The Video Gaming Industry
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Published: Tue, 18 Oct 2016
Introduction: The video gaming industry had undergone changes in the recent past due to various factors including external environment, emergence of new competitors, the power of rival products, changes in technology, demographics and so on. This case attempts to analyze Nintendo’s standing in the video gaming industry in 2009 after the emergence of Microsoft and Sony as strong competitors. The following paper presents a concrete analysis of the case with respect to macro environment, porter’s 5 factor model, strategic mapping and key success factors of the industry.
Macro Environment: The video gaming industry underwent several changes in the external environment during 2009. These can be summarized as follows:
- Economic Changes: International recession which started in 2007 emerged as a threat to the industry by impacting the buying behaviors and buying practices of the people. Until the mid-2009, the sales of video game consoles had not been affected. However, in the second half of 2009, the sales greatly declined. After 2000, this was the year during which the gaming industry made least amount of profits despite of a wide variety of products having diverse costs.
- Technological Factors: Before 2009, the video game industry had expanded greatly because of technological advancements. In 2008, revenues reached at a highest mark of more than 23 billion. More technology such as internet gaming, video discs and home gaming accessories began to emerge.
- Emergence of Competitor Forces: The industry, at that time, was also greatly impacted by entry of new competitors in the market. This resulted in continuous development and innovation of newer products that aimed to capture large portions of market share. These factors continue to expand the gaming industry until a down turn occurred due to economic recession.
- Demographic Factors: The advancement in social trends also impacted the gaming industry after 2009 because more customers became interested in the product offerings. Therefore, it became easier for the companies to do market segmentation and market targeting to capture potential market share. As the focus on social trends grew, the competitors tried to develop new ways to attract customers and build their market position.
In the light of above mentioned external factors, following is an analysis of Nintendo’s efforts to survive in the industry and compete with the rival forces by developing its distinctive edge.
Porter’s 5 Forces Model
The 5 factors described by Porter are: threat of new entrants, threat of substitute products, competitive rivalry, bargaining power of buyers and the bargaining power of suppliers. Nintendo maintained its position and brand by successfully dealing with all these forces.
- Threat of Entry: Nintendo had to face the threat of new entrants such as Microsoft and Sony who brought Xbox and PlayStation 3 (PS3) to overcome Nintendo. So, the industry’s 3 major players were Nintendo, Sony and Microsoft who had to compete in terms of prices, technology as well as better strategies to attract target customers.
- Threat of Rivalry: Nintendo maintained superiority over the rival products by delivering extra benefits to game seekers. It introduced Nintendo Wii which was a perfect mixture of technology, research, innovation and function. The company entirely changed the experience of video gaming by providing excellent controllers.
During 2009, the threat of rivalry had suddenly become very high for Nintendo while it was very low for Microsoft and Sony. The prices are almost static and the companies overcome this rivalry only through differentiating their software systems from others.
- Threat of substitutes: The industry faced threat of substitutes between the products of three major players in the game. This threat is from two types of gaming users: casual and hardcore. The latter do not shift their brand easily while the former may substitute one product for another. This threat was less for Nintendo after it launched Nintendo Wii because this product enabled it to grab large portion of market sales.
- Threat of Powerful Suppliers: This factor was not intense for the gaming industry because most of the resources needed to manufacture consoles very easy available such as circuit boards, processors, memory chips, capacitors, DVDs and so on.
- Threat of Powerful Buyers: From a game console standpoint, the threat of buyers was relatively low because the industry offered a huge amount of products are the target customers were willing to pay the price demanded by the companies. Moreover, the likelihood of any retailer manufacturing and developing his own consoles was quite low due to excessive cost and price barriers.
So, in the gaming industry threat of new entrants, substitutes and competitor rivalry were more powerful factors whereas the bargaining power of buyers and suppliers did not affect the industry much.
Driving Forces of the Industry
The various factors driving changes in the video game industry were market size, competition, marketing innovation, technological changes, and globalization and so on.
- Technology: Firstly, the technology brought changes by making the companies more efficient in manufacturing and distribution. For example: Microsoft’s online gaming community, Xbox live and portable and wireless controllers were due to technology. It resulted in producing efficient hardware and reduction of costs.
- Innovation and Creativity: The next driving force was innovation and creativity that continually brought growth of gaming industry by development of better software applications.
- Consumer attitudes and buying practices: Another driving force that brought changes were changes in the customer needs and wants with the passage of time. The consumers demanded highly energy efficient products that are portable and provide online services. Moreover, the traditional gaming industry had focused mainly on adolescent males, but with the passage of time, the industry expanded to young adults and women sector too. In the case, it has been described that Nintendo Wii aimed to attract those market segments that do not usually play video games. This segment included women who were generally untapped by this industry. By attracting such segments, Nintendo made huge profits.
So, changes in one domain can trigger changes in the mode of development of overall gaming industry.
Strategic Group Mapping
A strategic group refers to a cluster of companies within the industry that act as rivals to develop their own standing by grapping market share. According to this case, Nintendo’s rivals in the industry were Microsoft and Sony; all competing to increase their sales and market share. In 2009, Nintendo had sold approximately 51.6 million consoles. At the same time, the sales of XBOX 360 were approximately 31 million and those of PS3 were 23 million. So, Nintendo was growing far ahead of the other two rivals by efficient use of its distinctive edge. Moreover, the market share of Nintendo was double as compared to Xbox and 4 times as compared to PS3. This indicated that Microsoft and Sony were operating at a loss while Nintendo had amended its strategy in such a way that could generate maximum profits in the industry.
By plotting the market share of companies on X-Axis and their relevant sales on Y-Axis, s strategic map can be formed which shows the strong and weak companies according to their positioning in the market (as shown in Appendix B).
Key Success Factors
The first key factor that expanded the gaming industry was the ability of companies to reduce the material costs used in production. Secondly, the gaming industry has the ability to improve the production process according to the needs and demands of the customers. For example: consumers need 8-bit, energy efficient portable and online games and the industry has been able to provide all of them. Moreover, product innovation capabilities are another success factor due to which gaming industry witnessed new product lines within short spans of time such as DS, SNES, and Nintendo’s Duck Hunt and so on.
The industry also had success factors related to geographical distribution of its products. Direct marketing and sales through the internet forums enabled companies to gain huge profits. And lastly, clear advertising and marketing strategies developed by Microsoft, Nintendo and Sony were so powerful that they attracted customers from all demographic sectors.
Industry Profile and Attractiveness
Thus, the external environment, changes in technology, a strong sense of competition and rivalry among the companies, innovative products as well as cost and marketing strategies enables a huge expansion of the video gaming industry. Although some factors such as international recession and changing social trends affected the sales in the short term in 2009 but the industry soon recovered from this down turn and moved in a positive direction. Initially, the emergence of Microsoft and Sony were serious threats for Nintendo but the company soon maintained its brand positioning by delivering distinctive benefits and a variety of product lines that differentiated its Nintendo Wii from other substitute products. Currently, the gaming industry is highly attractive to a particular segment of the society especially the youngsters who are the source of much revenue generation for the industry.
APPENDIX A (Porter’s 5 forces Model)
APPENDIX B (Strategic Map)
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