Case Analysis: Sega in 16-bit Video Games Group 6, Section - E Value net analysis deals with the four

forces of potential competition surrounding a firm: Partners whose products and services complement that of the firm, Suppliers whose raw materials are essential for the firm to carry out its operations, Customers and Distributors whom the firm s products finally reach and Rivals who fiercely compete with the firm. In the video game industry, partners are game developers and suppliers are companies manufacturing microprocessors. The companies partner with game developers by giving them licenses to develop games for their systems. Companies try to gain ground by changing the terms of licenses and providing them incentives in terms of royalty fee and also give exclusive rights to develop games only for them to underplay the competition. In 1987, NEC, a major Japanese electronics company was the first company to introduce a nextgeneration 16-bit video game technology. It was followed by Sega, the Japanese arcade game business leader and an unsuccessful player in the 8-bit home video game market. NEC could establish its foothold in the consumer electronics business after mid-1980s when it sought to roll out products in the higher-ticket segments. After introducing its first 16-bit system in 1987, NEC went on to improve its features and performance by developing TurboGrafx with higherquality graphics, sound and faster action. NEC over the years established itself as a company with a broad expertise in a variety of related technologies. The company was proactive in reaching out to independent software houses to develop games for its system. Within no time, in winter 1990, NEC launched a handheld system that boasted a color display and compatibility of cartridges with the previous releases. After its entry to the U.S in 1986, Sega enjoyed only limited success with its 8-bit Master System. So Sega decided to change the image of its arcade centers. In place of the dark, cramped early centers, it began building large, brightly-lit, spacious arcades in shopping areas and equipping them with games the whole family could enjoy. NEC systems were priced higher than Sega and were targeted at 8-16 year olds. Whereas Sega systems were priced lower and targeted at Japanese 12-34 year olds. A significant move by Sega was made by Nakayama who invested aggressively in game development- breaking Japanese traditions to pay headhunters to hire the best and brightest from Japan s leading technology companies. Sega s first outside game developer was Electronic Arts. Another early licensee was Tengen. After this, Sega started offering licensees terms very similar to Nintendo s except for a slightly higher fee and the absence of an exclusivity clause. Sega s entry in the handheld category was in April 1991 before which Nintendo was the only player. Sega slowly gained market share and increased its sales by 300% over 2 years. At the same time, NEC s sales did not show any rise in the same period. Growth became stagnant for NEC during this period with the entry of Sega. Nintendo on the other hand was a step ahead with its 16-bit video game system which was under development since the late 1980s. It decided against backward compatibility to keep the cost of the new hardware down. But Nintendo was not in a rush to introduce its 16-bit system in the US market. Three incompatible 16-bit systems were combating an endless battle for market share.