• Read the Nintendo Revolution case.
• Submit a short answer to each of the following items. You may repeat certain findings in one or more of the analyses at appropriate.

1. Perform a PEST or PESTEL analysis of Nintendo. Summarize that analysis in one page.

2. Perform an analysis of Nintendo's competitive environment using Porter's five forces model. Summarize that analysis in one page.

3. Perform a SWOT analysis of Nintendo. Summarize that analysis in one page.

4. Propose a basic strategy for Nintendo and explain why you think it "fits" its environment.

Satoru Iwata, president of Nintendo Corporation (Nintendo), strode from the conference room with a smile on his face. It was late 2004, and he was tremendously excited with what his engineers had just demonstrated a video game controller that was not a variation of the joystick, but rather a stubby rod that a gamer could manipulate with one hand. Not only did it enable the creation of games that mimicked real-world movements like throwing, hitting, or aiming, Iwata believed it could help open up video games to a vastly different audience than the boys and young men who traditionally bought video game consoles.

Expanding the gaming industrys customer base was key to Iwatas vision of a next-generation console codenamed Revolution. The idea was to bring tens of millions of new customers into the gaming realm, people who had never played video games before or saw them as mere toys. Iwata believed that a new take on gaming might even attract mothers an influential household constituency, thanks to their influence over household spending1 through a combination of hardware design, game-play, and price. What better way to attract them than through a controller that had a form factor similar to a TV remote control?

But Iwatas enthusiasm for the controller prototype was tempered by a number of real-world considerations. First, no other company had ever released such a controller. How would the marketplace react to such a vastly different model? Second, many of the technologies that were required to make the rod controller work such as wireless positioning might never operate perfectly outside of the lab, in peoples apartments and homes. Third, any new Nintendo controller had to be backwards compatible with games made for older Nintendo consoles like the GameCube, which used traditional two-handed controllers.

Additionally, Iwata was very sensitive to the reaction of the gaming industry and the existing gaming population to a non-traditional product aimed at a non-traditional audience. Nintendo had a long history of video game success, epitomized by the popular Mario Bros. franchise invented by Nintendos game design guru Shigeru Miyamoto in the 1980s. However, the companys last console, the GameCube, was unable to get sufficient traction after it was launched in 2001. In 2002, sales forecasts for the GameCube had been off by 44% and the company had been forced to cut revenue targets by 100 billion.2 Gamers much preferred Sonys PlayStation 2 console and Microsofts Xbox console,3 which were characterized by flashy graphics and hardcore fighting and sports titles. Iwata needed a home run to put Nintendo back on its feet. Could the Revolutions radical hardware design help turn the companys fortunes around?

History of Video Games 1960s-1970s

Video games have been around since the early 1960s. In 1962 MIT students Steve Russell, Martin Graetz and Wayne Witaenem developed Spacewars, the first video game. Spacewars marked the first time that computer graphics were used in a game. It quickly gained popularity among hackers and computer geeks,4 but never had a mainstream audience, owing to the fact that most people did not have computer access.

In the late 1960s, Alan Kay developed the Dynabook, an early personal computer, which was targeted at children. The Dynabook concept set the stage for both the PC and computer game revolutions in the 1970s.5 The first game console was the Magnavox Odyssey, developed by engineer Ralph Baer as a side project in 1972.6 The following year, U.S.-based Atari launched a simple table tennis game called Pong in the United States, which could be hooked up to a TV set.7 It was a hit. In 1977, the company released a more sophisticated game console, the Atari 2600, which let users load different games into the system using rectangular cartridges. It was an even bigger hit, selling more than 30 million units. Japanese companies took notice. In 1977, Nintendo released a Pong knockoff called Color TV Game 6 (6 referred to the number of variations of the game that players could select). It sold more than 1 million units.9 In 1978, Taito launched an arcade game called Space Invaders. The game, designed by Tomohiro Nishikado, was one of the first video games to feature shooting, and helped expand the video game industry from a novelty to a global industry.10 In 1980, Atari licensed the game from Taito, which greatly boosted the 2600 consoles sales and audience size.

Global Expansion

Ataris business model licensing titles, commissioning developers to write games, and developing other titles in-house was not sustainable, especially as the 2600 consoles 1977-era technology became dated. As it faded in the early 1980s, Japanese companies took the lead in developing gaming hardware and software for both mobile and console systems.

In 1980, Nintendo launched Game and Watch, which was the first handheld game device inspired by an LCD calculator and digital watch.11 Later in the decade, the company would release the Game Boy, which dominated the hand-held gaming market for years.

Nintendos console foray was even more successful. It developed the Famicom (short for Family Computer) in Japan in 1983. Titles such as Mario Bros. and a console version of the arcade hit Donkey Kong made the Famicom hugely popular in Japan. In 1985, Nintendo released the Famicom worldwide as the Nintendo Entertainment System, or NES.12 (See Exhibit 1.) The NES console had a different exterior casing than the Famicoms, but the components inside were nearly identical. It was a runaway success, selling 62 million units worldwide.

Key to Nintendos success was the companys control over third-party software developers. Nintendo encouraged third-party developers to create games for the wildly popular NES, as long as they agreed to produce no more than five games per year, and not produce titles for any other console system for two years.14 Nintendo would manufacture approved titles on NES-compatible game cartridges and sell them back to developers, who would then market and distribute the games. The system encouraged the development of innovative new titles and more NES sales. By 1989, video games were a $3.4 billion market in the United States, and Nintendo claimed a 79% market share. Nintendo wasnt the only company to profit. Several American game studios grew very successful businesses creating games using the Nintendo model until lawsuits from shut out developers and an antitrust investigation forced Nintendo to discontinue exclusivity requirements.16 Nevertheless, the third-party developer model was established as an extremely profitable and effective way to sell games and consoles.