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Nintendo Switch Case 22 Strategic Management
- 1. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. CASE 22 Nintendo’s Wii U Alan B. Eisner Saad Nazir Eshai J. Gorshein Eric S. Engelson Copyright Anatoli Styf/Shutterstock
- 2. ©McGraw-Hill Education. How many of you have used the Wii or Wii U? Even if you haven’t used it, what’s your opinion? How many of you have heard of the Switch? How many of you have also used a Sony Play Station or Microsoft Xbox? How do Nintendo’s products compete with these? Questions
- 3. ©McGraw-Hill Education. Discussion Questions 1. What were key forces in the general and industry environments that affected Nintendo’s choice of strategy? 2. What internal resources and assets did Nintendo have that gave it a competitive advantage?
- 4. ©McGraw-Hill Education. External Environment Q1: What were the key forces in the external environment that affected Nintendo? External Scanning • Surveillance of a firm’s external environment: • Predict environmental changes to come • Detect changes already under way • Proactive mode External Monitoring • Track evolution of: • Environmental trends • Sequence of events • Streams of activities
- 5. ©McGraw-Hill Education. The General Environment The general environment is composed of factors that are both hard to predict and difficult to control. • Technological • Economic • Global • Demographic • Sociocultural • Political/Legal
- 6. ©McGraw-Hill Education. External Environmental Forces Political-Legal - Copyrights, product safety, trade regulations Demographic – Baby boomers getting older, youngest generation much more “wired”; U.S. consumers living longer, staying active Sociocultural/Global - Customers increasingly sophisticated; knew what they wanted, didn’t want to pay a lot; seduced by design; social networking, family involvement important Technological – Internet & availability of mobile devices created opportunities & challenges for delivery of content & promotion
- 7. ©McGraw-Hill Education. The Competitive Environment Segments of the competitive environment include: • Competitors • Customers/Buyers • Suppliers Sometimes called the task or industry environment Porter’s five forces model
- 8. ©McGraw-Hill Education. Five Forces of Competition Rivalry Very High Substitutes Threat High Buyers’ Power Low Suppliers’ Power Med-Low Suggested: The three major rivals compete for market share. Quest for lower prices pushes down margins. High technology obsolescence puts a premium on innovation. Suggested: Although the end consumer has little economic power, all three companies have achieved strong brand identification, and present switching costs to customers. Suggested: Depending on the commodity, lots of competition among suppliers keeps supply up and prices down. Game developers preferred creating for multiple vendors – the Wii was not compatible, meaning a potential shortage of game supplies. Suggested: Within the video game industry the threat of substitute products is high. Computer or mobile gaming is the greatest threat, especially with online sites offering free games, free downloads, and the ability to play games with other people from all over the world at any time of day or night. Threat of New Entrants Low Suggested: With three companies dominating the market place a newcomer to the industry would face high barriers to entry, such as economies of scale, product differentiation, capital requirements, switching costs, distribution channel access, and cost disadvantages. Based on the external environmental factor analysis, the video gaming business has three strong competitors trying to carve out a piece of the “profit” pie. Nintendo has a unique product line – able to compete in many consumer segments and create customer switching costs – which should give it the innovation advantage. Jump to Appendix 1 for long description.
- 9. ©McGraw-Hill Education. Internal Analysis Value-Chain Analysis: • Sequential process of value-creating activities • Amount buyers are willing to pay for what a firm provides them • Value measured by total revenue • Firm profitable to the extent the value it receives exceeds the total costs involved in creating its product or service Q2: What internal resources and assets did Nintendo have to give it a competitive advantage?
- 10. ©McGraw-Hill Education. Value Chain Activities Exhibit 3.1 The Value Chain: Primary and Support Activities Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press. All rights reserved. Jump to Appendix 2 for long description.
- 11. ©McGraw-Hill Education. Value Chain: Primary Activities Value Chain Activity Primary: How did Nintendo create value? Inbound logistics Not in the case: Poor assessment of product popularity could create shortage of materials. Operations Cost efficient production process. Outbound logistics Difficulty meeting shipping schedules, distribution to retail centers. Game development delays. Marketing and sales Developed a product for all ages, effective and creative promotion via TV, Internet, and word-of-mouth, encouraged product trial and purchase by all. Some concern that products were mainly for children. Service Presumed good due to loyal customers.
- 12. ©McGraw-Hill Education. Value Chain: Secondary Activities Value Chain Activity Secondary: How did Nintendo create value? Procurement Relationships with third-party developers appear to be essential for console sales. Technology development Not in the case: Open-ended, team-based approach to innovation, access to state-of-the-art technology, created culture of creativity. Human resource management Excellent recruitment and retention of key talent was assumed by firm performance. General administration Poor planning, lack of anticipation of product popularity, but product development decisions kept profit margins in excellent shape. Communication between key decision- makers seemed fluid and productive.
- 13. ©McGraw-Hill Education. Resource-Based View Resource-Based View of the Firm: • Two perspectives: 1. Internal analysis of phenomena within a company 2. External analysis of the industry and its competitive environment • Three key types of resources: 1. Tangible resources 2. Intangible resources 3. Organizational capabilities
- 14. ©McGraw-Hill Education. Tangible Resources Tangible Resources: • Financial: Large holdings in cash & equivalents, but total income & asset value has declined • Physical: Assumed adequate • Technological: Access to state-of-the-art technology tools, support for independent research created new technological development opportunities in the past • Organizational: Not in the case: Team-based approach to management structure further encouraged creativity; decisions to keep it simple (no advanced graphics) gave clear direction to developers
- 15. ©McGraw-Hill Education. Intangible Resources Intangible Resources: • Human: Creative culture gave Nintendo developers the initial opportunity to acquire a unique skill set, thereby attracting and retaining talent. • Innovation & Creativity: A culture of experimentation encouraged innovation without fear of failure. • Reputation: Legacy games such as Donkey Kong, Zelda, Mario created strong brand loyalty.
- 16. ©McGraw-Hill Education. VRIN Analysis Model Firm Resources and Sustainable Competitive Advantages Is the resource or capability… Implications Valuable? Neutralize threats and exploit opportunities Rare? Not many firms possess Difficult to imitate? • Physically unique • Path dependency (how accumulated over time) • Casual ambiguity (difficult to disentangle what is or how it could be re-created) • Social complexity (trust, interpersonal relationships, culture, reputation) Difficult to substitute? No equivalent strategic resources or capabilities Exhibit 3.6 Four Criteria for Assessing Sustainability of Resources and Capabilities
- 17. ©McGraw-Hill Education. VRIN Analysis VRIN analysis: Nintendo had resources that were both valuable and rare. • Its approach to managing its human resources – the path dependence of its history, the social complexity of its team-based development – had made Nintendo’s reputational and creative resources inimitable for a while. • In an industry where innovation created a competitive advantage, it was no wonder Nintendo was so successful. • BUT Microsoft & Sony were able to copy the technology, perhaps even improve on it.
Editor's Notes
- Environmental scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape – what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.
- What factors or trends might be most important to Nintendo? To assess how the external environment might affect Nintendo’s strategy, it’s necessary to take a look at the factors in the general external environment. Nintendo must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment we might pick that have a significant impact on the video game console business.
- Political-Legal: Political-legal issues, especially the issues around copyrights, product safety, and global trade regulations, were important for technology-intensive firms to stay abreast of. Demographic: Demographics had changed. Baby-boomers were getting older, while the youngest generation was much more “wired.” But U.S. potential consumers were also living longer, and staying active into their senior years. In addition, genders appeared to be equally interested in playing all kinds of games. Sociocultural/Global: Customers were growing increasingly sophisticated. They knew what they wanted, and they didn't want to pay a lot for it; but they could be seduced by design. Increasing globalization meant borders didn't matter so much anymore – American products did not have an edge. As long as products were high performance and high service, the customer didn‘t know or care where they came from. The ability to engage in social networking using various devices was becoming increasingly important to customers, and a movement to involve the entire family in joint activities was also growing strength in the U.S. Technological: Technology, the growth of the Internet and increased availability of mobile devices, created new opportunities and challenges for the delivery of content and for promotion. The pace and direction of change required considerable monitoring and possibly risk-taking, i.e., the incorporation of virtual reality. Complementary sources of technological innovation needed to be considered, i.e., the third-party software developers.
- It’s also necessary to assess the segments of the external competitive environment that include competitors, customers/buyers, suppliers, substitutes, and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable.
- Let’s apply Porter’s Five Forces of Competition to the video game console industry. Based on the external environmental factor analysis, the video gaming business has three strong competitors trying to carve out a piece of the “profit” pie. The rivalry is very strong in the video game industry. Each company tries to be the first company to introduce the latest generation of their product to the market, and, throughout generations, customers are very loyal to their gaming console of choice. However, up until 2010, Nintendo was the only one with a unique product line – able to compete in many consumer segments and create customer switching costs – which gave it the innovation advantage. Now, either more innovation was needed, or operational strategies had to shift.
- When one firm outperforms others by a wide margin over a long period of time, it’s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Nintendo’s value chain. Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e., margin) is a key concept used in analyzing a firm’s competitive position.
- Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Nintendo can make a choice of how to proceed to craft a competitive advantage. Nintendo’s value chain is captured in the following slides.
- In terms of primary activities, the key to Nintendo’s ability to differentiate itself in the market appeared to reside in its operational choices and marketing. However, lack of finished goods scheduling (outbound logistics) appears to have hindered strategy implementation – why weren't more games available for the Nintendo products when launched? Value Chain Activity Primary: How did Nintendo create value? Inbound logistics: Not in the case: Poor assessment of initial product popularity could create a shortage of materials to supply increased production demands. Operations: Appears to be a cost efficient production process for the console. Outbound logistics: Appears to have difficulty meeting shipping schedules and distribution to retail centers. There are significant delays producing games to play on the Nintendo consoles. Marketing and Sales: Developed a product for all ages, effective and creative promotion via TV, Internet, and word-of-mouth, and encouraged product trial and purchase by all. Some concern that products were mainly for children. Service: Presumed good due to loyal customers.
- With regards to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Nintendo should have been able to leverage its human resources and technological assets to produce more than just an innovative game console. Lack of planning (a general administration function) and possible poorly developed relationships with third-party software developers suppressed initial Wii U sales. Value Chain Activity Secondary: How did Nintendo create value? Procurement: Relationships with third-party developers appear to be essential for console sales. Technology development: Not in the case: Open-ended, team-based approach to innovation and access to state-of-the-art technology created a culture of creativity. Human resource management: Excellent recruitment and retention of key talent was assumed by firm performance. General administration: Poor planning, lack of anticipation of product popularity, but product development decisions kept profit margins in excellent shape, i.e., Nintendo realized more profit per console than the Microsoft or Sony products did. Communication between key decision-makers seemed productive.
- In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm’s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities.
- Based on a reading of the case, we might identify tangible resources to include the above.
- An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands like Nintendo (well known for the NES, DS, and GameCube), sustaining reputation is essential. Look at intangible resources that are controlled by Nintendo that might enable it to develop and implement value-creating strategies.
- Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6.
- Applying the VRIN concept, Nintendo had resources that were both valuable and rare. Its approach to managing its human resources – the path dependence of its history and the social complexity of its team-based development – made Nintendo’s reputational and creative resources in-imitable for quite a while. In an industry where innovation created a competitive advantage, it was no wonder Nintendo was successful. However, the opportunity for imitation always exists, which is why sustaining a competitive advantage is so difficult. Although it took many years, both Microsoft and Sony were able to copy the motion-sensing technology, and perhaps even improve on it.