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Case 11 – Video Game Consoles Industry Discussion

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    Case 11 – Competition in Video Game Consoles: The State of the Battle for Supremacy in 2008 DISCUSSION QUESTIONS 1. What are the strategy-shaping business and economic characteristics of the console segment of the video game industry? What is the industry like? The video game industry is the economic sector involved with the development, marketing and sale of video games. It encompasses dozens of job disciplines and employs thousands of people worldwide. It includes video game consoles, game software, handheld devices, mobile games and online games.

    Console is the largest segment in the industry, but online, mobile and broadband are some of the fastest growing segments. In recent years, the video gaming industry has been growing rapidly and is expected continue to grow in the future. There are several strategy-shaping business and economic characteristics of the console segment. These include the intensity of competition, the relationship between console manufacturers and game producers, and global economic health. The major business characteristic that shapes strategy is the competition, combined with the large size of the industry.

    The market is dominated by three global firms – Microsoft, Sony and Nintendo. They are all locked into the same technology cycle, and the dawn of each cycle provides an opportunity for tremendous gains or losses in market share. The strategies of each of these firms are heavily influenced by the competition and the technology cycle. Description of Economic characteristics 1) Market size & growth rate: More than $35 billion was spent on video games consoles, game software etc. Industry is expected to have more than $51 billion sale by 2010. ) Number of rivals: There are a lot of game consoles worldwide but there are only 3 leading video game consoles appeal to generate large-volume sales of new units: namely, Microsoft’s Xbox 360; Sony PlayStation 3; and Nintendo’s Wii. 3) Scope of rivalry: Global presence with regional focus is required for company’s competitive long-term success. 4) Number of buyers: Buyers are in all ages. Most of them are preteens, teenagers, and young adults. Average game player’s age increases to 33 and 25% of buyers are over age 50. Buyers are video game console literate.

    In 2008, there are about 300 million game players worldwide. 5) Degree of product differentiation: The larger the degree of differentiation, the more competitive advantage. 6) Economies of Scale: Any new innovative video games and/or its components with larger economies of scale help the company to reach a larger market with greater geographical area. It also helps to maintain a competitive price on video game products. 2. What is competition like in the video game system industry? Which of the five competitive forces [new entrants, suppliers, buyers, substitute or rivalry] is the strongest?

    Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants? Industry rivalry here occurs in the strategic alliances i. e. battle to control market. With huge players like Sony, Nintendo and Microsoft there is a tough battle between companies to dominate the market, therefore rivalry is the strongest of the five competitive forces. The threat of entrants into the industry can be negligible with the existence of players like Sony, Nintendo and Microsoft.

    Also, It takes lot of resources and capital to enter into this market. Hence, new entrants is the weakest of the five competitive forces. There can be no substitute to the video games. The power of buyers in the video game industry is low as there are very few successful companies in the video game industry, therefore a small variety of video games available to the buyers. On the other hand, the power of suppliers is pretty high as there are more suppliers available to a handful of companies in the video game industry. 3. How is the video game system industry changing?

    What are the underlying drivers of change and how might those driving forces individually or collectively change competition in the industry? The following are the driving forces that govern the video game industry that have been behind the change and evolution of the industry over time- – Technological Change: Technology in the industry is constantly changing, producing successive generations of increasingly powerful systems, typically at lower costs. – Product Innovation: The software development side of the industry is increasingly becoming a business of risky bets on individual software titles that are hoped to be significant hits.

    The large number of developers has resulted in a continuous production of highly innovative products. – Changes in the personal computer industry: As a significant substitute for consoles, the lower cost and increasing performance of home computers can eventually threaten the industry. – Changes in the industry’s consumers: Although video game hardware has largely appealed to adolescent males, changes may occur, which cause the demographics of the industry’s customers to expand to young adults and women in general. – Changes in the mobile industry: Mobile devices are changing the landscape of many industries e. . music, camera, GPS, games etc. and is rapidly becoming one-device fits-all. As technology advances, this will have significant impact on handheld gaming consoles. 4. What does your strategic group map of the video game industry (all segments) look like? Which strategic groups do you think are in the best positions? Who’s in the worst position? Note: Please label the two axes and position Nintendo, Sony & MS where you think they fit. Following chart shows the position of each product in the video gaming industry with types of video game suppliers or distribution channels vs. verall cost to players of video games. The size of the bubble shows the size of the global video games market. [pic] I think video game consoles are in the best positions because overall cost to players is not too high, many players can afford. In addition, there are many distribution channels to sell their games. The worst position should be online games because overall cost to get online games is not that low, meanwhile, their distribution channels are numbered. 5. What key factors determine the success for video game console producers?

    Factors that are necessary for competitive success in the console segment of the video game industry include large installed base, technological capabilities, partnership with independent software developers, acceptable development and production costs, and access to distribution. 6. Which console makers seem to be best able to perform the industry’s key success factors and other measures of competitive strength? What ratings do Microsoft, Sony, and Nintendo merit in a competitive strength assessment? According to answer #5, I would score 8/10 for Microsoft, 7/10 for Sony, and 9/10 for Nintendo.

    Therefore, I think Nintendo seems to be best able to perform because Nintendo attempted to develop a game system that would appeal to nongamers, and created a game console that would easily fit within the family budget. As a result, developers saw more opportunity for immediate profits from Wii games than those for PS3 and were holding off on creating games for Sony until its installed base grew. 7. What recommendations would you make to Sony to win the next generation battle in the video game console industry?

    I would recommend Sony to lower the price of PS3 to be competitive with Microsoft Xbox 360 and improve their production capabilities, provide incentives for PS2 users move to PS3, enhance PS3 product features like online experience and expand on gaming titles, improve on the controller sensing capabilities to adopt and improvise the wireless wand controller by Nintendo, form Strategic alliance with innovative companies like Apple to enter the PC gaming market, and built on the strength of high video quality in their laptops by utilizing Apple’s support of high quality graphics in their operating system.

    Five-Forces Analysis for the Video Game Console Industry Case NEW ENTRANTS |SUPPLIERS | |Economies of scale |Presence of substitute inputs | |Proprietary product differences |Supplier concentration | |Technology, know-how and innovation |Importance of volume to supplier | |Capital requirement | | |BUYERS |SUBSTITUTES | |Buyer switching costs |Relative price performance of substitutes | |Substitute products |Buyer propensity to substitute | |Price | | Product differences | | |Impact on quality or performance | | |Industry Rivalry | |Product differences | |Switching costs | |Diversity of competitors | |Industry growth | ———————– List four factors for each of the five forces unless you feel there are fewer or none for a particular category. After reviewing your lists, indicate on the diagram the strength of each force: Strong, Moderate or Weak.

    Then briefly explain your assessment of the overall competitive situation. [pic] Summarize of the Competitive Nature of this Industry. NEW ENTRANTS Low – It takes lot of resources and capital to enter into this market. SUPPLIERS Moderate – There are not many companies that the suppliers can supply to. But on the other hand the game development companies can have more power by developing specific games. BUYERS Moderate – Buyers hold moderate bargaining power because of low number of competitors and high switching cost. SUBSTITUTES Moderate – Interactive entertainment substitutes are not that many. Industry Rivalry Strong – There is intense competition among Sony, Microsoft and Nintendo for market share.

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