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Subject: Video Game System Industry Analysis

Date: June 27, 2010

To: Professor Ford From: Matthew Roetting

Nicole Huber

Kyle Lubbers

Nanette Brames

Billie Heilman



As requested, an industry analysis for video game systems has been conducted. In this report, we have evaluated the attractiveness of this industry in terms of the potential for sustained profitability over time. The main focus throughout the analysis is Michael Porter’s five forces model and how they relate to the history and future of video game systems.

Industry Analysis for Video Game System Industry

Industry Name. Video game systems are the industry that is going to be analyzed throughout this report. The scope is going to be the three major system producers: Microsoft, Sony, and Nintendo and only the newest systems available on the market. Not included in this analysis are the games that are played on the varying systems.
Industry Classification. The North American Industry Classification System (NAICS) code for video game systems is 339932 titled Game, Toy, and Children’s Vehicle Manufacturing.1 Yahoo Finance categorizes the sector for Sony as consumer goods and the industry as electronic equipment. For Microsoft, they are in the technology sector where the industry is application software.2,3 Since Nintendo is not publicly traded in the United States, they are not classified under Yahoo finance, however are classified under other products in the Tokyo Stock Exchange.4
Output Description. The video game console is the product that defines this industry. The machines considered throughout this report are: Microsoft’s XBOX 360, Sony’s PlayStations 2 and 3 as well as their PlayStation Portable (PSP), and Nintendo’s Wii and DS.5 These are not the only consoles still available on the current market, however, are the latest produced, thus are the basis for this entire report.

Geographic Scope. Microsoft is home-based in Redmond, WA; Sony is based in Tokyo, Japan; and Nintendo is based in Kyoto, Japan.6,7 The following pie charts represent the geographic markets the video game systems primarily serve.8
Figure 1: Geographic Markets for Video Game System Industry as a Whole

A more specific way to breakdown the geographic scope of our industry is to break the preceding pie chart into individual competitors. The following series of pie charts represent the geographic scopes of Microsoft, Sony, and Nintendo individually.9 An interesting observation is that the geographic breakdown of Nintendo is the same as the industry breakdown shown above.

Figure 2: Geographic Markets for Microsoft, Sony, and Nintendo Individually




Supply Chain. The following diagram is the supply chain for video game systems. In a sense vertical integration exists in this industry because the three video game competitors fall under two steps in the supply chain: development and design and storage and warehousing as seen in the figure. 10
Figure 3: Supply Chain Distribution

Development and Design



Manufacturing and Production



Storage and Warehousing




Best Buy


Game Stop

Individual consumers purchase the systems

Industry Size. For our video game system industry, size is measured in annual output (specifically in units). In the following table, we have broken down the number of units sold for each of the three competitors, Nintendo, Sony, and Microsoft in millions; as well as provided output over a three year span: 2006, 2007, and 2008.11 It is pretty obvious from the table that the amount of video games sold over the three years has increased steadily. This is due to increased demand of the systems and expansion into different markets.

Table 1: Annual Output in Millions for the Three Competitors





















Market Value. The market value of the video game console industry has been growing very rapidly and is expected to continue this trend in the future. As of 2005, the estimated market value of the industry was $29 billion. Analysts predict that in 2011, the market value will have grown to $44 billion and will only continue to thrive.12
Age. The video game system industry had their major debut in 1967 when the first console, called The Brown Box, was introduced by Ralph Bare. Since then there have been dramatic improvements and innovations throughout this industry’s history and it will continue to grow in the future. The following timeline lays out the major breakthroughs that have occurred in this business and shows how video games have evolved over the last 43 years. 13

Figure 4: Video Game System Timeline











Nintendo 64 is released marking the last console to use cartridges.

Mattel releases the Intellevision to challenge Atari.

Atari sells the first home version of Pong.

The Super Nintendo is released.

The Nintendo Entertainment System is released in the U.S.

Atari releases the 2600 SPACE VCS. This is the first console that can play multiple games.

Magnavox begins production of the first commercial video game console, The Odyssey.

The first video game console was called the brown box and was designed by German born Ralph Bare

Nintendo introduces the first Game Boy. Sega also introduces the Sega Genesis.

Sony releases the PlayStation 1.

The Sega Dreamcast is introduced by Sega.

Sony releases the PlayStation 2.

Microsoft enters the video game system industry with their introduction of the XBOX.

Nintendo releases the new Game Boy Advance.

The Nintendo DS is released.

Sony releases the PlayStation Portable (PSP) to challenge Nintendo’s dominance in the handheld gaming market.

Mass release of the Nintendo Wii, Sony’s PlayStation 3, and Microsoft’s XBOX 360.

Industry Life Cycle. Since the video game system industry has been around for a while and still continues to evolve and grow, it is practical that they are in the maturity stage of the product life cycle. As noted earlier in the timeline, this industry probably peeked in the maturity stage in 2006 when the following games were all introduced around the same time: Sony’s PS3, Microsoft’s XBOX 360, and Nintendo’s Wii. The follow diagram represents the four phases in the industry life cycle and highlights visually where the video game system industry lies.14

Figure 5: Industry Life Cycle

Video Game Systems

Competitors. As noted in earlier sections, there are three competitors in the video game systems industry: Microsoft, Sony, and Nintendo. Microsoft is home-based in Redmond, WA; Sony is based in Tokyo, Japan; and Nintendo is based in Kyoto, Japan.15,16 Microsoft was founded in 1975, Sony in 1946, and Nintendo in 1889 originally as a playing cards company by Fusajiro Yamauchi.17,18 One way to calculate the market share of the three competitors is to determine how much of the market each individual console produced by the three companies holds. The following pie chart represents this for the year ending in 2008 and includes the six major consoles presented throughout this analysis.19

Figure 6: Market Share of the Six Leading Video Game Consoles in 2008

When combining the market shares of the consoles produced by the same company we come up with the following market share figures in the next pie chart for the competitors as a whole. It is interesting to note that Nintendo controls well over half of the video game system industry.

Figure 7: Market Shares of the Three leading Video Game Competitors in 2008

Financial Data.

Table 2: Video Game System Industry Revenues

Worldwide video game industry revenues
(in billions)



% Change












This chart shows worldwide video game industry sales from 2005 through 2008. We felt like this was a very important piece of information because it clearly shows how this industry has changed over the years. As you can see, revenues have been significantly increasing and we believe that they will continue to increase for years to come.20

Table 3: Number of Employees for the Gaming Industry

U.S. Video Game Industry Employees



% Change









This second chart shows U.S. video game industry employment from 2006 through 2009. As you can see as well here, there has been a significant increase in jobs in this industry especially from 2006 to 2007. We feel that these numbers will continue to increase which is great for the industry, but even greater for the U.S. as unemployment continues be a major economic issue in our country.21

Key Trade Groups. The Entertainment Software Association (ESA) is the U.S. association exclusively dedicated to serving the business and public affairs needs of companies that publish computer and video games for video game consoles, personal computers, and the Internet. The ESA offers a range of services to interactive entertainment software publishers including a global anti-piracy program, business and consumer research, government relations and intellectual property protection efforts. The ESA also owns and operates the E3 Expo. The E3 Expo was recently held June 15-17 in Los Angeles. If you go to, you can check out their reviews for new Microsoft, Sony and Nintendo games that were just released, as well as trailers and much more.22

Key Trade Publications. In recent years there has been a growth in the amount of journalism based on the video game industry. The Internet has allowed serious gamers to begin blogs and websites discussing video game news. Therefore, it can become difficult to recognize the publications that are reputable. However there are a couple that seem to receive consistent recognition in the industry. The first magazine to cover the video game industry is Play Meter Magazine and it is still in publication today.23 Game Developer is a monthly trade periodical and is distributed to approximately 35,000 readers.24
Force 1: Intensity of Rivalry

According to Michael Porter, “rivalry occurs in an industry because one or more competitors either feels the pressure or sees the opportunity to improve position.”25 Many times organizations are mutually dependent of each other, meaning competitive tactics performed by one firm have highly noticeable effects on their close competitors, thus this may spark efforts to counter the move (Porter 17). There are two main forms of rivalry: price based and non-priced rivalry. The concentration of an industry can be assessed by calculating the CR4, the concentration ratio of the 4 largest firms, and the herfindahl index. Specific assets, stability of demand, product differentiation, and buyer switching costs are all factors that can increase the level of rivalry in an industry.

Price-Based Rivalry. As with most technologies, the prices of video game systems are decreasing. This is typical for this industry, because when a new system hits the market it is priced incredibly high due to consumers’ excitement about the newest product innovation. However, once that system has been on the shelves for a considerable amount of time, the price decreases in order to keep the sales level high. The following table represents the beginning prices of the three original systems introduced in 2006: Sony’s 20GB PS3, Nintendo’s Wii, and Microsoft’s 20 GB XBOX 360. Also included are the prices for the same systems in 2007 and 2008.26,27,28
Table 4: Prices for PS3, XBOX 360, and Wii from 2006-2007






PS3 20 GB




XBOX 360 20 GB








An important note to make is that most of the original systems were discontinued after a short period of time and replaced with consoles that had higher gigabytes of memory. This is the major contributing factor to the reduced price over the following years. Another factor that needs to be considered is the fact that every retail store offers different prices depending on whether or not they are offering discounts, so the prices listed above are just an estimate of what the consoles were going for on average during that three year period. Notice that the price of the Wii remained pretty constant over the three year period. The company claims that they are selling every Wii system that they produce and thus said, “We'll stay at $249 for the foreseeable future.”29

Non Price-Based Rivalry. The main non price-based rivalry occurring in this industry is product innovation. Each producer wants their product to be most up-to-date technology on the market. An example of this is both Sony and Microsoft are coming out with motion based controls in order to compete with Nintendo’s Wii.30 As in all industries, quality improvement is also a major non priced-based rivalry tactic used by video game system makers in order to ensure consumers are fully satisfied with their end product.
Industry Concentration. As displayed in the following table, concentration for the video game system industry is very high.31 Since this is only a three company industry, it is impossible to calculate the CR4. Therefore, we will use the herfindahl index. If the herfindahl index is greater than 1800, then it can be assumed that the potential for rivalry is reduced. It is evident in our HI calculation of 4,502 that the preceding statement is true for the video game system industry.

Table 5: Amount of Video Game Systems sold in 2008 for the Three Competitors


Units Sold (in millions)

% Share of Units Sold













Herfindahl Index: 4,502

Herfindahl Index= 10,000 (Σ Si2)

= 10,000 (.592 + .302 + .112)

= 4,502
Specific Assets. Given that all video game system production is outsourced, there is no need for the companies in this industry to possess a large amount of specific assets. The firms, however, do have regular operating assets such as warehouses to store the finished products before they are shipped, office space, and knowledgeable employees to keep the business operating.

Stability of Demand. The stability of demand for this industry is high and is forecasted to continue to grow in the future. According to a series of new reports from DFC Intelligence, “The worldwide video game and interactive entertainment industry is expected to grow from about $29 billion in 2005 to as much as $44 billion in 2011. This forecast includes revenue from video game hardware and software, dedicated portable system hardware and software, PC games, and online PC and console games.”32 Capacity additions will not be necessary for this expected growth in the coming years, because all production is outsourced. The companies will, however, need to consider investigating into more suppliers in order to match this upcoming demand.
Product Differentiation. Inside this industry there is a great deal of product differentiation between the three competitors. Some of the distinguishing features include the physical looks of the console, the image quality of the games, and the ability to play other electronic media. For example, the Sony PlayStation 3 can play blue-ray disks and DVDs, whereas, the Nintendo Wii cannot. Since the three competitors all produce different features, this product differentiation factor also reduces the level of rivalry in our industry.
Buyer Switching Costs. Switching costs for this business are relatively high for two reasons. The biggest switching cost to consider is the fact that when a consumer wants to switch to a new system, they have to buy a whole new console and all of the necessary controls and accessories that go along with the new system. The following diagram lays out all of the expenses that were necessary to buy the latest consoles introduced in 2006 and shows how expensive switching from one console to the other can be.33
Figure 8: Switching Costs between Consoles in 2006
The second issue that arises with switching systems is the games that go along with it. Competitors have their own games that can only be played on that specific system. Thus these two switching costs reduce the level of rivalry dramatically, and encourage consumers to steer towards one particular system maker.
Summary of Intensity of Rivalry. After taking all of the preceding factors into consideration, we can conclude that the video game system industry has reduced rivalry, and thus based solely on this single force, has the potential for increased profits. The biggest factors that lead us to conclude this is the fact that there are only three competitors in this industry making the herfindahl index really high, the fact that product differentiation exists, and the high switching costs associated with the changing consoles.
Force 2: Availability of Substitutes.

Recognizing a substitute product requires identifying products that perform the same function as the product of the industry. When an industry has a low threat of substitute products the result is that the industry appears to be more attractive which in turn increases profit potential. A high threat of substitute products has the opposite affect; the industry becomes less attractive and decreases profit potential. In April 2010, the video game industry suffered a 37% loss year-over-year.34 The question to ask becomes did a portion of that lost market share go to a substitute product? In analyzing this question, we will focus on the usage of personal computers as a video game console. We will also discuss the effect the Iphone/ITouch/IPad has had on handheld gaming devices. Finally, we will consider the switching costs associated with choosing a substitute to a video game console.

Personal Computers. In 2003, according to the US Census Bureau, 61.8% of households had a computer.35 Further, the Entertainment Software Association has reported that computer game software sales totaled $701.4 million.36 While this number pales in comparison to the $8.9 billion in game console software, it has the potential to become a real threat should the industry begin to shift.37 One such factor that could give PCs the potential to steal market share away from the gaming consoles is the recent announcement by Valve to release its Steam content delivery platform to Macintosh operating systems.38 Previously the Steam platform was used solely for Windows machines. By expanding it to Macintosh-based machines, Apple computers will become a more viable option for gamers to consider. Considering Apple’s recent increases in the market share of personal computers, in particular premium priced units, their chances for success as it relates to video games should be promising.
Handheld Devices. When the IPhone was originally released in 2007 no one considered the impact it could have on handheld gaming devices. Recent statistics, however, show that the IPhone is a force to be reckoned with when it comes to using it as a gaming device. Since July 2008 over 30,000 games have been released in the IPhone App Store.39 By 2009, Apple was responsible for the sale of 19% of all portable game software, which is an increase of 5% from their 2008 numbers.40 Apple is clearly taking market share away from Sony’s PlayStation Portable and the Nintendo DS. While Apple’s numbers have been rising, Sony and Nintendo have dropped. In 2009, Sony reported a 9% drop and Nintendo reported a 5% drop.41 With the recent introduction of Apple’s IPad, it is believed that the situation for Sony and Nintendo will worsen.
Switching costs. Determining the threat of substitution can also be done through analyzing the amount it would cost the consumer to switch to one of the strategic substitutes mentioned above. For the video game industry the cost to switch to a substitute product would be relatively low. Since a large portion of US households already own a computer and games are readily available on most computers via existing software or the Internet then a consumer could easily decide to just use their computer versus investing in a gaming console. Furthermore, consumers may be more likely to purchase an IPhone over the PlayStation Portable or the Nintendo DS because of the multiple uses the IPhone offers.
Summary of Substitute Effects. It appears that the video game industry is certainly losing ground to substitute products. The efforts being made to make gaming on a personal computer more attractive will make a dent in the market shares of the big three video game console manufacturers: Sony, Microsoft, and Nintendo. Also, the recent introductions of the IPhone 4 and the IPad along with their multi-use platforms could persuade consumers away from handheld gaming devices. Further, consumers do not have to be overly concerned with the switching costs associated with choosing a substitute product. All of these factors make the overall threat of substitutions for the video game industry high, which makes the industry look less favorable and decreases profit potential.
Force 3: Bargaining Power of Suppliers
Supplier power refers to the ability for suppliers to exercise control over participants in an industry. When the bargaining power of suppliers is strong, industry profitability is negatively affected. There are several factors that need to be considered when the determining the bargaining power of suppliers such as supplier size, concentration, substitutes, inputs, and the threat of forward integration.
Supplier Overview. In this industry the suppliers handle all the manufacturing of the gaming consoles and some of the big ones are Foxconn, Flextronics, ASUStek. Sony, Microsoft, and Nintendo rely heavily on their manufacturers in order to meet the intense demand of customers.
Supplier Size. The suppliers in this industry are relatively larger than other various industry suppliers. Foxconn for example has been associated with manufacturing for Sony, Microsoft, and Nintendo as well as other big electronic companies such as Apple.
Supplier Concentration. The suppliers in this industry are very concentrated to ensure consistency with the manufacturing of the gaming console. This will allow a better relationship between the suppliers and the companies in our industry.

Supplier Substitutes. There are some alternative suppliers in this industry, however as we mentioned above, our industry tries to maintain good relationships with fewer suppliers. Even though this may decrease potential profits, we feel that product quality is increased which would then increase customer satisfaction.
Importance of Supplier Input. The suppliers depend on the design offered by the big gaming producers like Sony, Microsoft, and Nintendo. The suppliers then manufacture the gaming console as well as provide feedback on how to be more efficient and cost effective.
Threat of Forward Integration. Even though the suppliers have the manufacturing know how, we feel the threat is very low because Sony, Microsoft, and Nintendo have already established themselves as brand leaders in this industry. The suppliers also don't have the design process nor do they know what the customers want.
Summary of Supplier Power. A +/0/- rating will now be given to each of the findings I just explained. Supplier size (+), supplier concentration (-), supplier substitutes (-), importance of supplier input (+), threat of forward integration (+). Supplier concentration and supplier substitutes both got a negative because a good relationship has to be made in order for the console manufacturing to be successful and go according to plan. The rest got a plus because we feel they are very aspects of our industry. Overall I would give this force a (+).
Force 4: Bargaining Power of Buyers.

Buyer power refers to the ability for buyers to exercise market power over sellers. Porter initiates that “buyers compete with the industry by forcing down prices, bargaining for higher quality services, and playing competitors against each other” (Porter 24). When the bargaining power of buyers is strong, the industry profitability suffers.

Buyer Overview. The main buyers of game systems are retail businesses. With all the new technology that is being integrated into the games, growth of players in every age group is expected to continue to rise. According to Jesse Schell, instructor of entertainment technology at Carnegie Mellon University “There are games now for pretty much every age, every demographic. More and more women are going online. It comes down to everybody is playing games. Games are just evolving like species in order to fit into every little niche of our lives.”42 Some industry facts for gamers from the United States alone, is as follows:43

  • 67% of American households play computer or video games.

  • 34 is the average age of a game player and he/she has been playing games for 12 years.

  • 40% of all game players are women.

  • 33% of women game players are over the age of 18.

  • 20% of game players are boys age 17 or younger.

  • 26% of gamers are over 50 years old.

  • 48% of games sold in 2009 were rate “E” for Everyone.

  • 63% of parents believe games are a positive part of their children’s lives.

Buyer Size.

  • 250 million video game units were sold in 2009.

  • 41% of Americans have purchased or plan to purchase 1 or more games in 2010.

The bargaining power of customers will be low. Retail stores usually supply all available video consoles and locate them in convenient areas for consumers to view.
Switching Costs. Retailers will not have any switching costs between the industry products. The consumers will have switching costs in changing game systems, since games can only be played on the system that they were created for.
Availability of Full Information. Information on our industry with regards to what options and games is available to our customers from each supplier.
Threat of Backwards Integration. We would not have to worry about a threat of backward integration from our retailers.
Summary of Buyer Power. After taking all of the preceding factors into consideration, we can conclude that the video game system industries consumers have little bargaining power. But, we must remember that factors change with time and company strategies. This can cause the power of buyers to rise and fall. The biggest factor that lead us to conclude this is the switching costs of the consumer. They may have a lot of games for their system they already have, but switching to a new system means that the games they previously had will not work in their new system.
Force 5: Threat of Entry

Every industry has circumstances that create disadvantages for new competitors attempting to enter the market. According to Porter, new entrants bring new capacity, the desire to gain market share, and often substantial resources (Porter 7). When barriers to entry are high, then the threat of entry is low. Economies of scale, product differentiation, capital requirements, access to distribution channels, excess capacity, the learning/experience curve, and government policy are all aspects of entry that need to be analyzed for our industry.

Entry decision model?
Economies of Scale. According to Porter “Economies of scale refer to declines in unit costs of a product as the absolute volume per period increases (Porter 7).44” He also states that “Economies of scale deter entry by forcing the entrant to come in at a large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage (Porter 7).” Both of these scenarios are far from desirable. In the video game system industry economies of scale do play a large role, especially since all production of the systems is outsourced. The more units one of the big three game console producers orders from their suppliers the better price deal they will get. Since this industry is so concentrated and the organizations in it are so large it would be very difficult for a new company to come in and steal a good deal of the market from them. In order for this to happen the new company would defiantly need a vast amount of resources. An example of this would be when Microsoft entered the video game system industry around ten years ago.45 Nintendo and Sony had been around a while but since Microsoft had endless amounts of cash to put into the project, and also knowledge of computer games, they were able to make it and become a serious competitor. After looking at this example it is probably safe to say that the most realistic threat of new entrants will come from already existing technology companies that want to expand their business portfolio.
As seen earlier in the memo as time, sales, and units produced increase the price of a particular system will decrease. This is a clear sign that economies of scale are being utilized in this industry and it will make potential entrants rethink their decision. Even if they have the money and know how to get started they may come to find that the opportunity cost of entering this already well defined industry will be much higher than pursing other endeavors.
Product Differentiation. Porter states that “differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties (Porter 9). Many new entrants incur massive start up costs in order to try to build their own brand and make customers change their loyalty from one product to another. In many cases new companies are never able to recover these costs and eventually fail. In the video game system industry each company is known for its own specialty. Nintendo is renowned for its touch screen on the DS and its motion sensing controls on the Wii. Sony has always been well known to have the best graphics on its PlayStation Portable (PSP) and the PlayStation 2 and 3 gaming systems. Microsoft’s Xbox 360 is well regarded for having the best online gaming network. 46 There are many people who will only play one of these systems because they are partial to one of the specialties mentioned above. A new entrant would have to pour a hefty amount of time and money into research and development in order to try produce something that would be popular enough to break these brand loyalties, and then who is to say they will even come up with anything. This will defiantly be a factor new entrants will have to consider.
Capital Requirements. In the video games system industry since all production of the consoles is outsourced to manufacturers outside the company the majority of major capital expenses would be for warehousing, office space and equipment, and research and development47. The most important of these costs would be research and development. That is what can turn a good game system into a great one. For a new entrant in the industry with little previous experience this could be a big turn away because of the amount of money needed to really develop a state of the art system. A new entrant could also decide to go against the grain and manufacture its own products, but this would only put them at a disadvantage to their competitors because they would be spending too much on equipment when they could be spending it on research and development to make a better product48. It seems that the costs mentioned above may cause many potential entrants to look elsewhere for new opportunities.
Access to Distribution Channels. Porter states that “A barrier to entry can be created by the new entrants need to secure distribution for its product (Porter 10).49 “ In the video game system industry this is really not an issue as long as you have money and a gaming system that is well liked by the customers. If your company can provide a supplier like Foxconn with the design and the money to manufacture it they will be more than happy to take your business.50 If the systems is innovative and a hit with customers then the company will not have a problem with getting their product to distributors or just sending it straight to retail stores like most of the game system designers do.51 This is because not only the designers, but everyone in the supply chain will want to make money off the new product.
Excess Capacity. Neither Sony, Microsoft, or Nintendo produce any of their consoles so looking at their capacity is not very helpful. However, if we look at the capacity of the companies that do manufacture their products some use full information can be seen. Foxconn, the major electronics manufacturer in the world, used to be the sole maker of the Xbox 360, the Playstation 3 and Nintendo Wii. Then some other manufactures such as ASUSTeK and Flextronics began to realize that there was a lot of business to be gotten and are now slowly beginning to take some from Foxconn. Even though the competition is becoming more fierce, Foxconn is still twice the size of its leading competitor.52 This tells us that capacity utilization for the industries suppliers is pretty high but that may not be enough to get potential entrants to jump in considering the other factors discussed.
Learning/Experience Curve. The learning curve for this industry is very steep. When a new system is built costs go down as more units are produced. Then when the next innovative game console comes out it’s like the curve starts all over again until it becomes more commonplace and easy to produce. The figure below illustrates the learning/experience curve for the video game industry.
Figure 9: Learning/Experience Curve Video Game System Industry

Cost Per Unit

Video Game System

Cumulative Volume

Government Policy. The government does not regulate the video game industry very closely. Right now interest rates are extremely low which does make entry into an industry more appealing, especially when you need to borrow start up funds. A potential negative that may arise from government policy is that all of the manufacturers are based in Asia so an American or European company may have to pay a tariff on the systems that are made and shipped to them depending on the amount of imports already coming in from that specific country. Based on these finding government policy has little effect on this industry.
Summary of Entry Threats. It appears that economies of scale, product differentiation, capital requirements, and the learning/experience curve are all factors that would discourage new entrants from coming to this industry. While excess capacity and access to distribution channels seem to favor new entrants, and government policy seems pretty neutral. Forward integration will also be low in this industry because the console manufactures do not have the system development experience or the loyalty of the customers who purchase the systems. With all this considered we can conclude that the threat of new entrants will be low for current companies in the industry.
Five Forces Results:

Using the information above, we have analyzed the five forces model and done a preliminary assessment of our industry. The following table summarizes our findings and detailed explanations of our findings are below:

Table 6: Five Forces Summary



Rating (+/-/0)

Threat of Entry

Product Differentiation is high (+)

High Capital Required (+)

Excess Capacity Needed (+)

Learning Curve is high (+)


Threat of Substitution

Personal Computers (-)

Handheld Devices (i.e. i-phone) (-)


Bargaining Power of Buyers

Large Number of Consumers (+)

Switching Costs to Consumers (+)

Threat of Backward Integration (-)


Bargaining Power of Suppliers

Large Number of Suppliers (+)

Supplier Concentration is high (+)


Intensity of Rivalry

Changing Innovation (-)

HI > 1800 (-)

Warehouse and Shipping Costs (+)


Total Rating


Strategic Map.

Figure 10: Retrospect Strategic Map for Video Game Systems

Video Game Consoles 1975-1996














Age of Console


This first strategic map contains video game consoles from 1975-1996. We chose to compare technological leadership versus the age of consoles because we felt that both factors combined really gives a strong indication of how the video game industry has changed over time. The map can be divided into three clusters as shown above by the bigger circles. The first cluster is composed of the Atari and the Intellevision and could be known as “the dinosaur consoles.” The second cluster contains three consoles, the Nintendo Entertainment System, the Nintendo Game Boy, and the Sega Genesis. This cluster is the start of Nintendo’s dominance in the video game industry. The third cluster contains three consoles as well, the Super Nintendo Entertainment System, Nintendo 64, and the Sony Playstation. Just like the last cluster was the first for Nintendo, this cluster was the first for the Sony and the start of great competition between the two.53

Figure 11: Current Video Game System Strategic Map

Video Game Consoles 1999-2006













Age of Console


The second strategic map contains video game consoles from 1999-2006. This map as you can see picks up right where the first one left off and also can be divided into three clusters. The first cluster is made up of the Sega Dreamcast, Sony Playstation 2, and Microsoft’s XBOX. This cluster is significant because it ends one company’s run in the industry while starting yet another. Microsoft knew this industry’s strategic map because as portrayed up top, they knew where they had to enter in order to be successful. The second cluster consists of the Nintendo DS and the Sony Playstation Portable, both handheld consoles. The Nintendo DS will go on to dominate in console sales for about three years. The third and final cluster contains three more consoles, Microsoft’s XBOX360, the Nintendo Wii, and the Sony Playstation 3. This cluster is the newest as well as showing the most technological leadership of all the consoles so far. Like I mentioned before, these maps really show how this industry changes over time and as you can see, there was a steady increase in technological leadership from cluster to cluster. This is how the video game industry works, “what’s going to be the next technological phenomenon?”54
















1616 http://nintendo .com









25 Porter, Michael E. Competitive Strategy. 1980 The Free Press. Pg. 17















40 Dalrymple, Jim. CNET News. “IPhone Stealing Game Market Share from Sony.” 22 Mar 2010.

41 Dalrymple, Jim. CNET News. “IPhone Stealing Game Market Share from Sony.” 22 Mar 2010.



44 Porter, Michael E. Competitive Strategy. 1980 The Free Press. Pg. 7-9





49  Porter, Michael E. Competitive Strategy. 1980 The Free Press. Pg 10






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