05-05-2012, 02:57 PM
Strategic Management – Nintendo Wii Case
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Threat of new entrants
The video game console industry, being a typical oligopoly, enjoys high barrier to entry. Three firms dominate the industry with comparable market share. See Exhibit 1 and 2 for latest sales data.
Existing industry players enjoy high supply-side economies of scale. This includes economies of scale in research, advertising and manufacturing. Without sufficient market share, it would be difficult for new entrants to price consoles competitively.
Customer switching costs are relatively low. A typical console costs about $300, which is 0.61% of average US consumer expenditure per year. Usually, a new model is released every 5-7 years, which is rapidly adopted by consumers and game developers.
Due to independent game developers, demand-side benefits of scale are high. After all, without a good game, there is no use of a console. Game development for the console industry is closed, in the sense that the same game will not run on multiple consoles. So games are developed specifically for each console. Since the sunk cost for developing a game is high, game developers will not risk developing games for new entrants. In turn, consumers tend to buy consoles which offer most blockbuster games. Hence consumers choose among existing three players. So it is difficult for newcomers to develop a large base of customers.
Retail and wholesale distribution channels are limited for new entrants. For example, Sony already has an established network of stores and retail channels, which it uses to market and retail its other products. Because of the volume required to compete in the industry, newcomers have to invest in global distribution channels. But, at the same, it is possible for newcomers to sell consoles using online shopping websites. However, potential users would always like to take part in a demonstration.
Threat of Substitute Products in the Industry
There are many games from the Wii which are not exclusive to Nintendo due to independent game designers that supply the same games to the console gaming industry. The same games are made available to customers using the “Xbox 360” and “Playstation 3” systems. There are, however, high switching costs should buyers decide to switch between different consoles.
In terms of a substitute that could replace gaming itself, most ideas are mostly unforeseeable. For instance, with the ever-changing technologies, a new type of media could emerge to replace this game in future.
Competitive Rivalry in the Industry
Nintendo Struggling in the 2000s’
Let us go back a little bit in time. In the late 90s', Nintendo was going in limbo. After having dominated the growing video game market in the 80s and the 90s, Nintendo had to face a new competitor arriving: Sony. Afterward, the Play station started its expansion, and Nintendo was struggling to get back on track. The Nintendo 64 was released at least 3 years too late, and they were clearly two steps behind the other competitors.