In 2004, Nintendo had a number of strategies available to change the company position in the market. It had become more than clear that following the same tactic would not allow them to overlap its competitors. In order to growth further, Nintendo could integrate the opportunity to reduce costs and expand into other markets at the same time. Secondly, and maybe most promising, they could explore different consumers segments, which would enable Nintendo to reach market opportunities that had been ignored by Sony and Microsoft so far.

VERTICAL INTEGRATION

After analyzing its core competences, the costs, benefits and risks involved, Nintendo developed a strategy based on internalizing as much as possible gaining substantial influence in the final products. This allows the company to outsource primarily activities in which either they possess a low level of core competencies and/or transaction costs show clear disadvantages in internalizing. Nintendo follows a fabless production model (derived from “fabrication-less”) which means that all production processes are outsourced to external suppliers and production factories and then sent and assemble in Nintendo-owned factories. By avoiding investing money on expand vertical, the company reduce their transaction cost by outsourcing the manufacturing and still manage to maintain lower retail prices than competitors. This result in a different vertical integration compare to the previously existing model allowing Nintendo to succeed without controlling their raw materials and manufacturing process. Nowadays the market is living a different vertical integration concept where the value is around, starting from the user experience and working backwards, instead of beginning with some piece of hardware and then designing software and a user experience to make it work.

In order to be as successful as possible, Nintendo focuses in internalizing areas for which it has core competencies, outsourcing activities for which it has no core competencies and/or transaction costs are high. This is especially true for the extraction and processing of raw materials and production as the company completely outsources those areas. When it comes to quality control, rigorous testing procedures and the overseeing of partners’ operations ensures the highest quality standards are met.

DIVERSIFICATION

Simplicity can be a powerful tool when it comes to satisfy non-consumers providing innovation that can outsell its competition. Nintendo is no longer competing with the other gaming consoles and handhelds companies. The appearance of smart-phones and tablets open the door to another market segment that is growing every year.

In order to conclude whether Nintendo decision to enter in this new market segment is in its best interest, we carried out Michael Porter three essential tests:

The attractiveness test invites to ask whether the smart consumers segment is capable of being attractive. In the past 10 years, the game market stalled although its high profit margins. To respond to the losing market growth, Nintendo could explore this new trend of playing games in smart-phones and tablets. There is no doubt that one of the other strengths is on its games. But once more, if they can only be played in Nintendo hardware, unless those characters are constantly update in new games, the company fans will fade. Since the market growth and size of mobile gaming platform industry are increasing, Nintendo can take advantage of its well known games and diversify them into smart phones and tablets platforms, allowing their existing audience to play these games in other devices as well as capture new potential consumers.

(Analyses of market growth and market size (divided between consoles and tablets)

By widening its product scope, Nintendo would not only grab this opportunity before any of their direct competitors, but also take advantage of this new huge potential unexplored market that is growing year after year.

The cost of entry test requires that future profits are not going to be absorbed by the cost of gaining positioning in the market. In high-developed hardware technological industries, entry barriers are usually very high, mainly due to the initial investment necessary, the need to have great knowledge and experience regarding how the manufacturing process works and also because of patent and other proprietary rights. In this case, Nintendo has a big advantage since they are already in a highly-intense tech industry and has already significant internal resources and capabilities that could reduce some of these costs. First of all, the company’s strong relationship with its suppliers (who some of them also work for the tablet industry) means that the company already has the know-how for production process characteristics and the connections to start working on a product. Also, another important feature of Nintendo is its historical brand awareness, which helps selling new greatly innovative products in a way new entrants could not. However, and despite all of these advantages that manage to reduce the costs of entry, Nintendo cannot tap this new market without the technology necessary to produce it and that is protected by the main players of the industry like Apple and Samsung. In this case, an interesting way to exceed this misfortunate is by strategic ally with a major player like Apple. Nintendo could manage to create conditions to run as independent game studio under a larger parent like Apple, benefitting both companies: Apple could help an important video-gaming company developing specialized content to its new products and Nintendo could use Apple’s expertise and brand recognition to produce a new gaming experience.

The better-off test requires that the new strategy will provide Nintendo with a new competitive advantage. For the past years, Nintendo focus was only about handhelds, consoles and games. But the world has changed and the insanely popular Nintendo hardware is losing market share to smart phone’s cheaper to buy and to make gaming industry. There is no doubt then that the company should analyze if it is still profitable to be the only stand-alone company in the gaming market and diversify to this new segment or exit this current era as a leader and merge in other company in order to gain new momentum. Nintendo is struggling to keep its market share on current industry and the gaming space is no longer just another 4-5 years gap between console makers launch a new device since Apple and Google are living cycles of 1-2 years maturity, charting a new pace. Nintendo can take advantage of its low costs entry, weak expected retaliation by its competitors who were focused on appealing “hard-core gamers” and already distinct competency that will influence the market to enter this new market and develop games with more enjoyable experience than the currently existing.

Companies that do not adapt to the winds of change will pay for it in the future and Nintendo should realize that expanding their consumer targets will definitely be one strategy to strength its position in the game business. By widening company vision, they can explore a growing market and collect benefits from it. This type diversification strategy is called concentric diversification where Nintendo expanded into a similar field of operation that they already been present (same industry but different product)

MANAGING CORPORATE PORTFOLIO

Has it been stated early on the analyses, Nintendo is a single-business company being its business portfolio only compound by gaming industry products. Thus, if any opportunities appear to add value through diversification or vertical integration, portfolio planning models are one tool to start address how to maximize the value of the company. In this analysis we took the Boston Consulting Group`s growth–share matrix to evaluate Nintendo product scope attractiveness when and after Nintendo WII was launched (2005-2007). We also take into consideration Nintendo competitive position to compare the strategic analyses held when they launched the new console and 2 years late.

In terms of hardware, when we look at the BCG matrix, the console at the time (game cube) was positioned as poor dog. This market segment was not delivering high return rates as the creation or development of consoles requires a high investment and huge costs, plus the fact that Nintendo's pricing strategy enables the company to set a higher price.

Nintendo mustered itself with strategic business units capable of delivered a strong value of integration, new markets exploration, improving disruptive technologies and reducing costs by eliminating features. Technology was rapidly changing and by addressing to casual gamers, the new target consumers, Nintendo understood that high prices would not convince them buy the consoles. This resulted in the launch of WII, that proved to be a huge success in the industry and allowed it to step into the star level by diversifying its target audience with a new low cost product which gave them an increasing market share at high growth rates.

Regarding handsets, the market growth was been stall, but its contribution margin was much higher to the business than Wii. Wii on the other hand, was an innovation introduced to the market, setting since early days a high market share and a rapidly growing rate as it is positioned to target not only the teens but the whole family and older segments.
(Even if the company develops variations to their consoles, they will still be positioned as dogs, as consoles don’t sell as much as games)

In terms of games, there is no doubt that they are the main source of revenue to the company, as they do not include high costs and margins set are much higher.
Games are positioned as cash cows, as they have been in the market for a while and adoption process is much quicker, hence generating high revenue. Games have a high market share but a poor growth rate, and create much more money than what has been spent into development.

At this stage, Apple started to appear with is idea of re-enter the industry by releasing games to the mobile platform industry. This put the company in the question mark level once this strategy was still uncertain but already showing signs of increasing market growth. After entering again in the market, Apple captured 5% of the mature U.S. video game share, start slowly beginning to climb throughout market share.

Conclusion:
The consoles are not the main source of profit. Since high investments are required, increasing cost of production and the limit price imposed by the strategy. The software is what delivers the most profits for the Nintendo.
Consoles grow slowly but game developments have to be quick as their life cycle is shorter. The video game industry had grown tremendously during this period and games become more complex and graphically intense. Adding Nintendo’s disadvantages of low technological compounds than its rivals, we see that the present trends changed the way of looking into the industry and new treats are rising.

APPENDIX

| |Operations |Internally Managed |Externally Managed |Comments |
|Backward |Raw Materials & Suppliers| | |Suppliers assure the delivery of inputs, to |
|Integration | | | |the multitude of Nintendo partner plants. |
| |Manufacturing | | |Nintendo follows a fabless production model |
| | | | |(derived from “fabrication-less”) which |
| | | | |means that all production processes are |
| | | | |outsourced to external suppliers and |
| | | | |production factories and then sent and |
| | | | |assemble in Nintendo-owned factories. |
| |Concept & Design | | |Nintendo Design Safety Review Committee |
| | | | |consists of employees from several |
| | | | |divisions, including Engineering, Quality |
| | | | |Assurance and Legal Affairs. The committee's|
| | | | |goal is to screen product designs for |
| | | | |safety, particularly during the design and |
| | | | |development stages. The committee reviews |
| | | | |prototypes and reports created by the |
| | | | |product development departments to assess |
| | | | |the safety of each product from a wide range|
| | | | |of perspectives. |
| |R&D | | |“Nintendo develops game systems and |
| | | | |software, both independently and in |
| | | | |collaboration with a wide range of |
| | | | |development partners.” Nintendo's internal |
| | | | |Research & Development operations are |
| | | | |divided into four main division: |
| | | | |the Nintendo Entertainment Analysis & |
| | | | |Development (the main software development |
| | | | |division); the Nintendo Software Planning & |
| | | | |Development (which main focus is overseeing |
| | | | |second and third-party licensing and |
| | | | |development activity); the Nintendo |
| | | | |Integrated Research & Development (the main |
| | | | |hardware development); and the Nintendo |
| | | | |Network Business & Development (which |
| | | | |focuses on developing other minor hardware) |
| | | | | |
|Production |Financing | | |Since 1962 that Nintendo is a public |
| | | | |company, therefore its financing system |
| | | | |relies on the harmonizing between |
| | | | |shareholders and managers. |
| |Assembling | | |As stated above, Nintendo production |
| | | | |strategy allows the company to outsource |
| | | | |manufacturing process and focus its |
| | | | |resources on assembling the products and |
| | | | |launch them to the clients |
| |Human Resources | | |Nintendo considers its employees to be the |
| | | | |building blocks of their success. Like |
| | | | |stated on its corporate mission, the company|
| | | | |commit toward its employees by maintain an |
| | | | |atmosphere in which talented individuals can|
| | | | |work together as a team. “Commitment and |
| | | | |enthusiasm are crucial to the high quality |
| | | | |of our products and support services. We |
| | | | |believe in treating our employees with the |
| | | | |same consideration and respect that we, as a|
| | | | |company, show our customers.” |
| | | | | |
|Foward |Product Transportation | | |The transportation to actual stores and |
|Integration | | | |wholesalers is successfully done by Nintendo|
| |Storage & Distribution | | |“To expand our consumer base, we must |
| |Centers | | |cooperate with our sales partners in |
| | | | |effectively conveying the appeal of our |
| | | | |products to consumers around the world. |
| | | | |Nintendo continues to build these |
| | | | |relationships and encourages open |
| | | | |communication with its sales partners.” |
| | | | |Nintendo has a key distributor for each of |
| | | | |its regions along certified sub distributors|
| | | | |for specific countries. They have 10 US |
| | | | |distributors plus an additional 29 to cover |
| | | | |the globe allowing Nintendo to easily supply|
| | | | |its products to almost any country on all |
| | | | |continents. |
| |Licenses & Merchandising | | |The Nintendo Licensing Division is a company|
| | | | |within Nintendo that |
| | | | |produces Nintendo published titles that have|
| | | | |been developed by third party companies. |
| | | | |They license out characters to third parties|
| | | | |to be used in their video games, such as |
| | | | |giving Namco the rights to |
| | | | |include Link in Soul Calibur II for |
| | | | |the GameCube. |
| |General Affairs | | |Nintendo offer’s official support and repair|
| | | | |service to its clients, providing a fast |
| | | | |service through its storages and |
| | | | |distributors. |

REFERENCES

The Release – “Brand Analysis of Nintendo Before 2006 Market Introduction of Wii During R&D stage (2003-2005)”

http://nintendo.wikia.com/wiki/List_of_Nintendo_divisions

http://nintendo.wikia.com/wiki/Nintendo#Nintendo_offices

http://kotaku.com/5954397/the-result-of-nintendos-investigation-into-underage-foxconn-workers

Nintendo 2013 CSR Report - http://www.nintendo.co.jp/csr/en/index.html

http://en.wikipedia.org/wiki/Nintendo

https://massasoit.instructure.com/courses/1015943/wiki/can-i-access-canvas-on-my-smartphone-or-tablet

http://www.jagannemani.com/2011/11/23/strategy-frameworks-for-innovation/

http://www.lostgarden.com/2005/09/nintendos-genre-innovation-strategy.html

NINTENDO’S DISRUPTIVE STRATEGY: IMPLICATIONS FOR THE VIDEO GAME INDUSTRY

Video games Industry overview – An analysis of the current market and future growth trends

Takeovers and managing

http://www.scribd.com/mobile/doc/56415077

Strategy and Strategists - Por James Cunningham,Brian Harney

http://vectorstudy.com/management-theories/blue-ocean-strategy

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FORWARD INTEGRATION

FORWARD INTEGRATION