Directional Policy (GE-McKinsey) Matrix

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Table of Contents

Introduction
Analysis of market attractiveness using the porter’s five forces model
Summary
Conclusions and recommendations
References

Introduction

The GE/McKinsey is a portfolio analysis model that was developed by the General Electric Company in (GE) in the 1960s (Afuah 2011). The model is used to draw a comparison between businesses in terms of their market attractiveness and competitive strengths.

This paper seeks to conduct a directional policy GE matrix analysis for Nintendo and Sony, the two biggest companies in the video gaming industry. The video gaming industry is mainly controlled by three competing firms (Sony, Nintendo and Microsoft) which are constantly trying to combine their talents and strong points, to mix and match their offerings and achieve higher profit margins.

Analysis of market attractiveness using the porter’s five forces model

The Porter’s five forces tool can be regarded to be a simple but nevertheless powerful tool that helps one to understand where power lies in any business situation (Nag, Hambrick, & Chen 2007). It basically provides a framework of five forces that determine how profitable an industry is.

The supplier power– The video gaming industry utilizes hardware, software and other accessories to run. Some of these components such as game consoles and software are developed by the companies but many others are also provided by third party companies. More than 80% of the products marketed by Nintendo are sourced from third party providers (Mulcaster 2009). The companies also get hardware components from other suppliers.

The graphics components for Nintendo are sourced from ATI, processors from IBM and batteries from Panasonic among others. Sony, being an established electronic company, makes many of the hardware components for itself. It however acquires some accessories such as processors and graphic components from third party providers (Jonson & Scholes 2008).

All these suppliers have some power but as of now, the power is in the hands of Nintendo, Sony and other leaders in the video gaming industry that can source these products from a variety of providers eager to ride on their success (Gamble & Thompson 2010).

Buyer Power

The video gaming industry is very competitive. The major three companies are fighting for a bigger market share. Many strategies have been advanced but it’s apparent that the buyer has the power to drive prices down. The affordability of Nintendo’s Wii saw other market players cutting their prices to compete (Afuah 2011).

The buyer power has also seen an innovation and technology race by the top three companies in the Video game industry. The company’s are constantly enhancing the capabilities of their products in order to attract more sales. Video gaming belongs to the larger entertainment industry. These companies must also fight to keep their share in the entertainment industry.

The industry produces non essential products which have to appeal to the consumer for consideration. Thus as far as the video gaming industry is concerned the customer has more power than the company.

Competitive rivalry

As described above, there is no one company in the video gaming industry that has absolute power. The industry has a very healthy competition that benefits the consumer. Market performance by any of the three companies depends on how their gaming devices appeal to the consumer (Jonson & Scholes 2008).

Competition has shifted away from scrambling for the video game market dominated by adolescents, hardcore gamers to expanding the age bracket and getting more casual gamers on board. In the last decade the competition is very strong among the top three companies whose products are more similar. However, Nintendo is currently leading through its innovative and pricing strategies.

Threat of substitution

In the Video gaming industry, the threat of substitution is always present. Video gaming is a form of entertainment which can easily be substituted by other forms of entertainment. The threat of substitution also exists within the industry due to the various ranges of products provided. If the customers can get the same satisfaction with a different product they will go for it (Gamble & Thompson 2010).

There are different segments designed for different gaming experiences which can attract a significant amount of substitution within the industry. The three dominant companies have been outdoing each other with newer innovative strategies and adoption of newer technologies (Afuah 2011).

Threat of new entry

The threat of new entry is always present in the Video gaming industry. Nintendo had been a market leader for a long time since the 1980’s but its fortunes declined with the entry of Sony’s playStation. Therefore the threat of new entry is significant as long as newer technologies are still being developed. However the top three companies have now held tightly on the industry and this may pose a considerable challenge to any new entrants (Markides 1999).

Summary

The video game industry is mostly affected by the technological changes which shape the needs of the consumers. The industry is also affected by the various forces within and outside the industry but the strongest forces are competitive and consumer powers. The video gaming industry can be described as being moderately attractive.

Table1: Strategic business units’ (SBUs) strength analysis

	Product	Market share	Technology advancement/ Relative product quality	Price	Market segments
Seventh generation consoles	Nintendo’s Wii	50% (Console segment)	Does not support HDTV Simple, less intimidating Innovative controller Standard CD drive Motion sensors	$250	Hard core gamers Casual gamers First time gamers All age groups
Seventh generation consoles	Sony’s PS 3	23% (Console segment)	HD blue ray drive 3.2 GHz microprocessor 60 GB hard drive High definition graphics	Between $499 and $599	Hard core gamers
Eighth generation handhelds	Playstation Vita	20% (In the handheld segment)	Blue tooth 3G Touch screen 512 RAM Up to 32 GB memory card 2 cameras	$300	Hardcore gamers Casual gamers
Eighth generation handhelds	Nintendo 3DS	70% (in handheld devices segment)	Innovative user interface Dual screen LCD touch screen Microphone Wifi capability Autostereopscopic 3D 2 cameras	$249	Hardcore gamers Teenage gamers

Table2: The GE/McKinsey Matrix for Nintendo and Sony

Competitive Strength	Market Attractiveness
		High	Medium	Low
	High	Nintendo Wii Nintendo 3DS
	Medium		Playstation vita Playstation3
	Low

Conclusions and recommendations

This paper sought to conduct a directional policy GE matrix analysis for Nintendo and Sony, the two biggest companies in the video gaming industry. The directional policy matrix has helped establish that the video game products (both handheld and console segments) manufactured and marketed by Nintendo have a larger market share compared to those produced by and marketed Sony (Moncrief 2004).

Nintendo video game devices are simpler, less sophisticated but innovative. For instance, the Wii was a success due to its redesigned and unique controllers that seem to naturalize the gaming experience (Gamble & Thompson 2010). The addition of motion sensitivity sensors and ports to facilitate more add-ons was a winning strategy for Nintendo (Liebeskind 2003). The company should however ensure that the quality of their products is not compromised.

For instance, the poor graphics and lack of a standard DVD rom on the Wii cost significant jitters from the industry analysts. This implies that a significant number of consumers who preferred better displays were left out. The company should therefore come up with ways of ensuring that up to date technologies are adopted without inflating the costs.

On the other hand the video gaming devices produced by Sony have high capabilities as they use advanced technology. This means that Sony has to sell its products at higher costs in order to make profits compared to Nintendo. The sophisticated nature of its video game products also limits their use to hardcore gamers only (Mulcaster 2009).

The company should therefore follow in Nintendo’s footsteps and produce innovative video game devices that will appeal to casual and first time gamers. The company should also rethink on its quality strategy as it is resulting into marginally higher prices that are not going down well with the consumers. As a corrective measure, Sony should adopt a cost cutting strategy. Such a strategy can implemented through spreading of the fixed costs on a variety of units to lower the cost of production (Jonson & Scholes 2008).

References

Afuah, A 2011. Strategic innovation: New Game Strategies for Competitive Advantage, University of Michigan, Michigan.

Gamble, J & Thompson, A 2010. Essentials of Strategic Management, University of Alabama Alabama.

Jonson, G & Scholes, K 2008. Explorig Corporate Strategy, Prentice Hall, Essex.

Liebeskind, J. 2003. ‘Knowledge Strategy and the theory of the firm’, Strategic Management Journal, vol.11, pp. 345-356.

Markides, C 1999. ‘A dyamic view of strategy’ Slan Management Review , vol.40, pp. 55-63.

Moncrief, J 2004. ‘Is strategy making a difference’, Long Range Planning reveiw , Vol.32 no.2, pp. 273- 276.

Mulcaster, W 2009. ‘Three Strategic Frameworks’, Business Strategy Series , vol.10 no.1, pp. 68-78.

Nag, R, Hambrick, D, & Chen M. 2007. ‘What is strategic management, really? Inductive derivation of the Consensus definition field’, Strategic Management Journal , vol.28 no. 9, pp. 935- 955.

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