Subject: Strategic Management

Submitted to: Mr. Ahsan Durrani

Submitted By: Amnah Fawad (6465)Shafaq Naveed (6462)Shakuntala Ashok (6719)Gauhar (Zia (

Case: Nintendo versus Sega (The video Game industry)

Date: 10th February, 2009

Q1. What are the industry’s dominant traits?

Some of the industry’s dominant traits are as follows

Market Size and Growth Rate

In 1992 the total share of the video games industry was $4619 however at the end of

1996 it reached up to $5872, Nintendo is the only company which has lost its market

share because in 1992 the total Nintendo shares were $3223 and in 1996 the shares

declined down to $2162.In 1993, 1994 and 1995 Nintendo lost its grip on the videogame

market due to complacency and slow reaction to SEGA’s competitive moves.

SEGA’s market share has increased from $1313 in 1992 to $1591 in 1996.SEGA has

given a tough competition to Nintendo in the early nineties.

Sony’s play station hardware and software launched in 1995 also saw a rise in the market

share by 1996.

Atari and 3DO’s market share have also increased by the end of the year 1996, however

less as compared to other key players of the video game industry.

If we analyze the market share trend of the industry, after years of steady growth,

videogame industry’s revenue declined in 1995.This mature market was attributed to

decline, however some new games systems offset its decline.

Number of Rivals and Scope of Rivalry

Initially the video game industry was dominated by Nintendo and Sega however at the

end of 1996 several companies (Nintendo, SEGA, Atari, 3DO, Sony CD-1) were in the

market. Participants of the video game industry are all competing against each other

globally. Presence across the global market is essential for a company’s competitive

success in the video game industry.

Product Innovation

Rivalry is strong in the video game industry as each participant is active in launching

fresh actions to boost their performance. Companies are trying to continuously improve

the innovation capabilities of their products.

For example, to claim a stake in the videogame business, in 1994, Sony Corporation of

America developed and markets a next generation home videogame, called the Sony

playstation.The play station had been under developed for more than four years and

represented an important strategy to dominate the entertainment markets for hardware

and software.

Product Differentiation

Industry members are racing to differentiate their products from rivals by offering better

performance features and a wider product selection. Members are also active to build

good dealer networks, establish positions in foreign markets and expand distribution

capabilities.

Pace of Technological Change

All the members of the videogame industry have and need strong technological

capabilities to survive in the industry. From the basic principal types of hardware

platform (8-bit, 16 bit, 32 bit, 64 bit) companies are now using portable systems, CD

based delivery systems etc.

Q2. Based on Porters five Force model how attractive is the industry?

The industry is very attractive based on the Porters Five force model of the industry

according to the following analysis, the industry was at a mature stage causing intense

competition and giving profits to the companies that came in with newer innovations

Exit Barriers (High)

The exit barriers of the industry were strong in 1996 as mergers and acquisitions were

taking place, the existing companies wanted to stay in the competition. This is

unfavorable for an industry

Nintendo and Sega are expecting to introduce Ultra 64 and Saturn which are being

designed by Silicon Graphics Incorporation it requires computer work stations and

specialized technique, this involves high production and fixed costs at such a time

Nintendo and Sega could possibly not have left the industry. They were also enjoying

high market shares which encouraged them more to stay in the competition

Sony developed the next generation home video game called the Sony Play station their

strategy was to dominate the hardware and software market. The game player was

powered by a 32 bit microprocessor providing 3 dimensional animated graphics, CD

Quality sound and digital full motion and all of this caused them to incur high costs

which would de motivate Sony to exit the market.

3 DO planned to introduce a peripheral upgrade, the M2 accelerator which introduced

movie like graphics and sound to its video game players , it also included new Motorola

powered pc and microprocessors and hit Nintendo in 1996 with 1 % growth in market

share. They also offered the CD for the first time.

Atari enabled jaguar, 64 bit to play CD ROM games and regular audio CD’s and a full

motion video cartridge that would enable CD ROM to play movies.

Lastly Philips was on of the first companies in the world to market a CD based interactive

entertainment system called CD – 1.

All these companies kept on coming with newer technologies and differentiated products

in order to stay in the market making the competition intensified and the industry

attractive. None of them were willing to exit the market.

Entry Barriers (Weak)

The entry barriers were low which is unfavorable for an industry there was a lot of

competitive pressure coming from the threat of entry of new rivals. By 1996 Nintendo

Sega were dominating the market share however a lot of new companies that entered

disturbed their monopoly such as 3DO Atari Sony and Philips.

Sony entered the market as late as 1995 capturing a market share of 4 % increasing to 10

% by 1996.

On the other hand Philips also increased its market share of 1995 from 1 % to 3 % by

1996.

Both these industries entered the market late but were able to capture a market and win a

market share due to low entry barriers.

Competitive Pressures from the substitute products

Substitutes are available in the video game industry easily. If one does not want to use a

handheld portable system they can simply switch towards the use of CD’s.

Different companies were trying to win buyers by offering various kinds of substitutes.

Supplier Power (High)

The suppliers for the game are the members of the video game development team

consisting of the producer who oversees the project and is responsible for coordinating

the efforts of the team.

The designers, who come up with the basic concept of the team, draft, script, and are

responsible for the characters and objects in the game.

The programmers who write the computer code that incorporate all the various elements

into a form that can be used on the appropriate hardware platform.

After all the testing is done and the game is error free and workable it is send for

manufacturing and packaging.

These suppliers were solely responsible for the game to be available in the market hence

had a lot of power.

Buyer Power (Strong)

Industry growth created new competitive challenges for retailers. It was only a few years

ago that demand for games was so high that a retailer could sell whatever was put on the

shelf. The major complaint of retailers was not having enough products, sales seemed to

be concentrated but however with the passage of time the buyers became careful

They looked at three questions

What product to stock?

The quality of the game

The amount of advertising the publisher plans to do

Reputation of the publisher

As most of the competitive forces were lower therefore the overall profitability was

higher in this industry making it more attractive for the players.

Overall Industry attractiveness

Factors Unfavorable Neutral Favorable

Entry Barriers

Exit Barriers

Rivalry among

existing firms

Power of

buyers

Power of

Suppliers

Threat of

substitutes

Unfavorable

Unfavorable

Unfavorable

Unfavorable

Neutral

Favorable

Q3) What are the Strategic Groups present in the industry?

In this video game industry there are three strategic groups that have similar competitive

approaches. Companies in these groups resemble in some way or the other based on two

or three characteristics mainly on locations or globalization (high or low), customer

service and quality and based on innovation(high or low). On the bases of these

characteristics the industry has been differentiated. The firms in the same strategic group

are the closer rivals. However the next closest rivals are in the immediately adjacent

groups.

Sega and Nintendo

These two companies are in the same strategic group. Both Sega and Nintendo had

expanded in different countries starting from Japan to reaching USA and finally Europe

and had gained a large market share giving intense competition to their rivals. They have

wide distribution network and had gained large market through working more on

customer service and quality products. These two companies are leading the market by

bringing new innovations in the market within a short passage of time.

They engaged in the development, manufacture, and sales of various kinds of electronic

equipment, instruments, and devices. Home entertainment systems based on the 8 bit

micro processor were introduced in the early 1980s. Sega featuring more powerful

microprocessors, colors, better graphics and sound as compared to Nintendo products.

Due to this technological enhancement Nintendo again came in competition with a 16 bit

Super NES similar to that of SEGA in 1991 using larger memories advanced hardware

better software cartridges offering more realistic video images, natural sounds and

synthesized music.

So both the companies were dealing in innovation and were giving intense competition to

their rivals in the group as well as the other groups. These two companies were also

leading in relation to the market share as compared to other companies.

The 3DO Company and Atari Corporation

The 3DO Company and Atari Corporation are in the same strategic group. They were

dealing with a similar technology that is home interactive multimedia platforms and were

developing different technology in it. Both the companies have high globalize network.

Six global electronic companies were licensed to manufacture the 3DO interactive

multiplayer systems.

These systems were made available in 6,500 retail locations also. Atari also attracted

mass market by different methods of distribution through retailing, supply stores,

distributors of electronic products etc and had 117 employees worldwide. So both the

companies were globalize and attracted a significant market.

In relation to market share, both the companies were lower than the 1st strategic group.

They did specific innovations in relation to their base products rather than going for

different systems as Sega and Nintendo did. Atari developed a 64 bit videogame system

called jaguar based and software and hardware systems. It was known as the best new

game system. In order to gain more market share it made more developments in jaguar

system it played CD-ROM games and regular audio CDs.

The 3DO company on the other hand developed the same interrelated multiplayer which

played conventional CDs and display photo CDs. Many CD systems were launched by

3DO Company dealing with the same hardware and software system. They both were

dealing with same level of competition among them but were dealing with decline profits

because of intense competition from their rival firms. They were more inclined towards

customer service by using effective distribution channels.

So both the companies did low innovations as compared to other leading companies and

therefore enjoy a separate strategic group with similar strategies. Their market share is

also low as compared to Nintendo and SEGA.

Sony and Philips Electronics

The third strategic group in the industry dealing with same level of competition is Sony

and Phillips Electronics. Both the companies were dealing with same resources with

minor differences. Their same strategy was that they were receiving royalties for their

sales.

Sony entered by launching Play station (PSX) in the areas of both hardware and software,

while Philips developed CD-1 game platform and software. Though Phillips was not the

first company to introduce this game therefore the competition was very intense for both

of the companies because Sony was also having tough competition from 3DO, Atari

Nintendo and Sega because of their new innovations.

They were dealing in differentiated product while these two companies were dealing in

one commodity and had to work harder to gain their market share in the market which

was quite tough. So they were innovative in relation to home videogame CD system.

In relation to globalization both the companies were recommended industries; though

these industries entered late in the market when rivalry was intense it was hard for them

to survive which incurred more costly production which these two companies were

unable to pursue. So the market share of these two companies is the lowest in the industry

because of changing environmental conditions.

So these were the main strategic groups present in the industry which reveal the close and

distinct competitors in all strategic groups.

Q4. Briefly describe the industry dynamics within the dominant strategic groups

(Porter’s Five Forces Model)

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Q5. What are the drivers of Change in the industry and what impact they have on

the industry?

Increasing Globalization

Globalization of Competition really starts to take hold when one or more ambitious

companies precipitate a race for worldwide market leadership by launching initiatives to

expand into more and more country markets.

Both Sega and Nintendo had expanded in different countries starting from Japan to

reaching USA and finally Europe.

Nintendo began as a playing card manufacturer in 1889 in Kyoto, Japan it then entered

the U.S. market and NOA Nintendo of America was established in 1980.

Sega started its operations in Tokyo Japan in 1951, the company expanded into

amusement game imports and adopted the slogan “service and games” Sega of America

was formed in 1986. Sega of Europe was a big success.

There was a stronger overseas demand for Sega’s products, particularly in the United

States, offset the falloff sales to Europe.

Sony Corporation was established in Japan in May 1946 as Tokyo Tsushin Kogyo

Kabushiki Kaisha. Sony Corporation of America was formed in 1960. They engaged in

the development, manufacture, and sales of various kinds of electronic equipment,

instruments, and devices.

The 3DO company was formed in 1989; the company was incorporated in September

1991 as SMSG Inc in California. The company consolidated its technology advanced

developments product management licensing and business developing groups into a new

business operations department.

Atari‘s total market share by 1996 was 2 % of the industry their principal product was a

64-Bit Video Game systems in the form of Atari Jaguar a multi media entertainment

system offering video with 24 bit graphics, 16 million colors and a 3-D engine. Jaguar

incorporates a 16 bit CD quality sound system as well.

Atari and Sega got into cross licensing agreements through the year 2001, which allow

them to publish on each of their respective game platforms.

Philips Electronics NV was number 32 in Fortunes 1994 Global Ranking of the world’s

largest industrial corporations and was listed amongst the top 8 companies in the Global

Electronic industry.

Changes in the industry’s long- term growth Rate

The industries long term growth rate was changing; demand for differentiated products

was increasing triggering a race amongst established firms of Nintendo and Sega and new

comers to capture the new sales opportunities.

The development of CD-ROMS and better graphics in the mid 1990s drove rapid growth,

these Hardware and Software games were becoming very popular. Therefore there was a

line of differentiated products being offered starting from 8-bit, 16 bit, 32 bit, 64 bit

consoles, portable systems, CD based systems and home computers.

And the video game industry will keep on flourishing with technological changes in

times to come. The video game market is simply becoming diversified in

multiple respects. Consumers are increasingly willing to buy multiple

systems for multiple purposes.

Product Innovations

Competition in an industry is always effected by rivals racing to be the first ones to

introduce new products by attracting first time buyers offering them with new and

attractive features different from the competition. The video Game industry has been

focusing on Product Innovations continuously.

Home entertainment systems based on the 8 bit micro processor were introduced in the

early 1980s by Nintendo however their sales have now declined and no growth

opportunities exist due to the introduction of 16 bit video Genesis game systems by Sega

featuring more powerful microprocessors, colors, better graphics and sound as compared

to NES.

Due to this technological enhancement Nintendo again came in competition with a 16 bit

Super NES similar to that Of SEFA in 1991 using larger memories advanced hardware

better software cartridges offering more realistic video images, natural sounds and

synthesized music , however this innovation also came to an end by 1995.

In 1994 SEGA launched its portable Genesis 32-X adapter which was more powerful

with arcade quality graphics and speed at a reasonable cost. These 32 bit portable systems

included Sega’s Saturn and Sony’s Play station. Nintendo’s portable Virtual Boy was

also introduced in US in 1995.

The 64-Bit Video Game systems was then innovated by Atari in the form of Atari Jaguar

a multi media entertainment system offering video with 24 bit graphics, 16 million colors

and a 3-D engine. Jaguar incorporates a 16 bit CD quality sound system as well.

Handheld Portable Game Systems were released by Nintendo in 1989 known as Game

boy that allowed players to insert any number of different game cartridges. Sega again

came up with new innovations and offered color Game Gear in 1991. Atari also then

offered portable handheld systems called Atari Lynx which was far more powerful than

the handheld systems offered by Nintendo and Sega

In the 1990s development of CD-ROMS and better graphics drove rapid growth SEGA

came up with SEGA CD in 1992. But the speed to access data on a CD is very low. The

hardware is more expensive they are damaged easily by users.

But all the above mentioned innovations are a prove that the video game industry kept on

coming with new product innovations year after year and will in the times to follow so as

to capture customer needs and wants with differentiated features.

Changes in who buys the product and how they use it

This has also been a factor driving changes in the video game industry. The video game

industry is particularly seen for the teenagers as well as young adults. Adults like titles

that fit in with their interests and life styles. However video games have never been so

popular amongst women. Most of the video games are about street fighting, crime, car

racing etc and females do not have interests in them.

Software developers are slowly responding to this question and are offering games for

females as well.

Marketing Innovations

In 1994 videogame marketing was a big business. The major videogame releases were

marketed much like a release from a major movie studio. Television advertising,

promotional tie-ins, merchandising, direct mail, and special launch parties were a

common place. Small game publishers without the resources of the big players in the

industry faced an uphill battle.

Technology can also play a major part in marketing innovation. Companies are engaging

in experiments that could revolutionize distribution. These experiments include such

things as direct marketing, electronic distribution in retail, on demand via cable

television, and on-line distribution through networks such as the internet.

Q6. What are the key success factors for the industry?

Three strategic groups have been identified in the video game industry.

The strategic groups are:

i. Sega and Nintendo

ii. The 3DO Company and Atari Corp.

iii. Sony and Philips electronics

The key success factors of this industry in relation to the above mentioned strategic

groups are

SEGA and Nintendo

Technology related

Advancement in technology opened ways for SEGA to come up with differentiated and

innovative products, hence breaking the long formed monopoly of Nintendo.

Distribution related

Nintendo’s key success factor was its strong distribution network as compared to SEGA.

In its home market of Japan, SEGA was being badly out competed by Nintendo [90% of

all game sales in Japan went to Nintendo], majorly because of its distribution problem.

Marketing related

In early 1990’s SEGA’s marketing was so strong that its marketing included TV ads that

disparaged Nintendo as a system for ninnies. SEGA tried to position itself as the cooler

machine….The MTV generation plays SEGA and your little brother plays Nintendo.

Nintendo faced increased competition from SEGA.

Sony and Philips Electronics

Product Innovation Capabilities

Sony entered the video game market with a superior product quality and better product

innovation capabilities. In 1994, Sony came up with PlayStation X [PSX] which

continued to remain its pioneer product until 1996.

Although Philips was one of the first companies in the world to market a CD based

interactive entertainment system called CD-I, it could only gain 1% market share in 1994

and just 3% in 1996.

For inventing the digital audio technology used in CD players, Philips and Sony receive

royalties’ on each one sold.

Technology related

Sony reported that more than 160 videogame developers and publishers in Japan had

agreed to support the PlayStation. Both Sony and Philips were technology driven

companies but their sales turnover in 1996 wasn’t very impressive. Both the companies

were depending upon a single product each [PSX and CD-I] which could not make them

superior in ranking as compared to the industry giants.

Distribution related

Sony was an old established company which came in the videogame business in 1994.

The advantage it reaped over its competitors was the already setup distribution network.

Sony PlayStation was made available everywhere Sony products were sold.

Marketing related

Philips tried to build market visibility by improving its marketing effort. Since beginning,

CD-I by Philips couldn’t succeed in pulling the users from PSX. The company itself

admitted that the marketing strategy of Philips was confused and unfocused.

The 3DO Company and Atari Corporation

Technology related

3DO as compared to Atari was a new entrant in the market but very soon due to its

innovation in technology it succeeded in getting its products manufactured by 6 global

companies. The M2 Accelerator by 3DO was a technologically superior machine

developed to compete with the new models of SEGA and Nintendo.

Atari being the oldest one in the industry was very experienced in understanding the

demands of the game players. From 16 bit portable games to 64 bit interactive

multimedia, Atari had a wide variety of products under its umbrella due to its superior

technology. IBM assembled the 64 bit Jaguar for Atari.

Distribution related

Both the companies had fairly decent distribution network. Atari sold its products

through mass market retails, consumer electronic specialty stores and distributors of

electronic products, whereas 3DO systems were available at over 6500 retail locations.

Manufacturing related

3DO’s products were manufactured by 6 global renowned companies which helped in

reducing cost of production per unit.

Apart from the gaming products, Atari entered the PC industry in order to achieve

economies of scale, using the same title for both.

Q7. Develop a competitive profile matrix.

Strategic Factors

Weight Nintendo Rating

Nintendo Weighted Score

Sega Rating

Sega Weighted Score