutes
The power of substitutes is strong, which displayed by the competition between PS3, Xbox 360 and Wii. The ‘big 3’ companies have dominated the video game market and attempt to gain competitive advantages via using their innovative ideas and technology. The most important factor considered by the consumers is the products’ price and quality, focusing on this concern, the Wii may win in the market by sales because of the cheaper price of consoles. However, it not means that the Wii can substitute either Xbox 360 or PS3. Actually, the key assessment for winning in video games market is to catch the consumers’ propensity. Furthermore, despite the internal competition by the industry, also the other entertainments have possibilities to substitute the video game industry. Thus, it is difficult to predict the video game whether may be substituted in the future.
3.5 Intensity of industry rivals
It is absolutely high barriers to exit in the video games industry, unlike the PC games industry. According to the study by Williams (2002, p46), which states that PC games manufacturing fees are significantly lower versus console games, because PC games need only CD duplications, a jewel box, instructions and a box, typically $2-3 total per unit. However, comparing with the PC games industry, console development requires ‘development kit’ typically costing $10 to $20 thousand. In addition, Grant (2010, p688) also mentions that the huge cost by video games development is result of the demand for multi-featured, which contribute to the significant cost on technological talents hiring, equipment cost and advertising. Thus, video games industry must be high barriers to exit because of the significant cost efforts.
4. Interconnections between macro-environment analysis and industry environment analysis Reviewed to the above macro-environment analysis and industry environment analysis, there are some interconnections between them, which are sustainability factor, related to the presence of substitute inputs. This highlight must be considered by the video game industry, because the preview of sustainability to the industry development is quite important. The key assessment for the industry development is to keep their products ‘un-substituted’ and competitive. Therefore, the industry must focus on the innovation and technological development by their games and console in order to keep the video game ‘long-being’ for the future.
Technology and innovation play a main role in the video games industry. The video game industry is so profitable that many new entrants may want to enter the industry. However, the industry looks like ‘unhealthy’ because PS3, Xbox 360 and Wii have dominated the industry for a decade. Furthermore, the current economic situation is still on recession, and may last a few years. This may contribute the cost of consoles increase, and decrease the sales of consoles result by the people’s income decrease. Actually, it is hard to preview the future of video game development, but, by now, the video game market has saturated, even the technology and innovation is good.
Form the figures evaluated by Flacy (2011), the video game sales over July dropped over 25 percent year over year and have fallen to the lowest levels since 2006. Total sales in July 2011 amounted to $707 million while sales just a year ago in July 2010 topped $960 million. The reasons for the decline by sales should be varied, as mentioned before, which causing by the economic recession and market saturation. Moreover, the people’s favors may also change; video game playing is not the only way for people to entertain because people can entertain by the other ways. Thus, the video game industry development is getting tough and unpredictable for the future, even the recession has over.
Appendix 1 – details of macro-environment analysis
Environment factor| Comment| Effect on industry growth|
Economic factor| | | global finance crisis| Widely impact on the manufacturing industry| negative| inflation| price of raw material and console accessories increased, result to the cost increase| negative| Economic recession| People’s disposable income decreasedreducing purchasing power| negative| Overall: negative|
Political/legal factor| | |
Government issue for video game violence| Legislation for classifying the amount of violence under age. | negative| Regulation for playing limitation| Time limitation for playing under 18 | negative| Overall: negative|
Social/cultural factor| | |
Multiculturalism| Different cultural background’s people may have different type of favors on video games| Positive| Religion| Some violence games is restricted by some countries under religion efforts| Negative| Overall: medium|
Demographic factor| | |
Population numbers| Attracting more ‘new’ consumers possibly. Attracting more customers means increasing sales.| positive| Gender difference breakdown| Designing more games which suitable for women playing, make the games be varied.| positive| Age difference breakdown| Video game is not only designed for 18-33, which could possibly consider to attract some aging player| Positive| Overall: positive|
International factor| | |
Globalization| Reducing the trade barriers for games imports and exports| positive| Overall: positive|
Sustainability factor| | |
Substitution by other entertainments| More and more entertainments can substitutes the video games, such as sports, karaoke, twitter, facebook etc.| negative| Strikes by online games| Computer games are seemed more popular and preferable.| Negative| Market saturation| More and more rivals tend to enter the video games market to gain advantages.| Negative| Overall: negative|
Technological factor| | |
Lack by renewing generation| Console generation needs to spend a lot of time and money for generation renewing| negative| Long time for designing a new title game| Taking 18-36 months to complete a new title based on a new platform | negative| Console generation (PS3)| Fantastic games’ feature (HD) based on Blu-ray drive technology.| Positive| Console generation (Xbox 360)| Large amount of titles by games, multifunctionality based on high-technology support.| Positive| Console generation (Wii)| Easy to control, hand movement based on their innovative ideas and technology. | Positive| Overall: positive|
Appendix 2 – details of industry environment analysis
Items| Issue analysis| Impact ranking: extremely low, low, medium, high extremely high.| Threats of new entrants | | |
Product differentiation| If a company wants to survive even win in the competitive market, a unique product with considerable difference must be offered. Wii, Xbox 360 and PS3 has achieved this as well| Extremely high| Brand loyalty| Company must have their own brand loyalty which can prevent new entrants from making their way into the market. Wii, Xbox 360 and PS3 have extremely great loyalty with their brand.| Extremely high| Economic of scales| Wii, Xbox 360 and PS3 have large sales on their product every year. It is tough for new entrants to have such huge finances to fund | Medium| Capital equipment and technology development| Wii, Xbox 360 and PS3 have their own experienced and professional designing team for innovation and technological development. New entrants are hard to maintain their business unless sufficient finance supports.| High| Government policy| Many industries are either owned or regulated by the government, causing barriers for entry.| high| Overall: extremely high |
Bargaining power of suppliers| | |
Switching cost of suppliers| The switching cost of suppliers is low| Medium| Supplier concentration| The supplier will have strong bargaining power if there are only a small number of suppliers. (monopoly) There are some publishers for the video game industry (electronic Arts, Konami, take-two Interactive, Activision etc.)| high| Information about suppliers’ product| The suppliers should be aware their product (consoles, software and title games), as these suppliers have minimal competition, they hold strong power and influence.| Low| Supplier profitability| Suppliers are able to bargain because there are few rivals and highly profitable nature. | Extremely high| Overall: medium|
Bargaining power of buyers| | |
Switching costs of buyers: | Switching costs of buyers is low; the power of buyers will be high. Buyer can easily switch to a rival product, which depends on the products’ quality and price and there are almost no switching costs for customers| Extremely high| Buyer concentration: | The number of buyers is related to whole industry. Massive numbers of buyers on video game industry. | Medium| Presence of substitute inputs: | The ‘big 3’ is not just competing against with each other, they are also competing against other entertainment, such as online games and twitterThere are lots of substitute are present to convert the buyer| Extremely high| Buyer profitability| If the buyers are unprofitable, they are unable to bargain.Since economic decrease and high levels of unemployment, people will be entertaining less.| High| Overall: high|
Power of substitutes| | |
Relative price/quality of substitutes| Wii, Xbox 360 and PS3 although have their own specialties and advantages in different areas, but substitution is also available and possible. It depends on price and quality of the console.| Extremely high| Buy propensity to substitutes| Video games market is huge, customers tend to be varied. The key assessment for winning in video games market is to catch the consumers’ propensity. Develop their own advantaged area, and create a new strategic to attract the new customers.| Extremely high| Switching cost| The ease of buyers switching products.It is very simple for the customers to switch to a different product as it cost them less and with similar experience.| High| Overall: extremely high|
Intensity of industry rivals| | |
Industry growth rate| Growing rapidly in recent years, but grow slowly now because of the economic recession. However, the trend is positively growing.| Extremely high| Exit barriers| Significant exits costs because the capital to enter the industry is so high (including technological talents hiring, equipment cost and advertising) and spends too much time for preparing. | Extremely high| Overall: extremely high|
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