INTRODUCTION

Nintendo and Sega had been the giants in the videogame industry throughout the 1980s. During this period, the two competitors engaged in fierce rivalry that was labeled the ‘Videogame Wars’ The fight was intensifying, with Sega recently winning some crucial engagements in the bottle of the market share.

The videogame wars were taking a new dimensions in 1995 as ‘new generation’ game players were being released wordwide by Nintendo, SEGA’s, Sony Corp’s Playstation, joining 3DO’s Interactive multiplayer and Atari Corp.’s Jaguar already on the market. Not all of these game players were expected to win a big enough market following to survive. The challenge for the competitors was getting limited self space and lining up software developers. But Nintendo and SEGA compete strightly to have more portion of the wordwide market. They follow each other to watch the developments.

We briefly explained Sega and Nintendo profiles to understand their capacity in the past and their developments to have a big market share in the entertainment world.

NINTENDO COMPANY, LTD.

Nintendo background in 1994 was one of the word’s largest hardware manufacturers and software developers for interactive entertainment. Nintendo was credited reviving the videogame industry after collapsed in the early 1980s due to the weight of too many bad games(such as ATARI’S ET), poor marketing, overproduction.

In order to learn what kids really want. Nintendo sent its representatives to video arcades around the country to learn why youg people went to arcades rather than playing at home free. Nintendo understood that arcades-quality, full animation, imaginative play of the arcade games that the videogames providers attract the kids. Therefore, introduced a game system, a sophisticated device with the power of personal computer, able to reproduce near arcade quality games on the home screen.

Nintendo’s new machine was its Nintendo Entertainment System (NES). In 1985 when NES was introduced , $1.1 million units were sold. At the end of 1988 Nintendo sold $1.7 billion of the $2.3 billion videogame business. During the most of the 1980s, Nintendo was in the leader in the videogames industry, controlling 80 percent of the market at the end of the decade. By 1994 Nintendo market share declined to about 45 percent.

SEGA ENTERPRICES, LTD.

SEGA considered itself a leader in interactive digital entertainment media, with operating on five continents competing in three core business segments:

· Consumer products

· Amusements center operations

· Amusement machines

SEGA produced both hardware and software in these areas. Since 1989 SEGA increase its sales from $800 million to $4 billion in fiscal year 1994. Both Nintendo and SEGA have equal market share in US. In Europe, SEGA had more than 66 percent market share than Nintendo. SEGA increased its market share all over the word by Hayao Nakayama president of SEGA had the leadership and strength position in the industry. He had been an American style decision making manager.

To catch Nintendo they decrease the price 25 percent to $149, recruiting software developers to create new games, and accepting lower royalties, sometimes 15 percent below Nintendo’s. The strategy works. SEGA managed to cut Nintendo’s 90 percent market share in 1990 and to about 50 percent in 1993, increasing its own market position from 7 percent to almost 50 percent in the process. SEGA’s US sales increased from an estimated $280 million in 1990 to more than $1billion in 1994.

QUESTIONS AND ANSWERS

Q1) What is Nintendos’s Strategy? What is Sega’s Strategy? Who Has The Best Strategy?

Nintendo is the market leader during 1980. However, SEGA started to gain a market share in the word market. Nintendo search and develop new strategies. Nintendo started paying companies to write softare programs exclusively for it. Nintendo also increase the amount spent inhouse game development and production from its current 35 percent sale of software sales. Leo Burnett USA, a Chicago ad agency, was selected to design Nintendo’s first ad compaign in order to increase sales. Nintendo reversed its strategy of not selling videogames directly to the video rental dealers. With the video rental business representing $1 billion a year, Nintendo decided to be a competitor in that segment as well.

Nintendo avoided rental business in years past because it did not collect royalties on each rental transactions. However, as the law prohibiting royalty arrangements was to expire in 1997, Nintendo hoped to collect royalties on game rentals. Nintendo announced a formation of an alliance with GTE interactive media to develop, market, and distribute over telephone lines into interactive television sets.

Nintendo introduced better software titles, including “Donkey Kong Country” Nintendo also softened its opposition to the depiction of the violence in Nintendo-licensed videogames. The company began manufactured in China in order to gain access to that large and new market and opened two subsidiaries in Spain and Australia.

SEGA’s main aim is to build an entertainment empire. To achieve this goal, SEGA had adopted technolojy oriented strategic plan that focus on acquring and maintaining competitive advantage in such fields as multimedia, computer graphics, virtual reality, and high-tech amusement theme parks. SEGA had spent on R&D in multimedia and audiovisual products. The company had approximately 850 employees working on interactive amusements for homes, arcades, and theme parks representing the highest R&D in the industry.

SEGA made an alliance with AT&T in communications, Hitachi in chips, Yamaha in sound, JVC in game machines and potentially Microsoft in software. SEGA produced its popular videogame software available for PCs equipped with CD-ROM drives.

SEGA compete in both home and arcade games. It was able to develop expensive technology for arcade machines as then transition the technology to home machines as the price of the computer chips fell. Additionally SEGA planned to move beyond auto racing and action games, at which it excelled to more multimedia entertainment featuring full motion video drama, and characters besides Sonic that could be as popular as Mickey Mouse.

SEGA built SEGA Club, a vehicle for marketing its games to nearly 32 million children aged 3 to 11. SEGA’s objective was to be an industry leader. Its aim to increase market share in Japan by increased ad, more extensive marketing. The company planned to increase mareket share in local Europen markets, to improve sales.

SEGA saw Asia as a high potential market and a center of manufacturing. The company produced all of its videogames in Japan with subsidiary of Hitachi Ltd. Localizing in Asia, was expected to increase ratio of non-manufacturing, lower costs and decreased the fluctuations in yen, imported some of the goods to lower the costs.

SEGA’s future strategy aimed at capturing $6 billion U.S. theme park market. Small theme park that combined high-tech amusement center machines using state-of-the-art computer graphics.

They want consumers to spend their time and money with SEGA entertainment when they are out of home aand when they are inside home. They want to provide entertainment that we would rather do with them than any of the alternative forms.

SEGA hasthe best strategy because SEGA is the market leader and make more R&D to becomea better position and protect its market share. Therefore SEGA is more creative than Nintendo. It has better marketing, production strategy than Nintendo. SEGA can understand the needs of the customer and enlarge their market by competed both home and arcade games. It spend lots of hour and money on multimedia, computer graphics, virtual reality, high-tech amusement theme parks. Nintendo is market follower. It watch the developments that SEGA made closely.

Q2) What Are Nintendo’s Strengths and Weaknesses? What Are The Opportunities and Threats?

In the early 1980, Nintendo entered deeply the videogame industry due to the many bad games, poor marketing, and over production. It was a good time to enter this industry since competitors were not strong. Customers & the market needed that company. Furthermore, Nintendo made research why young people went to arcades rather than playing at home free. What they discovered set the stage for the eventual Nintendo-led recovery of the video game industry.

Nintendo’s machine called as its Nintendo Entertainment System(NES). Nintendo sold and controlling 80 percent of the market share but it decrease about 45 percent and was expected to further decline as SEGA continued to increase.

Nintendo started to develop new strategies to prevent this reduction. It pid more money to companies to write software exclusively. However it paid a lot for this and SEGA could write their own software programs and SEGA made alliances with Microsoft. That is more cheaply.

Other companies embraced CD-ROM technology, Nintendo stayed out of multimedia business.

SEGA provided itself a big opportunity by using CD-ROM, virtual reality, multimedia options.

SEGA ran comparative ads in 1990 disparaging Nintendo’s software as “games for ninnies” Nintendo did not respond, “allowed SEGA to brand our games as children toys. It was a serious

mistake”

Nintendo started to make TV ad campaign. Previously It had limited only to its own magazine. It started to enlarge market. However, it was too late. Also Nintendo reversed the strategy to sell videogames directly to the video rental dealers.

Nintendo was closely watching the developments of SEGA’s TV channel and Nintendo made an alliances with GTE interactive media to develop, market, and distribute videogames over telephone lines into interactive television sets.

Nintendo introduced better software titles to attract customer’s attention such as ‘Donkey Kong Country’. Nintendo entered and began manufacturing in China to increase market and opened two new subsidiaries in Spain and Australia.

In 1995 Nintendo introduced new low priced virtual reality game system in USA and Japan called as Virtual Boy which is portable, table-top unit but it did not connect to a TV.

Q.3) What strengths and weaknesses does Sega have? What are its opportunities and threats?

Their strong vision is one of the biggest strengths that they have; “ to build an entertainment empire”, that is very motivating statement that encourages people to always fight for the best position in the industry. Thomas Kalinske, new chief executive of SEGA, is expressing their goal “ I don’t think we should be happy until there are more people using our products than sitting down to watch Melrose Place and Beverly Hills 90210”. It is clear that their ultimate goal is being number one and they agressively work for it.

They are making huge amounts of investment in R&D, in an industry like video games it is an obligation and they are doing it much better than Nintendo. It is a result of their strategy of “being first at all costs”, so they can get benefits of being first mover and making innovations that will result more increase in their market shares. Their market share in Europe is %66 and equal with SEGA in USA that is an another strength of them.

Besides of them SEGA’s drive to achieve of industry dominance led the company to make alliances with AT&T in communications, Hitachi in chips, Yamaha in sound, JVC in game machines, and Microsoft in software; that results movie like sound and visual effects.

While Nintendo competed in only home games, SEGA is competing both home and arcade games. That will help them to reach more users, by market development. Also by means of that, SEGA is able to develop expensive technologies for arcade machines as then transition to home machines as the price of chips fell.

SEGA Club, a vehicle for marketing its games to the nearly 32 million children aged 3 to 11, that is an strategic move into more general multimedia entertainment.

More popular games usually are the ones which includes sex and violence. Nintendo is very conservative about them, they never use them in their games. However, SEGA by using a rating classification system, includes them in their games which are available for people above 17 years old, it also increase their users.

Their major weakness is about finance. Although their sales are increasing their profits and income is decreasing in the 1994. SEGA’s cost of goods sold and other expenses is higher than Nintendo. They must conduct their expenses. Also their market share in Japan far behind Nintendo’s commanding %90 market share because of its sports oriented games were not popular and because of distribution problems.

Their most important opportunity is the small parks they want to build. They will be combination of high-tech amusement center machines using state of the art computer graphics with virtual reality technologies to fully engross players in the games environment. And they expect gross margins above %30.

Their another opportunity is increasing their market share in Japan by combination of new products, increased advertising and more extensive marketing.

The threats that will face are; increased number of competition so decreasing profit margins, increasing expenses because of their strategy, they have no experience in running amusement parks, and parents that have negative attitude toward SEGA because of games contain sex and violence.

Q.4) Who has the strongest position?

SEGA has the strongest position. The industry they compete in is very dynamic and Nintendo’s strategy “ wait and see” results in loosing their market share to SEGA. And although SEGA’s ‘ first at all cost “ has some risks, it is their key element of success. SEGA is more creative, more innovative, more aggressive, has better and more marketing efforts to capture market share, has more market share, has alliances with some industry leaders to make perfect games and they are always looking for new opportunities like high-tech amusement parks. If they won’t face with financial problems they will be the exact winner of this war.

5-) Which of the two competitors has turned in the best financial performance over the past two years?

First of all both of them were suffered an unexpectedly sharp appreciation of the yen against other major currencies during years 1994 and 1993. The strong yen caused the increase in the cost of sales and also difficulty in the foreign markets such as US and Europe.

When we analyze Nintendo, although they sold more video game cartridges than any previous years, their consolidated net sales fell 23.5%. As can be seen from the “Financial Comparison” figure, their operating income declined 35.31%. But they managed to decrease cost of good sold by 23.19%. Net income of Nintendo was $860,281 in 1993, then fall to 511,198 in 1994, by 40.58%

The financial situation of Sega in years 1993 and 1994 was also bad. When we analyze their data, we can clearly see that their net income decreased 58.89% from 264,463 to 108,725. Surprisingly, their sales were increased 12.83%. But they could not able to manage their cost of good sold. It increased 26.71%.

In the light of these data, it can be said that, Nintendo was better than Sega. Because, Nintendo has a total sale of $4,714,675 and a net income of 511,198. But Sega has a total sale of $4,038,197 and a net income of 108,725. Thus, Nintendo earned 11% from their sales whereas Sega has a profit of only 3%.

These analyses were based on their financial data. But Nintendo was following a stability while Sega was highly investing in the future. It will be not a surprise that Sega will be successful in the financial situation by their returns from their current investments on multimedia games, CD technology and the theme parks.