Industry Overview The video gaming industry in this decade sees the introduction of the 8th generation gaming console. The console manufacturers have continued to adopt the five-year console development life cycle. Since the 6th generation gaming consoles i.e. around the early 2000s three prominent players in the form of Sony, Microsoft and Nintendo have emerged. As of January 2014 the Sony had the biggest chunk of the $9.9 Billion market with 62% of the market share. Microsoft was second with 23%, followed by Nintendo with 15% market share.
Console Gaming Market Share
Microsoft 23% Nintendo 14%
Sony 63%
With the 8th generation console, the PlayStation 4(PS4), Sony has emerged to be the market leader gaining the position after 4 years. Sony is followed by Microsoft with the XboxOne, which has seen rapid decline in sales in the last quarter. Nintendo Wii U sold about 2 million consoles after its launch in 2012 and similar sales for the PS4 and XboxOne are expected by the end of 2014. The console industry as a whole has seen dive in sales because of increased competition from the mobile and internet based gaming. The expected sales for the 6th, 7th and 8th generation are as shown below:
Competitive strategy prior to Nintendo Wii The gaming console industry has been a Red Ocean with the three main players competing for market share for the last decade. The Strategy adopted by the console players prior to launch Nintendo Wii (6th generation) was based on value creation rather than innovation. They achieved this by focusing more on technology advancement by providing more inbuilt storage, better graphics and improved processing capacity. Bundle Deals: Console makers introduced bundle deals by offering additional controllers, remote controls or games in order to tempt them away from competitors. Pricing Strategy: One of the important tools used for gaining market share is the aggressive pricing strategy. They have adopted a loss leader strategy where the products are prices below the production cost and they expect that lower input cost over the years will make their product profitable. Captive deals: As price of games consoles fall, console manufacturer release much hyped games that can only be played on their platform. Games console manufacturers usually make most of their money on software sales. They get the console into the household by selling it cheaply then they capture the customer on the premium price for new game releases. For example if you wanted to play Halo, it could only be played on the Xbox 360 All these strategies are for value creation and thus created a Red Ocean. With Nintendo Wii, Nintendo created a blue ocean to attract new customer base.
Porter Forces in the game console market Customers Customers tend to buy only one console at a time. The bargaining power of the customers is also restricted since the prices are fixed for an entire region. Switching costs are also high as there is no platform portability for games; if an individual wants to play a particular game, he or she is usually locked into the console that plays it. Suppliers The Manufacturing and Assembly of most of the part of Nintendo are outsourced. Thus the costs for Nintendo are higher in comparison to Sony and Microsoft. Also, for them there is a threat of forward integration by the part suppliers. In case of software Nintendo does most of the development on its own. It also licenses a software development kit (SDK) to outside game developers. These firms could have a bargaining power over Nintendo as they too act as customers which Nintendo looks forward to satisfy. Overall, Nintendo's SDK tends to be priced lower and have better support than similar packages offered by competitors.
Threat of new entrants The console market has a strong threat of new entry. There is very little patentable technology in game consoles, and most consoles tend to have similar features and functionality. Economies of scale act as one barrier. The new entrant will have to build its own games and would have to market it well since the existing players are a household name. Substitutes The customers have high bargaining power since there is multiple source of entertainment available which could substitute gaming. In addition to competitors' products available to them, they may choose television, movies, PC games, board games, literature, sports, etc., in their leisure time. Thus, game consoles have to make an effort to be wanted since they are not needed. Rivalry There is a very strong rivalry in the console industry. At this juncture there are three major players in the form of Sony, Nintendo and Microsoft. There was heavy price competition among the players in 2004 and Nintendo, as the weakest competitor, would have suffered most loss from price competition. Thus in order to be profitable Nintendo had to think out of the box and come out with innovate strategy.
Company Overview: Nintendo Nintendo began as a handmade playing card company in 1889 and developed into a video game company, becoming the most influential in the industry, and Japan’s third most valuable listed company, with a market value of over US$ 85 billion. Nintendo has enjoyed the leading space in Gaming industry for over decades with Strong competitors like Sony and more recently Microsoft vying for the top spot. Nintendo holds the record for the most number of consoles sold cumulatively which is approximately 625 million till Nov 2013. The major successes of Nintendo include Super Nintendo, Game Boy, Virtual Boy, Game Cube, Nintendo DS, Nintendo Wii and Nintendo Wii U. Nintendo Wii Through the launch of Wii in 2006, Nintendo successfully created a niche market for their product and in effect were successful in increasing the size of the market without actually competing with the existing players (The detail strategy is explained further in the document). Before Wii was launched, Nintendo had lost a lot of ground to its competitors Sony (PS2) and Microsoft (Xbox 360). Sony and Microsoft were far superior in terms of technological advancements in their gaming experience in terms of HD graphics and faster processor speeds and online user experience. Thus in early 2006 Nintendo’s GameCube with 22 million units was a distant third after Xbox360 with 24 million units and PS3 in terms of market share and sale of consoles. After Wii was launched the market scenario started changing gradually and by the year 2009 Wii was able to regain the lost market share for Nintendo and at that time held the greatest lifetime market share (41%) out of the three major video game consoles. Wii reached maturity early as compared to its competitors leading to a “3 rd place” position in terms of Market share in 2011. Snapshot of Comparative performance of three market leaders in Gaming industry in 2008: 4000 3000 Wii Sale 2000
PS3 Sale
1000
Xbox 360 Sale
0 Mar-08
Apr-08
May-08
Jun-08
SWOT Analysis for Nintendo Wii Strengths
Weakness
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Important heritage in video game development
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Low focus on offering online user experience
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Strong global brand in video game market with Valuable IP’s Like Mario, Zelda
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e.g. No unified user account system
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Lack of innovative video games (partly due to poor tie ups with third party developers)
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Complete exclusion/ignorance DVD gaming market
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Unable to back up / Replicate the Huge success of “Wii” with new product launches like “Wii U”
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Complete lack of focus on the hardcore gamers needs and expectations
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Focus on Value Innovation (Pioneer Motion Sensing)
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Simple User Interface and Greater Playability
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Family Friendly Values
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Backward Compatibility
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Attracting traditional Non Gamers to the gaming world by offering them unique entertainment value
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Focus on providing an immersive and entertaining experience
Opportunities
Threats
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New unifying Nintendo OS under development for coming release
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of
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Tablet games can be ported to Wii U without hassle
Sony PlayStation 4 which comes with Superior motion detectors and HD graphics
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Microsoft XBOX One seemingly missing the mark with consumers
Games available on Smart phones and Social Media
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Third party developers are likely to flock to other more successful systems, if the Sales of new launch “Wii U” do not improve
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The niche possessed by Wii in motion sensing being eroded away with numerous new entrants like Oculus Rift, Valve Steam Box, Ouya etc.
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Wii U will no longer compete in Blue Ocean
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Aging population markets
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Growing consumer base in emerging markets
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Improved online experience through improved OS and a unified account system
in
Developed
Nintendo & Blue Ocean Strategy At the end of 2005, Nintendo was hardly sailing smooth. Its GameCube had failed and its GameBoy withered after reaching an early peak. Its games were also not so well received and hardly any competition to Sony's PlayStation2. Nintendo came up with their path breaking product “Nintendo Wii” in Nov 2006, which challenged the way a video game was played by creating a completely unique offering through the introduction of motion sensors in a gaming experience. When Nintendo introduced Wii, its President talked about Blue Ocean and disruptive thinking, inspired by Kim Chan and Mauborgne's then-recent book "Blue Ocean Strategy". Nintendo, he said, intended to not simply compete, but to expand the industry. Why Nintendo felt the need to create a blue ocean With the hyped release of Wii, it earned the scorn of gamers because Wii didn’t have any high-definition graphics, its graphical output was a measly 480p in comparison to industry's 1080p ceiling. Wii had a miserable 512MB internal storage compared to the 20GB and 80GB its competitors had at launch. It had no optical audio-out port nor did it have any external storage option and also lacked a centralized online service. In short, Wii could never compete with Xbox or PlayStation and that was the primary reason of Wii's existence. Rather than fight for the same finite market and dollars, Wii wanted to create its own market space and attract new audience altogether. Wii's target was beyond just kids, it was the whole family. The heart of Wii's strategy was that consoles do not necessarily require state-of-the-art technology, power and performance. It shifted its focus to providing a new form of player interaction to a wider audience How it went about creating the Blue Ocean Wii simply proved that there are far more noncustomers than customers and that a better solution to an existing problem is not good enough. Nintendo focused on the demand side and redefined the problem itself. Nintendo looked into the gaming industry's noncustomers for insights i.e.; older non-gamers, parents who wanted their kids to play active games, elderly and the very young.
CREATING BLUE OCEAN Value innovation Value innovation is the cornerstone of blue strategy which simply defies the traditional dilemma of value-cost trade-off. In value innovation, companies don’t just concentrate on value creation or just on innovation. If you concentrate only on value creation, you cannot stand out in the crowd as competition catches up with you. If only innovation is focused upon, the value to customers tends to be technology-driven and not cost leadership, which buyers are not ready to pay for. Hence in value innovation, instead of focusing on beating the competition, companies focus on creating a leap in value for buyers and hence make competition irrelevant. How to implement Value innovation occurs only when companies align innovation with utility, price, and cost positions. Buyer value is lifted by raising and creating elements the industry has never offered. Cost savings are made by eliminating and reducing the factors an industry competes on. Over time, costs are reduced further due to high sales volumes that superior value generates. Hence, companies have to drive costs down while driving value up for buyers. Wii's Value Innovation Changing the Concept with New Game-Play, New Consumers, New Approach As of 2005, Nintendo's main business of gaming consoles was a speck in the gaming arena, with its GameCube selling just 20 million whereas Sony's PS2 had amasses an excess of 115 million buyers. Nintendo desperately needed a radical change in its strategy and market focus in order to gain major traction in the video game industry. With the creation of the Wii, Nintendo made radical changes to its strategy: Now gamers were playing with their families, their friends and not alone in the dark at night. This was the biggest utility Wii provided. Nintendo changed its focus from the technological race towards a more user-oriented strategy - from better graphics to having more fun, thus providing value for its buyers with low costing consoles. Another cost saving offer was with its Wii Sports package, which includes Baseball, Bowling, Golf, Tennis etc., some people did not even find a reason to buy more games. Also, after realizing its past mistake when aiming for a younger audience, Nintendo started tapping into the “casual gamers category; reaching far beyond the “hard-core gamers” which the PS3 and Xbox 360 target directly.
Analytical tools and frameworks The Strategy Canvas The strategy canvas is both a diagnostic and an action framework for building blue ocean strategy. It serves two main purposes: to understand where the competition is investing and what the consumer perception is of these offerings. The vertical axis depicts the value derived from each of the factors the industry competes in (horizontal axis).
The above figure is called the “value curve”, a graphic depiction of a company’s relative performance across its industry’s factors of competition. The vertical axis depicts the offering level that buyers receive across each factor. All these factors together depict the strategy that each of the companies chose to differentiate themselves in the market. These are compared among the competitive group and a certain value is assessed to be perceived by consumers. The resulting value curve is the graphic depiction of a company’s relative performance across its industry’s factors of competition. Wii’s Value Curve Wii’s strategic vision was to lower cost by reducing high-end technological features like DVD integration, processor quality, graphics etc. but at the same time providing value to the customer with a new revolutionary motion control stick and a gaming experience with family and friends which also provides fitness at a lower price point. Thus, Wii’s value curve scores high on the factors of social gaming, fitness, wireless motion-sensing controllers and price.
The Four Actions Framework & E-R-R-C Grid BOS also defines a framework to reconstruct those buyer value elements that a company should look across if it intends to create a new market space and hence define its strategic logic. Called the four action framework, it explains the four key questions to be asked in order to challenge an industry’s strategic logic and business model. The Eliminate-Reduce-Raise-Create grid pushes companies to not only ask the four questions but also to act on all four to create a new value curve.
REDUCE
Strategically reduce cost
Which factors should be reduces well below the industry standard ?
RAISE
CREATE
What factors should be raised well beyond the industry standard ?
What Factors should be created that the industry has never offered ?
New Value
ELIMINATE What factors should be eliminated that the consumers don’t require ?
Strategically invest in
Wii’s ERRC Grid We have tried to map BOS’ four action framework with Wii’s strategies to understand how Wii has created a Blue Ocean. Eliminate
Raise
High resolution graphics
Hardware accessories
DVD/HD-DVD Playback
Wireless controller
Hard Disk storage
Social gaming Fitness & Sports Backward compatibility
Reduce
Create
Processing power
Motion sensor controller
Graphics quality
Family-friendly gaming
Online gaming
Character customization
Complexity of games
Active fun
Price
Three Characteristics of a Good Strategy When expressed through a value curve, then, an effective blue ocean strategy like has three complementary qualities: focus, divergence, and a compelling tagline. Focus Looking at the value curve of Wii, it is clear that the focus is on ease of use and interactive games for groups. In contrast, Microsoft and Sony concentrated on high definition graphics and complex games which made it very difficult for them to focus on developing motion sensor based video games as well as consoles. Consequently, Wii could sell more appealing group oriented games and consoles at cheaper prices than the Xbox and PlayStation 2 games and consoles. Divergence On the strategy canvas, therefore, reactive strategists tend to share the same strategic profile. In case of Nintendo Wii, the value curve of Microsoft Xbox and Sony PlayStation 2 are virtually identical. Wii, however, pioneered the motion sensor based gameplay and brought in the non-traditional buyer group of non-gaming women and elderly. Compelling Tagline A good tagline delivers a clear message to gain customers’ interest and trust. Nintendo Wii’s tagline “Wii would like to play” delivered a clear message that it was focused on a group based gameplay which proved to be a game changer in the industry.
6 Paths Framework
To break out of red oceans, companies must look beyond the generally accepted boundaries that define the competition. Instead of confining themselves within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time. This gives companies keen insight into how to reconstruct market realities to open up blue oceans.
Looking Across Buyer Groups Till 2006, Nintendo had been fighting Sony PlayStation 2 and Microsoft Xbox on the technological front. The industry was dominated by high definition graphics and complex games. The competition was intense since low differentiation was forcing companies to lower price of offerings. This meant that profit could be achieved only through huge sales volumes. Nintendo found out that 2 of the biggest factors which affected the sale of video games were the fact that parents believed that video games made children obese and isolated them from their families and made them socially awkward.
A CDC/NCHS study shows that 18.4% of children in US suffer from obesity. 99% of boys under 18 and 94% of girls under 18 report playing video-games regularly. In a related study, NCOOR discovered that children and adolescents aged 8-18 years spend, on average, more than six hours per day watching television, playing video games and using other types of media. Hence there was a clear link between the rise of obesity and video games. Nintendo addressed this problem by coming up with a new gaming console based on motion capture – the Nintendo Wii. The Wii had easier games and titles appealing to older audiences. The fact that Wii combined fun with exercise made it very attractive to the parents who were the main buyers in the industry. Games were designed keeping the family involvement in mind. Nintendo essentially created a new market space for itself by targeting a completely different buyer group than the traditional gamers. In most industries, competitors usually define the target buyer in similar terms. In reality, though, there exists a chain of “buyers” who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ.
In case of the video game industry, the avid gamer of age group 18-25 was the main target. Nintendo, before Wii, targeted the “under-18” market, which represented only 1/3 of the total market. This put a cap on Nintendo’s success, a strong differentiation from its competitors who had a higher price but targeted an older audience with much more buying power. Wii's target was beyond just kids, it was the whole family. The heart of Wii's strategy was that consoles do not necessarily require state-of-the-art technology, power and performance. It shifted its focus to providing a new form of player interaction to a wider audience. The new Wii boosted the fun factor and made video gaming active fun.
Four Steps of Visualizing Strategy Visual Awakening Firstly create an “as is” (status quo or the current situation) strategy canvas of the company in comparison with the competitors on a set of competitive factors. Then look at the factors that need to be modified. Visual Exploration Venture into the field to explore the six paths to creating blue oceans. Evaluate the distinctive advantages of alternative products and services. Use the four actions framework to determine which factors to raise, reduce, create and eliminate. The alternative products/services in the case of Wii were field sports played by those who wanted to stay fit. The advantages offered were entertainment and fitness. Visual Strategy Fair Create the To Be Strategy Canvas based on insights from field observations. Get feedback on alternative strategy canvases from customers, competitors’ customers and non-customers. Use Utilize the feedback to choose the best 'to be' future strategy. The strategists at Nintendo tried to answer the question “why aren't more people playing videogames?” Reflecting on this question gave them two insights. The first, the game consoles in the market had become far too complicated. Most people felt intimidated by that. And the second insight was that most games were created for hard-core gamers, which again put people off. Visual Communication Distribute your before-and-after strategic profiles on one page for easy comparison. Support only those projects and operational moves that allow your company close the gaps to actualize the new strategy.
Expanding demand in the Blue Ocean Another principle of Blue Ocean Strategy talks about reaching beyond existing demand. To expand the demand, this principle says that companies should challenge two conventional practices: 1) focus on existing customers 2) drive for finer market segmentation. By reversing the strategic course from the above two practices, companies can maximize the size of their blue oceans. To do this, a company should look to noncustomers. And instead of focusing on differences, they need to build on powerful commonalities in what buyers value.
Nintendo did exactly this. It looked beyond its existing customer base and built a product that appealed to a larger mass, thereby attracting non-gamers and casual gamers. It built on commonalities that buyers value: ease of use, family gaming and active fun.
The Three Tiers Of Noncustomers There are 3 tiers of noncustomers that can be transformed into customers by a company in Blue Ocean.
Wii’s three tiers The Wii offers the first tier a leap of value that attracts them (casual gamers), and, while the second tier customers seem mostly unaffected, it is the third tier that was readily attracted by the Wii. The 1st tier was attracted because of the price point and new motion sensing controllers. Wii’s strategy also pulled in the 2nd tier customers to an extent because of the first-of-its-kind motion controller cum active gaming. However, the 3rd tier was Wii’s biggest pull because of the simplicity of its games, the fitness-oriented gaming provided and the idea of playing with your family. The Wii has even been praised for use as means of recovery as physical therapy for patients, being prescribed by doctors to regain strength and help with rehabilitation of certain injuries.
The Right Strategic Sequence With an understanding of the right strategic sequence and of how to assess blue ocean ideas along the key criteria in that sequence, one can reduce business model risk. Companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.
Wii’s Strategic Sequence
The Blue Ocean Idea (BOI) Index
Utility
Is there exceptional utility? Are there compelling reasons to buy your offering?
Price
Is your price easily accessible to the mass of buyers?
Cost
Does your cost structure meet the target cost?
Adoption
Have you addressed adoption hurdles up front?
Microsoft
Sony
Nintendo
Xbox
PS2
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