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Case study: Nintendo disruptive strategy implications for the video game industry

Nintendo Co., Ltd. develops and markets interactive entertainment products. It manufactures and markets hardware and software for its home video game systems. The company also produces playing cards, Karuta and other products. The company has a strong brand name, which gives it an edge over its competitors. However, fluctuation in foreign exchange could prove to be a threat to the company as it could lead to a decline in its top line growth and put pressure on its margins. 1. External Analysis OPPORTUNITIES: *Increasing demand for online gaming: Demand for online gaming is increasing in line with the growing number of broadband connections. Nintendo has created a distinctive environment for online gaming and services. *Changing, and positive, trends in gaming patterns: The US video games industry is witnessing a change in demography like the increase in age band of players and number of female players. Video games, which previously attracted children and teens, have begun to appeal to adults and women as well. * Nintendo being a major player in video game industry is introducing products with a strategy of expanding the gaming audience. The company's is encouraging video games through its unique hardware and software offerings to customers regardless of their age, gender, language, cultural background and game experience (expert or novice). The company's major product Wii features a user friendly remote which enables the elderly people and women to play. THREATS: *Currency exchange fluctuations could affect operating results: Foreign exchange fluctuations could adversely affect the company's earnings. Nintendo operates its businesses in foreign currencies but publishes its financial statements and measures its performance in Japanese currency. The company's exposure to currency fluctuations could have serious affect on its operating results. * Short products lifecycle: The interactive entertainment software market is characterized by short product life cycles and frequent introductions of new products. New products introduced by Nintendo may not achieve significant market acceptance or achieve sufficient sales to recover development, manufacturing, and marketing costs. Such rapid changes in the gaming industry could therefore have an adverse affect on company's revenues. * Shift in consumer preferences: The company's business is engaged broadly in the entertainment segment. However, its business could be affected with the changing trends in other entertainment fields. Although, the company continues to develop

innovative and attractive products in the field of computer entertainment, there is no guarantee that all new products will be accepted by consumers due to shift in consumer preferences. The shift in consumer preferences could have unfavorable impact on the company's operations and results.

2. Internal Analysis STRENGHTS: * Established brand gives a competitive advantage: Brand Nintendo is widely associated with video games. Nintendo has been operating in the video game console market since 1977 with color television games, and is considered to be the oldest company in this market. It is one of the largest console manufacturers in the world, and a leader in the handheld console market. The company had released four generations of gaming devices over the past two decades, which include Nintendo Entertainment System; Super Nintendo Entertainment System; Nintendo 64; GameCube; Nintendo DS, Nintendo DSi and Wii. * Nintendo's well established brand name gives it a first mover advantage over its competitors and provides it with a strong bargaining power apart from facilitating easy customer recall. * Global presence and geographical diversification reduces the business risk : The company has a relatively diverse geographic presence. Nintendo operates in Japan, the America, and Europe. The company's manufacturing plants are located in Japan and it operates through subsidiaries in the US, Canada, the UK, Spain, Germany, France, Italy, and Australia. * The geographical diversification provides Nintendo with a wide scope of increasing its revenues by utilizing its global presence and thereby reducing its business risk. WEAKNESSES: *Declining margins and cash flows from operations * Declining operating profit margins have impacted the company's profit making capacity, which in turn tends to negatively impact investor confidence. * Dependency on suppliers: Nintendo depends on outside manufactures for supply of key components or assemble finished products. Many of these suppliers are located in overseas and any potential production interruptions would have a negative impact on the company's business. The company may face difficulty in procuring key components or products from these suppliers in case of any business disagreements. In an event of suppliers failure to provide necessary components on a timely basis, the shortage of key components could cause margin decline due to higher costs. The lack of integration in producing certain key components or assemble finished products puts the company at a competitive disadvantage as compared to its peers.

* 3. SWOT Analysis OPPORTUNITIES: *Increasing demand for online gaming *Changing, and positive, trends in gaming patterns THREATS: * Currency exchange fluctuations could affect operating results *Short products lifecycle *Shift in consumer preferences STRENGHS: *Established brand gives a competitive advantage *Global presence and geographical diversification reduces the business risk WEAKNESSES: *Declining margins and cash flows from operations *Dependency on suppliers 4. Recommendations and Justifications *The dependency of suppliers is the most important weaknesses to be resolved. So Nintendo has $2,473,526,000 of net income, they can buy his biggest supplier to reduce cost of production of each product and even if the supplier is in overseas if its Nintendo property there is no interruptions problems. *Innovate in the distribution channel *Build a strong community: create a system that encourages purchases of game and accessories. *The video game product has a weak lifecycle, so Nintendo has to innovate more and more and to stay on the top of the best video game company they have to put invest in R&D more often.