How Nintendo Disrupted the Video Game Industry

This is a case study analysis I wrote for my Strategy and Competitive Advantage course. It discusses how Nintendo was able to disrupt the video game industry with its wildly successful Wii console.

The Nintendo case study can be used as an example of true innovation and disruptive strategic thinking for all technology-driven companies. Early on, Nintendo had much success in the entertainment space with their playing cards, toys, and their early consoles. They were even allied with the likes of Sony at first to support CD-ROMs.

Due to some disagreements between the organizations, they decided to work on their products separately. This was the start of a difficult period for Nintendo. According to the case study, “In 1995, Sony released the PS in the US, totally uprooting Nintendo’s established name in the industry”. Sony didn’t stop with the PS1, they took a first-to-market strategy with the next generation of the console, the Play Station 2. This approach led to the PS2 being the best-selling console in history. They also established themselves as a differentiation leader by trying to make their product all-encompassing. For example, according to the article, “The PS2 was not only backward-compatible with the PS, but could also be used to play CDs and DVDs”. By taking steps like this, Sony would be able to retain customers who purchased PlayStation games in the past and get the casual users who also needed a DVD player.

Microsoft, a new player to the video game industry took a few steps to change the dynamics of the video game industry. A notable action they took was to vertically integrate the parts for their console. According to the case study, Microsoft “abandoned its previous approach of using off-the-shelf parts provided by Intel and Nvidia to build its consoles”. This move helps to decrease the power of their suppliers to increase costs and, in turn, increase profit margins.

Another way Microsoft tried to change the dynamics of the video game industry was to make some moves to lower the competitors’ advantage in areas they traditionally had one. This includes having Japanese-style games and the first-mover advantage in the new release cycle. Microsoft worked with Japanese game producers and also released their consoles earlier than normal.

Nintendo took a look at the way their competitors were trying to improve their product and created some discontinuity. The organization decided to take an approach that leveraged some aspects of differentiation and cost leadership. They recognized that many of their competitors only focused on existing customers. Instead of following suit, the people at Nintendo decided to focus on new customers and non-gamers. By doing this, they were able to engage a completely new customer base. They focused on easy-to-learn games like sports and added a fitness component to their consoles. According to the case study, between November 2006 and June 2008, Nintendo was able to sell 10.9 million Wiis. This led both the PS3 and the Xbox360 in number of units.

Not only was their differentiated system popular, but it was also cost-efficient. Nintendo had a strategy for having multiple suppliers for many parts of their console. This gave them room to negotiate on some items and bring their prices down. In addition, they merged their hardware and software development for their game systems. By doing this, they were able to bring their costs down and be profitable on every console they sold. Sony and Microsoft took losses on every system and hoped they would make more on the backend from software sales.

Many lessons can be taken from this case on effective approaches to develop and commercialize a technology-based product. The first and most obvious is to not tunnel yourself to the existing market. A core tenet of technology is to innovate and solve problems. Nintendo saw a landscape of people with some leisure time who cared about fitness but were not being served by the ever-growing in complexity of games. Instead of increasing the complexity or graphics like all their competitors, they focused on the underserved market. Technologists can use this approach in other problem spaces as well.

Another lesson that could be taken from this case study is to listen to the customer. Many people are frustrated that when they purchase a console, they have to spend more money just to use it. Nintendo saw that and built a console paired with some games built into the initial price. By doing this, they addressed an underserved customer need and found success.

Sources: “Nintendo’s Disruptive Strategy: Implications for the Video Game Industry” — https://hbsp.harvard.edu/product/HKU814-PDF-ENG