Internal and External Environment at Nintendo - Case Study Example

MGMT 19114Strategic Management Assessment item 3- Group Case Report Chien, Hung Ju S0205678 Lam, Wai Sum S0199351 Pang, Poh S0192774 Shujun Wu S0188429 Due date 22 September 2011 Tutor Ali Abusalem We certify that this assignment is our own work, based on our personal study and/or research, and that we have acknowledged all material and sources used in the preparation of this assignment whether they be books, articles, reports, lecture notes, and any other kind of document, electronic or personal communication. We also certify that the assignment has not previously been submitted for assessment in any other course or at any other time in this course, unless by negotiation, and that we have not copied in part or whole or otherwise plagiarized the work of other students and/or persons. We have read the CQU policy on plagiarism and understand its implication. We can produce a hard copy of this assignment within 24 hours if requested. Executive Summary This report identified the internal (e.g. strengths, weaknesses, resources, capabilities, value chain), external environment (e.g. opportunities, threats, the changing characteristics in political, social-cultural, and technological segment), and Nintendo’s used business level strategy to compete with its rivals and analysis of several journal articles gave the resolution of Nintendo to turn its weaknesses into strengths for future development. By analyzing the external environment, industry competitive rivalry, etc, the paper concludes that Nintendo used the business strategy that listening to their customers closely and meet their changing preferences. It developed Wii to capture another class of non-players and thus reached a bigger market with increased sales. Nintendo aimed to compete with its rivals by integrating health and entertainment with family members and surrounding colleagues and reinforce communication with featured 40 different activities. Nintendo used another business strategy that is having more than one supplier for the same product means to have more accurate game design and cheaper, thus the production will increase in the market. The study also established that companies change their business models and cultures in order to gain innovative outputs that help them remain competitive. Arakji and Lang (2007) stated that producer and consumer collaboration could help innovation and product development in the video game industry. Choi (2010) stated that it is possible to develop games with other firms and learn from each other without sharing programming source code. Table of Contents Executive Summary 1 Table of Contents 2 1.0 Introduction 3 2.0 Literature Review and Strategy development for Nintendo 4 3.0 Review of the Nintendo’s case 5 4.1.1 Strengths 7 4.1.2 Weaknesses 8 5.0 External Environment 8 5.1.1 Opportunities 9 5.1.2 Threats 11 6.0 Industry and Competitive Rivalry 12 8.0 Conclusion 15 9.0 Recommendations 15 10.0 References 17 1.0 Introduction Game Players lived in mass cultural environment with stable and predictable consumption patterns before, but today they are live in a shifting world because of the networks that redefines their lifestyles and purchase intentions. Nintendo in the game industry find it more difficult and costly to understand their customers and it becomes challenge to create products meet their needs. Joshi and Tsang have believed the game industry is ready to use disruptive strategy not only Nintendo, but also for all gaming firms. They tend to expand target audience and create their imagination in the development processes. This paper identifies several issues that Nintendo is confronting: It keeps a close watch on industry competition; It always listen to their customers’ needs; It invests aggressively in new technology; It aims to reach the top positions when using the disruptive strategies; The term ‘disruptive strategy’ is created by the disruptive changes in the video game industry. ‘Disruptive technology’ is the strategy that used for innovation and better than sustaining strategy in the firms. This paper will discuss the industry and competitor environment, external environmental, the internal environment (e.g. resources, capabilities and core competencies), Nintendo’s strengths, weaknesses, opportunities and threats from other competitors; certain theories and concepts from academic articles and text book are being included as the argument resources which will be helpful to resolution of the Nintendo’s strategic challenges. The recommendations will be given for future improvement. 2.0 Literature Review and Strategy development for Nintendo Arakji and Lang (2007) stated that producer and consumer collaboration could help innovation and product development in the video game industry. Firms opened a portion especially for consumer designed and implemented products. By selecting these derivatives, firms are able to outsource of the product design and development process. Outsourcing allows firms to concentrate on other issues while taking care of the details by outside experts. The specialized outsourcing company has world-class capacities and access to newest technology that firm cannot afford to buy (Thompson 2011). Arakji et al. (2007) identified ‘the traditional collaboration is producer with producer partnerships; include joint ventures for research and development’. The information technology is changing new product development; in fact, it is enabling valuable relationship between firms and customers. For example, IBM opened its source software to encourage consumer innovation as part of its business strategy. However, the collaboration is driven by ‘falling cost of communication and information transfer’ (p.196). While some firms are no longer gathering the details of players’ needs and redesigning the product because of external sources of ideas; they prefer give rise to new business model. Many firms have already gave all the outsource part or innovation process to players’ networks. Von Hippel (1986; cited in Arakji p.197) clarified lead players experience particular need of product that ahead of general players, they can ‘constitute need forecasting agents to help firms creating new design’. In order to have intellectual property environment, firms use strategic enforcement of copyrights. Cyberspace laws are using to balance the Internet as open platform that generate creativity and against threats and business risks that emerge from the openness. (Lessig 2001) Firms safely distribute products to players and offer additional protection to creators that ensure they have incentives and keep creating new products. Firms formulate a trend and culture that ‘invite players to stop being passive receivers and become active contributors’ (Barlow 1994; cited in Arakji). Binken and Stremersch (2009; p.88) stated that game systems are constituted of online video games and console games. The figures of system markets show that sales of hardware (the product) are mainly depending on the complementary product (software). Firms have to produce exclusive software and the certain high quality software may have large effects on hardware sales. Nintendo is the obvious example that created Wii and family, sport oriented entertainment software. Choi (2010; p.125) stated that ‘global co-development is the strategy to respond the increasing competition’. The collaboration was limited to easily parts, such as sound design and motion capture’, whereas game feature and server, player programming were developed by both parties. Choi (2010; p.131) illustrated there were some signals of games failing in the market no matter how innovative, exciting, or even created by brilliant firms. In order to reduce the distribute risks, costs and time of inventing new games; firms have been pushed to find alternatives. Global collaboration is one of the options to meet the challenges. 3.0 Review of the Nintendo’s case Nintendo was ranked seventh among the world’s most innovative companies; it was only thirty-nine previously. The recognition gave more confidences of Nintendo firm to transform into more innovative powerhouse; thus, it designed the video game that prevail the new business model. In 2000, its competitors Sony used the product of PlayStation 2 as the clear winner in that year; and Microsoft reached their high outselling of Xbox; however, they continued using the previous strategies to introduce new generation video games which are increasing computing power and adding more enticing graphic interfaces, and these actions were not enough as Nintendo did; Iwata, the president of Nintendo believed that video gaming should more focus on non-gamers, such as women and old generation, and this was the light of the company’s belief. Nintendo repositioned itself developing a totally different product called ‘Wii’, which allowed non-players to emulate the real life games such as tennis, bowling and boxing. The launch of Wii had brought triple values for company in Japan market, and this had been proved as runaway success. 4.0 Nintendo Internal Environment: Resources, capabilities and core competencies, value chain Some companies have been changing their business models and cultures in order to gain innovative outputs that help them remain competitive. They not only need correct structure, but also sufficient resources; the possibility to have sustainable competitive advantages when firm uses its unique core competences and capabilities to implement the strategies. (Hanson et al. 2011; p.71). Nintendo’s core competence was to develop simple games, targeting all customers at any age, gender, no restraint of gaming experience. These new games were only requiring few minutes to set up and play smoothly. In addition, these games need Nintendo’s easy-to-use controller that monitors wide range of game scenarios with real-life situations rather than virtual world fantasy. Hanson (2011; p.72) states that ‘by exploiting the core competencies, firms not just create values for customers, but from internal value chain analysis to outsource preparation’. Cited in Bradford et al. 2010 Value chain includes inbound logistics, operations, outbound logistics, marketing sales and service that supported by firm infrastructure, HR management, technology development, and procurement (Bradford et al. 2010). Values are measured by product performance and its attributes by firms that customers are willing to buy. Firms have to provide superior values compare to their competitors, and these values exist by innovatively bundling and leveraging firm resources and capacities (p.72). Value is created by combination of low cost and high differentiation. At all times, strategic management process should concentrate on understanding the features of the industry so that can adding value to the products. 4.1.1 Strengths Nintendo known that its key strengths can generate competitive advantages. It has the abilities to exploit core competencies via different angles; not like other firms that underestimated the industry characteristics and overestimated their competitive strategies and firm’s resources and capabilities. Christensen noted that (cited in Hanson et al. 2011; p.73) ‘successful strategist can cultivate deep understanding of competition process, progress and the factors generate advantages’. Nintendo was an obvious example of this. It invented popular ‘Nintendo’s’ for female users, which could interact with virtual pet via touch screen; this game gave the convenience of female players or young teenagers who wanted to have pets in real world and share their loves to walk with dogs, teach them tricks, etc. It had another popular game called ‘Brainage’ for stable workers or who wanted kind of challenges; it featured brain training and was actually puzzles. Nintendo has different kinds of games to cater different generation needs. 4.1.2 Weaknesses Nintendo rolled out its ways to many directions; however, any product could be taken over by new innovative games, and no exception for Nintendo. It lost control of the fixed market to Sony’s PlayStation. Bradford et al. (2010) stated that ‘in some cases, weakness may be the flip side of strength’. For example, lack of protection of the games, lack of good reputation among specific area, difficult to reach the best natural resources; in this case, Nintendo needed technology partners to implement the innovative ideas, while this capacity was considered as strength that competitors cannot share, it also be considered as weakness if the capacity was too high that prevented firm to react quickly. Nintendo needs to turn weaknesses into strengths by better integrating and coordinating set of firm’s commitments and actions. For instance, when other firms failure to satisfy customers’ needs, Nintendo need to consider the other way around that identify why those customers did not buy the product and what is the real target market need to be served and what needs those target players will satisfy, it is the option of turn defeat into victory. 5.0 External Environment Nintendo firm faces external environment that is highly turbulent and complex, it engaged in the process that includes four elements (scanning, monitoring, forecasting and assessing). Nintendo identified early signals of environmental changes and trends, it started manufacturing of the popular playing cards, and formed business called Nintendo Playing Card Company in 1959; it detected opportunities via ongoing observations and during 1970 to 1985, it entered the emerging area of video games. This was important experience of Nintendo firm to identify the opportunities and threats. If opportunities are exploited, it helps a company to achieve competitive advantages; meanwhile, threats may hinder Nintendo’s efforts to achieve these. An important element that Nintendo is promoting is the production cost. Because both Wii and DS have less strong architectures, as compared to other major consoles on the market, generating a game for them can be less costly because they do not need high definition content or costly and powerful game engines to compete with other games on the machine. Maintaining low production costs enables the small developers to produce and publish triple-A games, reducing the risks publishers have to take regarding finances. In that manner, the triple-A games become less aggressive regarding money requests, and this creates more potential involvement of small corporations. More importantly, for the last ten years, the video game industry has been focusing a lot on visual aspects, spending a lot of time in the development of cutting edge technologies capable of increasing polygons on the screen, controlling multifaceted light effects as well as realistic physics. Currently, Nintendo is demonstrating that there are elements such as hardware interfaces that have not gotten enough attention within the recent years and that they are the major element in differentiating its consoles from the others. 5.1.1 Opportunities By analyzing the external environment, it may reveal certain new opportunities for Nintendo’s growth and to dominate the market. Such opportunities are often from these areas: Social-cultural segment, such as unfulfilled customers’ needs; New technologies arise; Political and legal environment, such as unfasten regulations; Economic and global segments, such as no barriers of international trades; Nintendo with its new technologies and developed the new console just in time for holiday shopping season. Its goal was to design game machine that even mums would want, easy use, quick start up, etc. Nintendo thought carefully about what a real game console should be. For an effective march up –market, Nintendo would require to improve the performance of its next generation providing along the performance dimensions it introduced, namely; intuitive control and intuitive game play. This may not be adequate to combat Microsoft and Sony. For example, Microsoft has set up a special partnership with Netflix to increase the magnetism of its present offering that it has a probability of carrying it on to its next-generation console, because it already assists keeping Xbox 360 sales high. Devoid of any systematic changes to the traditional business model in the video game industry by the disruptor, there is a high chance for its high-end competitors to attack. Continuing to compete against non-consumption, this could be an appealing strategy for Nintendo. The company has already come up with simple gaming to new levels within the developed world with its DS handset. Handling non-consumers with easier solutions develops competitive advantage that can be sustained for a significant period. The Nintendo strategy to introduce Wii caught the competitors unexpectedly. It took three complete years within the competitive world of consumer electronics for both Microsoft and Sony to change their game controllers to make their games more intuitive, which initially seemed simple. Simplicity can be an influential means of disruption when targeting non-consumers. It's typically unattractive for market incumbents to lower the performance of their offering along traditional dimensions to compete for non-consumers right away because this would not meet the demands of existing consumers. So it can take long for the incumbents to recognize and integrate the newly introduced performance dimensions in a way that does not isolate their core consumer base. In the meantime, the disruptive innovation can outsell its competition. The market development trap is opportunity not a threat. Competing against non-consumption can become a self-renewing cycle that a company can commit itself to over the long term. The trick is master the challenges of continually improving and expanding the disruptive "base" while also tackling new circumstances of non-consumption. 5.1.2 Threats Changes in external environment may have threats to Nintendo. For instance, shifts consumers’ tastes from Nintendo’s games, substitute games, new regulations, and increased trade barriers (Bradford 2010). The battle begins between Nintendo, Sony and Microsoft, and it was apparent that the rules of competition have changed. Sony continued to claim its success by using PS; and Microsoft remained confident for its Xbox, it announced Xbox has beaten the Nintendo’s Wii and PS; Xbox gave Microsoft an edge over Sony. Its leading time helped Micro build vast range of games. However, after the sales figures released in 2008, Nintendo with the 10.9 million Wiis sold had gain the leader position back (Joshi and Tsang 2007; p.286). For Nintendo, games are not all about graphic but more about interaction. Actually, the community has been intrigued by this message because the DS and Wii are making high sales. Probably, this because of several elements; games like Brain Age and Wii Sports promote the non gamers to approach Nintendo consoles, the odd controller of the Wii and the touch screen of the DS tease both informal and hardcore gamers, the cost of Wii and DS is lower than the other consoles, and Nintendo franchise are popular and appreciated by the society. Evidently, through efficient consoles such as NES, PSX and now Wii and DS that video game industry goes beyond technology. 6.0 Industry and Competitive Rivalry Hanson (2011; p.48) states that industry means a group of firms produce close substitutes; industry includes mix of competitive strategies that companies use to pursue leading position. The intensity of competition and potential profits came from five dimensions (e.g. ‘the threats by new entrants, the power of suppliers and buyers, substitutes, and the intensity of strong competitors’) (Hanson et al. 2011; p.48). Hanson (2011; p.49) states that ‘firm concentrated on companies which they have directly compete; however, they should search more of current and potential competitors by identifying potential users other firms are serving. In other words, competing for the same customers that can improve firm’s performance by how users evaluate the products and firm’s capabilities. By offering better online virtual world gaming services, players can form loyal communities that create perceptual demands for service providers and their alliances; thus, this can leads to millions visitors per day at particular firm which will generate advertising revenues. 7.0 Business-Level Strategy used in Nintendo Case Business level strategy is defined as to satisfy group of customers that competing in individual product markets. There are five business-level strategies, cost leadership, differentiation, focused cost leadership, focused differentiation, integrated cost leadership and differentiation (Hanson et al. 2011; p.106). The purpose of Nintendo using business-level strategy is to create position differences between their competitors. It has performed different activities and creates unique values. Firms have specific structure that allows them to explore safely and successfully collaborative relationship of producer and player in the video game industry. The important fact is that most games are played online by numerous people. They facilitate the game information for firms. In fact, these players not only have the game motivation but also some of them have ‘technologically proficient’ to reinvent the game (Arakji et al. 2007; p.198).It is only beneficial collaboration when players’ derivatives constitute complements to the original design not replacement. For safety issues, it is better for developers to compensate inventors and also open part of the proprietary content to the players. The firm’s strategic positioning defines that optimal combination. In the case, video games can divide into personal computer games and console games. The latter need specialized hardware as Nintendo’s Wii, Sony’s Play Station, and Microsoft’s Xbox. This industry reached $21 billion in 2003, and it will continue to grow strongly probably reaching $13.5 billion in 2006 if more invented online. Firms have game industry specific applications called ‘game toolkits’ that professionally develop original product for use. By using this tool, firms enable player to create and test customized game designs, and reduce the cost of transferring information about the game design. Cited in Hanson et al. 2010; p.73 Hanson (p.75) stated that ‘resources alone do not reach a competitive advantage’, and competitive advantages are based on‘the unique bundling of several resources’. Toolkits have the potential to be competitive advantage that it reduces cost, develop time by enrich information process, make decision, and invite players to be ‘responsible for improving existing games’ (Van Zandt 1999). An excellent marketing strategy and campaign and giving the product some “life” can distinguish the product from others and result to its success. Obviously, the success of a product is also affected by the mistakes that the opponents make. Nevertheless, in the long run, a console is supposed to offer games that lay emphasis on a vision, in the manner that Wii Sports have done for DS and Wii. Because it is the games that have to take advantage of the hardware, signs of revolution among them should be looked into. Some titles for both DS and Wii illustrated interesting utilization of the interface but none of them can be taken as being revolutionized within their game play. This is an extremely important element that should be acknowledged by Nintendo and other developers as well. The involvement of the body does not facilitate revolutionary game play solely. Touch or shake, as a substitute of pressing a button, can be more relating for the player but this does not imply that there is a new game play. For that reason, within the large majority of games is a button replacing pattern applicable to the touch screen of the DS or the shaking features of the Wii. From this view, seemingly there is a probability of a game revolution, from a game play perspective, has not been established up to now. The intuitive taking part of the body is turning out to important within the Nintendo’s strategy and hence it can be presumed that each manufacturer ready to follow the same viewpoint within the next generation will be stirred by what Nintendo has done. 8.0 Conclusion As team developed the collaboration skills, the paper found the impact of innovative ideas, integrating hardware and software importance in Nintendo Company, as well as for Sony and Microsoft. Within the last twenty years of console history, several things have changed; in terms of both processing power and also in terms of market share. Nintendo lost headship that it had achieved with the early 80s whereby Sony Company ruled with its Play station brand. Nintendo effectively turned its low cost hardware into a competitive advantage since the company focused on characters and not special impacts. The cost of Wii was half the price of both Xbox and PS games. Wii also constituted five easy games devoid of any extra cost and this was an additional chief marketing strategy. Therefore, Nintendo introduced a new technology that employed a disruptive strategy and hence overturned the existing dominant technologies in the video game market. 9.0 Recommendations Clearly, there is more to disruptive technologies. Even if the risks are high and immediate return on investment is not obvious, with a well planned technology/product management; There should be a clear focus on the customers and good timing. The video game firms should concentrate on business model and organizational structure, if needed, change the model to suit the market and consumers’ needs, and the only competitive advantages exist when unique bundling of vital resources. Research should be carried out regarding the extent that should be involved in the player body of the video games and also research about the physical limitations. Finally, the educational and also health care field is a new market in the past untapped by the video game industry and hence video game industry should focus on this. 10.0 References Barlow, J.P. 1994. ‘The economy of ideas’, Wired Magazine viewed 4 September 2011 www.wired.com/wired/archive/2.03/economy.ideas.html Binken, J.L.G. and Stremersch, S. 2009. ‘The Effect of Superstar Software on Hardware Sales in System Markets’, Journal of Marketing, Vol.73 pp.88-104 Bradford, R.W. Duncan, P.J. Tarcy, Brian. ‘Simplified Strategic Planning: A No-Nonsense Guide for Busy People Who Want Results Fast’, QuickMBA.com viewed 3 September 2011 http://www.quickmba.com/strategy/swot/ Choi, J.S. 2007. ‘Creative industries and global co-development: Lessons from the first successful case in Korean online games’, Creative Industries Journal, Vol. 3(2) pp.125-136 Lessig, L. 2001 ‘The Future of Ideas’. New York: Random House Lessig, L. 2004. ‘Free Culture: How Big Media Uses Technology and the Law to Lock Down Culture and Control Creativity’, New York: Penguin Press NetMBA. 2010. ‘The Value Chain’, Business Knowledge Center, viewed 4 September 2011 http://www.netmba.com/strategy/value-chain/ Perelman, M. 2002. ‘Steal This Idea: Intellectual Property Rights and the Corporate Confiscation of Creativity’, New York: Palgrave Macmillan Thompson, T. 2011. ‘What is Outsourcing?’ WiseGeek, viewed 4 September 2011 http://www.wisegeek.com/what-is-outsourcing.htm Van Zandt, T.1999. ‘Decentralized information processing in the theory of organizations’, Contemporary Economic Issues, Vol.4 pp.125-160 Read More