MMM001 – International Strategic Management

Strategic Analysis
of Nintendo
Consulting Team:
23868055
23864947
23873134
23865955
23876487

To the Nintendo CEO

Word count: 3,197

17.1.2016

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Table of Contents
Executive Summary ................................................................................................................... 1
List of Figures ............................................................................................................................ 2
List of Abbreviations .................................................................................................................. 3
Introduction ................................................................................................................................ 4
The key elements underlying the past success of Nintendo ....................................................... 4
Environmental Analysis – Changes taking place in Nintendo’s macro and industry
environments .............................................................................................................................. 5
VRIO – Nintendo’s core competences relative to its competitors ............................................. 8
Five possible strategic options – Critical evaluation, prioritisation and recommendation ...... 11
Plan of action ............................................................................................................................ 13
Bibliography ............................................................................................................................. 14
Appendices .................................................................................................................................. I
Appendix I: PESTEL Analysis ........................................................................................... I
Appendix II: Porter’s Five Forces ..................................................................................... II

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Executive Summary

In order to improve Nintendo’s economic situation and re-establish them as the top player in
the gaming industry, this report will propose a strategic realignment for Nintendo, based on
thorough analysis and research.
A conducted analysis of the macro- and industry environment of Nintendo shows several
significant influences on Nintendo. An increased demand for family friendly games caused by
demographic transition of the game playing group can be observed. Further, technological
convergence is establishing smartphones and tablets as gaming devices, thus causing a decline
in sales of handheld consoles. Technological convergence can also be observed in the form of
industry giants entering the living room entertainment market with devices that have
increasingly strong technological capabilities. Innovation in Virtual Reality and the
development of increasingly sophisticated and cheaply obtainable mobile games are further
changing the industry.
A VRIO analysis has shown that substantial potential lies in utilising Nintendo’s uniquely
valuable gaming brands, the established and differentiated family-friendly set-up, and the
ability to implement a blue ocean strategy.
In accordance with this analysis and through playing on Nintendo’s strengths, the report will
propose a strategic focus on the utilisation of existing products, the integration of smart
devices into their product portfolio, and an expansion on the strengths of existing IP.

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List of Figures
Figure 1: Nintendo Wii Unit Sales, Games and Consoles, 2003-2008 (O'Gorman, 2008) ........ 5
Figure 2: Age Distribution of Game Players (Entertainment Software Association, 2015) ...... 6
Figure 3: Yearly Handheld Sales Comparisons - Global (VGChartz, 2016) ............................. 6
Figure 4: Total global console sales as of January 9th, 2016, Last generation (left), Current
generation (right), (VGChartz, 2016) ......................................................................................... 7
Figure 5: Current strategies followed by the three main providers of home video game
consoles, using the Generic strategies by Porter M. (1980). ...................................................... 7
Figure 6: VRIO Framework ..................................................................................................... 10
Figure 7: SWOT Analysis for Nintendo .................................................................................. 11

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List of Abbreviations

CEO – Chief Executive Officer

CSR – Corporate Social Responsibility

DS – Nintendo Dual Screen

FSA – Firm Specific Advantage

IP – Intellectual Property

PC – Personal Computer

PS - PlayStation

R&D – Research and Development

SWOT – Strengths, Weaknesses, Opportinuties, Threats

VR - Virtual Reality

VRIO – Value, Rarity, Inimitability, Organisation

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Introduction

Nintendo is one of three big players in the highly dynamic gaming industry. However, in
recent years Sony and Microsoft have gained a competitive advantage over Nintendo and new
trends in the industry have caused setbacks for Nintendo, thus creating the need for strategic
realignment.

The consultants have conducted a thorough analysis of Nintendo’s position in the macro- and
industry-environment, as well as a detailed analysis of Nintendo’s core competences.
Based on the desire to build on Nintendo’s previous success, five proposed strategic options
have been critically evaluated and recommendations will be made on the implementation of
three of those strategies. Finally, further strategic recommendations will be made that focus
on leveraging Nintendo’s FSAs in accordance with the identified trends and opportunities.

The key elements underlying the past success of Nintendo

Nintendo was founded by Fusaijiro Yamauchi in 1889 of which eventually grew to become a
national well-known brand. Nintendo’s past success have been supported by various key
underlying elements. One key element supporting Nintendo’s success is through the ability to
incorporate knowledge and expertise from alliances. Nintendo have demonstrated this through
partnerships with Magnavox and Sharp, improving their quality of consoles as well as
licensing popular characters such as “Mickey Mouse” and “Popeye” both contributing greatly
to the success of Nintendo’s Game and Watch device (Kittilaksanawong & Gillet, 2015, p. 2).
Nintendo also adopted very strict licensing policies to ensure the quality of the game,
highlighting the industry’s intense competition.

Another key element underlying the success is the company’s use of technology and
competitive advantage of a cost leadership strategy. Nintendo developed “entertaining games
that were easy to use” (Kittilaksanawong & Gillet, 2015, p. 2), and a more powerful system
known as the “Famicom” that was priced lower than competitors.

A final key element in support of their success is seen through their design and innovation
focus. Nintendo’s innovative culture and orientation has allowed the company to implement a
blue ocean strategy entering new markets. “Instead of competing within the confines of the
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existing industry... Nintendo developed uncontested market space that made competition
irrelevant” (Kittilaksanawong & Gillet, 2015, p. 4). Nintendo were able to differentiate
themselves through the development of the “WiiMote” and games such as “Donkey Kong
Arcade” and “Super Mario Brothers”. The “WiiMote”, eliminated “difficulties non-gamers
experienced with the many buttons and sticks in the classic controller” (Kittilaksanawong &
Gillet, 2015, p. 4). From this, Nintendo have benefitted from attracting a large demographic
including women, people over the age of 60 and non-gamers, in particular due to its “budget”
price strategy and mobility. Similarly as the Wii, the DS offered gamers with a new way of
playing handheld consoles through the development of touch screen technology. Thus,
Nintendo were able to tap into a new market with games such as the Wii Fit, as it enabled
Nintendo to attract a larger demographic beyond the “traditional” gamer. The Nintendo DS
achieved global sales of 154.88 and Nintendo Wii with 101.17 millions of units respectively
(Kittilaksanawong & Gillet, 2015, p. 12) as well as a significant sales of Wii games following
its launch (Figure 1). Both consoles held high sales in North America with a substantial
revenue of £2132m. As of 2014, Nintendo are drawing in the most revenues by product
through handheld hardware with revenues of $1959m and secondly home console software of
$1623m (Exhibit 4) as supported by their success from the Nintendo Wii and DS.

Figure 1: Nintendo Wii Unit Sales, Games and Consoles, 2003-2008 (O'Gorman, 2008)

Environmental Analysis – Changes taking place in Nintendo’s macro

and industry environments

The gaming industry is very dynamic with competition happening on the console as well as
gaming front. Further, the gaming industry has increasing macroeconomic value. Therefore,
macro and industry influences are highly significant and need to shape the strategy
formulation of companies.
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 The macroeconomic changes in the environment have been assessed with the help of a
PESTEL analysis. The full details of this analysis can be found in Appendix I, the most
significant changes influencing Nintendo’s macro environment will be discussed here.
From a social point of view, a shift in gamers can be observed.
While gamers used to be young males, the age distribution of
gamers is now diverse. As indicated in Figure 2, a major part
of gamers are under 18 or in the age group of 18-35. However,
with 27%, the age group of gamers 50+ is the biggest group.
Additionally, the number of female gamers is increasing
(Entertainment Software Association, 2015a).
A social controversy that is influencing policy making on
games and that is affecting the design of games is the effect of
violent games on gamers. Studies show that there is indeed a
link between violent games and violent behaviour (Bushman
& Anderson, 2001). Recently, a shift to more educational
Figure 2: Age Distribution of Game
games can be observed (Entertainment Software Association, Players (Entertainment Software
Association, 2015)
2015b).
The age distribution of gamers shows that there is potential for family games and the negative
effects of violent games in combination with an increase in educational games further confirm
this need. Nintendo should therefore keep following a family friendly game strategy.
A significant change has also been
Yearly Handheld Sales happening in the technological macro-
Comparisons - Global environment. As shown in Figure 3, the
35000000
30000000 handheld console market has experienced a
Yearly Units

25000000
20000000
steep decline in sales in most recent years.
15000000 Even newly developed consoles such as the
10000000
5000000 Nintendo 3DS or the PS Vita have not been
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

able to perform as well as their previous

Date models at their peak and have remained
under their expected sales figures
Nintendo DS Playstation Portable
Nintendo 3DS Playstation Vita (Kittilaksanawong & Gillet, 2015). This

Figure 3: Yearly Handheld Sales Comparisons - Global

decline in sales can be attributed to the fact
(VGChartz, 2016) that in increased number of gamers uses

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their smartphones to play games (Entertainment Software Association, 2015a). Smartphones
develop increasingly strong processing power and mobile games are improving in quality and
availability (Kittilaksanawong & Gillet, 2015). As the handheld console market was
especially important for Nintendo, this presents a significant threat to their business.
However, it may also be seen as a strategic opportunity.

Figure 4: Total global console sales as of January 9th, 2016, Last generation (left), Current generation (right),
(VGChartz, 2016)

To further underpin the current pressures influences on the gaming industry, a Porter’s Five
Forces framework has been utilized, for in depth analysis see Appendix II.
In addition to the big three developers (Sony, Microsoft, Nintendo), new entry has been
undertaken by PC game developer and
distributor Valve Corp. with the introduction of
its Steam machines in late 2015 (Edwards, 2013;
Valve Corporation, 2016). The entry of Software
Giants into living room entertainment market
with the introduction of Google chrome cast and
Apple TV could provide further direct
competition, should these introduce gaming
features in the future, as Amazon Fire TV just
introduced (Evangelho, 2013; Freeman, 2015)
There is a considerable rivalry and pressure to
innovate among the industry incumbents,
Figure 5: Current strategies followed by the three main
currently virtual reality (VR) seems to be a providers of home video game consoles, using the Generic
strategies by Porter M. (1980).
forefront of development, and is expected to be
a major contributor in where the industry is heading in the future (Euromonitor, 2015).
Furthermore the introduction of mobile games may provide even higher pressures on

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Nintendo’s handheld gaming platforms, as the benefits of portability are virtually similar as
with the Nintendo handhelds, however providing gaming experiences at far lower costs for
the customer (Kittilaksanawong & Gillet, 2015), while also providing a communication
commodity. As new platforms are being introduced, the bargaining power of third-party game
developers’ increase, and mitigating the adaptation needed for release of titles on Nintendo’s
platforms becomes even more important than in previous years. This is relevant for those
families which consist of different types of consumers both dedicated and casual (focused
audiences), when considering purchasing platforms from several providers, as the strategies
followed by Sony and Microsoft cater mostly to dedicated gamers, valuing graphics as a
major contributor to their gaming experience (Figure 5).

VRIO – Nintendo’s core competences relative to its competitors

Since the gaming industry has been an ever-developing industry that consists of numerous
competitors, it is vital for a company to be aware of its competences and values in order to be
successful. In this regard, Nintendo possesses various core competences that allow them to
differentiate themselves from their rivals. To further elaborate these competences, a VRIO
Framework (Barney, 2002) has been used with the help of a table which can be found at the
end of this section.

Gaming brands: Nintendo holds a number of very valuable strong brands which have been
pillars of the gaming industry since its inception such as Mario, Peach, Donkey Kong and
Pokémon. These gaming brands have strong, dedicated followings and are extremely
marketable past simply gaming titles and into other products, such as TV shows and cards for
Pokémon along with stuffed toys for both. Looking at Nintendo’s competitors such as Sony
and Microsoft, none of them holds such strong and valuable brands. These properties can be
considered valuable as they differentiate Nintendo from its competitors by enabling the firm
to pursue a different business model compared to its competitors and by considerably
increasing its market share. Unlike its competitors that develop their profit policies upon the
sales of their systems, these brands constitute the basis of Nintendo’s business model. For
instance, “in 1980s, Nintendo, after developing Famicom, used these games to change its
business model by selling the system without margins but making profits from games bundled
to it” (Kittilaksanawong & Gillet, 2015, p. 2). Moreover, with intellectual property rights to
these brands and very strict licensing policies pursued by Nintendo (Nintendo, 2016), they can
only be controlled and used by Nintendo, which makes them both rare and inimitable. For
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example, “during the first two years after the release of Famicom, licensees were not allowed
to develop similar games on other competitors’ platforms” (Kittilaksanawong & Gillet, 2015,
p. 2). The company also has had a long history of successful implementation and marketing of
these brands, meaning it is very organised to continue leveraging this strong core competency.
For example, Nintendo kept updating and releasing new versions of these games throughout
the years such as Donkey Kong Country and Super Mario World (Kittilaksanawong & Gillet,
2015, p. 2).

Family Friendly Set-up: One of Nintendo’s largest strengths is its family friendly set-up as it
allows parents to purchase the company’s hardware knowing none of the games are
particularly unfriendly to children. This also means that their consoles can become family
activities and appeal to generations outside the main gaming market (Kittilaksanawong &
Gillet, 2015, p. 4). This is a valuable asset due to the different demographics it appeals to
along with creating a strong option for parents more concerned about violence in video games
or other inappropriate content and was identified as such by Nintendo in their 2015 CSR
report. (Nintendo, 2015). While other console manufacturers such as Sony and Microsoft do
offer many child friendly games, Nintendo is the only platform that offers parents an
exclusively child-friendly option they can be confident in, making Nintendo’s family friendly
set-up rare. The company is well organized to continue leveraging this strength though it
should re-enforce its family friendly values in the minds of customers through marketing to
make certain that potential customers are aware of this.

Blue Ocean Strategy: The other important competence of Nintendo relative to its
competitors is its ability to implement the blue ocean strategy. This extremely valuable asset
allows Nintendo to tap into the industries that have not been touched and contested before.
For instance, unlike its competitors Sony and Microsoft, Nintendo aims to expand video
games to children, women and people over 60 years old rather than try to take away
customers from its rivals (Rusetski, 2012). Nintendo, as a part of its blue ocean strategy,
launched Nintendo DS and then Nintendo Wii, which is a unique system that allows people to
play games by moving their arms naturally and also allows Nintendo to tap into the casual
gamers rather than hard-core gamers that have already been targeted by its rivals’ systems, PS
and Xbox (O'Gorman, 2008). These assets have a low chance of imitation as it would require
very large barriers of entry for competitors to not only enter the console market but to then do
so against Nintendo’s brand dominance. This is the main reason why PlayStation Move and

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Kinect have not been able to compete with Nintendo’s Wii. However, as Hollensen (2013)
discusses, it is important that Nintendo continue this innovative structure as new ideas in the
gaming market may not be replicated to the same quality quickly but will soon become
expected features across all platforms. The company is well organized to continue to leverage
these strengths though it should focus on making sure consumers are aware of them.

(V)alue (R)arity (I)n- (O)rganizational

imitability

Gaming Brands (Mario, Yes Yes Yes Yes

Donkey Kong etc.)

Family Friendly Set-up Yes Yes Yes Yes

Blue Ocean Strategy Yes Yes Yes Yes

Figure 6: VRIO Framework

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Five possible strategic options – Critical evaluation, prioritisation and
recommendation

Strengths Weaknesses

- Strong brands (e.g. Pokémon, Mario) - Weaker graphic capabilities in

with dedicated followers comparison to competitors
- Valuable brand heritage - Lost relevance for hard-core gamers
- Licensing these brands and makings
use of them in the form of
merchandise
- Family friendly set-up
- Market position that is not directly
obtained by competitors

Opportunities Threats

- Increase in demand for family - Restrictions on certain games due to

friendly games
- Tapping into the new market for
games on smartphones and tablets
- Tap into the market for home use of
VR devices
the effect of violence on gamers
- Smartphones and Tablets are taking
over the handheld console market
- Entry of new players (e.g. Valve) into
the console market
- Entry of Apple, Google and Amazon
to the living room entertainment
market

Figure 7: SWOT Analysis for Nintendo

Based on the identified opportunities and threats through the external and internal analysis of
Nintendo (summarized in the SWOT), the consulting team has made the following evaluation
of the proposed strategic development areas by Nintendo’s management.

Revitalize existing products

As the release of blockbuster games increased sales of the Wii U, prioritization on releasing
such titles should be emphasized while the next generation gaming console is underway.
Another short term strategy the consultant team propose to revitalize these products is the
creation of a subscription service giving players access to classic Nintendo-games from
previous generation of Nintendo machines on both the Wii U and Wii, this to ensure a high
subscription number initially. The subscription service would also allow independent

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developers to publish small games in exchange for royalties from subscription and eventual
buyouts of titles from customers. This would ensure an increased revenue for the company
while still revitalizing the old machines with minimum effort by Nintendo, which could focus
on their releasing their big titles and future game console, the Nintendo NX (Corbin, 2015).

Take advantage of smart devices

By introducing smart devices, Nintendo may both expand its business into other business
areas and revitalize the existing products. One such product identified by the consultants is the
Wii Fit. Development of an app that would allow players to collect data from their smart
devices and enhance the experience of these games will not only revitalize the highly
successful Wii Fit concept, but also take advantage of the emerging existing trend of using
technology in accordance with exercise (Thompson, 2015). Given their first mover advantage
with the Wii Fit, The consultants recommend pursuing this opportunity with both existing and
future gaming consoles (Nintendo NX), and should be prioritized by their mobile
development partner DeNA, which could assist in development of this functionality (Corbin,
2015). Nintendo can also launch games on mobile platforms under a subsidiary brand. By
doing so, Nintendo are able to compete on the mobile platform against competitors without
sacrificing their strategy of focusing on quality of “games such as Mario and Zelda designed
for its machines” (Kittilaksanawong & Gillet, 2015, p. 9)

Actively utilize the intellectual property right on existing characters (Character IP).
It can be argued that Nintendo’s characters such as Mario, Donkey Kong, and Pokémon have
enabled their success in creating a worldwide brand that the young generation can relate to, as
well as being nostalgic for older generations. Nintendo can exploit this through utilising their
character IPs perhaps by extending product lines of merchandise of which, to some extent,
would be regarded as a “collector’s item” for those who associate themselves with the brand.
Nintendo have already launched a product called the “Amiibo”, providing the ability to
incorporate characters and provide in game extras allowing the ability for consumers to
customize their experience. Nintendo should extend and explore this concept further,
incorporating merchandise with software of which could add value to the “consumer
experience” that Nintendo wish to develop and focus on.

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Expand into other new markets / Expand into other new business areas
In comparison, it seems that the last two proposed strategies to “expand into other new
markets and business areas” are less feasible for Nintendo, as their appeal strongly rest with
their Character IP, which may not be leveraged as strongly in new geographical locations.
However, the strategy of “expanding into other new business areas” such as the “fitness-
game” market would provide a viable opportunity as seen with the success of the previous
experience with the Wii Fit. Should the already proposed revitalization of the franchise prove
successful, the company should consider an alliance with a fitness technology provider, such
as Polar, or Fitbit to ensure technological synergy with their upcoming projects and extension
of this service on their pending gaming console.

Plan of action
We advise the Nintendo CEO to utilize the financial potential of the character IP rights in the
short term, through increases in merchandizing and the continuation of the Amiibo concept,
which may fund R&D into new gaming technologies (including VR) which could be utilized
in the next upcoming console known as Nintendo NX. By revitalizing the existing products
through the development of complimentary smart technology, important lessons and
optimizations may be learned towards this upcoming launch. We recommend further
development and expansion of the Wii Fit concept, as wearable technology is projected to be
the number one fitness trend worldwide in 2016 (Thompson, 2015). Nintendo is in an
excellent position to seize this opportunity as they already have experience in providing an
exercise gaming experience and increase its attractiveness to parents who may also identify
with their exclusive gaming franchises introduced in the 80’s and 90’s. To do this successfully
Nintendo will need to develop the technology itself, or partner with existing providers of
technology (possibly Polar Systems, Finland) integrating this technology with the Wii U, and
in the future the NX. Another possibility for the management is to be more aggressive in their
pursuit of these strategies would be to increase their allowance of utilization of their IP rights,
possibilities could be kids TV shows with their characters as well as other forms of licensing.

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Appendices

Appendix I: PESTEL Analysis

Political - Due to positive economic effects, incentives have been provided to

game developers by 22 states as of 2011 (Entertainment Software
Association, 2012)
Economic - Theories exist which state that the sale of video games and consoles
is recession-proof, as games give people a fairly cheap escape from
reality. While sales numbers of recession times show slight
declines, one may argue that these are come from a lack of game
development (The Economist, 2010)
Social - The average age of gamers is 35. 26% of gamers are younger than
18 and 30% are between 18 and 35 (Entertainment Software
Association, 2015a).
- 56% of gamers are male, 44% of gamers are female (Entertainment
Software Association, 2015a)
- PCs have higher technological capabilities than consoles and are
therefore preferred by frequent gamers (Leather, 2013)
- An increasing amount of games is developed in the educational
field (Entertainment Software Association, 2015b)
- There has been worldwide controversy on the effects of violence on
gamers and studies confirm the theory that exposure to violent
video games leads to increased aggression levels, especially with
young adults and children of both genders. Long-term effects
remain to be observed, but are believed to be existent (Bushman &
Anderson, 2001)
Technological - One of the biggest downsides of consoles is, that they cannot be
upgraded in terms of hardware and therefore need to be
repurchased once out of date (Moore, 2014)
- An increasing amount of game sales is happening online, via
subscriptions, in social networks or on mobile (Entertainment
Software Association, 2015a)

I
 - Competition in the console market mainly comes from Microsoft
and Sony (Kittilaksanawong & Gillet, 2015)
- Consoles have a fairly long life-cycle compared to that of
computers, with life-cycles between 6 and 8 years in the case of the
Nintendo Wii, the Xbox 360 and the PlayStation 3 (Shaw-
Williams, 2014)
- Technological development needs to be up to the competitor’s
standards (Kittilaksanawong & Gillet, 2015)Smartphones and
Tablets have shifted the handheld console market
(Kittilaksanawong & Gillet, 2015)
Ecological - The console industry heavily uses hazardous chemicals and
materials. Microsoft, Sony and Nintendo have made commitments
to improve the environmental impact of their products (Brigden, et
al., 2008)
Legal - Intellectual property is a significant competitive advantage and
therefore needs to be defended accordingly (Greenspan, et al.,
2014)
- There are different ways and institutions analysing games and their
impact on children, rating them accordingly (Entertainment
Software Association, 2015b)

Appendix II: Porter’s Five Forces

Forces Considerations

Rivalry - Dominated by Sony, Microsoft and Nintendo (Kittilaksanawong & Gillet,

among 2015)
competitors - Sony and Microsoft offerings more similar than Nintendo, top sellers for last
generation platforms are third party releases (vgchartz.com, 2016)
- Nintendo has a differentiated focus strategy (Kittilaksanawong & Gillet,
2015)

II
 - Considerable pressure for innovation, VR at the forefront at present
(Euromonitor, 2015)

Threat of Hardware (Video consoles)

new entry - Present, demonstrated by Valve’s Steam machine entry (Edwards, 2013;
Valve Corporation, 2016)

Software (Games)
- High, independent developers have shown ability and success previously i.e.
the substantial success of Minecraft by Mojang AB (Yarow, 2014)

Threat of - Threat from PC and Mobile technologies (Kittilaksanawong & Gillet, 2015)
substitutes - Mobiles threaten 3DS and other mobile gaming consoles, and provide
gaming at lower prices
- Other forms of entertainment (Streaming services)

Bargaining - Some game developers have considerable bargaining power (EA,

power of Activision) as they provide blockbuster titles i.e. Call of Duty, FIFA
suppliers - Little chance of platform exclusivity for these games, however their
availability provides considerable attractiveness for consoles.

Bargaining - Considerable bargaining power rests with the buyers, only a few exclusive
power of titles and features separate the offerings of the big three (i.e. Gran Turismo,
Buyers Halo).
- Buyers can easily change platforms with each generation released
- A strong base of console owners enables companies attractiveness for third-
party developers for release of their titles (Kittilaksanawong & Gillet, 2015)

III