Factors affecting competitive strategies choice of global companies in the video games console industry by the example of Nintendo in Japan and the USA

Размещено на http://www.allbest.ru/

GOVERNMENT OF THE RUSSIAN FEDERATION

FEDERAL STATE AUTONOMOUS EDUCATIONAL INSTITUTION

OF HIGH EDUCATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

Topic: Factors Affecting Competitive Strategies Choice of Global Companies in the Video Games Console Industry by the Example of Nintendo in Japan and the USA

Student: Ervand Zarmanyan

Moscow 2020

Table of contents

• Introduction
• 1. Theoretical aspects of competitive strategies in the videogame console industry
• 1.1 Existing research on competitive strategies
• 1.2 Existing research on competitive strategies in the videogame console industry0
• 1.3 Existing research on factors affecting competitive strategies choice in the videogame industry
• 2. Factors affecting competitive strategy choice in the video games console industry in Japan and the USA
• 2.1 Videogame consoles market in Japan and the USA
• 2.2 Case study of Nintendo in Japan and the United States
• 3. Results and applicability
• 3.1 Research findings
• 3.2 Limitations and further research
• Conclusion
• References
• Introduction

The video games industry is fairly young. In 1972, by creating first video game, Atari created the whole new industry (Kent, 2001). Now it generates $60 billion worldwide, with 20$ billion in the USA and $13 billion in Japan (Newzoo, 2019). Video game consoles stand out as a segment of high economic significance in the industry. Approximately three quarters of the households in Japan and the United States have video game consoles.

There are three aspects why video game console industry is particularly interesting. First is that around every six years developer have to introduce new console with an incremental technological innovation that can lead to the success or failure of a number of companies (Christensen, 2000). Second, there is a unique integration between the consoles (hardware) and its main complementary good, the games (software) that make up an integrated system. The third is that the Internet and technology convergence are changing the way people deal with entertainment and consumer electronics. Solutions have been identified for communication between devices and the integration of functions in a single device, such as smartphones. But this new era is going beyond technology convergence. It is characterized by digital convergence, the integration of different technologies into the same digital environment, allowing the full integration of hardware, software and services, which is made possible by connectivity. The video game console is one of the best examples of a combination of these aspects.

Nowadays there are three major console developers - Sony, Microsoft and Nintendo, which share the market, which makes the market oligopolistic. But the competition between them is fierce. Nintendo was a constant industry leader before Sony and Microsoft entered the market. These two huge corporations depraved Nintendo's position and made the competitive environment on the market very rough. Satoru Iwata, former CEO of the Nintendo said “Fighting with a brute force is not our way of doing business. Yet again it is our intention to go into blue ocean” (2014), this harsh situation on the market made Nintendo to adapt, innovate and look for blue oceans, it was not always successful, but that is what made the company different from its competitors.

The object of the paper is international competitive strategies.

The subject of the paper is competitive strategies of global companies in the video game console industry.

The goal of the paper is to describe the factors in Japan and the USA that affect competitive strategy choices of global companies in video games console industry.

The thesis is based on the case study of Nintendo.

There are three chapters in the paper: theoretical aspects, analytical part, and results and applicability.

Theoretical aspects include three subchapters. First subchapter covers Porter's five forces, Porter's generic strategies, hybrid strategies and blue ocean strategies. Second subchapter dives deep into specifics of competition in the video game console industry. Third chapter reviews the factors that may affect competitive strategy choice of the video game console companies.

Analytical part has two subchapters. First subchapter is the overview of the video game console market in Japan and the United States. Second subchapter is the case study of Nintendo in two periods of its life, describes the company's strategy and analyzes the factors in Japan and the United States that affected the choice of the strategy.

Third chapter presents findings of the case studies, and results and limitations of the research.

1. Theoretical aspects of competitive strategies in the videogame console industry

1.1 Existing research on competitive strategies.

There were two kinds of strategies before the year 1980 - corporate and functional. Long-term goals and processes to implement these goals were determined by corporate strategies, while short-term activities and business operations like finance, marketing and sales were determined by functional strategies (Salavou, 2015). In 1980 Michael Porter's work on competitive strategies revolutionized approach to strategic management (Jorgensen, 2008). The actions of firms at the intermediate level were determined by this type of strategies. It showed how the company can achieve above-average performance and build a sustainable competitive advantage (Porter, 1985).

Porter's Generic Strategies.

In 1980 Michael E. Porter wrote a book, which was acknowledged as one of the most influential management books of the twentieth century (Bedeian and Wren, 2001), called “Competitive strategy”, where he alleged the relative competitive position of companies. According to Porter, three generic strategies for positioning exist: Cost leadership, differentiation and focus (see Figure 1). The choice of the competitive position is independent of the average industry profitability, in other words, companies are able to be profitable regardless of what the overall profitability of the industry may be. According to Porter, companies have to appoint only one of those strategies. Otherwise firms will not attain any competitive advantage at all (Porter, 1998). By not committing to one strategy, companies will be “stuck in the middle” which will lead to below-average performance. However, firms should on the one hand, always seek opportunities for cost reductions that do not harm differentiation, and on the other hand, they should simultaneously pursue all opportunities of differentiation that are not costly. In the end, the overall aim must be above-average profitability, regardless of the choice of strategic option. In the following, the three generic strategies are explained in detail.

Cost leadership. Historically, strategic management considers cost advantage as the main reason for competitive advantage in an industry. The focus on costs reflected the traditional emphasis on price as the main principle of competition - companies were only able to compete on price if they were managed efficiently. Therefore, the pursuit for cost reduction was the predominant strategy of enterprises. Companies were driven by the quest for economies of scale and scope, making investment in mass production and mass distribution. This contemplation changed in the eighties of the twentieth century, when cost efficiency was still important, but focus shifted towards cost cutting through restructuring, downsizing and outsourcing. The striving for dynamic rather than static sources of cost efficiency was established. Today, some industries (e.g. commodities) still aspire cost advantages as the main basis for competitive advantage, because of limited space for competition on other dimensions than costs. Certainly it can be stated that - where the focus of industry competition lies on product differentiation - increasing competition has lead to increasing importance of low cost strategies as a requirement for profitable management (Grant, 2005)

Cost leadership is a strategy that aspires to produce goods and services cheaper than competitors. By following the cost leadership strategy, companies try to generate their products or services at the most competitive price possible (Miller 1986). It consists of the search for an extensive cost advantage within its own industry, by implementing a whole series of activities to reduce costs. These activities to reduce costs consist of intensive installation of production facilities, avoidance of marginal customer accounts, the resolute use of economies of scale, strict control of costs and furthermore cost minimization in all areas of the enterprise. It can be stated that lower costs represent the central theme of the firm's strategy. However, quality and services are not insignificant and should not be neglected (Porter, 1980).

Although bearing high risks resulting from high investments in equipment, price wars and start-up losses, once reached, cost-leadership offers high rates of return, which can be reinvested in modern technology, equipment and machinery to sustain the cost leading position (Prahalad, Hamel, 1990). The cost-leadership approach explains that, in the long run, competitiveness derives from an ability to build faster and at lower cost than competitors.

As mentioned above, companies seek to achieve the lowest possible costs. Therefore, they forgo on expenses for product R&D, services, selling and advertising. Instead of laying importance on product innovations, which are only imitated after a clear risk-reduction period, they concentrate on process optimization for further cost reduction of the manufacturing process (Kroll, Parnell, 1998).

Due to the fact that a low cost producer must exploit all methods available to reduce costs, it normally sells a standardized product with no frills. A company has to achieve and to sustain cost leadership to reach above-average performance in its industry, assuming that it is able to set prices at or near the industry average (Johnson, Scholes, Whittington, 1993). Because of its lower costs, the cost leader is able to charge a lower price than its competitors for its products and nevertheless be profitable (Wheelen, Hunger, 2000).

Lower costs enable companies to earn profit even in times of high competition. Even if the industry is distinguished by high completion, an efficient cost position can result in over-average profits. Once the competitors have erased their profits through their rivalry, the cost leading company would still be profitable by cause of its more efficient cost situation.

Cost leadership is connected to a high sales volume and a large market share to gain economies of scale. This enables the cost leader to profit from scale economies in areas such as purchasing (quantity discounts), manufacturing (mass production), distribution (mass wholesaling and mass merchandising) and financing (large firms usually attain lower interest rates). Resulting from this, cost leaders are most likely able to earn above-average returns on investment.

A susceptibility of the cost leadership exists when two or more market participants simultaneously follow a low cost strategy. In this intensively competitive case, profit margins are driven down until they vanish. Another threat to cost leadership might be technological obsolescence. If the products of the cost leader do not match industry standards, customers are lost to competitors with superior products. These two factors deter many manufactures from adopting the low-cost strategy (Wright, Kroll, Parnell, 1998).

Differentiation. “Differentiation means the offering of a product or service that is a perceived by the customer as somehow unique or different.” (Stahl, Grirgsby, 1997). Companies try to create a monopolistic range of products, which is only offered by them.

Differentiation seeks to create a product that customers perceive as unique concerning its attributes. It underlines important marketing factors such as a strong interaction of marketing channels, reputation for quality, a good company image and well-designed, creative products. Opportunities for differentiation are vast: Product, distribution, sales, marketing, services, image and technology to name a few. It is possible to distinguish between two aspects: Tangible and intangible aspects of differentiation (Ansoff, 1965).

Two types of differentiators exist, each of them with different specifications. First there is the innovating differentiator which distinguishes itself from competitors by constantly launching new products and technology. He symbolizes the spearhead of their industry in innovations matters. Due to the strong emphasis on R&D and innovation, which results in higher customer value, he is able to charge fairly higher prices to cover the higher costs for product development.

Secondly, the marketing differentiator: These firms offer an attractive marketing mix, consisting of high quality products and services and convenient locations. In contrast to innovating differentiators, they are hardly the ones who innovate. They emphasize their marketing power by spending huge sums for advertising, sales force, promotion and distribution.

Of course, here the costs can neither be discounted, although they do not represent the key elements of the strategy. The firm must ensure that the higher charged price covers the costs of differentiation. High differentiation and the resulting brand loyalty of customers lower the customer's price sensitivity.96 Therefore, the differentiating company usually may charge a premium price for its product which is counterbalanced by a higher degree of customer values such as quality or service.

Contrary to the cost leadership, there can be more than one successful differentiator in the industry, due to the fact that differentiation can be extremely varied.

Focus. The third type of generic strategy represents the most appropriate for small business units: The focus strategy.

The focusing company selects a target segment in the industry and sets up its strategy based upon the needs of the selected target group. The focus strategy co-ordinates its business on target segments which are neglected, due to economies of scale, by companies that orient their strategy on a broader target market. Customers' needs and wants can be observed on a more narrow level, so the focuser is able to align its products and services exactly to its customers. This narrow approach enables the focused companies a competitive advantage in comparison to firms that concentrate on a broader scope.

The two generic strategies named above can be transferred onto the focus strategy: Cost focus and differentiation focus. Additionally, companies sometimes introduce products into a niche segment in order to use it as an experimental area for further product development.

Implementing one of the generic strategies mentioned above does not mean certain and eternal success. Once a company has established a competitive advantage through its competitive strategy, it must assure to sustain it.

For the purpose of sustainability of a generic strategy, it is of particular importance that the competitive advantage of a firm prevails against threats of competitors (imitability) and industry development (durability). To pre-empt threat of competitors, a company must protect its superior performance by factors that impede rivals imitating their advantage (Collins, Montgomery, 1997).



Figure 1. Porter's generic strategies. Adapted from: “Competitive Advantage: creating and sustaining superior performance” by Michael E. Porter (1985). New York: Free Press.

In order to protect the own competitive advantage, companies have to build up barriers to imitation of competitors. These barriers are easier to overcome the higher the degree of transparency, transferability and replicability in an industry is (Wheelen, Hunger, 2000). As these barriers are never insuperable, the firm has to invest to build up new barriers of imitation. A constant ongoing process of improving the own position, either following cost-leadership or differentiation, is necessary to protect its competitive advantage.

Many industries offer the possibility of coexistence of the three generic strategies as long as firms follow different ones or select different segments to focus on. However, if two or more firms choose to follow the same generic strategy at the same basis, the result is rising competition and reduced profits for every market participant. The battle of these competitors would have influence on the whole industry by reducing its attractiveness for profitability. Accordingly, the best circumstances would occur if each market participant would follow a unique strategy to gain competitive advantage and thus lower competition in general.

An alternative view of how to achieve competitive advantage and to outpace the competition is offered by Gilbert and Strebel (1987). They agree with Porter that competitive advantage is based on the two cornerstones: Lower delivered costs and higher perceived value, meaning differentiation. Nevertheless, unlike Porter, they combine these two factors in order to push a company into a superior position within its industry. They suggest companies to offer the highest perceived value at the lowest delivered costs (Capon, 2004).

Therefore, Gilbert and Strebel argue that in certain cases it could be favorably to change or to combine the strategies in order to outpace the competition. An example for this is a company that differentiates through innovation: While competitors wait until a clear standardization of the new technology is established, the innovating company has to preempt its rivals by changing to a low cost strategy to skim off the profit of its new innovation.

Hybrid strategies.

Helen E. Salavou in her work “Competitive strategies and their shift to the future” (2015) described, based on the researches that were conducted before, an idea of hybrid strategies. While original frameworks offered to choose one way from several, the hybrid strategy offers to choose multiple ways. “Stuck in the middle” concept suggests that if the company makes multiple choices, it is an indicator of company's uncertainty of how to compete, and it will inevitably hurt the company because of the lack of emphasis on any particular part of the strategy (Pertusa, Ortega, 2009). The hybrid concept says that it is possible, and sometimes essential for companies to choose several dimensions, and make emphasis on all of them. Researches stated that if the strategy is more complex and multidimensional, the more competitive it will be (Spanos, 2004). Hence emphasis on several dimensions at once is better than just going with one. There are evidences for the applicability of hybrid strategy. It is demonstrated that the combination of low cost and differentiation strategies would be most useful in the situation of oversaturated market (Gopalakrishna, Subramanian, 2001; Proff, 2000). Leitner and Guldenberg (2010) stated that hybrid strategies are more effective in the long run than pure ones. According to Li and Li (2008) multinational companies financially benefit more from the combination of strategies in the foreign markets.

Based on Porter's (1980) generic strategies, Salavou (2015) listed 16 types of hybrid strategies:

Table 1. Types of strategies based on Porter's generic strategies. Adapted from “Competitive strategies and their shift to the future” by Helen E. Salavou (2015). European Business Review

	Low cost	Differentiation	Focus
Pure strategy 1	High	Low	Low
Pure strategy 2	Low	High	Low
Pure strategy 3	Low	Low	High
In the middle	Average	Average	Average
No strategy	Low	Low	Low
Hybrid strategy 1	High	High	High
Hybrid strategy 2	High	High	Low
Hybrid strategy 3	High	Low	High
Hybrid strategy 4	High	High	Average
Hybrid strategy 5	High	Average	High
Hybrid strategy 6	High	Average	Average
Hybrid strategy 7	High	Low	Average
Hybrid strategy 8	High	Average	Low
Hybrid strategy 9	Average	High	High
Hybrid strategy 10	Average	High	Low
Hybrid strategy 11	Average	High	Average
Hybrid strategy 12	Average	Average	High
Hybrid strategy 13	Average	Low	High
Hybrid strategy 14	Low	High	High
Hybrid strategy 15	Low	High	Average
Hybrid strategy 16	Low	Average	Average

Blue Ocean Theory.

In contrast to Porter, Kim and Mauborgne (2005) offer a differing view on strategy: they suggest pursuing a low-cost route and differentiation simultaneously by applying the key concept of value innovation. But, before going into detail on value innovation, their general view on competition is described.

Kim and Mauborgne's idea was to make competition irrelevant, instead of competing with rivals. They argue that it is more sustainable to create new demand, than to fight for existing markets and customers (Tidd, Bessant, 2009). To explain their strategic approach, they distinguish between red and blue oceans, which describe the overall market universe. According to their theory, red oceans symbolize already existing and established industries. Here the market space is known. Whereas the idea of blue oceans is to seek entirely new markets that create a previously non-existing demand. The conventional approach of red ocean companies is to defend their existing customer base and to maintain the established industry order. Their strategy consists of dividing up the ocean and competing with rivals for market share. In other words, their means how to achieve competitive advantage over rivals are usually based on monitoring and outperforming the competitors. As a result of benchmarking and imitating, rivals' products and services increasingly become commodities with shrinking differentiation. With no clear differentiation and converging brands, the buying decision will be based only on price levels, which will result in price wars and shrinking profit margins. Due to cutthroat competition, markets end up as red, `bloody' oceans.

In contrast to this, blue ocean companies follow a different strategy. They try to develop new demand by creating new markets. These new markets are brought into being by challenging the boundaries of established industries. Thereby sometimes completely new industries are created. To lever out the existing industry constraints and with this, the traditional value-cost trade-off, companies have to make use of what Kim and Mauborgne call value innovation. As mentioned before, this value innovation is the key point of the Blue Ocean Strategy.

Value innovation is the simultaneous striving for fundamental increase of customer value and lower costs for companies. While simultaneously reducing cost for companies and increasing value for customers, a leap in value for both parties is achieved. This leap in value creates untapped market space for the value innovator. In areas where a company affects its cost structure and its value creation for buyers, value innovation takes place. For the purpose of cost reductions, expenditures are reduced and eliminated. Buyer value is increased by rising and creating elements, which the industry had not previously offered.

Value innovation represents a new way of thinking about strategy. Unlike the conventional belief that companies are only able to create higher value at higher costs or reduce value to achieve lower costs, value innovation strives for both differentiation and low cost, thereby breaking the traditional value-cost trade-off. Disproportioned to Porter's belief, that a choice has to be made between differentiation and low costs, the Blue Ocean Strategy combines both strategies simultaneously.

A company has to put equal emphasis on both value and innovation. If companies simply concentrate on increasing customer value without considering innovation they tend to come up with incremental advancements of value. This improves value but offers no outstanding position on the marketplace. On the other hand, only concentrating on innovation without value often tends to overshoot customer's needs. Customers need to perceive a link to value to be willing to pay for the new technology. Therefore, value innovation is only given when companies align innovation with value, utility and price.

Which influence the value innovation has on creating a new market, can best be described by comparing it to the conventional strategic thinking. In the following, differences between value innovation and the traditional logic of competition will be highlighted by examining five dimensions of strategy: Industry assumptions, strategic focus, customers, assets and capabilities as well as product and service offerings.

Industry conditions can be shaped and rearranged, and they are waiting to be set by the value innovator. While red ocean companies see industry conditions as given and set their strategy accordingly, Blue Ocean companies do not. They seek for innovative ideas and quantum leaps in value.

The traditional strategic belief is that companies must focus on benchmarking their competitors in order to achieve competitive advantages. This conventional thinking leads companies to compete at a margin for incremental market share. Following a Blue Ocean strategy companies monitor the competitors but do not use them as benchmarks. With a focus on not competing, they can discern and increase the factors that deliver superior value from all other means of differentiation an industry competes on. They do not offer certain products or services just because their competitors do, but instead they try to identify completely new sources of customer value. Therefore, although they do not seek to create competitive advantage, companies using the Blue Ocean approach, end up achieving the greatest advantage over their competition.

In terms of target groups, red ocean companies must ensure that their existing customers are served while concurrently expending their customer base. This leads to finer segmentation and more customized services to meet the specific customer's needs. Furthermore, growth is connected to higher competition because in confined markets a gain in market share for one company necessarily means another company's loss. Contrary to this, value innovators increase customer value by trying to identify similarities of customers' buying patterns. They do not target at a specific customer group, but instead the mass of buyers. According to the Blue Ocean Theory, a company can try to approach three tiers of noncustomers: The first tier consists of “soon-to-be” noncustomers which are at the edge of the established market so they are waiting to jump in. Second tier noncustomers are knowingly “refusing” to join into the market. Finally, the third tier noncustomers are “unexplored” situated in differing markets.

The concept is to convert all three tiers into a mass of new demand. Instead of focusing on customer differences Blue Ocean companies concentrate on commonalities of customers and noncustomers. By concentrating on similarities value innovators are able to approach a much broader customer base. The underlying idea is that buyers will drop their differences if they realize the significant increase in customer value. To win new customers, Blue Ocean companies stick to this strategy, even at the potential loss of some existing customers.

Many Red Ocean organizations seek to find new business opportunities by keeping in mind their existing assets and capabilities. They identify the best opportunities that their established assets and capabilities offer. In contrast to this, value innovators start over from the beginning. They do not build up their business based on their existing conditions. By being non-partisan, their acting is not influenced of prejudices and restrictions. Their strategy is not limited by existing norms and restraints, so “value innovators not only have more insights into where value for buyers resides - and how it is changing - but also are much more likely to act on that insight.”

Finally, in respect of products and services red and blue ocean companies show varieties in their offerings. Red ocean companies traditionally offer products and services in the framework of existing industry boundaries. They stick to what the industry traditionally does and what it always had been offering. Their goal is to score off their rivalry by increasing the value of their offerings. Blue Ocean companies on the other hand, are not limited by the boundaries of the existing industry and are thus able to pursue the total solution for customers. They offer products and services for buyers that fit the overall chain of the buyer's solution, even if this takes them across industry borders into new businesses and beyond its industry's traditional offerings.

Nevertheless, it must be stated that red and blue oceans have always been concurrent and they will always coexist in the future. Conventional thinking will always exist and be a part of business. Consequently, companies will always try to outcompete rivals. But with oversupply and increasing competition in most markets, it is difficult to achieve above-average performance. In order to achieve superior performance and to discover new profits and growth opportunities, companies need to think beyond competition and create blue oceans. It follows that a better balance between red and blue oceans must be developed.

Porter's five forces.

Michael Porter's theory for assessing potential risks was developed back in 1980, but has remained popular to this day. It consists in assessing possible adverse events that may somehow affect the business in the future. The analysis is carried out in the context of 5 factors, or so-called forces (Porter, 1980).

Figure 2. Porter's five forces. Adapted from: “The Five competitive forces that shape strategy” by Michael E. Porter (2011). HBR's 10 Must Reads On Strategy, Boston: Harvard Business Review Press.

Threat of new entrants.

This force considers how easily new participants can join the existing market. The easier it is for a new competitor to appear in the field, the more dangerous is the market share of each of the existing participants. Barriers to entry for new entrants can be expressed in absolute cost advantages per product, well-known brands operating in the market and access to materials.

Threat of substitute products or services.

It examines how easily a consumer can move to a new product with a lower price and greater functionality. The buyer's willingness to replace and the effectiveness of the substitute product, as well as the cost of switching to a substitute product, are determined.

Bargaining power of buyers.

This force considers the ability of consumers to influence pricing. If there are few consumers and many sellers, the power of consumers becomes very tangible. They can easily switch between manufacturers, which also makes the market unstable.

Bargaining power of suppliers.

This force shows the level of power of suppliers - how much they influence prices. If suppliers have enough power to increase prices uncontrollably, this greatly reduces the profitability of the business. The same force considers the number of suppliers available - the smaller they are, the higher the power of each of them. Businesses are in a more stable position with more suppliers available.

Rivalry among existing competitors.

This force considers how intense competition is currently on the market, it is determined by the number of players existing in the market - company's direct competitors, and their abilities. A high level of competition implies several enterprises offering almost identical goods or services. In this situation, consumers can easily switch their attention from one company to another. High competition causes marketing wars and price dumping, which negatively affects the market.

1.2 Existing research on competitive strategies in the videogame console industry

Global Games Market Report (Newzoo, 2019) disclosed that revenues of $152.1 billion were generated, which is 9.6% higher than in 2018. The videogame market is increasingly growing and becomes more and more attractive for newcomers. The console games segment is the second biggest in the global games market after the smartphone games segment, and first in case if one wants to play big studio games. It occupies 31% or $47.9 billions of share in global games market. So, how the videogame console industry is organized?

Hardware.

Usually videogame console is a stationary device, which is developed by a certain company for gaming purposes, that needs to be plugged to the television set or monitor. The hardware specifications remain the same to be compatible with all the games that are released for the platform. By releasing the new console the company upgrades hardware to the modern standards, and therefore begins new “generation”. Historically it happens every six years.

For the past twenty years three major players on the market were, and still are Nintendo, Sony and Microsoft. Nintendo is the only one of these companies, that has gaming as a primary business. It started as a playing card company in the beginning of nineteenth century in Japan (Ryan, 2011). The first major videogame console that earned global success was Nintendo Entertainment System, which was released in 1983. Since that Nintendo has released a lot of consoles, but the most successful are GameBoy, the first handheld console which was released in 1989; the dual screen handheld Nintendo DS sold 154 millions from 2004 to 2014; Nintendo Wii, the first console with motion controllers, which made people to be active while playing, and the most recent one, Nintendo Switch, the first console that can be both stationary and handheld, with a big variety of famous titles.

Sony entered the market much later than Nintendo. Sony presented PlayStation 1 in 1995, the first videogame console that used CD's instead of cartridges. It sold 100 million copies, and it was a huge success for the newcomer, to become the leader with the first produced console. In the beginning of twenty first century Sony presented its new console to the world - PlayStation 2. It is recognized as the best selling console of all time, with 158 million of sold copies. An ability of playing DVD's and music made PlayStation 2 not only a videogame console, but a home entertainment system, and the cheapest DVD player on the market. In 2006 Sony released PlayStation 3, which tried to do the same, but instead of playing DVD's, it had to play Blu-ray format, and because of that it was launched a year later after its competitor. PlayStation 3 was an expensive console, with lots of redundant functions, and it sold poorly. Eight years later, the PlayStation 3 successor PlayStation 4 was released. Sony took into account their experience with PlayStation 3, and created the console that was focused on delivering the best gaming experience, which made it number four on the list of best selling console in history.

Microsoft, the youngest of these three in the videogame console market, released its first Xbox console in 2001. But same as PlayStation 3, Xbox was late. The market has already been occupied by PlayStation 2 and Nintendo GameCube. The main difference between PlayStation 2 and Xbox was advanced online capabilities of Microsoft's platform. From 2002 Microsoft started investing in its online service Xbox Live, and in 2005 the new generation was presented - Xbox 360. It was a huge success, which allowed Microsoft to establish itself as a major player on the market. In 2013 Microsoft released their new iteration of videogame consoles - Xbox One. But because it made the same mistakes as PlayStation 3 did, switching it focus from gaming, to being a house entertainment hub, which interfered with gaming experience, demanding constant internet connection, and restricting sharing physical copies of the games, it had overwhelming negative response, hence poor sales.

Software.

Besides hardware developers, videogame industry also involves software developers. In case of the videogame industry games are meant by software. There are developers, companies that create the game by doing all the creative and programming parts, and there are publishers, companies that manage distribution and marketing parts. Most publishers are usually involved in development business by owning one or several development studious. And also there are independent developers, who are financed by publishers in exchange for publishing rights.

Hardware developers are also involved in the software developing and publishing processes. Any game produced by the developer, that is owned by Sony, Microsoft or Nintendo, is going to be a console exclusive, and being referred as a first-party title. All the games that are being produced and published by the companies, that are not owned by any of the hardware developers, are referred as third-party titles.

There are ten publishers that are responsible for 70% of the games sold. Sony, Microsoft and Nintendo are between them. But unlike hardware, the software in general has a lifespan of three months. There are examples of games that extended their lifespan for years, but that is extremely rare.

Network Effects and Pricing.

The videogame consoles themselves have no use for the consumer. If there were no games, then there would be no consoles. The customer, when choosing a console, looks at variety, quality and exclusivity of the games available on the platform. On the other side the publisher, when deciding on which platforms its game is going to be available, looks at the amount of people already using it, and on the potential of growing bigger user base. Because of that videogame consoles are usually being sold below or close to the cost of production. But instead of earning money on selling consoles, hardware developers earn money from royalties being paid by publishers for every copy of the game sold (Evans, Hagiu, Schmalensee, 2006). Because of this pricing strategy hardware companies suffering losses several years after they introduce new console to the market. But usually costs for the console manufacturing eventually fall, and hardware developer starts gaining profit from the console sales on the end of the generation.

Exclusivity.

If the game is developed for one certain console, it will not work on others. The only way to play the game on another console is to port it, or in another words to create brand new version of the game for different console. The developer or the publisher should assess the potential profitability of the game on another console, because porting, especially nowadays, might cost millions of dollars.

Because of the abundant number of low-quality software on the videogame market in 1983 it crashed. After that Nintendo started to control amount of third-party titles in the library, and from that time Nintendo was suing every unauthorized developer that produced games for NES. It was Nintendo who started taking royalties from publishers. But there were more restrictions from the Nintendo's side - one developer could produce only five games a year for the NES, had to give at least two years of exclusivity rights to the Nintendo, and pay 20% of royalties from any copy sold. But in the beginning of 1990 Nintendo was sued itself, for anticompetitive behavior. From that time there were no restrictions, and obligatory exclusivity was not in conversation. After that many software developers started making their games “multiplatform”, so they were compatible with multiple consoles from the start. But there are still many studios that pursue “exclusivity” path. Some of them, because of high costs or small player base, do not want to make their games multiplatform, some of them are tied by an agreement with hardware developer, and some of them are a part of the hardware developer.

Porter's five forces in the videogame market.

In order to understand how competition is shaped within the industry we will use Porter's five forces framework. The analysis is based on the research by Song, Jung and Cho (2017) “Platform competition in the video game console industry”.

Threat of new entrants.

Since the functionality and features of the consoles are more or less similar, and the number of patented technologies in the consoles are very limited, the market has a strong threat of entry. But there are several major barriers like economies of scale. Since production of consoles is very expensive, the company, that has intentions to produce a new console, should be able to produce them on a large scale. Also, it is vital for such hardware as videogame consoles to have software, in this case - games. There are two ways of resolving this problem: either the company produces games for the console itself, or/and it should have partnership with multiple game producing companies. Since the market already has three big corporations with international presence and recognition, a big marketing campaign is needed. But still all these obstacles are not that big for large corporations, Microsoft stepped over them in 2001, and now Google is planning to do that (Ross, 2019).

Threat of substitute products or services.

Since the videogame market is part of entertainment industry, the threat of substitute is very high. Not far ago phones and tablets became a serious competition for the consoles. But videogame console's substitute is not only console from another manufacturer, but also every kind of leisure activity that customer can be entertained by. Things like movies, TV, sports, books and etc. can replace the console in the customer's amusement activities.

Bargaining power of buyers.

Since videogame consoles are very popular nowadays, and their popularity is still growing, bargaining power of buyers is low. There are three major players on the market right now, so there is no much choice for the consumer. Also, because certain copy of the game, bought for one platform, will not work on another, the switching costs are high.

Bargaining power of suppliers.

Amount of components that are designed by the console manufacturers are very small, and the amount of produced components is zero. Majority of the vital components for consoles are developed by third-party developers, like Nvidia in case of video cards, or IBM and Intel in case of processors. Also small number of companies that are capable to produce at the demand makes bargaining power of suppliers very high. Besides hardware, there is also software. Big publishers have a leverage, it is they who decide whether game will be available on the certain console or not.

Rivalry among existing competitors.

The rivalry is very high in the videogame console market. There are three big players, with resources and loyal customers. Since the cost of inventory and production are high, the volume of sales must be also high. The constant competition between three competitors drives the prices down, which makes it very hard to survive on the market.

1.3 Existing research on factors affecting competitive strategies choice in the videogame industry

There are two types of factors that affect competitive strategy choice in any industry - external and internal. External factors are factors that can not be controlled by the company, while internal factors are in the scope of company's control. We will elaborate on these factors in the following paragraphs.

External factors.

Political.

In every country there are different laws that regulate different industries, and videogame industry is no exception. Mostly these regulations affect software, but because software and hardware are very tied in the videogame industry, consoles are affected too. Regulations involve:

· Rating systems - the video game rating system helps parents determine which games children should play and which not. Typically, government agencies are involved in certification, and ratings are included in the local movie rating system;

· Censorship - some videogames are censored or restricted in different countries. Usually it happens when game is too violent, or hostile to the outlook of the certain state.

Economical.

Economy affects the performance of any industry. If it is in decline, it will have a negative effect on the industry. If it is prospering, the consumption of products produced by the industry will rise. But industry can not rely entirely on the turns of the economy, and it needs to sustain itself despite the economic turns. The main indicators here are GDP, inflation rate, CPI, unemployment and exchange rates.

Social.

Population and social trends is also a considerable factor. There are 2.5 billion people playing videogames today. It becomes harder for videogame companies to expand. Because of that companies today, instead of developing adventures for 30 hours, are releasing huge online games, that can hold player for 100+ hours.

Entertainment Software Association (2018) released report about sales, demographics and usage data in videogame industry. It stated that gamers of age 18 or older represent 70% of videogame players, 61% of all gamers are male, and 39% are female. More to that, community of female players is growing, and developers take that into consideration too.

Technological.

Technology is a crucial factor in the videogame console industry. Competition constantly developing new consoles and games with new and advanced features that improve gaming experience, hence higher demand for the technologically advanced videogame consoles.

Internal factors.

Videogame industry is characterized by high degree of innovation (Marchand, 2013). Clayton M. Christensen, author of “The Innovator's Dilemma” (2000), wrote that there are three factors that determine competitiveness of the company that works with innovations - resources, processes and values. These three factors form a framework called RPV.

Resources.

Resources is the most obvious factor that can lead company to success. According to Christensen (2000) resources include “people, equipment, technology, product designs, brands, information, cash, and relationships with suppliers, distributors, and customers. Resources are usually things, or assets--they can be hired and fired, bought and sold, depreciated or enhanced”.

Resources are very valuable for companies producing video game consoles. Since life cycle of a console is in average five years, resources improve chance of success when the time for change comes.

Processes.

Process is transformation of the resources into something that has value for the customer. Christensen (2000) notes that “the patterns of interaction, coordination, communication, and decision-making through which companies accomplish these transformations are processes. Processes include not just manufacturing processes, but those by which product development, procurement, market research, budgeting, planning, employee development and compensation, and resource allocation are accomplished”.

Values.

Christensen (2000) defines values as “the standards by which the company make prioritization decisions - by which they judge whether an order is attractive or unattractive; whether a customer is more important or less important; whether an idea for a new product is attractive or marginal”.

Besides that, values also establish the limits of the company. Since values are echoing in the company's structure and business model, employees must act according to the values to earn profits.

videogame console competitive nintendo

2. Factors affecting competitive strategy choice in the video games console industry in Japan and the USA.

2.1 Videogame consoles market in Japan and the USA

Japan.

Japan is an island nation in East Asia. It is a member of the UN, G8 and APEC. Japan is a highly developed country, in terms of GDP, it ranks third in the world after the United States and China. Territory - 377.9 thousand square kilometers, population - 127 million people. Japan is among the top ten countries in the world in terms of population, and in terms of economy it is among the five largest economies in the world. Life expectancy in the country is the highest in the world (76 years for men and 82 years for women). Japan is a mono-ethnic country (99% of the population are Japanese; more than 340 people per 1 sq. Km). About 80% of the population lives in cities. 11 cities are millionaires. The largest metropolitan areas Keihin, Hanshin, and Tyuka merge into the Tokyo metropolis (Takaido) with a population of over 60 million people. According to World Bank Japan's GDP in 2018 was $4,827 trillion, while GDP per capita was $39,290. Inflation rate in the country is 0.5%.

Today, the thesis “Japan is a symbol of progress” is an axiom. However, even 70 years ago, when Japan was destroyed by the Second World War, there could be no talk of this island country at the forefront of science and technology.

Active investments attracted to Japan in 1950-1960 provided the country with the opportunity to “catch up and overtake” many of its competitors. The “economic miracle” forced the international community to take a fresh look at this “innovative empire”, unique in all respects. Even the collapse of the economic bubble could not break the desire for leadership for a long time. The country, economy and life in Japan revived from the ashes, like a magical phoenix. And by the beginning of the 21st century, the Japanese, taught by bitter experience, had become more rational in approaching financing, development, and other issues from the field of science and technology.

The most important feature of the post-war economy of Japan was the widespread use of the most significant world achievements in the field of science and technology. Advanced technologies are the basis of the efficiency of the economic process, and the government and business structures are taking serious steps towards strengthening the financial, personnel and material base of science. However, Japan does not ignore the manufacturing sector, where there is a constant update of equipment, technology improvement, the development of quality control methods and the active use of new knowledge (Francis, Frame, 1989).

...