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Nintendo: the Illusive Competitive Advantage Luke Nguyen Raymond Nintendo: The Illusive Competitive Advantage Luke Nguyen Raymond Estrella Toan Bui James Crosby Don Hatley Jeremy Westerman The University of Texas at Dallas Nintendo: The Illusive Competitive Advantage 1 History The video game industry owes much of its popularity generated today to one company: Nintendo. From its beginnings in the late nineteenth century, Nintendo has proven the ability to survive throughout dire circumstances, but the challenging dynamics of the video game industry proved companies could not survive without adapting a variety of business strategies. In 1889, Nintendo was established by Fusajiro Yamauchi and began as a card company (Jones, 2013), producing playing cards similar to those found in casinos and game parlors. The company maintained this simple product line for over 50 years until the grandson of Fusajiro, Hiroshi Yamauchi, took over the company and began to explore ways to expand the business. Solidifying the first game card licensing deal in 1959, Yamauchi agreed to produce playing cards for Disney’s iconic characters, bringing in significant revenue and a change of pace from the arena of gambling. Success driven, Yamauchi expanded the company into “non-game related markets which included taxi services, hotels, and even the food industry, all which failed” (Cohen, 2014). Taking to a host of different ventures while continuing to produce the majority of products for the playing card market, the company fell into debt and was at risk of facing bankruptcy. Nintendo needed to reinvent itself and did so by deciding to manufacture toys for children and hired engineers to develop and run the production lines. Gunpei Yokoi, a recently hired mechanical engineer, developed and constructed an extending arm toy on his own initiative. His creation was later discovered by Yamauchi on a factory visit. Nintendo developed and produced this toy, the “Ultra Hand”, which Nintendo: The Illusive Competitive Advantage 2 became an instant success. Yokoi moved into the product development division and the company began to dabble in what is now referred to as “video games”. Nintendo started to produce electro-mechanical arcade cabinets and video games in the 1970’s. A successful breakthrough into the video game market occurred when Shigeru Miyamoto developed and released Donkey Kong. Most arcade games in the 1970’s primarily focused on shooting or driving simulations. Nintendo introduced a new genre of gaming referred to as “platforming”, known as gameplay where an avatar jumps upon platforms and dodges obstacles. Due to extreme popularity, Donkey Kong was produced for multiple systems within the home video game market. After years of initial success, Nintendo was greatly affected by the video game market crash in the early 1980’s. A number of factors significantly contributed to the crash, including negative perceptions, market saturation, and the introduction of home computers (Dillon, 2011). Shortly preceding the crash, Nintendo was seeking to enter the market of home video game computers and tried to secure a deal with Atari to distribute their system, “The Family Computer”, or Famicom. Atari suffered financially from the crash and never secured a deal to distribute the Famicom gaming console. As a result, Nintendo developed and released the Nintendo Entertainment System (NES) into the American market in 1985. High quality control measures, nonexistent competitors, and financial capabilities led to first-mover and competitive advantages. Computers were far too expensive and difficult to operate and the video arcades had become less family friendly over the years, allowing Nintendo to control the entire home video game market. Recognizing Nintendo’s success, rivals began to enter into the video game market. The immense success of the NES planted the seeds for the upcoming “Console Nintendo: The Illusive Competitive Advantage 3 Wars” between Nintendo and a newly formed Japanese gaming company, Sega. Boasting additional features from the arcade scene such as a light gun, Sega attracted software developers who were unhappy with the stringent requirements enforced by Nintendo. Enjoying marginal success, the Sega Master System prompted the company to produce a new generation of hardware. The 16 bit generation began to touch on limitations of storage technology. Nintendo and Sega used cartridges to house physical memory chips in order to store their video game software. Capacity for the software was prohibitive to game design and additional memory increased the price of games significantly. These technological limitations led Nintendo and Sega to research CD-ROM storage based technology. Nintendo entered into a partnership with Sony, an ally who had reliably produced the sound processor for the Super NES. Initial development produced several working systems to evaluate for production, but the company grew weary as they were not able to achieve a satisfactory licensing agreement with Sony (Dillon, 2011). Sega released the CD-ROM add-on to a lackluster reception, but the industry had begun the movement towards optical drive systems using compact discs for storage. Focusing efforts on more advanced video processing technology, Nintendo wanted to adhere to the internal mantra of “quality over quantity” developing the Nintendo 64 (N64). The N64 was a cartridge based system with innovative hardware accessories but still remained true to the rigid Nintendo structure of licensing and quality control. Software developers unhappy with Nintendo’s strict internal procedures moved to a new competitor, the Sony PlayStation (PSN). The failed partnership with Sony produced the PSN, debuting a full year ahead of the N64. Nintendo’s delayed entry and high cost of Nintendo: The Illusive Competitive Advantage 4 development eventually led the PSN to dominate the N64 in terms of sales, availability, and market share. In reaction to the PSN, Nintendo’s next system release, the GameCube, showcased mini-DVD technology and multiplayer focused hardware, similar to competition from Sony. Many developers readily accepted the ease of licensing and development for the PSN, leaving Nintendo with few quality titles produced by in-house software development teams. Uncertainty in the home video game market continued as Sega left the console market after weak showings from the Saturn and Dreamcast consoles. Sony enjoyed unbridled success with the release of the PlayStation 2 and Microsoft emerged to challenge the industry with limitless financial means, forcing Nintendo to rethink market strategies. Competing in an increasingly competitive market required the company to develop a broader approach to future products. Relying on innovative technology, Nintendo released the Wii and showcased motion control as a new style of gameplay. The system gained mass market appeal by attracting an audience who previously avoided video games and offering an online service with access to a library of Nintendo classics. To date, it is Nintendo’s best-selling console. Riding the wave of success of the Wii, Nintendo conducted an internal analysis to discover inspiration for the next system, the Wii U. The focus of multiplayer gameplay that the Wii offered did not please some of the company’s long time fans, so Nintendo attempted to remedy the complaint by once again offering a unique piece of hardware, taking cues from the handheld GameBoy product line. The Wii U gave players a touch screen device that players used on the go and at home, never sacrificing progress due to leaving the base console unit. Competitors continuously out sell the Wii U by large Nintendo: The Illusive Competitive Advantage 5 margins and the future is unknown, but examining key decision points in Nintendo’s history give insight as to how the company arrived here. Three Critical Decision Points Decision Point One: Nintendo’s Reaction to the Crash of 1982 Video games proved popular throughout the latter part of the 20th century, but inadequate system advancements and market stagnation led to the downfall of the gaming industry in 1982. Industry revenues fell 97% from 3 billion dollars to just under 100 million dollars in nearly a year (Werner, 2011). Multiple gaming platforms had flooded the market with lackluster systems and poorly designed games, leaving consumers uninterested. Prior to debuting in America, Nintendo enjoyed financial success in Japan allowing the company to take advantage of technological advancements despite their unfamiliarity of the market (McFerran, 2013). The company realized their innovations and gameplay were rare and the threat of rivalry was minimal following the crash in 1982. Through their external analysis, Nintendo discovered opportunities to exploit the market. Nintendo’s new game console, the Famicom, was released in Japan in 1983. It was thoroughly redesigned and rebranded to exploit first mover advantages in the American gaming market (Jones, 2013). The Famicom was renamed to the Nintendo Entertainment System (NES) to introduce a product similar to the PC, yet distinct from previous video game consoles. Featuring an enclosed cartridge slot for the software games and controllers with improved functionality, Nintendo differentiated the product by increasing the perceived value for their customer base. The NES’s physical architecture was completely overhauled; the childlike hardware was redesigned into a Nintendo: The Illusive Competitive Advantage 6 mature electronic product, combating the negative perception of pre-crash video game consoles. Facing heavy skepticism
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