Executive Summary
Nintendo Company Ltd. is a strong contender in the home entertainment industry and has faced the challenge of developing and maintaining a competitive advantage over the years. Its mission is to offer the highest quality products and services while treating their customers with attention and respect. Since 1983, Nintendo has focused on video game consoles and with the introduction of the Nintendo Wii console the company gained a strong hold as a leader in this industry. In 2008, Nintendo experienced various production and legal issues. However, their most significant challenge during this time was identifying and investing in innovative products that would allow the firm to continue to expand in the video game industry; while defending itself from rivals (Sony and Microsoft).
Our analysis is based on various analytical tools, including SWOT (Appendix A), segment analysis (Appendix B), competitive strength assessment (Appendix C) and financial ratios (Appendix D). Overall, Nintendo has several opportunities and strengths of which they can take advantage to stay competitive in the market. However, their competitive threats and weakness pose significant financial challenges for the firm.
Based on our analysis, we considered the following alternatives: 1. Continue to focus on the existing marketing strategy by differentiating itself from the competition; 2. Expand the video game product line to include games with improved graphics and functions for the current Wii in an effort to expand their customer base; 3. Invest aggressively in research and development to create a new video game console that takes into account the requirements for both the non-gamer and traditional gamers; and 4. Continue to differentiate itself from the market by expanding into gaming through social media and mobile devices.
For Nintendo to maintain a competitive advantage while maintaining the integrity of their brand image, it is our recommendation that Nintendo pursue alternative. This provides them with the best opportunity to compete with the industry rivals going forward. The resources that are required to implement this plan include increased expenditures in research and development and marketing to attract new gamers. In addition, Nintendo will need to allocate financial and capital resources to implement this alternative and remedy the current supplier and patent issues. A detailed action and contingency plan can be found starting on page 12.
Table of Contents
Executive Summary 2
Identification 4
Background 4
Current Competition 4
Current Strategy 4
Marketing Strategy 4
Pricing Strategy 5
Supply Chain Strategy 5
Performance 5
Objective and Goals 5
Problem Statement 6
Analysis and Evaluation 6
Competitive Analysis 6
Competitor's Strategy 6
Porter's Five Forces 6
SWOT Analysis 7
Market Analysis 8
Segment Analysis 8
Case Keys 9
Financial Analysis 9
Discussion of Alternatives 10
Alternatives 10
Evaluation Criteria 12
Recommendations 12
Contingency Plan 14
Appendix A - SWOT Analysis 15
Appendix B - Segment Analysis 16
Appendix C - Competitive Strength Assessment 17
Appendix D - Key Financial Ratios 17
Works Cited 18

Identification
Background
Nintendo Company Ltd. was founded in Japan in 1889 by Fusajiro Yamauchi and was a family run company until 1959 when it went public. The company produced playing cards from 1889 until 1966 when it entered the Japanese toy industry with its introduction of the Ultra Hand. In 1977, Nintendo entered the video game market with its system, the Color TV Game, which hand four different versions all playing a single game. In 1981, they entered the coin-operated video game market with its widely popular Donkey Kong game that fast became one the hottest selling individual and coin-operated machine. In 1983, Nintendo launched the Family Computer, later called the Nintendo Entertainment System in the United States. In 1989, Nintendo entered the handheld video gaming market with their Game Boy device and it quickly became one of the world’s best-selling video game playing systems. Since then, Nintendo has continually improved on its systems starting with the Super Nintendo Entertainment system in 1991, then in 1996 with the Nintendo 64. In 2001 they came out with both the next generation of video game console (GameCube) and the next generation of handheld device the Game Boy Advance. In 2004, Nintendo introduced its wildly successful Nintendo DS handheld system which had sales surpassing 50 million by September 2007. Then in 2006, amongst much criticism and lack luster reviews, Nintendo launched their new Wii gaming console and surprised everyone with their success. competitors without sacrificing acceptable quality and essential features. 1. Competitions price higher due to development cost compared to Nintendo. 2. Nintendo not spending on cutting edge technology – consoles with higher quality graphics and games designed specifically for HD.
Supply Chain Strategy 1. Nintendo continues to diversify its manufacturing base and form additional partnerships for the manufacturing and supply of key components.
Company Vision
Nintendo's vision for the Wii is to attract individuals who do not play video games to their products. The Wii player interface is simpler than other video game consoles, which allow users to navigate and play gamers easier than with Sony's PlayStation 3 ("PS3") or Microsoft's XBox. Nintendo's focus is creating product differentiation advantages over their competitors by accomplishing the same tasks, but better.
Industry Overview and Global Value Chain
Nintendo is currently the market leader based on total units sold. As at October 1, 2008, Nintendo has 48% of the total market, whereas Sony currently has 22% of the total market share and Microsoft has 30%. Nintendo's value chain includes suppliers who manufacturer key components of the Wii console, game developers (external and internal to the organization), and arms-length retailers who sell the product in their stores.
Performance
Nintendo’s net sales were more than 20% from previous year’s quarter. Wii was outselling Sony’s PlayStation 3 and Xbox 360. Nintendo’s net income was up more than 30% from previous year’s quarter.
Objective and Goals
Nintendo's objectives and goals include: * Continue to expand their customer base; * Defend its market against rivals who are currently improving their systems to compete more effectively against the Wii; * Improve on their forecasting of demand as a shortage is expected again for the 2008 holiday season; * Improve issues with supplier chain; * Defend themselves against the current patent infringement lawsuit; and * Continue to invest in product design that will allow them to remain a leader in the gaming console and handheld gaming industry.
Problem Statement The most significant issue facing Nintendo is identifying and investing in innovative products that would allow the firm to continue to expand in the video game industry while defending/increasing its market share from rivals.
Analysis and Evaluation
Competitive Analysis
Nintendo's major competitors are Sony's PS3 and Microsoft's Xbox. Both firms sell their consoles at a loss in a hope that software sales will fill the gap and generate profitability. Based on total units sold as at October 1, 2008, Sony currently has 22% of the total market share and Microsoft has 30%.
A competitive strength assessment can be found in Appendix C. In this analysis, Microsoft has a competitive advantage over both Nintendo and Sony due to their innovation abilities (by leveraging on existing capabilities). Nintendo’s strength lies in its reputation and cost position with equal strength in financial resources with Microsoft. However, its weakness is in their technology; but it is important to note, that the target market for Wii is non-gamers, whereas Sony and Microsoft’s target market is gaming enthusiasts.
Competitor's Strategy
Sony
Sony’s strategy is to focus on “hard-core” and enthusiastic gamers by offering them a highly functional and technologically advanced gaming system. This gaming console focus’ on elaborate models and graphic design combined with other advance features.
Microsoft
Microsoft’s strategy is to focus on different levels of gamers by providing consoles which can be highly specialized including providing the ability for on-line game play. The Xbox allows gamers to build on-line communities through Xbox live, allowing serious gamers in different locations to play against each other.
Porter's Five Forces
An analysis of the impact of Porter's five forces can be found below.
1. Threat of New Entrants (Low):
Since the market is dominated by three large video gaming producers (Sony, Microsoft, and Nintendo) a new entrant would require significant capital and financing.
2. Threat of Substitutes (High): * Brand loyalty – consumers will be intensely loyal to their brand largely because games are not transferable; Xbox and PS3 gamers might not be interested in trying Wii. * Product-for-product substitution – consumers can access games on the internet, via smart phones, tablets and computers and therefore are considered high risk for the video gaming industry.
3. Bargaining of Buyer Power (High): * Switching cost – This is not a threat because there are very few competitors in this industry and it’s not easy for consumers to switch another gaming console. * Serious gamers are always looking towards the next game or console which has latest technology, and better graphic resolution.
4. Bargaining of Supplier Power (Medium to High):
Differentiation of the product/service and alternative sources – since there are very few suppliers who could produce better quality graphics it would be hard to find a qualified alternative source.
5. Competitive Rivalry (High):
Similar size and power of the gaming console – the key players in the market are Sony, Microsoft and Nintendo. These competitors are have economies of scale, powerful brands, and are of similar size within the gaming console industry. Each competitor is trying to take market share from the other, using various tactics including low prices and product differentiation.
We conclude based on collective strength of Porters five forces; in particular, the threat of new entrants and the bargaining of buyer Power is high, that this industry is conducive to high profits.
SWOT Analysis
Nintendo's SWOT analysis can be found in Appendix A. Overall, Nintendo has several opportunities and strengths which they can take advantage to stay competitive in the market. Nintendo was the first company to target a completely different market segment than its main competitors. The company’s market approach to focus on non-video gamers is an exceptionally strong feature for the company. However, Nintendo has various threats and weakness which are affecting the company’s financial performance, such as the product shortage which needs to be rectified in order to stay competitive in the market. Also, serious gamers are not interested in buying a Wii because it is shown that they are willing to pay premium prices for high resolution graphics, functions and a strong processor. In conclusion, the SWOT analysis suggests the company’s strategy is mostly on track and reasonably well matched to the company’s challenges face by its competitors.
Market Analysis
The video game industry is highly competitive and lucrative market. In 2006, the industry contributed $3.8 billion in revenues to the gross domestic product of the United States alone. The market is driven largely by technological advancements and societal trends. Even though there has been an increase in competition, the video game industry has continued to grow as a whole even though there has been a downturn in the overall world economy.
Video game consoles are items that a consumer really wants and will make a special effort to find. Typically these items are in high demand around the holidays and then demand will subside with small peaks throughout the year. This enables businesses to stockpile products for the next holiday season. Unfortunately this has not happened for Nintendo and demand has stayed high throughout the year which means they have not been able to stockpile for the upcoming holiday season.
The challenges of this market is that when one firm makes a strategic move that produces good results, its rivals respond with a better version and take the market share back. The current market leader has no guarantee of continued leadership. Based on this we find these conditions to be strong or fierce when it comes to market share.
Segment Analysis
In Appendix B, you will find the Segment Analysis chart. We divided the market into four main segments young children, teenager/young adult, parents and senior citizens. With its easy to use and more simplistic family and fitness oriented games Nintendo currently has a large majority of the young children, parents and senior citizen market which makes up approximately 65% of the industry. As there are currently many games on the market that appeal to these groups, their efforts may be better served trying to obtain some of the teenager/young adult market by developing a few games with enhanced graphics, speed and increased violence.

Case Keys Key Opportunities * Could increase revenue through online Wii channel; * The non-gamer market is just starting to be tapped; and * New innovative and revolutionary video gaming platform. | Key Success Factors * Ensuring enough supply for the upcoming holiday season; * Develop an improved strategy to increase customer demand and compete with Microsoft and Sony if they do come out with their own consoles that appeal to the broader market; and * Continue to develop improved video console systems and accessories. | Key Uncertainties * Whether suppliers will be able to meet demand for product; * Will Nintendo be able to win over hard-core gamers; * How soon will it be before Microsoft and Sony come out with their own motion sensor controller; * Product life cycle can be very short if product is not upgradable; and * Nintendo needs to be responsive to changes in market trend. |
Financial Analysis
Nintendo’s key financial ratios can be found in Appendix D. Although Nintendo is a profitable company, its profitability ratios are satisfactory with the exception of its return on total assets and shareholder’s equity. Nintendo’s operating profit margin has increased and is at its highest in four years. However, both their gross profit margin and their net profit margin (excluding extraordinary items) are lower in 2008 than in 2005 and 2006. Ideally, Nintendo should be striving for a net profit margin of over 20%; however, currently net profit margin is at its lowest in four years at 15.86%. Return on stockholder’s equity should be between 12% and 15%; however, in 2008 Nintendo’s was 21.51% an increase of 11.85% since 2005, which encourages the shareholders of Nintendo to increase their holdings.
Nintendo’s liquidity and leverage ratios are in excellent shape which means that they should have any problem satisfying their debt as minimum amount of borrowed funds has been used to fund the normal operations of the company.
Nintendo’s times-interest-earned ratio is in excellent shape which means they are well equipped to pay any annual interest charges. Nintendo’s activity ratios seem on par for an industry that depends greatly on the holiday season.
In conclusion, overall Nintendo is currently in good financial shape. Its low leverage rate gives them the ability to use long-term debt to fund if its needed. They could also fund future needs with the issuing of shares as the value of their stock is also in good shape. However, they need to keep an eye on their profitability to ensure that it doesn’t slip any further and see if there are any cost savings strategies they can incorporate.
Discussion of Alternatives
Alternatives
Based on our analysis, we feel that that the following alternatives are available to Nintendo:
#1 – Continue to focus on the existing marketing strategy by differentiate itself from the competition.
Pros:
* Nintendo was the first company to target this different market segment and already has a competitive advantage with the Wii; * Potential increase in customer demand as the non-gamer market is vast and Nintendo has only begun to tap it; * Games cost less to develop; * Minimal organizational changes; and * Manageable financial cost.
Cons:
* Will not win over any of the hardcore gamers; * Sony and Microsoft are already working on a gaming console to better compete against Nintendo in this market and Nintendo may not be able to withstand the competition; * Targeting solely one market segment increases its risk operational losses; and * If it does not succeed than potential high long term cost when they need to change strategy.
#2 – Expand the video game product line to add new video games with improved graphics and functions for the current Wii that will appeal to the hardcore gamer to expand customer base.
Pros:
* May win over some of the hardcore gaming market which will allow Nintendo to target the entire video game market; * May allow Nintendo to keeps its younger customers as they get older if there are more games that will appeal to them; * Meets most of the decision criteria’s; * Still aligned with vision of the company; and * Nintendo is not starting from scratch – just adding to Wii capabilities.

Cons: * May not be able to develop top quality games that will work with the current console; * These types of games cost more to develop and produce so would have to be higher priced than current games; * May not win over hardcore gamers as they already have a specific impression of what the Wii does; and * If supply chain issues are not rectified may not be able to keep up with the increased demand for the console.
#3 – Invest aggressively in R&D to develop a new video game console that takes into account both the hardcore gamers requirements as well as the less hardcore gamer.
Pros:
* Will target the entire video game industry; * Will be able to compete directly against Microsoft and Sony for the hardcore gamer; * May allow Nintendo to keeps its younger customers as they get older if they see that there is a more advanced alternative for them that will still play their existing games; and * Meets most of the decision criteria
Cons:
* This type of console will cost more to make and the current two on the market are being sold at a loss; * May not win over hardcore gamers as they already have a specific impression of what the Wii does; and * May not be able to develop it fast enough to compete against Microsoft and Sony before they put out there game console to compete against Nintendo.
#4 – Continue to differentiate itself from the market by expanding into gaming on social media and mobile devices.
Pros:
* First of the top three video game console competitors to enter this market; * Potential new revenue stream; * Sales more diversified; * Very large market with growth potential; and * Could still provide games for all ages.
Cons:
* Already a large amount of competitors in the industry; * Very low barriers to entry so many potential competitors; * Two completely different products so research and development funds will be split; * Does not meet most of the decision criteria; and * High long term financial cost
Evaluation Criteria
A summary of our evaluation criteria can be found below:

Recommendations
Based on the analysis of the current situation, our recommendation is for Nintendo to adopt alternative #3 - invest aggressively in research and development to create a new video game console that takes into account both the hard-core gamers requirements as well as the less hard-core gamer.
This recommendation will require the establishment of new strategic plan that supports casual and hard-core gamers through the creation of new advanced video gaming system. Our recommendation is intended to ensure that Nintendo retains market share and has the capability for long-term growth and expansion.
The new advance video gaming system will have the following: * 2D and 3D high-definition graphics to have the user feel that they are part of the game; * Allow for 5.1 Dolby surround sound; * Permit the user to save multiple versions of the same game; * Allow the user to record their game and make it available for upload to various social media sites; * Permit users to play on-line against other players in real time; and * Eliminate the need for a joy-stick by utilizing a high-definition motion sensor and camera to record the player’s movements.
To finance our alternative, we recommend the following actions: * Utilize the working capital currently available in the balance sheet; * Obtain a line of revolving line of credit from their financial institution (the interest expense is deductible for tax purposes); * The issuance of commercial paper (short-term) and/or corporate bonds (long term) as the interest is tax deductible for tax purposes; * The issuance of common and/or preferred shares; and * Any combination of the above (depending on market conditions).
A detailed implementation plan can be found below: Period | Task | October 2008 | * Hold a career fair to increase staffing levels within the Research and Development Department. * Marketing to perform a market analysis to determine what features should be included in Wii 2.0. * Marketing and finance to perform sales forecasting and produce pro-forma segmented financial statements. | November 2008 | * Based on market analysis, research and development to design prototypes of Wii 2.0 and provide costing data. | December 2008 | * Perform in-depth analysis of prototypes and financial/marketing results. Compare findings with industry key performance indicators and other decision criteria. * Perform market testing. * Present finding to Senior Management; obtain approval to proceed with development. | January 2009 | * Release a request for proposal (RFP) for the infrastructure/components that will be required based on the approved prototype. | March 2009 | * Evaluate RFPs, notify bidders of RFP results. * Finalize agreements with suppliers/contractors; implement value supply chain. * Establish quality control guidelines. | June 2009 | * Perform user acceptance and market testing of final Wii 2.0 prototype. * Marketing and finance to revise sales forecasts based on market testing. * Production schedules to be finalized among all stakeholders. * Present update to Senior Management; obtain approval to proceed with development. | July 2009 | * Establish economic production quantities. * Commence production. * Monitor quality control. * Marketing to commence to design marketing campaign. | October 2009 | * Approval of marketing campaign. * Notify major retailers of launch date for Wii 2.0. | November 2009 | * Launch marketing campaign. * Commence shipments to retailers. | January 2010 | * Evaluate the results of Wii 2.0 launch (production, marketing, financial, human resources), and make refinements as required. |

Contingency Plan There is significant risk with developing and designing a new console aimed specifically at the hardcore gamers, while simultaneously enticing the casual gamer. In particular, the hardcore gamers might not embrace the new console. Nintendo should pursue the possibility of designing games with improved graphics and functions. Under this scenario, there is less risk to Nintendo, especially less financial risk. There is no need for a significant expenditure in research and development as the games will be designed for the current Wii.
This scenario should be combined with expansion of its e-commerce as well as the regular distribution methods. Expanding Nintendo’s e-commerce presence will increase its bottom line as e-commerce removes the middle man, resulting in greater profit margins

Appendix A - SWOT Analysis Strengths | Weaknesses | * Product priced lower than the competition due to the fact that Nintendo has lower unit costs relative to its key competitors * Nintendo games appeal to a wider market because they are easy to learn, but hard to master * Nintendo has the first motion-sensing controller in the video game industry * "Wii" is easy to pronounce and understand and therefore surpasses cultural limitations, and also reflects the game's usefulness for group play * Software sales have significantly increased. * Wii is earning a profit per console sold * Able to expend development of the Wii due to low cost of production and cash available * Brand name in gaming industry * Wii system fits strategically with DS handheld video game player * Lower priced (affordable), innovative (intuitive) designs and interactive games * Strong cash flow from an operation that’s why the Nintendo is able to invest in research and development | * Weaker graphics and processors as compared to its competitors do not appeal to hard-core gamers * Supply shortages – struggling to make enough units to meet demand and customer felt the shortage was an attempt to create demand for the Wii * Viewed as a toy by hard core video game users * Limited actions games * Lack of games compared to competitors * Experiencing a slight decline in unit sales. | Opportunities | Threats | * Just starting to tap the non-gamer market with appeal to the older and younger market that likes challenging non-violent games * Shifts in values and cultures * Speed of change and adoption of new technology * Social mobility (Nintendo DS and Nintendo DS lite) * It target market completely different from Sony and Microsoft * Possible that the industry is recession proof; video game industry continued to grow during economic downturn. * Significant technological advances have occurred, and continue to occur. | * Serious gamers are willing to pay premium price for better function and graphics and more complicated harder to win games * Suppliers for parts are unable to meet Nintendo’s demand * New patents and products * Relative price and performance of substitute consoles in the market. * Copying of their unique motion sensor controller by its competitors * Losing the current and future core gamers market segment * Cell phones are constantly updating – maybe the next gaming environment * Nintendo can be exposed to changes in currency value and the global economic condition * Sony and Microsoft are launching an attack in multiple areas including software for casual gamers, new controllers and price cuts. * Due to weakening differentiation, strategies to gain market share have become price oriented. * Companies never gain a competitive edge over one another, even though they generate profits. |

Appendix B - Segment Analysis Segment name: | Young Children | Teenagers and Young Adults | Parents | Senior Citizen | Qualifying Dimensions | | | | | Who? | Males and females Age 4 - 15 | MalesAge 16-30 | Males and femalesAge 35-63 | Males and females, Age 64 and up | What? | Games | Controllers, fast action & high graphic games | Controllers, games and consoles | Controllers, games and consoles | Where? | From friends, television, in stores | From friends, television, in stores, internet | From friends, television, in stores, internet | From friends, television, in stores | When? | All year | All year | All year | All year | Why? | Exercise, educational, entertainment, socialize with friends | Entertainment, socialize with friends | Exercise, educational, entertainment, socialize with friends | Exercise, educational, entertainment, socialize with friends | How do they buy? | Cash, debit or credit | Cash, debit or credit | Cash, debit or credit | Cash, debit or credit | Size of Segment | 20% | 35% | 30% | 15% | Trends/Potential in segment | Growing market as more educational and simpler games are developed | Market has remained fairly consistent with most owning a game console | Growing market with health conscious trend looking for physical activity | Growing market with health conscious trend looking for physical activity | Determining Dimensions | | | | | Benefits sought | Encourages physical activity, educational, fun and means to socialize | Looking for high graphic fast paced games with lots of violence | Encourages physical activity, brain stimulation, fun and means to socialize | Encourages physical activity, brain stimulation, fun and means to socialize |

Appendix C - Competitive Strength Assessment Key Success Factor(Rating Scale: 1 = very weak; 10 - very strong) | Importance Weight | Nintendo | Sony | Microsoft | | | Rating | Score | Rating | Score | Rating | Score | Quality / Product Performance | 0.20 | 8 | 1.60 | 8 | 1.60 | 8 | 1.60 | Reputation / Image | 0.10 | 8 | 0.80 | 7 | 0.70 | 6 | 0.60 | Technological Skills | 0.15 | 5 | 0.75 | 8 | 1.20 | 8 | 1.20 | Value Chain | 0.10 | 6 | 0.60 | 7 | 0.70 | 7 | 0.70 | New product innovation capacity | 0.20 | 7 | 1.40 | 8 | 1.60 | 8 | 1.60 | Financial Resources | 0.10 | 8 | 0.80 | 5 | 0.50 | 8 | 0.80 | Cost position | 0.15 | 8 | 1.20 | 6 | 0.90 | 7 | 1.05 | Total Weights | 1.00 | | 7.15 | | 7.20 | | 7.55 |
Appendix D - Key Financial Ratios

Works Cited
Aoife Cunningham Holger Langlotz, Marc Rhode, Clayton Whaley. Video Games Industry Overview: An Analysis of the Current Market and Future Growth Trends. http://holgerlanglotz.de/downloads/BU4510_VideoGamesIndustry_LanglotzEtAl.pdf. Last accessed: October 9, 2013.
Arthur Thompson, John Gamble, and A.J. Strickland III, Crafting & Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases, Seventeenth Edition (New York: McGraw-Hill Ryerson, 2012).