Krizia L.

Maac
38668

Case 18: The Home Video Games Industry: the first four decades

I. Analysis
1. Familiarize the company
The video game industry is the economic sector involved with the development, marketing
and sale of video games. It encompasses numbers of job disciplines and employs a lot of
people worldwide. It includes video game consoles, game software, handheld devices,
mobile games and online games. Console is the largest segment in the industry. In recent
years, the video gaming industry has been growing rapidly and it may grow in the future.

2. Internal Environment

Strengths:

 strong brand name

 market leader for hand-held machines
 low cost hardware and software
 uniqueness of motion sensing controller
 cost advantage over competitors

Weaknesses:

 limited selection of software

 lack of games produced for Nintendo consoles
 dependence on contract manufacturers
 having low earnings per share
 design of the products
 3. External Environment

Opportunities:

 good reputation
 opportunity to expand to other markets
 online gaming

Threats:

 focusing only on gaming experience

 attracted younger customers
 changing technology
 change in consumer lifestyles

Porter’s five forces

 Competition from industry rivalry

The home videogame console industry is a standard based industry where the first
entrant takes huge advantage of it, evidenced by Sony’s victory for over a decade.

Installed base is a key factor to secure third parties, using Microsoft as an example,
when it first stepped into the market in 2001, most established game developers balked
at the proposal as well as potential third-party console makers.

High capital investments at new entry for new entrants; Microsoft has a lost of 85% at
operating margin when first entry the market to invest in hardware, software and
technology.

By looking into Microsoft’s example, one of the potential causes of its lost when first
entry the market was the weak relationship with Japanese game developers, thus game
developer relationships is a key issue to new entrants.
 Bargaining Power of Suppliers

Sony and Microsoft are using IBM as their processor manufacture developing their
processors, if switching to another manufactures, the switching cost would be very high.

Only a few large manufactures are capable to produce at the demand (Dell, Mitsubishi
and Samsung etc.), thus they exert more power on market price.

Big game publishers can leverage the company depends the popularity of third party
developed games.

Game delivery methods can be affected by third part developers or manufacture, using
Microsoft as an example, it first wanted to make their games compatible with Windows,
but due to hardware suppliers’ rejections, they have to shift the plan.

 Bargaining Power of Consumers

Consumers have limited power over console developers, as the number of potential
consumers is huge, the firm is not too worried about losing customers.

Only three big firms exiting in the market are developing home videogame console,
there aren’t many choices left for the consumers.

The switching cost of moving to other consoles is not cheap for consumers.

 Threat of New Entrants

The console has been last in the market for a long period where many people grew up
with it, thus consoles are not likely to be substituted.

PC was seen as a potential substitute to console by Microsoft but result failure,in 2006
consoles has also developed markets for its latest generation products.
  Threat of Substitutes

There are only three main plays in the market, thus causes high intense in the
competition.

All players have rich resources and have many loyalty consumers.

Cost of inventory and production are not cheap thus fighting for volume.

It is expensive and difficult to exit the industry as Dreamcast’s example.

Overall, the videogame console industry is still not very attractive to console
manufacturers as in general the demand for home videogame console is high but there
are only three key players in the market with huge leverages. In addition, the investment
capital and fixed cost for new entrants is too high for entry the market with the need of
having third-party developers to develop games to sell on their platform. Even though
the home videogame console is an industry of potential growth but it is not so attractive
for potential console manufacturers to step into.

The key competitor facing Sony is not Wii but Xbox 360. Firstly, Wii is designed for all
age groups and gender where PlayStation 3 and Xbox 360 are mainly focusing on 18 to
34 years males. PlayStation 3 and Xbox 360 both featured the same clock speed, data
width and memory storage, and Microsoft has taken the advantage of being first- mover
with a lower retail price. Thus Sony should concern about how to win the battle with
Xbox 360 rather than paying attention to Wii.

4. Corporate level strategy

The corporate level strategy of the video games industry is vertical integration because they
cater not just the software like games and updates but also the hardware like the consoles
and controllers.

5. Business level strategy

The video game industry uses a differentiation strategy because give superior quality in
game graphics and well-built hardware.
 6. Identify the structure

The video game industry is under the vertical business organization where it is a centralized
organization because each company has an owner and they are responsible for every
decision that has to be made about the company and only ask for suggestion thru the
board.

II. Recommendation

With the home video game industry evolving, there are a few things that need to be in mind
as you try to improve. You need to stay technologically advanced by continuing to change
games, software, and new models. These adjustments require this technology to be low
cost to be successful in this industry. If costs are high, not only will the customer be lost but
you may lose your competitive edge. Competitive advantage in this industry is a critical
factor. If you are ahead in the industry at one point, another company can come out with the
next best selling product with new features and graphics capturing market share.

Furthermore, being competitive in the sense of efficiency, quality, and response to the
customers is critical in this industry. It influences a customer to buy your product rather than
the competitors. If you have good quality and low prices, the customers would be willing to
upgrade to the newer product line. With the industry constantly changing, you need to be on
top of your game to be on top of the home video gaming industry.