MBA299: Strategy

1
MBA299 Strategy

• Nintendo in 8-bit Video Games
• Take-aways
• April 11, 2006

2
Value vs Value-add

• Key puzzle in case
• Value of video games has to be less than value of
  cars or TVs
• Yet, Nintendo is worth much more than Nissan or
  Sony in the early 1990s
• Why?
• Answer difference between value and value-add
• More than no competition monopoly over nothing
  is not valuable
• Requires strategizing around all players in value
  delivery

3
Value vs Value-add (Contd)Some examples

• Adam Smith and the water-diamond paradox
• The word VALUE, it is to be observed, has two
  different meanings, and sometimes expresses the
  utility of some particular object, and sometimes
  the power of purchasing other goods which the
  possession of that object conveys. He one may be
  called value in use the other value in
  exchange. The things which have the greatest
  value in use have frequently little or no value
  in exchange and, on the contrary, those which
  have the greatest value in exchange have
  frequently little or no value in use. Nothing is
  more useful than water but it is will purchase
  scarce anything scarce anything can be had in
  exchange for it. A diamond, on the contrary, has
  scarce any value in use but a very great
  quantity of other goods may frequently be had in
  exchange for it.
• - Wealth of Nations, 1776
• Creation of value vs capturing value
• The dot com phenomenon
• Video games
• Cars, TVs water
• Video games diamonds

4
A Framework for Value Add The Value
Net(Introduced in Brandenburger and Nalebuff
Customers
Firm
Complementors
Substitutors
Suppliers
Source Brandenburger and Nalebuff, Co-opetition
5
Keys to Nintendos Success Creating Value

• Hardware
• Highly dedicated
• Cheap, needs to be for a number of reasons
• Razor-razor blade business
• Hold-up problems buyers know will be gouged
  later, so ex ante need to have low hardware
  prices
• Overcomes barriers to uncertainty will I like
  it?
• Creates installed base of dedicated, standard
  machines
• Signals to both buyers and developers confident
  that software will sell
• Software creates hit games
• Creating shortages also may create value in
  certain product classes
• When WTP is a function of demand
• Note different from network externalities
  (slightly) one based on demand (desire) other
  based on use (possession)
• Stimulates demand of 2nd best titles
• Free publicity demand was met does not garner
  headlines!

Value creation is necessary but not sufficient
for Nintendos success
6
Keys to Nintendos Success Capturing Value

• Customers
• Consumers nonentities
• Big-box retailers (TRUS, WAL-MART) potentially
  huge threat
• Initial frosty reception from electronics
  retailers
• Restricting supply limited power of retailers
• Treat all symmetrically (resale price
  maintenance) ? limits ability of any retailer to
  gain advantage against competitors
• Key point undersupply reduced the added value of
  any single retailer?limiting their ability to
  capture significant value
• Very similar to Intel in Matching Dell case
• Suppliers (3 major categories)
• Commodities
• Chips
• Use 2nd generation shifts power relationship
  with Intel, AMD, etc.
• Characters
• Create bargaining power by in-house production

7
Keys to Nintendos Success Capturing Value

• Complementors
• Software business is where money was made
• Consoles sold near cost cartridges 6-8 for
  mfg, 40-45 retail
• Nintendo extracted value from software two ways
• In the business itself! (Super Mario was a
  mega-hit)
• Security chip allowed them to determine who was
  in
• Limited licenses ? creates developer excess and
  competition
• Limited of titles ? kept developers symmetric
  and fragmented ? meant no single powerful one
  emerges
• Punishes out-of-line developers (even seemingly
  powerful ones) Namco forced to accept Nintendo
  terms in 1989

In-house software development licensing
restrictions limited value-added of an one
developer
8
Keys to Nintendos Success Capturing Value

• Substitutors
• Can come from unauthorized Nintendo system
  developers (eg Atari) or other systems
• Hardware competition
• Takes place on 2 dimensions
• Cost
• Game availability
• Nintendo establishes positive feedback to shut
  out substitutes
• In-house hits get consoles in houses
• Nintendo lowers costs through scale and
  experience
• 3rd party developers invited in and accept
  because of installed base
• More hits come outmore consoles boughtlower
  costs, etc.
• Some herding also reinforces (I want one
  because my friend has one)
• Software
• Could prevent defection and replication because
  they had control over demand
• Want your quota? Want customers to buy your
  title? Want advertising in Nintendo Power? Want
  Seal of Approval?

9
Summary

• Nintendos success illustrates the importance of
  added value as opposed to value
• Typically rationing and high prices invite entry
• In this case, Nintendo avoided that situation by
  limiting the value-added of every other player in
  the game

The name of its monthly magazine, Nintendo Power,
sums it up nicely!