Industry Overview

The video gaming industry in this decade sees the introduction of the 8th generation gaming
console. The console manufacturers have continued to adopt the five-year console
development life cycle. Since the 6th generation gaming consoles i.e. around the early 2000s
three prominent players in the form of Sony, Microsoft and Nintendo have emerged.
As of January 2014 the Sony had the biggest chunk of the $9.9 Billion market with 62% of
the market share. Microsoft was second with 23%, followed by Nintendo with 15% market
share.

Console Gaming Market Share

Microsoft
23%

Nintendo
14% Sony
63%

With the 8th generation console, the PlayStation 4(PS4), Sony has emerged to be the market
leader gaining the position after 4 years. Sony is followed by Microsoft with the XboxOne,
which has seen rapid decline in sales in the last quarter. Nintendo Wii U sold about 2 million
consoles after its launch in 2012 and similar sales for the PS4 and XboxOne are expected by
the end of 2014. The console industry as a whole has seen dive in sales because of increased
competition from the mobile and internet based gaming.
The expected sales for the 6th, 7th and 8th generation are as shown below:
Competitive strategy prior to Nintendo Wii
The gaming console industry has been a Red Ocean with the three main players competing
for market share for the last decade. The Strategy adopted by the console players prior to
launch Nintendo Wii (6th generation) was based on value creation rather than innovation.
They achieved this by focusing more on technology advancement by providing more inbuilt
storage, better graphics and improved processing capacity.
Bundle Deals: Console makers introduced bundle deals by offering additional controllers,
remote controls or games in order to tempt them away from competitors.
Pricing Strategy: One of the important tools used for gaining market share is the aggressive
pricing strategy. They have adopted a loss leader strategy where the products are prices
below the production cost and they expect that lower input cost over the years will make their
product profitable.
Captive deals: As price of games consoles fall, console manufacturer release much hyped
games that can only be played on their platform. Games console manufacturers usually make
most of their money on software sales. They get the console into the household by selling it
cheaply then they capture the customer on the premium price for new game releases. For
example if you wanted to play Halo, it could only be played on the Xbox 360
All these strategies are for value creation and thus created a Red Ocean. With Nintendo Wii,
Nintendo created a blue ocean to attract new customer base.

Porter Forces in the game console market

Customers
Customers tend to buy only one console at a time. The bargaining power of the customers is
also restricted since the prices are fixed for an entire region. Switching costs are also high as
there is no platform portability for games; if an individual wants to play a particular game, he
or she is usually locked into the console that plays it.
Suppliers
The Manufacturing and Assembly of most of the part of Nintendo are outsourced. Thus the
costs for Nintendo are higher in comparison to Sony and Microsoft. Also, for them there is a
threat of forward integration by the part suppliers.
In case of software Nintendo does most of the development on its own. It also licenses a
software development kit (SDK) to outside game developers. These firms could have a
bargaining power over Nintendo as they too act as customers which Nintendo looks forward
to satisfy. Overall, Nintendo's SDK tends to be priced lower and have better support than
similar packages offered by competitors.
Threat of new entrants
The console market has a strong threat of new entry. There is very little patentable
technology in game consoles, and most consoles tend to have similar features and
functionality.
Economies of scale act as one barrier. The new entrant will have to build its own games and
would have to market it well since the existing players are a household name.
Substitutes
The customers have high bargaining power since there is multiple source of entertainment
available which could substitute gaming. In addition to competitors' products available to
them, they may choose television, movies, PC games, board games, literature, sports, etc., in
their leisure time. Thus, game consoles have to make an effort to be wanted since they are not
needed.
Rivalry
There is a very strong rivalry in the console industry. At this juncture there are three major
players in the form of Sony, Nintendo and Microsoft. There was heavy price competition
among the players in 2004 and Nintendo, as the weakest competitor, would have suffered
most loss from price competition. Thus in order to be profitable Nintendo had to think out of
the box and come out with innovate strategy.
Company Overview: Nintendo
Nintendo began as a handmade playing card company in 1889 and developed into a video
game company, becoming the most influential in the industry, and Japan’s third most
valuable listed company, with a market value of over US$ 85 billion. Nintendo has enjoyed
the leading space in Gaming industry for over decades with Strong competitors like Sony and
more recently Microsoft vying for the top spot. Nintendo holds the record for the most
number of consoles sold cumulatively which is approximately 625 million till Nov 2013.
The major successes of Nintendo include Super Nintendo, Game Boy, Virtual Boy, Game
Cube, Nintendo DS, Nintendo Wii and Nintendo Wii U.
Nintendo Wii
Through the launch of Wii in 2006, Nintendo successfully created a niche market for their
product and in effect were successful in increasing the size of the market without actually
competing with the existing players (The detail strategy is explained further in the document).
Before Wii was launched, Nintendo had lost a lot of ground to its competitors Sony (PS2)
and Microsoft (Xbox 360). Sony and Microsoft were far superior in terms of technological
advancements in their gaming experience in terms of HD graphics and faster processor
speeds and online user experience. Thus in early 2006 Nintendo’s GameCube with 22 million
units was a distant third after Xbox360 with 24 million units and PS3 in terms of market
share and sale of consoles.
After Wii was launched the market scenario started changing gradually and by the year 2009
Wii was able to regain the lost market share for Nintendo and at that time held the greatest
lifetime market share (41%) out of the three major video game consoles. Wii reached
maturity early as compared to its competitors leading to a “3 rd place” position in terms of
Market share in 2011.
Snapshot of Comparative performance of three market leaders in Gaming industry in 2008:

4000

3000
Wii Sale
2000
PS3 Sale
1000 Xbox 360 Sale
0
Mar-08 Apr-08 May-08 Jun-08
SWOT Analysis for Nintendo Wii

Strengths Weakness
• Important heritage in video game • Low focus on offering online user
development experience
• Strong global brand in video game • e.g. No unified user account system
market with Valuable IP’s Like Mario,
• Lack of innovative video games
Zelda
(partly due to poor tie ups with third
• Focus on Value Innovation (Pioneer - party developers)
Motion Sensing)
• Complete exclusion/ignorance of
• Simple User Interface and Greater DVD gaming market
Playability
• Unable to back up / Replicate the
• Family Friendly Values Huge success of “Wii” with new
product launches like “Wii U”
• Backward Compatibility
• Complete lack of focus on the
• Attracting traditional Non Gamers to
hardcore gamers needs and
the gaming world by offering them
expectations
unique entertainment value
• Focus on providing an immersive and
entertaining experience

Opportunities Threats
• New unifying Nintendo OS under • Sony PlayStation 4 which comes
development for coming release with Superior motion detectors and
HD graphics
• Tablet games can be ported to Wii U
without hassle • Games available on Smart phones
and Social Media
• Microsoft XBOX One seemingly
missing the mark with consumers • Third party developers are likely to
flock to other more successful
• Aging population in Developed
systems, if the Sales of new launch
markets
“Wii U” do not improve
• Growing consumer base in emerging
• The niche possessed by Wii in
markets
motion sensing being eroded away
• Improved online experience through with numerous new entrants like
improved OS and a unified account Oculus Rift, Valve Steam Box, Ouya
system etc.
• Wii U will no longer compete in
Blue Ocean
Nintendo & Blue Ocean Strategy
At the end of 2005, Nintendo was hardly sailing smooth. Its GameCube had failed and its
GameBoy withered after reaching an early peak. Its games were also not so well received and
hardly any competition to Sony's PlayStation2.
Nintendo came up with their path breaking product “Nintendo Wii” in Nov 2006, which
challenged the way a video game was played by creating a completely unique offering
through the introduction of motion sensors in a gaming experience.
When Nintendo introduced Wii, its President talked about Blue Ocean and disruptive
thinking, inspired by Kim Chan and Mauborgne's then-recent book "Blue Ocean Strategy".
Nintendo, he said, intended to not simply compete, but to expand the industry.

Why Nintendo felt the need to create a blue ocean

With the hyped release of Wii, it earned the scorn of gamers because Wii didn’t have any
high-definition graphics, its graphical output was a measly 480p in comparison to industry's
1080p ceiling. Wii had a miserable 512MB internal storage compared to the 20GB and 80GB
its competitors had at launch. It had no optical audio-out port nor did it have any external
storage option and also lacked a centralized online service.
In short, Wii could never compete with Xbox or PlayStation and that was the primary reason
of Wii's existence. Rather than fight for the same finite market and dollars, Wii wanted to
create its own market space and attract new audience altogether. Wii's target was beyond just
kids, it was the whole family.
The heart of Wii's strategy was that consoles do not necessarily require state-of-the-art
technology, power and performance. It shifted its focus to providing a new form of player
interaction to a wider audience

How it went about creating the Blue Ocean

Wii simply proved that there are far more noncustomers than customers and that a better
solution to an existing problem is not good enough. Nintendo focused on the demand side and
redefined the problem itself. Nintendo looked into the gaming industry's noncustomers for
insights i.e.; older non-gamers, parents who wanted their kids to play active games, elderly
and the very young.
CREATING BLUE OCEAN
Value innovation
Value innovation is the cornerstone of blue strategy which simply defies the traditional
dilemma of value-cost trade-off. In value innovation, companies don’t just concentrate on
value creation or just on innovation. If you concentrate only on value creation, you cannot
stand out in the crowd as competition catches up with you. If only innovation is focused
upon, the value to customers tends to be technology-driven and not cost leadership, which
buyers are not ready to pay for.
Hence in value innovation, instead of focusing on beating the competition, companies focus
on creating a leap in value for buyers and hence make competition irrelevant.
How to implement
Value innovation occurs only when companies align innovation with utility, price, and cost
positions. Buyer value is lifted by raising and creating elements the industry has never
offered. Cost savings are made by eliminating and reducing the factors an industry competes
on. Over time, costs are reduced further due to high sales volumes that superior value
generates. Hence, companies have to drive costs down while driving value up for buyers.
Wii's Value Innovation
Changing the Concept with New Game-Play, New Consumers, New Approach
As of 2005, Nintendo's main business of gaming consoles was a speck in the gaming arena,
with its GameCube selling just 20 million whereas Sony's PS2 had amasses an excess of 115
million buyers. Nintendo desperately needed a radical change in its strategy and market focus
in order to gain major traction in the video game industry.
With the creation of the Wii, Nintendo made radical changes to its strategy:
Now gamers were playing with their families, their friends and not alone in the dark at night.
This was the biggest utility Wii provided. Nintendo changed its focus from the technological
race towards a more user-oriented strategy - from better graphics to having more fun, thus
providing value for its buyers with low costing consoles.
Another cost saving offer was with its Wii Sports package, which includes Baseball,
Bowling, Golf, Tennis etc., some people did not even find a reason to buy more games. Also,
after realizing its past mistake when aiming for a younger audience, Nintendo started tapping
into the “casual gamers category; reaching far beyond the “hard-core gamers” which the PS3
and Xbox 360 target directly.

Analytical tools and frameworks

The Strategy Canvas
The strategy canvas is both a diagnostic and an action framework for building blue ocean
strategy. It serves two main purposes: to understand where the competition is investing and
what the consumer perception is of these offerings. The vertical axis depicts the value derived
from each of the factors the industry competes in (horizontal axis).
The above figure is called the “value curve”, a graphic depiction of a company’s relative
performance across its industry’s factors of competition.
The vertical axis depicts the offering level that buyers receive across each factor. All these
factors together depict the strategy that each of the companies chose to differentiate
themselves in the market. These are compared among the competitive group and a certain
value is assessed to be perceived by consumers. The resulting value curve is the graphic
depiction of a company’s relative performance across its industry’s factors of competition.
Wii’s Value Curve
Wii’s strategic vision was to lower cost by reducing high-end technological features like
DVD integration, processor quality, graphics etc. but at the same time providing value to the
customer with a new revolutionary motion control stick and a gaming experience with family
and friends which also provides fitness at a lower price point. Thus, Wii’s value curve scores
high on the factors of social gaming, fitness, wireless motion-sensing controllers and price.

The Four Actions Framework & E-R-R-C Grid

BOS also defines a framework to reconstruct those buyer value elements that a company
should look across if it intends to create a new market space and hence define its strategic
logic. Called the four action framework, it explains the four key questions to be asked in
order to challenge an industry’s strategic logic and business model.
The Eliminate-Reduce-Raise-Create grid pushes companies to not only ask the four questions
but also to act on all four to create a new value curve.
 REDUCE
Which factors
Strategically should be
reduces well
reduce cost below the
industry
standard ?

RAISE CREATE
What factors What Factors
should be New should be
raised well created that
beyond the
industry
Value the industry
has never
standard ? offered ?

ELIMINATE
What factors Strategically
should be
eliminated that invest in
the consumers
don’t require ?

Wii’s ERRC Grid

We have tried to map BOS’ four action framework with Wii’s strategies to understand how
Wii has created a Blue Ocean.

Eliminate Raise
High resolution graphics Hardware accessories
DVD/HD-DVD Playback Wireless controller
Hard Disk storage Social gaming
Fitness & Sports
Backward compatibility

Reduce Create
Processing power Motion sensor controller
Graphics quality Family-friendly gaming
Online gaming Character customization
Complexity of games Active fun
Price
Three Characteristics of a Good Strategy
When expressed through a value curve, then, an effective blue ocean strategy like has three
complementary qualities: focus, divergence, and a compelling tagline.
Focus
Looking at the value curve of Wii, it is clear that the focus is on ease of use and interactive
games for groups. In contrast, Microsoft and Sony concentrated on high definition graphics
and complex games which made it very difficult for them to focus on developing motion
sensor based video games as well as consoles. Consequently, Wii could sell more appealing
group oriented games and consoles at cheaper prices than the Xbox and PlayStation 2 games
and consoles.
Divergence
On the strategy canvas, therefore, reactive strategists tend to share the same strategic profile.
In case of Nintendo Wii, the value curve of Microsoft Xbox and Sony PlayStation 2 are
virtually identical. Wii, however, pioneered the motion sensor based gameplay and brought in
the non-traditional buyer group of non-gaming women and elderly.
Compelling Tagline
A good tagline delivers a clear message to gain customers’ interest and trust. Nintendo Wii’s
tagline “Wii would like to play” delivered a clear message that it was focused on a group
based gameplay which proved to be a game changer in the industry.

6 Paths Framework

To break out of red oceans, companies must look beyond the generally accepted boundaries
that define the competition. Instead of confining themselves within these boundaries,
managers need to look systematically across them to create blue oceans. They need to look
across alternative industries, across strategic groups, across buyer groups, across
complementary product and service offerings, across the functional-emotional orientation of
an industry, and even across time. This gives companies keen insight into how to reconstruct
market realities to open up blue oceans.
Looking Across Buyer Groups
Till 2006, Nintendo had been fighting Sony PlayStation 2 and Microsoft Xbox on the
technological front. The industry was dominated by high definition graphics and complex
games. The competition was intense since low differentiation was forcing companies to lower
price of offerings. This meant that profit could be achieved only through huge sales volumes.
Nintendo found out that 2 of the biggest factors which affected the sale of video games were
the fact that parents believed that video games made children obese and isolated them from
their families and made them socially awkward.

A CDC/NCHS study shows that 18.4% of children in US suffer from obesity. 99% of boys
under 18 and 94% of girls under 18 report playing video-games regularly. In a related study,
NCOOR discovered that children and adolescents aged 8-18 years spend, on average, more
than six hours per day watching television, playing video games and using other types of
media. Hence there was a clear link between the rise of obesity and video games.
Nintendo addressed this problem by coming up with a new gaming console based on motion
capture – the Nintendo Wii. The Wii had easier games and titles appealing to older audiences.
The fact that Wii combined fun with exercise made it very attractive to the parents who were
the main buyers in the industry. Games were designed keeping the family involvement in
mind. Nintendo essentially created a new market space for itself by targeting a completely
different buyer group than the traditional gamers.
In most industries, competitors usually define the target buyer in similar terms. In reality,
though, there exists a chain of “buyers” who are directly or indirectly involved in the buying
decision. The purchasers who pay for the product or service may differ from the actual users,
and in some cases there are important influencers as well. Although these three groups may
overlap, they often differ.
In case of the video game industry, the avid gamer of age group 18-25 was the main target.
Nintendo, before Wii, targeted the “under-18” market, which represented only 1/3 of the total
market. This put a cap on Nintendo’s success, a strong differentiation from its competitors
who had a higher price but targeted an older audience with much more buying power.
Wii's target was beyond just kids, it was the whole family. The heart of Wii's strategy was
that consoles do not necessarily require state-of-the-art technology, power and performance.
It shifted its focus to providing a new form of player interaction to a wider audience. The new
Wii boosted the fun factor and made video gaming active fun.

Four Steps of Visualizing Strategy

Visual Awakening
Firstly create an “as is” (status quo or the current situation) strategy canvas of the company in
comparison with the competitors on a set of competitive factors. Then look at the factors that
need to be modified.
Visual Exploration
Venture into the field to explore the six paths to creating blue oceans. Evaluate the distinctive
advantages of alternative products and services. Use the four actions framework to determine
which factors to raise, reduce, create and eliminate. The alternative products/services in the
case of Wii were field sports played by those who wanted to stay fit. The advantages offered
were entertainment and fitness.
Visual Strategy Fair
Create the To Be Strategy Canvas based on insights from field observations. Get feedback on
alternative strategy canvases from customers, competitors’ customers and non-customers.
Use Utilize the feedback to choose the best 'to be' future strategy. The strategists at Nintendo
tried to answer the question “why aren't more people playing videogames?” Reflecting on
this question gave them two insights. The first, the game consoles in the market had become
far too complicated. Most people felt intimidated by that. And the second insight was that
most games were created for hard-core gamers, which again put people off.
Visual Communication
Distribute your before-and-after strategic profiles on one page for easy comparison. Support
only those projects and operational moves that allow your company close the gaps to
actualize the new strategy.

Expanding demand in the Blue Ocean

Another principle of Blue Ocean Strategy talks about reaching beyond existing demand. To
expand the demand, this principle says that companies should challenge two conventional
practices: 1) focus on existing customers 2) drive for finer market segmentation.
By reversing the strategic course from the above two practices, companies can maximize the
size of their blue oceans. To do this, a company should look to noncustomers. And instead of
focusing on differences, they need to build on powerful commonalities in what buyers value.
Nintendo did exactly this. It looked beyond its existing customer base and built a product that
appealed to a larger mass, thereby attracting non-gamers and casual gamers. It built on
commonalities that buyers value: ease of use, family gaming and active fun.

The Three Tiers Of Noncustomers

There are 3 tiers of noncustomers that can be transformed into customers by a company in
Blue Ocean.

Wii’s three tiers

The Wii offers the first tier a leap of value that attracts them (casual gamers), and, while the
second tier customers seem mostly unaffected, it is the third tier that was readily attracted by
the Wii. The 1st tier was attracted because of the price point and new motion sensing
controllers. Wii’s strategy also pulled in the 2nd tier customers to an extent because of the
first-of-its-kind motion controller cum active gaming. However, the 3rd tier was Wii’s biggest
pull because of the simplicity of its games, the fitness-oriented gaming provided and the idea
of playing with your family.
The Wii has even been praised for use as means of recovery as physical therapy for patients,
being prescribed by doctors to regain strength and help with rehabilitation of certain injuries.
The Right Strategic Sequence
With an understanding of the right strategic sequence and of how to assess blue ocean ideas
along the key criteria in that sequence, one can reduce business model risk. Companies need
to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.
Wii’s Strategic Sequence

The Blue Ocean Idea (BOI) Index

Microsoft Sony Nintendo
Xbox PS2 Wii

Utility Is there exceptional utility? Are there

compelling reasons to buy your offering?

Price Is your price easily accessible to the mass of

buyers?

Cost Does your cost structure meet the target

cost?

Adoption Have you addressed adoption hurdles up

front?