May 3 Nintendo 2010

Nicole Wetzell Contents

PART 1: INTRODUCTION ...... 3 Executive Summary ...... 3 History of Nintendo ...... 3 Current Products...... 33 Main Problem ...... 33 Existing Mission objectives and strategies ...... 4 New mission and vision statements ...... 4 SWOT Analysis Discussion ...... 4 Nintendo’s strategy and its advantages and disadvantages ...... 55 Situational analysis ...... 66 Industry analysis ...... 6 Economy ...... 66 Consumer behavior during and after the recession ...... 77 Buyer behavior related to gaming industry ...... 7 PART 2: STRATEGIC ANALYSIS ...... 7 Nintendo’s SWOT Analysis ...... 7 Competitors’ SWOT Analysis...... 8 Playstation (Sony) ...... 88 Advantages and disadvantages of Playstation’s strategies ...... 8 Xbox (Microsoft) ...... 9 Advantages and disadvantages of Xbox 360’s strategies...... 99 Financial Analysis: ...... 1010 Nintendo ...... 1010 Playstation (Sony) ...... 11 Xbox (Microsoft) ...... 11 Nintendo | Porter’s Five Forces ...... 12 Playstation 3 | Porter’s Five Forces ...... 13 Xbox 360 | Porter’s Five Forces ...... 14 PART 3: Recommendations and conclusions ...... 15 Overview ...... 1515 General description of Wii Too ...... 15 Comparison of actual Nintendo Strategy ...... 15 “We would like to play too” plan, targeting “Happenin’ Moms” ...... 1616 Long-term Strategic Objectives | 2011 - 2012 ...... 1616 Cost ...... 1616 Budget ...... 1616 Target market ...... 1717 Marketing Message ...... 17 Examples of Marketing Vehicles for “Happenin’ Moms” ...... 17 Creating a Sustainable Competitive Advantage ...... 18 Evaluation ...... 1818 Works Cited ...... 2828

2 PART 1: INTRODUCTION

Executive Summary Nintendo has always committed to its customers by providing high quality entertainment products. In 2006, the company launched the Wii game console along with a catching marketing strategy which was very successful. Today, the company has experienced decreased sales. This plan will discuss the background of the company, analyze Nintendo’s current situation along with Playstation 3 (created by Sony) and Xbox 360 (created by Microsoft) and provide some recommendations for a new game console as well as a new marketing plan.

History of Nintendo In 1889, Nintendo started as a Japanese playing card manufacturer and remained in this industry until 1974 when it created the video game market with the Magnavox Odessey. Since then, the company has been committed to creating new and innovative video game consoles and games like Nintendo Entertainment System, Super Nintendo Entertainment System, N64, Game Cube, Game Boy, Game Boy Color, Game Boy Advance, Game Boy Advance SP, Game Boy Micro, Nintendo DS, Nintendo DS Lite, Super Mario Brothers game series, Donkey Kong and the Zelda game series (Thompson, Strickland, & Gamble, 2010, pp. C-238-239).

In 2006, the company released a brand-new and unique gaming system, Nintendo Wii, which won the majority of the marketing share. Currently, Wii console and game sales have dramatically dropped due to the current recession. Additionally, gamers and analysts are beginning to ask what next console release will entail, implying that demand has decreased for the console. (Thompson, Strickland, & Gamble, 2010, pp. C-238-239).

Current Products •• Nintendo Wii and various compatible games •• Nintendon DS and various compatible games •• Pokemon cards (Nintendo, 2010)

Main Problem Due to the recession and the fact that another game console has not been released since 2006, Nintendo Wii sales have dramatically decreased in the past couple years. In order to keep a sustainable competitive advantage over Playstation 3 and Xbox 360, the company needs to launch a new gaming system (which will please both hard core and fair weather gamers) along with a compelling marketing strategy.

3 Existing Mission objectives and strategies Mission Statement: “We are strongly committed to producing and marketing products and support services available.” (Nintendo Corporation, 2010)

Vision Statement: Based on Nintendo’s web site, the company does not have a vision statement.

New mission and vision statements Mission Statement: “Nintendo makes the high quality, innovative and unique gaming products and provides related services available world-wide.”

Vision Statement: “Bringing people together.”

SWOT Analysis Discussion Strengths

•• Since the 1980’s Nintendo has released several generations of cutting edge and high quality gaming consoles resulting in a strong brand name which many customers trust. This gives the company sustainable competitive advantage over competitors (Games Consoles Industry Profile: United States, 2009, p. 13). •• According to Games Consoles Industry Profile, Nintendo’s management team invests resources into profitable avenues and has enjoys high returns. For 2003-2007 their “return on average assets, return on investment, and return on average equity for the 2003-2007 were 8%, 9.8%, and 9.8%, much higher than the corresponding industry averages of 2.1%, 4.2%, and 5.5%, respectively.” (Games Consoles Industry Profile: United States, 2009, p. 14) •• Nintendo has a debt-free status while the industry average debt to assets ratio is 11.9%. The company has a great advantage over competitors because it has more financial flexibility (Games Consoles Industry Profile: United States, 2009, p. 14)

Weaknesses

•• Nintendo hires outside manufacturers to produce key parts for its consoles and software. In 2006, Nintendo could not keep up with consumer demand of its Wii because these manufacturers would not speed up production. This had a negative impact on profits (Games Consoles Industry Profile: United States, 2009, p. 14). •• Nintendo’s “fun for everyone” strategy for the Wii has been highly successful; however, one of the industry’s most important group of customers, hard core gamers, want high quality graphics and intricate story lines in the latest technology. By targeting the Wii console to everyone, this group now feels ostracized and ignored, leading them to try competitive products (Thompson, Strickland, & Gamble, 2010).

4 Opportunities

•• In order to play games on consoles, consumers must purchase software games. This market is expected to grow at a compound annual growth rate of 5% by 2011 creating a value of $10.3 billion (Games Consoles Industry Profile: United States, 2009, p. 15). •• Additionally, the console game market is growing at a rapid pace in India. This market is expected to reach $120 million by the end of 2010, from $13.3 million in 2006 (Games Consoles Industry Profile: United States, 2009, p. 15). •• The popularity of online gaming (also a threat ) is growing. Worldwide connections to the Internet are expected to increase to 413 million by 2010. Nintendo can capture more users because it already has a Wifi connection built into the Wii (Games Consoles Industry Profile: United States, 2009, p. 15). •• Nintendo can re-engage its biggest customers, hard core gamers.

Threats

•• Nintendo is a global company and approximately 67% of its revenue is generated from international locations. If foreign currency values become too volatile, the company will not be as profitable and profit margins will be squeezed (Games Consoles Industry Profile: United States, 2009, p. 15). •• Product life cycles are very short in an extremely competitive industry. The most popular games and consoles usually have a life of less than a year. Delays in console or software development and production will have a negative effect on revenues and profits (Games Consoles Industry Profile: United States, 2009, p. 16). •• Many more developed countries are still recovering from the recession. While developing countries are emerging strongly from the recession, many households will lack the funds to purchase a Nintendo (The Economist, 2009). •• If Nintendo remains complacent and does not find ways to include the Internet into their business model, the Internet’s popularity and ease of use may obliterate the gaming industry like the music, publishing, video and computer software industries (A Giant Sucking Sound, 2009). •• Sony’s market share (27%) is catching up with Nintendo’s (Games Consoles Industry Profile: United States, 2009).

Nintendo’s strategy and its advantages and disadvantages Nintendo’s ‘fun for everyone’ strategy worked in 2006 with the release of the Wii. They have built several new groups of customers which constitutes as casual gamers; however, it damaged their biggest customer base, hard-core gamers.

Additionally, Nintendo priced out their biggest competitors with a low console price of $250.

The company must now figure out how to satisfy all these different customer groups with one new console while staying at a reasonable price.

5 Situational analysis

Industry analysis In 2009, United States video game and console sales decreased 31 percent to $1.17 billion, from $1.7 billion in 2008. The NPD Group (a national market research firm) sites reasons for the decline are the deep recession and that major players have not produced a major video game console or title in the past few years. The group also believes that gamers could start moving to online gaming; however, online gaming industry numbers (i.e. subscription sales and downloads) are showing that this trend has not taken hold and is not a major threat this year (Musil, 2009).

The video games console market experienced a compound annual growth rate of (CAGR) of 20 percent from 2004 – 2008. Analysts anticipated a contraction in this market from 2009 – 2011 but also expected a resume a growth trend toward the end of this period. Additionally, they also expect this market to decrease with a compound annual rate of change (CARC) of -.5 percent to $7,608.3 million by 2013, an overall 2.5 percent decrease (Games Consoles Industry Profile: United States, 2009, pp. 7-8).

Economy General While many developing countries are experiencing a strong economic recovery, the United States is expected to continue to recover from the recession in 2010. Christina Romer, a White House adviser, assumes that unemployment numbers will remain high through 2010 and then slowly decline through 2012 (The Economist, 2009).

Other Economic Figures Gross Domestic Product (GDP)

Although the GDP declined in 2009, it is expected to increase slowly through 2012.

U.S. GDP measured in billions of dollars 2009 2010 2011 2012 12,983 13,182 13,399 13,657 (US Economic Forecasts, 2009)

Inflation The United States experienced a period of deflation in 2009 which is an effect of the current recession. The United States economy should return to a mild inflation trend by early 2010 which should continue through 2012.

Inflation for the U.S. 2009 – 2012 2009 2010 2011 2012 -.06% 1.9% 2.1% 2.3% (U.S. Department of Labor Statistics, 2009)

6 Consumer behavior during and after the recession “Understanding the Post-Recession Consumer” explains that United States publisher, Time Inc, discovered that many consumers were already beginning to feel “overwhelmed by the profusion of choices and 24/7 connectivity and were starting to simplify” before the recession. Recessions typically put psychological strain on consumers meaning that the demand for comforting and simple products have only been accentuated in the recession (Flatters, 2009, p. 108).

Consumers are looking for and will continue to value brands that can be trusted and are not overpriced; information sources (i.e. social networks or consumer/product ranking information) which simplify the presentation of product choices along with products that are less complicated and easier to use as the recession ends (Flatters, 2009, p. 109).

Many consumers were also already beginning to spend less money even before the recession began and this included middle to upper middle class consumers. Experts believe this new trend began as more consumers started to become unsatisfied with excessive waste and consumption. A trend of increased spending usually follows the end of a recession or during the beginning of a recovery; however many experts believe that “discretionary thriftiness” will continue as the economy recovers (Flatters, 2009, p. 110)

Buyer behavior related to gaming industry Since the first game console, Magnavox Odyssey, was release in 1972 the gaming industry has grown exponentially (The Game Console, 2010). Analysts predict that 190 million households will have a console by 2012 and 80 percent of these households will have the console connected to the Internet. Additionally, 75 percent of these households will use the console at least a couple times per week (GrabStats.com, 2010).

PART 2: STRATEGIC ANALYSIS

Nintendo’s SWOT Analysis Strengths Weaknesses Opportunities Threats High quality and Dependency on Growth in the Volatile exchange cutting edge products outside manufacturers software game market rates “Fun for everyone” Rapid growth in the Sound management Short product life strategy ignores core console game market decisions cycles customers in India Weak, recovering Online gaming Debt-free status economy in developed becoming popular countries Re-engage core Sony’s market share customers Competition with smart phones

7 Competitors’ SWOT Analysis

Playstation (Sony) Strengths Weaknesses Opportunities Threats Large company has 2009 restructuring Volatile exchange more resources to Legal troubles will increase savings rates draw from Focus on Brazil, Diversified product High manufacturing Weak, recovering India, Russia and offering reduces the costs negatively economy in developed China may impact risk of profit loss effects profits countries growth Brand is trusted by Continue to launch Nintendo has the consumers new video game titles market share Competition with smart phones (Datamonitor USA, 2009, pp. 16-17)

Advantages and disadvantages of Playstation’s strategies By examining the features of Playstation 3, it can be assumed that Sony is targeting the console toward the industry’s most valuable customers, hard core gamers. Initially, Playstation 3 was priced out of the market. The console originally cost $999 and costs $299 today. With a 120 GB hard drive, the console has more computing ability and has better graphics than the Wii allowing for more in-depth games with better graphics and more involved story-lines. Desirable features include the ability to play High Definition Blu-ray DVDs as well as MP3’s and CD’s. Playstation 3 customers can also stream complimentary music videos through “Vidzone” (Scott, 2009).

In 2009, Playstation 3 continued their strategy of attracting hard core gamers by releasing another extremely popular and exclusive to Playstation 3 game, “Final Fantasy XIII,” which is expected to sell 2 million copies in Japan alone. Yusuke Tsunoda, an analyst at Tokai Toykyo Securities Company believes that this game “should help lift sales of the Playstation 3,” and that “The Wii has peaked out, but Playstation 3 is still on the upswing” beginning to make a compelling impact on Nintendo’s market share (Alpeyev, 2009).

Keeping core customers satisfied is a proven strategy for Playstation 3. The company may have even stolen members of this highly coveted market from Nintendo; however, Nintendo also won over many new customers increasing their own pool of people who will consider a new gaming console.

Although Playstation 3 holds more appeal for the industry’s biggest market, hard-core gamers, the console still lost many sales back in 2006. In 2010, Playstation 3 will play catch-up with the Wii by releasing similar wireless remote controllers entitled Move for $100. What makes Move unique from the Wii’s controllers is the PlayStation Eye camera, “which tracks a glowing ball atop the controller and lets games better track your 3-D movements in space” (Kirby, 2010).

With such a late introduction into the market place, it makes more sense for Playstation 3 to introduce completely a new technology or console to the market place.

8 Xbox (Microsoft) Strengths Weaknesses Opportunities Threats Console has a long Large company has High price when X- Expose emerging way to catch up more resources to box 360 was first markets to the product market share with draw from released Nintendo Diversified product Low game console Market wireless Distrust among offering reduces the market share controller and headset Europeans risk of profit loss Brand is trusted by Complicated “Alan Wake” game consumers hardware Competition with Better graphics smart phones (Datamonitor USA, 2010, p. 29), (royaltyuniverse, 2007)

Advantages and disadvantages of Xbox 360’s strategies Like Playstation, Xbox 360 also has geared its console and games to hard core gamers. The Xbox 360 uses a wireless controller and headset (this allows fellow gamers to communicate with one another). Similar to the Playstation Xbox 360 has a 120GB hard drive which also gives the ability to store games, TV shows, movies, music and pictures from “Xbox LIVE Marketplace,” an online service that gives the ability for online multiplayer gaming, to download games and other media and instant messaging. There is an additional $89.95 annual membership fee to join “Xbox Live” (Scott, 2009).

Initially, Xbox 360 was priced at $549, much higher than Nintendo Wii. Today it is priced at $300 (Scott, 2009).

The latest, highly anticipated game, “Alan Wake,” is being released in 2010, and also exclusive to Xbox 360. With its in-depth story line, high technology features and eye-catching graphics, many analysts predict that this will be one of 2010’s hottest games and could dramatically boost Xbox 360 console sales (McEachern, 2010).

Like Playstation 3, Xbox has decided to release products that attract the primary target market of hard core gamers. Once again, making sure this market is satisfied is a good strategy; however, Nintendo is reaching many more people by creating products that appeal to everyone. There is a lot of power in large numbers which means if each company continues with their own strategy, Nintendo could always have more sales.

Xbox 360 also plans to play catch up with Nintendo by releasing their own version of Nintendo’s wireless remote controllers as an add-on to the Xbox 360 called Project Natal, except this technology does not involved controllers at all. Gaming expert Jason Kirby explains that “Instead it relies on advanced infrared and motion-sensor technology so that players' whole bodies become the controller.” Wedbush Morgan Securities analyst Michael Pachter believes that Microsoft’s new controller will become popular like the Nintendo Wii and will “outsell Sony five to one” (Kirby, 2010).

9 Although it’s a rather late response, Xbox’s Natal sounds like more innovative technology than Playstation’s Move, a more appropriate response to the Wii. If Nintendo does not take action and update their techonology, this is a possible threat.

Financial Analysis: Market Share

In 2008, Nintendo led the game console market with 58.40% of the market share followed by Playstation with 27.7% of the market share and Xbox trailing behind with 13.9% of the market share.

Nintendo When looking at recent financial information, it is determined that Nintendo is a sound and profitable company. Due to the enormous popularity of the Wii game console release in 2006, some ratios experienced a sharp decrease from 2006 to 2007. The company has experienced a slight downward trend from 2007 – 2008, but many companies have experienced the same trend due to the deep global recession.

Profitability Nintendo has a strong gross profit margin for 2006, 2007 and 2008 of 42.24%, 41.16% and 41.86% respectively. The gross profit margin fell approximately 1% between 2006 and 2007 because the popular Wii console was released in 2006 boosting sales and profits.

Nintendo has a weaker net return on sales. In 2006, 2007 and 2008, this was .19, .18, and .15 respectively. The fact that this ratio is decreasing is also a sign that Nintendo needs to reevaluate their operating procedures and the cost of goods sold.

From 2006 – 2008, the company has enjoyed an upward trend on the return on stockholders’ equity. The average return is between 12 and 15 percent (Thompson, Strickland, & Gamble, 2010, p. 104). In 2007 and 2008, Nintendo experienced above average returns in this area (Nintendo, 2007) (Nintendo, 2008).

Liquidity Nintendo carries very little to know debt, making this company very liquid. A strong current ratio is considered at least a 1.0 and most companies strive for a 2.0 . In 2006, Nintendo had a very high current ratio of 5.41 (because the popular Wii console was released that year). In 2007 and 2008, the company still had a current ratio of 2.7. While these ratios are still very strong, a downward trend is still present and Nintendo should make sure they are not losing too many assets (Nintendo, 2007), (Nintendo, 2008).

Additionally, Nintendo also experienced a similar trend in regards to their quick ratio. In 2006, 2007 and 2008, the company had a quick ratio of 5.41, 2.78, and 2.71, respectively. While these numbers are very strong, a downward trend is present and the company needs to investigate they will be able to continue to pay off their liabilities without selling their inventory over the next five years (Nintendo, 2007), (Nintendo, 2008).

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