Strategic Management in the Video Game Industry - Case Study Example

Strategic Management Case Study on Video Industry Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 1. Introduction - current situation overview 3 2. Summary of macro (PESTEL) environment analysis 4 3. Summary of industry (Porter's 5 forces) environment analysis 11 Any other issues highlighted 16 Recommendations for the future of video games industry 16 Works Cited 18 1. Introduction - current situation overview The video gaming industry is one that is full of competition. The major competitors, in no specific order, are Sony, Nintendo and Microsoft. Sony was the main dominating company between the years 1995 and 2006, accounting to almost 60% of the total world sales of gaming consoles. Following Sony was Microsoft, and these two were the main leaders in the market of video gaming consoles. Nintendo emerged some years later and had a very weak start and most people wrote off Nintendo as a competitor in this industry. Its poor performance was mainly accounted to the poor technological advancement Nintendo used, but there were also many other contributing factors. However, in 2009, Nintendo Wii rose to the top in the video gaming industry, and this unexpected success seems to have brought confusion to the two formerly leading companies in the industry (Wolf 121). One common thing about Sony and Microsoft is that they both viewed the video game console not as a product in its own right but as a component that has multiple functionalities (gaming and internet connection), and they therefore used the video gaming consoles as a marketing strategy. However, Nintendo Wii came with an altogether different idea that worked: it designed gaming consoles and gaming machines that were specifically for the purpose of gaming, therefore selling them as products in their own capacities. Another common thing about Sony and Microsoft was that both targeted male gamers aged between 11 and 30, and they therefore designed games and gaming consoles that were very sophisticated or hardcore, and the hardware and software had great capacities and graphics (Rainey 210). The story lines behind the games, too, were very complex. However, Nintendo Wii also came up with another shocking but successful logic: instead of targeting sophisticated and hardcore gamers, it would target casual gamers, and the capacities of the hardware and the graphics would be way less sophisticated than those of Sony and Microsoft. The idea here was to ensure that the games and hardware provided would be understood by the gamers with speed and ease, not having sophisticated hardware and games that were complex and not easy to learn and enjoy (Wesley & Barczak 102). This strategy was pure mockery to Sony and Microsoft’s complex and sophisticated strategies, and these two companies at first labelled Nintendo Wii as an outlier or an outsider, who had chosen to be separate from the main stream strategy in the industry. However, the two companies decided that of Nintendo’s strategy worked, then it was not an outlier, but it was absolutely one if the strategy failed (Wesley & Barczak 107). This report is a case study on the three major competitors in the video gaming industries in relation to strategic management. Strategic management is very important to any business, as good strategic management in its micro and macro environments gives the business competitive advantage over similar businesses in the market, and the business also gets higher sustainability over its competitors. A summary of the PESTEL analysis and the Industry Level analysis on the case will also be given in the report. 2. Summary of macro (PESTEL) environment analysis PESTEL analysis evaluates the Political, Economic, Social, Technological, Environmental and Legal factors in the macro environment of an organization that influence decision making and management strategies in the organization (Henry 164). One common factor will be put into consideration; the three companies, Sony, Microsoft and Nintendo are all located in the USA, and they therefore share a common political, economic, social, technological, environmental and legal environment. FACTOR ISSUE ANALYSIS EFFECT ON INDUSTRY Political Policies the government makes that affect the organization in one way or the other. The government has the power to change the political environment of Sony, Microsoft and Nintendo anytime. The government may pass bills or regulations that may change the decision making models of the companies at any time. Since the three companies face the same political risks, each company has to design management strategies that will keep it above its competitors. The industry has to abide by the various set environment laws such as safe disposal or recycling. As a result the company has to establish measures to deal with the same to ensure it keeps in line with legal requirements. The industry depends on access to intellectual property and patent acquired from third parties. As a result, it might encounter infringe problems with existing patent of others. The political environment’s influence on the human resource, infrastructure and facilities and even social or health issues in the country (Rugman & Verbeke 151). Negative Positive Positive Negative Positive/ negative Economic Recession and Inflation which as a result leads to economic depression which thereafter makes the industry change its marketing strategy which may affect its success. The three companies will therefore have to revise their costs of production so as to lower the prices of their products, and this may reduce the profit margin left (Henry 172). Foreign Exchange Rates. The rate at which a country earns its foreign exchange may also determine how decisions will be made and how management will be done in an organization. Stable macro economic environment for the industry with stable currencies, low interest rates, and international competitiveness which forms the basis for the growth of the industry. (Henry 172) Negative Positive or negative Positive Social Social and demographical factors mainly influence the demand and supply curve and the decision making model of an organization. For instance, if the population of the country or area in which the organization is based is mainly comprised of young people and fresh graduates, the demand on the organization from the government to employ more people will increase. (Hill & Jones 84). Sony and Microsoft have a social advantage because of the reputation and name they have created among the population over the decades. This therefore gives them advantage in the market because their products are more acceptable by consumers. However, the challenge is that these companies have to work even more to maintain the image and to continually please their fans. Nintendo is in the process of creating a good name and establishing its reputation in the market. Positive Positive Negative Positive Technological Design, efficiency and ease of learning and using a gaming console (Freeman 47). Technological innovation is seen as one of the major factors leading to the growth and success of the industry. Currently, technology is developing at a high pace and individual appreciate new advances in their systems. Technological advancement creates new markets and new challenges to an organization The focus of Sony and Microsoft on producing sophisticated gaming consoles caused the assumption of the need for simplicity. Nintendo, after adequate strategic market research, used this factor as an advantage. The constant change in technology in the twenty first century has affected almost all industries and has resulted to a shortened product life cycle Positive Positive Positive Negative Environmental Some businesses may engage in environmental unfriendly practices in order to maximize their profits without considering the welfare of the people. The company has to establish measures for recycling to ensure that, it abides with environmental regulations thus remaining environmental friendly. Eco-Friendly Technology. Because of the increased awareness of the environment and conservation the companies will be forced to make decisions that are environmentally safe and friendly. Such decisions are made as a marketing strategy and as an environmental legal requirement. A company that produces more eco-friendly products will attract greater markets than that which produces harmful products (Rugman & Verbeke 172) Positive Positive Legal Minimum wage requirements. This may force the organization to increase its workers’ salaries Gender or disability discrimination. The company may need to review its recruitment and hiring policies Negative Positive ` 3. Summary of industry (Porter's 5 forces) environment analysis The Porter Five Forces analysis of the industry evaluates the five factors that determine the profitability of an industry. These factors cause intensity in competition, and they either make an industry more attractive if it is more profitable or unattractive if the industry is unprofitable because of the weight of these factors. Out of the five factors, two are vertical forces (bargaining power of customers and bargaining power of suppliers) while three are horizontal forces (threat of new entrants, threat of rivals or close competitors within the industry and the threat of substitute products) (Freeman 44). FACTOR ISSUE ANALYSIS EFFECT ON INDUSTRY Bargaining power of customers The presence of substitutes The strength or bargaining advantage the buyers have over the industry. Sony and Microsoft were the dominating suppliers in the market, and the customers had very limited choices and a low bargaining power. However, when Nintendo came up with the new products, the customers gained bargaining advantage over Sony and Microsoft The concentration of the industry is relative to the buyers An industry market that has very few suppliers (competitors) as compared to the number of customers has buyers whose bargaining power is low. If in the market the buyer is stronger, then the buyer can either demand for a price reduction or for better quality products at the same price (Henry 214) High High Bargaining power of suppliers The supplier concentration is relative to the industry concentration. In this case, the firm is the supplier’s customer. If the supplier is more dependent on the business, then the supplier has a lower bargaining power, but if the business is more dependent on the supplier then the supplier has a higher bargaining power over the firm. A market that has few suppliers is characterized by firms that have very limited choices and a low bargaining power, giving an upper hand to the suppliers in the market (Rugman & Verbeke 234) The availability of substitutes The suppliers had a great advantage over the companies especially because of the limited number of suppliers of quality software and hardware devices. However, the companies started taking charge of the situation and started making some hardware devices (such as chips and CD-ROMS) for themselves High High Threat of new entrants A totally new competitor can enter the market and become a new entrant. An already existing competitor can launch a new product and become a new entrant in that manner for instance Sony and Microsoft were having a great time in the market until the somewhat dormant Nintendo entered the market with a new product. Nintendo cannot be termed as a brand new entrant as such, because it was in the market for a long time only that it was poorly performing. The profitability for Sony and Microsoft was greatly reduced as Nintendo zoomed past these two giants in the video gaming industry. (Hill & Jones 132). Medium Threat of rivals or close competitors within the industry Each firm strives to secure the biggest share in the market, thus putting the other firms in the market at a risk of losing business. In this case The main companies in the video gaming industry were Atari, Sega, NES, Nintendo, Sony and Microsoft. However, the last two, followed by Nintendo, had the greatest concentration in the market. This was before Nintendo managed to secure the biggest market share above Sony and Microsoft. (Schilling 143) Proprietary product differences Product differentiation is low High likelihood for new entrants High Threat of substitute products Customer’s switching to other products Consumers getting bored when a market is flooded with the same kind of product and quickly switch to an alternative product when it is offered to them. The consumers of video gaming consoles were used to the sophisticated products aimed at satisfying the hardcore male gamer. Therefore, female gamers and casual gamers, who form the majority in the market, were left out. Also, the targeted male hardcore gamers were also too used to the existing products.(Henry 274) Availability of substitutes Substitute products causing elasticity to the competition, thus posing a threat to the existing products and companies. Nintendo bringing in a new product that is less sophisticated was such a relief to many gamers. Therefore, Sony and Microsoft faced the threat of the substitute product. Because of this, it is rumoured that both companies plan to produce a similar product in 2012 (Bruton & White 164). (Henry 274) High High Any other issues highlighted From the study, it is seen that Sony and Microsoft are companies that were well established and that had grown, but their strategy did not change. It seems that these two companies employed defensive strategies whereby they protected the already existing market and target group. However, the failure in this is that they did not strengthen their roots within these existing markets. These two companies fell into the deadly trap of assuming consistency and sameness in the market and consumer expectations and preferences. Nintendo, on the other hand, employed offensive strategy, whereby it entered the market targeting a different group altogether and with a new product for video gaming. This way, Nintendo developed an advantage over its multimillion-dollar competitors. The advantage with Sony and Microsoft is the fact that these two companies have a very well established reputation among the consumers globally, and thereof introduction of a new product into the market will most likely be very easy and successful. Failure to understand the consumers was also another reason why Sony and Microsoft were caught in surprise by Nintendo. The two companies did not really and deeply evaluate whether there was actual need for the sophisticated products they produced. This shows that their methods of conducting research in the market were poor and wanting. Recommendations for the future of video games industry The companies in the video gaming industry only have two major hindrances; technology and originality (Gawer 233). Therefore, the companies in this industry should ensure that they beat the two barriers so as to obtain the best sustainability and competitive advantage especially in the ever-developing world. Also, since video gaming is a form of entertainment just like media entertainers such as radio and TV, among many others, those in the industry will have to make the games they produce socially and culturally acceptable. The companies will have to invest in employing programmers who are very talented in designing games and software that are unique. The companies will also have to beat the mentality in the market that vide gaming is for kids and young adults. Conclusion The video games industry is full of young people, and the concept behind the games will greatly influence the young people. Therefore, this calls for a great sense of leadership to those designing games. From the PESTEL and Industry Analyses, it is seen that the three companies all have almost equal challenges and opportunities, and this means that they all have almost equal chances of making it in the market. The policies and methods of strategic management employed will become the major determinant of the success of each company. Works Cited Bruton, Garry and White, Margaret. Strategic Management of Technology and Innovation. London: Cengage South-Western, 2010. Freeman, Edward. Strategic Management: a stakeholder’s approach. Cambridge: Cambridge University Press, 2010. Gawer, Annabelle. Platforms, Markets and Innovation. London: Edward Elgar Publishers, 2009. Henry, Anthony. Understanding Strategic Management. Oxford: Oxford University Press, 2008. Hill, Charles and Jones, Gareth. Strategic Management: an integrated approach. London: Cengage Learning, 2007. Rainey, Hal. Understanding and Managing Public Organizations. New York: John Wiley and Sons, 2009. Rugman, Allan & Verbeke, Alain. Analysis of Multinational Strategic Management: the selected scientific papers of Alan M. Rugman and Alain Verbeke. London: Edward Elgar Publishers, 2005. Schilling, Melissa. Strategic Management of Technological Innovation. Chicago: McGraw-Hill Publishers, 2010. Wesley, David and Barczak, Gloria. Innovation and Marketing in the Video Game Industry: avoiding the performance trap. London: Gower Publishing Ltd, 2010. Wolf, Mark. The Video Game Explosion: a history from PONG to Playstation and beyond. London: Greenwood Publishers, 2008. Read More