Tuesday, May 24, 2011

Nintendo's history and its business model reinvention process

The article “Reinventing Your Business Model[i]“ reminded me of Nintendo. Nintendo is well known as a hardware and software provider in the area of digital game. In this blog, I would like to introduce their business model reinventions basing on the historical transition of successes and failures.

Nintendo was founded in 1889[ii] as a card game company. The grandson of a founder, Hiroshi Yamauchi, took up a post as CEO in 1942. After he took office, Nintendo invented plastic cards and customized cards for children using Disney characters.

However, CEO realized that the growth of the company was limited as a card game company. He decided to diversify business areas. The company started the operation of hotels and Taxi Company, the production of instant food, and so forth[iii]. Unfortunately, every trial was failed because the company did not have know-how. Among all, Laser Clay Shooting System, which the company bet their future as core business area, was the biggest failure. As a result, the company saddled with huge debt. At that time, an employee of Nintendo came to him in a flash watching a person used a calculator in the train. Thanks to this inspiration, Nintendo could invent the mobile game machine, Game Watch. This product became a hit and took up the debt. Thus, the company had a little strategy and operated on a hit-or-miss basis several decades ago.

In 1980s, Nintendo prepared for digital game market for the consumer. Basing on the previous failures, they analyzed the market and decided to reinvent their business model. At that time, Atari was the major player in the United States; however the Atari’s market was shrinking. Nintendo analyzed that the cause of decline stemmed from the low quality software. Therefore, Nintendo built software market management system before they would start selling new hardware platform “Family computer”, the first mega-hit product of this company. The system is that only licensed software companies could develop and sell the game for Family Computer. Nintendo screened the contents. And the contents providers had to request Nintendo to produce their cassette media. Thus, Nintendo provided not only hardware platform; but also they established new business models using four features. First was customer value proposition that certified the quality of software for customer. Second was profit formula that yields continuous income in accordance with the expansion of the game market. Third were key resources such as technology of hardware and brand of Nintendo. Fourth was key process that was established by software market management system.

The second crisis had come in 1994. Sony released Play Station that had a CD-ROM. At that time, Nintendo focused on the performance of CPU and loading time of the game. Therefore, they adopted 64 bit CPU and decided to use cassette as a media in their new product, Nintendo 64[iv]. As a result, Sony grabbed market share from Nintendo. Based on the market trends, Nintendo changed strategy and released Game Cube, which had a superior media. However, Sony released Play Station 2 at the same time. It was difficult for Nintendo to retake control of market share.

In this circumstance, Nintendo decided to reinvent business model again. They found that the number of people who play with digital game seemed to hit a peak. They thought that the causes had roots in the complex game system and its difficulty for the beginner. The reduction of these factors was requires for the increase of consumer market such as women and middle-aged people who did not interested in the game. And Nintendo also focused how they could provide efficient and productive environment for developers. The reduction of investment and software development cost had a positive impact on the increase in contents providers. Based on these analyses, Nintendo DS and Wii had developed. It can be seen as a blue ocean strategy, and it made Nintendo irrelevant from competition.

In conclusion, I learned that business model reinventions would be required periodically from history of Nintendo. The successes and failures of Nintendo might be the same as the word of Darwin, “"Fitness” does not refer to whether an individual is "physically fit" – bigger, faster or stronger – or "better" in any subjective sense. It refers to a difference in reproductive rate from one generation to the next.” Nintendo clearly learned from the failures, and they did not persistent in business model that succeeded in the past. The persistence in the past success might be result in Inertia as a gradual decline. On the other hand, the trials and errors of reinventions seems to raise employees’ skill and knowledge to cope with current and future crises.

[i] Reinventing Your Business Model, Harvard Business Review, Mark W.Johnson, Clayton M.Christensen, and Henning Kagermann

[ii] Nintendo Homepage


[iv] The crises that Nintendo overcame


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