The Nintendo article was based on the coursework for my fourth year module, Strategic Management. The original coursework submitted was rather technical, so the key was to re-write this piece of work expressing it in more layman's terms, and encourage other undergraduates to do so in the future.

PhD student Tafara Makuni

PhD student Tafara Makuni is a pioneer of the initiative to rebrand module assignments by writing them in layman's terms for The Cambridge Engineer, the Cambridge University Engineering Society's (CUES) magazine. Here she presents a case study analysis on Nintendo's bounce back in the video games industry.

Have you ever wondered how Nintendo came from seemingly nowhere to take the market by storm with the radical innovation that was the Nintendo Wii? Tafara Makuni explains...

The Industry

The video games industry - originating in the 1970s - can be divided into three broad sectors: hardware, software and infrastructure. There are different players in these different sectors, however; in this case study analysis, the only players of interest are the console manufacturers.Over the past decade the dominant console manufacturers have been Sony, Microsoft and Nintendo. The video games industry has long operated with "winner-take-all" characteristics for each wave of new console releases (which are called generations). The winner, in terms of console manufacturers, was typically the firm that established market leadership by: (i) exhibiting a software advantage namely through game blockbuster titles, exclusivity deals and/or an extensive games library; (ii) being technologically superior to the competitors in terms of graphics, processing power and multi-functionality; and (iii) orchestrating all elements of the product launch well - particularly the manufacturing, global distribution and marketing.

The Background

Towards the end of the sixth generation, 2006-ish, Nintendo were trailing in third place to rivals Sony and Microsoft. In terms of sales, Sony was winning with 111 million units of the PlayStation 2; followed by Microsoft with 24 million units of the Xbox; and then Nintendo with 21 million units of the GameCube.

In preparing for the next generation of console releases (the seventh generation) Nintendo found themselves at a cross-road: Would they be able to successfully compete with rivals Sony and Microsoft in the existing market? Short answer, probably not. Nintendo had less technological capabilities compared to the rivals, and they also held the smallest software advantage. This was bad because, as mentioned above, software advantage and technological superiority were key winning formulae in the existing market. Establishing this, Nintendo saw that pursuing the existing market would not be an advisable competitive strategy. The main alternative strategies then available to Nintendo were: (i) retreat into the handheld console market as they were dominant here; (ii) diversify into related industries which played to their strengths; or (iii) create a new market in the industry - so-called blue ocean strategy.

Nintendo decided to create a new market. And in doing so, from the offset, Nintendo had to their advantage, brand reputation and tacit knowledge about the industry. However, the journey ahead of them was long, and more decisions had to be made for the launch of their next generation product - the Wii - to be successful.

The Bounce Back!

When identifying new markets, a firm should decide whether to entertain a broad or narrow audience; both have significant implications on profitability. Nintendo decided to target a broad market. Moreover, they decided to target a market that had no interest in existing video games!

"We want to appeal to mothers who don't want consoles in their living rooms, and to the elderly and to young women", said Saturo Iwata, Nintendo President.

Although this seems perverse, Nintendo found that these targeted 'non-gamers' would probably respond well to a gaming machine provided that it was: (i) low-cost, (ii) socially inclusive, and (iii) easily learnt - these reasons have been key to the Wii's success in the new market. More importantly, none of these factors heavily depended on technological power, therefore, Nintendo could supply a technically inferior system and still be successful in serving the new market - this is what they did. Technological inferiority was a weakness in the existing market, but not the new market.

Having identified a suitable new market to pursue, Nintendo had to decide on the nature of the product to serve this new market: (i) incremental innovation, (ii) radical innovation, or (iii) something in between? Nintendo opted for radical innovation which owed to the code-name "revolution" during the Research and Development stage. Code-naming the Wii in such a way created industry discourse, and a favourable tension for Nintendo. This is similar in strategy to Sony's periodic leakage about the PlayStation 2, in order to undermine Sega's Dreamcast in 1992. Furthermore, historically it has been observed that companies which successfully enter new markets do so using radical innovation.

Following on from this, to create the Wii, Nintendo decided to work with others (open innovation). This saw Nintendo maximise a strength - culture and creativity. And in making the Wii, Nintendo out-sourced most of the components. Traditionally firms have kept this role in-house due to the technological intensity, but most of Nintendo's components were common and readily available which allowed for outsourcing to be beneficial. In particular, the processor used was from a previous generation hence the games were "backwards compatible" (i.e. you could play old games on them). On release, this meant that there were many software titles available - a strong success factor. Furthermore, the cost of producing a unit console was low. Low enough for Nintendo to price the substantially lower than their competitors, and still make a profit on hardware alone. This is different from the razor and blades business model that was being followed by their rivals - selling the hardware (i.e. the consoles) at a loss and but making money from the software (i.e. the games). Further to this, to help facilitate the low-cost positioning and accessibility of the Wii, Nintendo included supermarkets and mass merchandisers in their distribution channels. Finally, to launch the Wii, Nintendo organised its biggest ever marketing campaign. And further still, the launch of the console included a free game - Wii Sports. Free games are a rarity in the industry. Arguably speaking, the effect of this was probably equivalent to a blockbuster title release. It generated volumes of interest! And it also demonstrated how the innovation worked.

So, in correctly identifying the new market needs, forming the right partnerships, as well as orchestrating the product launch well; Nintendo bounced back in the video games industry. In terms of unit sales, they were the outright winner in the seventh generation. By the end of 2009, Nintendo's Wii had sold approximately double as many units as Sony's PlayStation 3 and Microsoft's Xbox 360.

Now the question follows: For the eighth generation of competition, can Nintendo sustain this new market dominance? Nintendo have already instigated the start of the eighth generation with the release of the Wii U in 2012. Now the market waits for the rival products from Sony and Microsoft to be released...

This article was published in the CUES 2013 Lent Edition magazine, based on the coursework for Tafara's fourth year module Strategic Management which aims to teach students the basic tools needed to analyse the behaviour of firms.

The original 1923 magazine can been seen here