A comprehensive strategic analysis on Nintendo's software division in interaction to its hardware business and its competitiveness in the face of disruptive technologies and industry competitors.

1. A Strategic Analysis of
Software Division
Team Members:
Mayank Agarwal Luiz Branco Gaurav Gopinath Lin Sen Mu Marko Tesanovic

2. Company Introduction:
• Japanese multinational founded in 1889
• One of the largest video game companies in world
• Some of the famous historical consoles were Game
Boy and SNES
Software Division:
• Nintendo’s first character and blockbuster was
Donkey Kong
• Mario is most well-know Nintendo character
• Two main games for 2016: Pokémon Go and Super
Mario Run
Introduction – Nintendo is a world-leading gaming company
11%
3%
4%
12%
0%
4%
8%
12%
16%
Economic
Avg
Industry
Structure
Competitive
Positioning
Nintendo
ROS Piston Chart
Overview:
• In 2016, profits fell 36%, from 29 billion yen to 18 billion
yen
• Problems in promoting games to hardcore gamers as its
games primarily appeal to casual gamers
• Lack of new blockbusters in recent times
• Wii U was a huge failure, selling only 13 million units,
compared to 40 million units for PS4 and 21 million units
for Xbox One
• Slow approach to online games, starting only in 2013.
Competitors started back in 2000
• Games focused only to Nintendo platforms until 2016
(first mobile game)
10.00
20.00
30.00
40.00 Nintendo Stock Prices
Pokémon
Go Effect
Nintendo
announces
games for
smartphones
Business Unit
Industry Definition
Video Gaming
Software Development
Industry

3. Supplier Power: Low
• Software and hardware developers look for
meaningful career
• Graphic designers are scattered talents which don’t
have bargaining power
• Marketing agencies want to work for one of the most
recognized game brand and many marketing
campaigns in Nintendo are done in-house (again
employees have low bargaining power)
• Local transportation for copies of games is a
homogeneous business which does not possess
bargaining power (trending to be replaced by p2p
online stores)
Five Force Analysis
Rivalry: Low
• The games in the markets are differentiated in terms
of genres and the level of reality rendering
• Each game has a unique offering and appeal to
consumers with different tastes
• Large consumer base to support game consumption
in same genre (pie is big enough for everyone)
• Industry has an implicit agreement on the price
points of games (typically from $60 to $80 price
point) to set high margin on games
Buyer Power: Low
• End consumers are scattered therefore their
bargaining power is quite low
• Channel (Bestbuy, EB Games, Walmart, etc.) is
dependent on games to drive traffic therefore they
don’t have pricing or bargaining power; competition
within channel is high because consumers are
indifferent to acquire one way or another
• Usually game developers are game publishers at the
same time, therefore the publishers, supplementary
to software development, have a low bargaining
power
Threat of Substitutes: Low → Moderate
• ROS is above industry average but has been
decreasing (mainly due to substitutes), signifying
up-trending force
• Smartphone:
• Quick round-based and casual gaming is taking away
time spent on console gaming, especially casual
console games
• Social media has drawn away a lot of consumers’
disposal time (young Facebook user spends an
average of 1000 minutes on social media each month)
• Movies, sports and other personal hobbies (low threat)
• PC based MMOs (mass multiplayer online) have a
greater network effect (League of Legend: 64 million
active players, DOTA2: 43 million active players, etc.)
and have drawn away players
Threat of Entry: Low
• Loyalty to game franchise creates barrier to entry
(e.g. Halo and Call of Duty franchise deter other
entry to first-person-shooting game development)
• High development cost is required to create a game
(design of game logic, underlying software
engineering &development/acquisition of strong IP)
• It is time consuming and expensive to develop
relationship with distribution channel
• Incumbents which have strong brand recognition
could eventually circumvent channels and launch
product on their own platform, creating even larger
barrier to entry
Value
Creation
Supplier
Power ↓
Buyer
Power ↓
Threat of
Substitutes ↓
Value
Capture
Rivalry ↓
Threat of
Entry ↓
Video Game Software Industry ROS is above economic average, therefore all 5 forces are low

4. Casual Gamers
Hardcore Gamers
PC/Console
Mobile
Nintendo’s core customers, mainly casual gamers, are shifting towards the mobile platform
Blizzard
EAKoei
Midway Games
Ubisoft
Konami Pangea Software
Gameloft
Zynga
King Wooga
Gree
Playdom
 Perceptual Map laid out using the type of gamer – casual vs hardcore – on the Y
axis and platform – PC/console vs mobile – on the X axis
 Casual gamers are identified as those who spend ~5 hours/week while hardcore
gamers spend ~20 hours/week
 While hardcore game developers focus on PC/console market, they have
complementary apps for the mobile platform as well
 We have seen a decline in the number of console sales over the last 5 years
(50% reduction over the last 7 years), largely due to casual gamers adopting
mobile gaming as their preferred channel
 Therefore, Casual Gamers + PC/Console market is shrinking, giving Nintendo an
opportunity to leverage its brand value and create a niche within the Casual
Gamers + Mobile market through its existing IP – Pokemon and Mario
Perceptual Map
Nintendo
Industry Average
Willingness to Pay
Industry Average
Costs Incurred
Nintendo’s Value Creation vs. Competitors
Activision
Zynga As per statistics from Statista, 47% of video game players in the US are between
the age of 18 and 49, and they have an average WTP for video games of $100 per
game
 With a target market of casual gamers, Nintendo invests less on graphics while
Activision invests a lot more. This enables Nintendo to cut costs significantly while
the reduction in WTP is not as high (due to its strong IP in Mario and Pokemon)
 On the other hand, with games like Call of Duty: Infinite Warfare, Activision is
attracting the hardcore gamers who are willing to pay a higher price upfront
 Average selling price for a Nintendo game is $50 whereas for a Activision game is
$65. The gap between the sale price and WTP is to entice recurring game
purchases (razor blade model)
Competitive Positioning

5. Hardware Issues
• All console sales are going down:
• WII U has been a failure - WII U launch year
sales decreased dramatically compared to WII
launch year sales: from 24.09 million units to 2.17
million, representing a 91% decrease
• Closed system – e.g. Pokémon and Mario can only be
played on Nintendo platforms, only recently started to
seek opportunities such as AR (e.g. Pokémon Go) and
mobile (Super Mario Run)
• Hardware technology innovation cycle is accelerated and
Nintendo is not keeping up with its competitors.
Technology used in rivals consoles are better than
Nintendo’s in terms of performance and graphic
rendering
• Un-productive with R&D, 14% compared to
industry 6%
• Consoles are Red Oceans according to Kim and
Mauborgne, 2005
• Rise of mobile games reduces the demand for consoles
and PC games – Casual players do not buy consoles as
in the 90s and early 2000s
• With reduction in existing loyal fan base and difficulty in
attracting new ones, customer base is on the decline
Identification of Strategic Issues
Software Issues
• Lack of new blockbuster characters over the past 20
years
• Late integration with mobile:
• First game for mobile was Pokémon GO,
released in 2016
• Mario is planned to be release in December 2016
• No integration with other platforms, such as PlayStation,
Xbox and regular PCs
• Not attracting talent from independent developers
• Nintendo games are focused only to families, with a
teenage thematic
• Most of Nintendo’s existing loyal costumers are mature
adults by now, thus they don’t have enough time to play
games as often anymore
• There isn’t any impactful IP utilization on WII U platform
and no new impactful IP generation since 1996 (see time
line)
Console Sales By year
Donkey Kong (1981)
First Mario Bros Solo
Game
(1983)
Zelda
(1983)
Star Fox (1993)
First Pokémon game
(1996)
From 1997 to 2016,
no new blockbuster
character
Timeline of Nintendo IP generation
Nintendo is faced with adversities mainly in its console sales and in its late integration with mobile

6. Analysis of Industry Change
Console/PC
Mobile
AR & VR
Value
Creation
Time
Time
Volume
of Sales
Console/PC Gaming
Mobile Gaming
0%
10%
20%
30%
40%
0.
22.5
45.
67.5
90.
112.5
2008 2009 2010 2011 2012 2013 2014
Percentage
Units(million)
Industry Disruption from Smartphone
Global Console Sales World Smartphone Penetration
Origins of The Video Game Industry
• Video games are limited by the platform that they are running
on and as a result, the technical specifications of the hardware
are a significant driving force for the potential of the software.
• The first commercial video game, Computer Space, was
launched in 1971 in arcade and the arcade format was soon
disrupted by console and PC gaming which brought video
games into players’ homes.
• Console gaming saw disruptions as a result of technological
advancements through each successive generation of
consoles (e.g. through the introduction of Nintendo, Super
Nintendo & Sega Genesis, Nintendo 64 & PlayStation) and
saw the emergence of handheld consoles such as the
Nintendo Game Boy which complemented console gaming
rather than serving as disruptors.
• New generations of consoles and PCs increased the technical
potential of video games in terms of graphics, availability of
features and performance.
• Online gaming has improved the offerings of console and PC
game developers by merging the convenience of solo pick-up-
and-play with the enjoyment of multiplayer gaming.
• The industry has seen fragmentation in terms of video game
development with the emergence of developers who focus on
third-party games (games supported by multiple consoles)
rather than traditional first-party developers who create games
for only a single console, like Nintendo.
• Although less technically advanced mobile games like Tetris
have been around for quite some time, technological
advancements have disrupted console gaming through the
introduction of smart phones and addictive yet simple games
such as Angry Birds/Flappy Bird.
• As smart phones become more prominent and more
advanced, the added convenience of this platform is attracting
more casual gamers, which traditionally
had to invest in robust gaming consoles to enjoy video games.
Changes in Industry Dynamics
There is anticipated disruption from Mobile and Virtual Reality

7. Sources of Sustainability
Asset &
Capabilities
Valuable Rare Inimitable Organized to Benefit
Intellectual Property
(IP) Assets
+ Nintendo’s IPs are extremely
valuable. The recent success of
Pokémon Go, a non-Nintendo game,
is entirely attributable to its
association with a Nintendo IP.
Evidence: It’s the first ever mobile
AR game, which is the fastest mobile
game that reached $500 million
+ Nintendo IPs are extremely rare
because they are mostly exclusive
to Nintendo hardware.
+ Nintendo’s customers are more
loyal than its competitors’ customers.
Nintendo has a reserved right on all
its IPs which protects these IPs from
imitation
+ Nintendo has a multi-decade
track record of generating profits
from games based on its IPs. More
recently, Nintendo generated strong
revenues from selling merchandise
(“Amiibo”) based on characters like
Mario and Pokémon.
Software Development
Capabilities
+ Nintendo’s longstanding status as
a power player in the fast-moving
videogame industry speaks to its
high-quality game development
abilities.
+ Nintendo is perhaps the most
universally respected game
developer in the industry, despite the
fact that Nintendo sales have lagged
behind other software publishers (e.g.
Activision-Blizzard) because of
Nintendo’s hardware exclusivity.
+ The high quality of Nintendo’s
titles stand apart, and are the driver
behind the strength of Nintendo’s IPs
and the loyalty of its fans.
+ Nintendo is very strongly
organized – its costs to produce
games in-house are reportedly 25-
50% lower than industry average.
Hardware Development
Capabilities
+ Historically speaking, Nintendo
has a strong hardware R&D
capabilities, manifested through the
launch of Wii which was the first
console that has mature motion
sensor technology.
In absolute terms, though Wii U is
looking at an annual sales of only
3.68 million units, it still has sizable
impact on Nintendo’s profitability.
- Hardware development
capabilities are everywhere (see
smartphones, VR devices etc).
Nintendo hardware is not unique in
any way – and from a technical
standpoint, it typically underperforms
the competition.
- Once-innovative features
developed on Nintendo consoles (e.g.
motion tracking) have now become
industry standard as competitors
(Sony’s PS4 & Microsoft’s XBOX
One) followed Nintendo’s lead.
- Nintendo’s dubious track record of
hardware innovation in recent years
suggests it is not organized to benefit.
Nintendo’s high spend on hardware
R&D (14% of revenue) is one of the
reasons why it has low profitability.
Of the three sources of sustainability, two are core competencies (IP & Software) and one is temporary competency (Hardware)

8. • Developing games on smartphone platforms (iOS or Android)
would create a large audience base for Nintendo since this
strategy would allow Nintendo to capture the group of game
players who are:
• More used to spend time on smartphone rather than
game consoles (average US adults spend more than 3
hours on smartphone daily)
• Very much attracted to Nintendo content such as
Pokémon and Super Mario (Pokémon Go is the fastest
mobile game that reached $500 million and Super Mario
Run, which will be released on Dec 15th 2016, is
anticipating to be a blockbuster)
• Even though Nintendo has started experimenting its content on
smartphone platforms, it has not yet exploited the full potential of
its valuable intellectual properties. Nintendo should also look into
developing games for the other main console platforms such as
PS4 and XBOX One
• Nintendo should pay close attention to the evolution of virtual
reality technology as it is expected to hugely disrupt the gaming
industry as well as people’s ways of living. Business Insider
anticipates VR headset shipment to increase from 1 million units
at 2016 to 5 million units by 2020, a 400% increase.
• In the current PC arena, most of the traffic is drawn towards
MMO e-sport games such as DOTA2 and League of Legend.
Nintendo should also look into the developing games for PC
platform in the form of MMO where the players can create their
own avatars and create experience journey inside the virtual
world.
• However this strategy should be less prioritized than
earlier suggestions since PC gaming is fairly saturated
and is also the biggest victim of piracy
Recommendations
• With Nintendo's hardware failures, software has been the
success factor in their business model
• Looking at the below chart, we conclude that creating a strong
IP leads to recurring revenues through regular game releases
and game/IP loyalty
• The last IP release for Nintendo was in 1996, 20 years ago.
Clearly, there has been a lack of focus on one of their core
abilities.
• Therefore, we propose diverting some of the 14% R&D that is
currently focused on consoles, towards new IP generation.
• Development of new IPs gives them the opportunity to leverage
multi-platform audience through consoles and mobile and
handhelds for maximum revenue generation
• This is also an opportunity to grow their market share by
developing more diversified IP catering to different audiences
• Once a pioneer and industry leader in hardware development
and unit sales, Nintendo has since experienced a significant fall
from grace
• Wii U sales continue to underwhelm the market and its value
proposition continues to plummet
• Major competitors Microsoft and Sony continue to innovate and
improve both their consoles and their platform-exclusive game
offerings, widening an already significant gap in unit sales
despite the Wii U’s favourable price tag
• Nintendo’s strong, time-tested IPs and competitive software
offerings are being limited by their platform-exclusivity because
of the Wii U’s staggering sales
• The announcement of Nintendo’s new console, the Switch, was
met with a 7% drop in stock price
• Nintendo should phase out hardware development, where it has
proven it cannot compete with its competitors in conjunction
with an increased focus on cross-platform game development
Increase Cross-Platform Software Development Focus on In-House New IP Development Phase Out Investment in Hardware Development
• We recommend Nintendo to focus on cross-platform and IP development and phase out investment in hardware

9. Introduction:
• Canpolat, Cihan. "Strategic Analysis Of Nintendo".
Academia.edu. N.p., 2016. Web. 13 Dec. 2016.
• "Nintendo | SWOT Analysis | USP & Competitors | Brandguide
| MBA Skool-Study.Learn.Share.". MBA Skool-
Study.Learn.Share.. N.p., 2016. Web. 13 Dec. 2016.
• "Nintendo Market Analysis". Ukessays.co.uk. N.p., 2016. Web.
13 Dec. 2016.
• Nutt, Christian. "Analysis: The Nintendo Bubble".
Gamasutra.com. N.p., 2016. Web. 13 Dec. 2016.
• "Why Nintendo Is In Real Trouble - IGN". IGN. N.p., 2016.
Web. 13 Dec. 2016.
• "Why Nintendo Seems Determined To Fail". The Huffington
Post. N.p., 2016. Web. 13 Dec. 2016.
Five Force Analysis:
• "11.5 Million Playing Lol Each Month". Riot Games. N.p., 2016.
Web. 13 Dec. 2016.
• "Global Social Media Statistics Summary 2016". Smart
Insights. N.p., 2016. Web. 13 Dec. 2016.
• "VG General Manager Speaks On Esports In China". Liquid
Legends. N.p., 2016. Web. 13 Dec. 2016.
Identification of Strategic Issues:
• "Video Gaming Console Market Share 2016 | Statista".
Statista. N.p., 2016. Web. 13 Dec. 2016.
Industry Change:
• "Smartphone Penetration Worldwide 2014-2019 | Statista".
Statista. N.p., 2016. Web. 13 Dec. 2016.
Sources of Sustainability:
• Perez, Sarah. "Pokémon Go Becomes The Fastest Game To
Ever Hit $500 Million In Revenue". TechCrunch. N.p., 2016.
Web. 13 Dec. 2016.
Recommendations:
• "Growth Of Time Spent On Mobile Devices Slows -
Emarketer". Emarketer.com. N.p., 2016. Web. 13 Dec. 2016.
• Meola, Andrew. "Virtual Reality Is Poised To Explode In 2016".
Business Insider. N.p., 2016. Web. 13 Dec. 2016.
• "Nintendo Wii / Wii U Hardware Unit Sales 2007-2016 |
Statistic". Statista. N.p., 2016. Web. 13 Dec. 2016.
References