Nintendo Case

INTRODUCTION

Nintendo is a well-known gaming company that was founded on September 23, 1889. Beginning as a handmade card company, Nintendo has evolved into one of the biggest international producers of video game consoles and games. Today, it continues its legacy with the Nintendo Wii, which has reportedly sold almost 50 million units shipped worldwide since their 2006 launch, 22.96 million consoles alone in the United States (VG Chartz).

Nintendo is currently doing very well as a company (Refer to Financial Statements in Figure 1 and 2). However, all businesses need to make changes and improvements in order to keep a step ahead of the competition. As part of this case study, we will explore Porter's Five Forces and how they apply to Nintendo's current status. The second half of this paper will discuss what we feel Nintendo needs to do to stay ahead in the industry and how to achieve those goals we've set out.

FINANCIAL ANALYSIS

Financial ratios are chosen as means to analyze the financial statements as they provide a relevant summary of financial information. Furthermore, they serve as a control for size differences among companies, enabling meaningful comparison across the industry, and also over time. In our analysis of Nintendo financial statements, we obtained ratios for five time periods, 2004 through to 2008, for evaluation. These ratios will be benchmarked against the industry average, as well as the average major competitors in the industry that are most similar to Nintendo in terms of sales revenue and total assets.

Liquidity Analysis

For the past five years, Nintendo's Quick ratio has generally decreased since 2004. Nevertheless, at a value of 2.903, it remains significantly higher than the industry and competitor's average (Thomson). This reduction in liquidity can be attributed in part to the recent increase in current liability which spiked in 2006, probably due to the development of the Wii. Moreover, Nintendo's Quick ratio is still strong, and shows that there is little concern for liquidity risk.

Solvency Analysis

The Debt-To-Equity ratio for Nintendo has been constant for the financial years 2004 and 2007 at 0.00. The figure has however increased to 0.06 in 2008 (Thomson). This shows that Nintendo increased its reliance on debt. It shows that Nintendo is still operating on a very low proportion of debt. This could be attributed to research and development costs for future Wii products.

Efficiency Analysis

Throughout the years, the Total Assets Turnover ratio has been on an upwards trend, with the ratio in 2008 at a five year high of 0.94 (Thomson). However, this is lower than the industry average. This difference, being small, calls for no concern. On the other hand, it is important to note that the upwards trend signifies gradual improvement in Nintendo's operations efficiency. This could imply that Nintendo is actively seeking improvements in its operations, which could translate to even higher profitability in future years.

Profitability Analysis

As a profit organization, profitability is a vital measure of performance. Generally, Return On Assets (ROA) has been increasing from 2004 to 2008 7.01 to 9.67 and Return On Equity (ROE) has been increasing from 8.62 to 12.52. The Gross Profit Margin has only increased slightly from 2004 to 2008, 40.34 to 41.25 (Thomson). This shows that Nintendo has been getting more profitable over the years and we expect this trend to keep up with constant product innovations and improvements.

NON-FINANCIAL ANALYSIS

PORTER'S FIVE FORCES OF ANALYSIS

Threat of New Entrants

The threat of new entrants would be considered to be relatively low due to high barriers of entry; only entrants with large amounts of resources could enter. Despite the high barriers of entry, one big entrant in the industry coming out in the fall of 2009: OnLive. OnLive is a new company that has the chance to revolutionize the gaming industry. This new product throws out the idea of having to use a powerful piece of hardware (console or PC) to run games by using a USB drive to access OnLive's database of games, which can stream games directly to your screen (OnLive). In an industry that anticipates changing from selling hard copies of games into an industry that sells downloadable games, this could be the beginning of that movement.

Bargaining Power of Buyers

The Wii has a lower retail price of $250 as compared to competitors, Xbox 360 and Playstation 3, due to price sensitivity of buyers with the quality of the graphics. There is a relatively low concentration in purchases of large volumes relative to seller sales, as Nintendo Wii is catered mainly to individual. The quality of the Nintendo Wii is important in relation to the price of the buyer's product due to intense rivalry between the gaming consoles. Due to lower-powered hardware in the Wii, the manufacturing costs compared to competitors is substantially lower. Consequentially, this allows Nintendo to sell the Wii at a lower price. Therefore, we feel that the bargaining power of buyers is relatively medium to high for the Nintendo Wii.

Bargaining Power of Suppliers

Nintendo's inability to meet demand has been a left a negative mark on what looks to be by far the most-sold console in the industry. Currently, Nintendo's soul manufacturer has been Foxconn Precision Components (Caoili). This means that they must rely on this one company to produce enough consoles to match the very high demand of the consumers, so one can see how Nintendo ran into problems. The problem with having only one manufacturer is that Nintendo put all their cards into one company, which gives Foxconn Precision Components a lot of leverage on Nintendo because Nintendo has no other company to turn to in the immediate future in terms of production. For instance, if Nintendo demands Foxconn to produce more Wii's but Foxconn doesn't have the products or the ability to fund more production, the Nintendo Wii is handcuffed because of the bottleneck created by having only one manufacturer. Because of these issues, the power of suppliers is extremely high for Nintendo.

Threat of Substitute Products/Services

There are many games from the Wii which are non-exclusive due to independent game designers that supply to the console gaming industry. These games are also made available to customers using the Xbox