Video Game Console Issues - Case Study Example

Table of Contents Particulars Page No 1.0 Introduction 2 2.0 Environmental Analysis 3 2.1 PESTEL Analysis 3 3.0 Competitive Environmental Analysis 8 3.1 Porter’s Five Force Model of Industrial Competitiveness 9 3.2 More on Competition on Sony, Microsoft and Nintendo in UK 13 4.0 Summary and Conclusion 14 5.0 References 16 1.0 Introduction This report has been designed to provide readers with thorough understanding of the analysis of the video game console industry in United Kingdom. The report has been crafted in a manner to include two different segments. Firstly a macro or environmental level analysis and secondly a competitive analysis of the video game console industry in the United Kingdom. The report initially begins with a complete discussion on the environmental analysis of the video game console industry in UK which for better understanding has been explained by the help of a PESTEL analysis to figure out the different macro-level factors which impact the video game console industry. It is to be further noted that the analysis is done on basis of the complete industry and not specific to a particular organization or firm. The report in its second part looks to further explain the findings from the environmental analysis by concentrating upon the competitive analysis in the video game console industry. To ensure easy and in-depth analysis of the competition in the aforesaid industry, Porter’s Five Force Model has been used as a strategic tool along with identifying three giants in the video game console industry which are Sony, Microsoft and Nintendo and making a competitive analysis of the mentioned organizations through recent facts and figures. Lastly the report provides a conclusion to the overall discussion so as to ensure both practical and theoretical understanding of the entire topic under study. 2.0 Environmental Analysis Before looking into the environmental and competitive analysis of the video game console industry it is first important to understand some facts about the video game console industry. The video game console industry is a broad market which comprises of all video games which are used in conjunction with consoles along with its all associated hardware comprising of consoles, peripherals and accessories like different cables, memory cards and game pads. The video game console industry in United Kingdom has gone through a series of technological changes along with significant growth. Even during the economical downturn the global video game console industry was successful in maintaining a growth of 23.7% in 2008 which itself highlights the immense opportunity in this industry. Nintendo, Sony and Microsoft are among the market leaders in the global video game console industry occupying over 70% of the overall global market share in the industry. Let us now have a look at the environmental or macro level factors which affects the video game console industry in UK which has been explained through the help of PESTEL analysis to ensure coverage of all factors which could impact the industry. 2.1PESTEL Analysis PESTEL analysis is composed of different factors like political, economical, social which includes legal and cultural factors, technological, environmental and legal factors which externally affects an organization in a particular industry and are those factors which are beyond the control of any organization. However, such factors can in no sense can be overlooked as the impact of the same can be so serious that it may eventually led to shut-down of larger giants operating in any industry. A PESTEL analysis of the Video Game Console Industry in UK is discussed as under. Political Political environment consists of a composition of various tools which includes different laws, governmental agencies and various other pressure groups which influences different organizations and firms operating in a specific industry. For video game console industry one of the biggest challenges in UK is lack of strong governmental regulations against piracy of games by illegal manufacturers and individual game players which results in huge losses to the genuine registered firms in the industry. As video games are closely associated with emotions of the people, government looks to control the contents of video games with strong attitude. Copyright is yet another issue in the gaming world for instance Nintendo has recently launched Wii console which is big hit but however today faces problems of patent infringement which could seriously impact the firm’s growth and drain-off huge funds in case the judgment is hit against the company. Furthermore in addition to the aforesaid mentioned political factors there are immense governmental and taxation policies, foreign trade regulations and social welfare practices and policies which affect the video game console industry. For instance the UK taxation policies levy heavy entertainment taxes on video games which make the prices of domestic games in the country rise as against imported goods thereby increasing competition from international players in competition to domestic manufacturers. Economical Video Game Console Industry in UK has been identified as one of the biggest booming industry however, the same could not be kept outside the purview of recent global financial crisis which was characterized with adverse impact on the gaming industry in term of declining sales and reducing profits. On the brighter side the global economical downturn was considerably met by the video game console industry in UK by means of expansion in software sales and through installation of new generation hardware console. The UK GDP is much contributed by the video game console industry as there is little impact of the interest rates as most of the leaders in this industry has their own production units. UK has been further identified as the Europe’s largest gaming market with a position of third largest globally. With the global gaming market growing significantly and expected to reach $102.9 billion in 2017 which is a 8% compound annual growth rate when compared to 2013 of $75.5bn, the UK gaming industry is expected to follow similar trend thereby inviting immense opportunity to larger giants and potential threats of new entrants in the UK video game console market. Growth in the UK Video Game Console Industry is driven by mostly next generation off consoles which were developed and marketed by Sony and Microsoft. These were the first major consoles released by Sony and Microsoft since the Xbox 360 and PS3 in 2005 and 2007 respectively. Despite this Next Generation being released during the last quarter of 2014, the market adaptability of the same was so immense that it was able to bring the industry out of decline. The UK gaming industry was further worth of over £3.9bn in 2014 which is 13% up as compared to 2014 thus contributing immensely to the UK economy and over 1900 video game companies thus providing huge employment opportunities in UK. It is to be further elaborated that unlike global Video Game Console Industry the UK gaming industry is largely dependent upon the disposable income of its potential consumers, which is an area of concern as UK has recently experienced a decline in the disposable income of consumers however, the same could act as an opportunity by developing low manufacturing cost products and thereby selling the games at normal price than looking for premium pricing methods as have been historically done by Nintendo. Social Similar to the political and economical factors affecting the video game console industry, social factors also play a crucial role in the success or failure of a gaming organization. A recent trend in the UK has witnessed that more and more women and people over the age of 35 years have shifted their likes towards gaming world. Women take over 51% of the majority of casual players and people over 35 years are much more in number than the general trend of youth dominating the gaming industry in most of the countries across the globe. Furthermore apart from the demographic social factor as discussed above there are various other social factors which affect the UK Video Game Console Industry like the income distribution, life-style trends and pattern, social mobility, level of education, consumer behavior towards products etc. Games further have the magi to influence the culture of the people in a society especially it is the most used tool to bring violent to children. Furthermore as an improvement and recovery in the consumer’s life style after the financial crisis which UK has witnessed people tend to be more active in pleasure and entertainment stuffs like video games which again provides market opportunities for video game developers. In addition to the same the traditional pattern where video games were considered as an entertainment package for children only and parents were concerned of their children being addicted to the video games there has been a shift in the thinking pattern of parents who consider the same as an entertainment for the entire family and further strengthen family ties. Technology Technological factor is the most vital factor of the video game console industry as it can dictate the characteristics of the entire industry. Technology can stimulate growth by new innovations in the field of research and development in context to the gaming world. The UK video game industry experiences technological up-gradation on a continuous basis as the speed at which technology gets transfer is immense. However one of the biggest constraints in such technological advancement is the huge cost associated with it. With rise in the video game developers in UK it provides opportunity to both existing and potential new entrants to develop and craft new game designs. Furthermore technological development in the UK Video Game Console Industry further provides opportunity of tapping the online capabilities of emerging video game consoles such as Xbox360. However the same can be looked from a different perspective in terms of threat in context to piracy of games in different countries due to expansion of online games. In addition to the same complicated government regulations in UK in context to technology usage of the content in video games have to be met by the developer. Environmental Environment plays a significant role in any organization feasibility and durability as there are lots of laws preventing environment in UK which every company needs to adhere to. Furthermore, Nintendo uses a lot of plastics in developing its products and video game consoles consume a high degree of power during their running process. Thus, companies like Sony, Microsoft and Nintendo ensures that their products are developed with latest technology keeping in mind the environmental clauses so that their products consume less power. Furthermore, Sony has recently looked to develop its products which are environment friendly and aims towards “Go Green”, which attracts more of consumers as parents today are more concerned of educating their children about environmental safety thus creating a new and unique set of potential customers for video game console developers. Furthermore, Nintendo has been constantly looking to develop games which convey environmental messages to its users. Environmental factors need to be seriously considered today in any industry and consumers are becoming more conscious to environment friendly of which the video game console industry of UK is no exception. Legal This is another critical factor which every organization in any industry needs to adhere to, failing of which may result in huge fines and penalties to ultimate closure of the firm. There are a lot many legal issues which firms operating in video game console industry needs to follow like correct use of trademarks, copyrights, online ownership, revenue recognition, intellectual property right etc. There are many rules and regulations developed domestically in United Kingdom which developers of video game consoles need to abide by, furthermore there are international set of rules and regulations which need to be complied with. The Entertainment Software Association (ESA) is a small party in politics which represents the video game industrial segment and on a continuous basis publishes various gaming contents which need to be strictly followed particularly by larger giants like the Microsoft, Sony and Nintendo. Furthermore an international body The Entertainment Software Rating Board (ESRB) takes in charge of rating the various video game consoles and contents of the games at international level. In recent times UK has further experienced significant legal changes which have largely impacted the firms operating behavior. The introduction of new laws in context to age discrimination and disability discrimination legislation along with changes in the minimum wage requirements are some of the recent law changes which even the gaming developers need to adhere to (Finlay, 2000). Thus we see that the environmental scanning of Video Game Console Industry is very important for both its users and developers as it poses both threats and opportunities to the players in the field and a correct evaluation of the same can further help its developers to gain sustainable competitive advantage. Although the control of the aforesaid environmental factors are beyond the control of any specific organization or firm a study of the same is very critical to any organization in any industry as non-compliance of the same may eventually led to complete shut-down of the larger players as well. Now let us have a look at the second section of the report which looks to discuss on the competitive analysis of the Video Game Console Industry in UK. 3.0 Competitive Environmental Analysis This segment of the report looks to identify the overall Video Game Console Industry competitiveness where effort has been directed to throw highlight on the top three major competitors which are Sony, Microsoft and Nintendo who acquires a majority of 70 percent of the UK gaming market share while the rest is shared by other small video game console developers. In order to ensure an in-depth analysis Porters Five Force Model to Industry Competitiveness has been used along with a general discussion of the competition among the mentioned larger giants of Video Game Consoles in United Kingdom. Porter’s Five Force Model is examined as under to evaluate the competitive analysis of the UK Video Game Console Industry 3.1Porter’s Five Force Model of Industrial Competitiveness Porter’s Five Force Model was developed by Michael Porter which aims to identify five distinguish forces targeted towards identification of industries competitiveness. The same in context to UK video game console industry is examined as under. Threat of Substitutes The UK video game console industry unlike the global video game console industry posses threat from various substitute products like online games, highly developed mobile games, PC games etc which is gaining much popularity in UK. However, such games in real cannot in any sense compete with the fun and entertainment provided by console games. This very fact give the console game developers an added advantage of less customers switching to substitute products. Furthermore there is a direct threat from similar products offered by various developers which includes both the larger giants like Sony and Microsoft to small domestic and Chinese console game developer. For instance, Sony’s PS3 has been successful in establishing a larger UK market share due to its marketing strategy of offering its products as package, than the Xbox 360 or Wii which are similar products offered by other competitors and share the same characteristics and life span thus posing serious threats from direct similar substitute products. In simple words a product of Sony may be regarded as a direct substitute of products offered by Microsoft and Nintendo. Threat from New Entrants Threats from Potential new entrants range from moderate to low in the UK video console game industry. The main reason for the same is larger UK market share already been tapped by larger gaming giants like Sony, Microsoft and Nintendo offering strong product differentiation which discouraged new entrants to enter the video game console industry. Furthermore brand equity here acts as a strong factor and brand switching would be a challenging task for gamers to choose new entrants over the already established game developers. Furthermore if there is a considerable threat from new potential entrant in the video game industry, this would be clearly witnessed in terms of less product differentiation and would further lead to slow market growth as already has been identified that the larger market share is spread among the existing established game developers, creating severe and fierce competition which would be difficult for the new entrants to survive in the industry. Thus in a nutshell, threat from new entrants could be virtually ignored due to the presence of already established organizations in the gaming world who considerably is preferred by customers over any other new organization making an entrant in the video game console industry in UK. Nintendo was one of the first companies to develop console games globally and introduce the same in UK market hence it was able to achieve economies of scale at a much earlier phase than its near competitors Sony and Microsoft who were also able to develop a strong market share due to their ability to respond to future technological changes and design products as per customer needs and wants. However with rising market opportunities and companies like Sony and Microsoft already establishing their presence and mark, potential threats from new entrants are low with limited market share to tap for (Dimitri, 2002). There are formidable barriers to entry for any new potential entrants in terms of intense price competitions, difficulty in achieving the economies to scale, difficulty in providing a real match of quality to price offered making the entry of potential new entrants an unfavorable opportunity to achieve a favorable return on investment. Thus, a potential new entrant shall require huge capital, significant name recognition and sufficient marketing campaigning to earn such recognition and successful enter the UK video game console industry. Intensity of Competitive Rivalry among Existing Players The competitive rivalry among the existing players in the UK video game console industry is very high as all the competitors in the industry offers similar products with similar features and marketing strategies in terms of price, quality and durability of the products offered. For instance a price cut by Sony in its products like PS3 can be directly witnessed in a similar price cut in Xbox360 offered by Microsoft thus creating a downward pressure on price due to high rivalry among the existing players. Although there is a fierce competition for gaining larger market share in UK between the aforesaid mentioned console game developers (Sony, Microsoft and Nintendo) the competition levels out at industry level due to the presence of different preferences form different gamers alike. Furthermore rivalry among the existing players in the UK video game console industry can be clearly witnessed in similar market targeting, similar marketing objectives and marketing mix strategies deployed by existing competitors. PS3 developed by Sony has been successful in attracting customers owing to its high speed, power and graphics as it uses Cell Processor and Blue Ray. Nintendo on the other hand has a pricing advantage and concentrates more on gaming experience as it exploited the Wii consumers with a different approach where customers are instead of sitting in front of a television box balances themselves of a board. Thus there are different designing of the products which provides similar utility which itself justifies the high degree of competition intensity among the existing players in the UK video game console industry. Bargaining Power of Buyers Bargaining power of buyers in the video game console industry of UK is quite high as the products are mostly technology driven and customers on a constant and continuous basis looks for the best deals available in the market. Ever since the global economic downturn which had adverse impact even on the UK economy consumers in the video game console industry are ready to substitute quality for price. Customers in this industry has high bargaining power as they have the ability to influence prices down and bargain for higher and better quality services and products. Retailers are further important to the UK video game console industry as they sell the companies’ products and help in creating demand and excitement among potential consumers through advertisement of video game consoles. Furthermore, consumers in the UK video game console industry consist of a combination of teens, youths and people above the age of 35 who are much price-sensitive thus a decrease in the price of the product has immense impact on the sales. For instance, in 2013, PS3 and Xbox jumped by 102 percent and 32 percent respectively due to price cuts. Furthermore the choices of selecting the best gaming developers are very few for the consumers which are mainly from the big three. Thus , the larger giants or video game developers have considerable bargaining power to consumers. Bargaining Power of Suppliers The bargaining power of suppliers in the UK video game console industry is quite low as there are readily available substitute video game consoles in the market. Furthermore most of the suppliers of the video game consoles are mainly software employees, independent game publishers and editors or PC developers making the bargaining power of suppliers low. In contrast to the same video game console developers like Sony, Microsoft and Nintendo have strong brand equity and suppliers are more willing to maintain cordial relationships with them than looking to bargain. In addition to the discussion there are a lot of suppliers in the UK video game console industry which further make their bargaining power to reduce and also those suppliers are not able to exert considerable influence over the price, quality or sales of the products sold as there are only three major competitors in the UK video game console industry. Microsoft is one of the biggest console game developers globally and in UK and some of its associated parts of the console games are developed by suppliers while most of the fundamental and important parts of the console are manufactured in house. Therefore the ability to bargain price with Microsoft is low. Similar to Microsoft, Sony and Nintendo specializes in developing their products in-house making the bargaining power of suppliers low. Furthermore since the competition is set and console games are very similar in terms of their designing and utility, UK video game console market is expected t o remain same in future years even with the new releases of consoles with low bargaining power of its suppliers. 3.2 More on Competition among Sony, Microsoft and Nintendo in UK As already has been identified and discussed that majority of the market share in UK video game console industry has been tapped by three competitors namely Microsoft, Sony and Nintendo who occupies over 70%of the market share while the rest is shared by other developers. Competition among all the aforesaid video game console developers is very high not in terms of their products but also in context to their marketing strategies, objectives and business plan. Sony has a strong competitive advantage when compared to Microsoft and Nintendo owing to its successful products such as PS1, PS2, PS3, PS4 and the latest Next Generation video game consoles. Microsoft on the other hand has its own pool of loyal customers who are much attracted towards its products like Xbox360 and Xbox one. Nintendo has its own list of developed renowned products like Wii and Wii U. Thus the UK video game console industry is more of a structured differentiated oligopoly market as only few firms produce products which are partially differentiated along lines of price and its associated features offered (Children Now. 2000). Furthermore, the UK video console industry is characterized by huge cost of barriers to entry for any potential new entrants as currently it may take over $2 billion to develop a console game which could actually compete with the aforesaid mentioned larger gaming giants and further may take several years to scrape profitable returns on such investment with high market risks being associated with it. 4.0 Summary and Conclusion The report has been developed in a synchronized manner to make a complete discussion on the environmental and competitive analysis of the UK video game console industry where the study has been segmented under two different segments to ensure better understanding to all its readers. The environmental scanning of the UK video game console industry has been explained through the help of PESTEL analysis which is more industry specific than towards a specific organization operating in the industry. The significant changes which are more likely to occur are in the technological part of the macro environment. These technological changes are going to assist in developing simple appealing games to various distinct demographic groups which shall be consider a broad shift in the UK video game console industry. Another important trend which the UK video game console industry is more likely to experience is in terms of its copyright laws which prohibit counterfeit CDs and software. This shall possess a serious challenging threat for both video game manufacturers and console game developers as UK has been performing well in combating any such commercial frauds and counterfeit goods. The implication of which can be clearly witnessed in the relevant video game console market, primary and selective demand of goods and more fiercely in rising competition. Thus the environmental scanning of the UK video game console industry not just helps to identify the current market situations and conditions but equally through lights to the formidable changes which are more likely to occur in future years and even the larger giants need to develop marketing strategies and tools to ensure better positioning of their products in the UK market. The second part of the study looks to evaluate the competitiveness of the UK video game console industry where discussion has been explained through the help of Porters Five Force Model of industry Competitiveness and specific references have been made to three distinct competitors currently operating and occupying dominant position in the UK market namely Sony, Microsoft and Nintendo. The study reveals that the potential threat from new entrants is at a low side since majority of the market has already been tapped by the aforesaid mentioned console game developers who have been successful in establishing their own brand name and equity making it very difficult for any new entrants to achieve economies of scale and compete with the existing products and further ensure considerable returns on their investments. Furthermore threats from substitutes is low however the intensity of competition among the existing rivals is very high as product differentiation is very narrow and marketing strategies adopted by all three larger game developers are similar to one another. Looking at the bargaining power of suppliers and buyers, suppliers do not have a high bargaining power as there are readily substitutes available and most of the console game developers look to develop basic primary products in-house on the other hand bargaining power of buyers is high as products are technology driven and continuous up-gradation is required with buyers having the power to bargain price to achieve desired quality. Thus in a nutshell, the report not just looks to provide the theoretical implication of the study but identifies future probable trends and shifts in the UK video game console industry ensuring a practical exposure to the current study. Furthermore the report provides a complete scanning of the current scenario and can definitely act as a guide for both its readers and firms to ensure better understanding of the entire topic under study. 5.0 References Children Now. (2000). Girls and Gaming: Gender and Video Game Marketing. . Retrieved May 5, 2015 from http://www.childrennow.org/media/medianow/mnwinter2001.html Dimitri W. (2002). Structure and Competition in the US Home Video Game Industry. The international journal on Media Management, p. 41-54 Finlay, P.N. (2000). Strategic Management: An Introduction to Business and Corporate Strategy. Financial Times: Prentice hall Hoover’s Online. (2005). Sony Electronics, Inc.- Fact Sheet. Retrieved on August 15, 2013 from http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=112902 Johnson, T., Scholes, P. and Wittington, R. (2005). Exploring Corporate Strategy: Seventh Edition, Prentice Hall, Pg 319 Mintel Reports, (2005). Massively Multiplayer Online Games (MMOG) and Mobile Video Games, Leisure Intelligence, November Roper, C. (2005). Sony PSP VS Nintendo DS. Retrieved on August 15, 2013 from http://gear.ign.com/articles/599/599454p3.html Shah, N. (2005). The Video Game Industry: An Industry Analysis, from a VC Perspective, Tuck Darmouth, Hanover Read More