Video Game Industry Porter's Five Forces Model

Porter’s five forces model is one of the environmental analyzing tools; which is used to analysis the external environment of a firm. According to the Porter’s five force model, the industry dynamics for each of the two strategic groups were identified to be as follows.

Strategic Group 1 (consisting of Nintendo, Sega and 3DO)

 

Threats of new entrants 

Threat of new entrants in this strategic group was relatively low due to the fact that these companies’ marketing strategies, technology advancements, market share, brand recognition, and learning experience curve was very high.

Rivalry among existing firms

Competitive rivalry in this group is generally strong due to the following reasons:

Competing sellers are active in making fresh moves to improve their market.

The number of rivals increases and rivals are of roughly equal size and competitive capability.

Buyer costs to switch brands are low.

Rivalry among the competitors is high which leads to different acquisition and strategic alliances of the different suppliers.

One or two rivals have powerful strategies and objectives and are located in different countries.

Threat of Substitute Products or Services 

There is high threat of substitutes in the video game industry due to the following factors:

Sales of substitutes were growing faster than sales of the industry being analyzed.

Sales of the substitutes are high at the time of seasonality because the teenagers spent more time outdoor in warmer weather and less time in indoor playing video game.

Bargaining Power of Buyers

As the buyers’ switching cost to competing brands and substitute products were low, and retailers only took a company’s product if they had a strong brand name backed with advertising, the bargaining power of buyers was considered to be strong.

Bargaining Power of Suppliers

Bargaining power of suppliers was relatively low in this case because strategic alliances with selected supplier provided attracted win-win opportunities. Also, the strategic group members posed a threat to integrate backward into the business of suppliers and to self manufacture their own requirements.

Strategic Group 2 (consisting of Atari, Phillips and Sony)

Threats of new entrants

Threat of new entrants in this strategic group was relatively high due to the fact that these companies’ market share was comparatively low, technology was getting obsolete and turnaround strategy was being implemented which resulted in the shutdown of some divisions. Brand awareness was also low.

Rivalry among existing firms 

Competitive rivalry in this group is generally weak as industry members were moving infrequently, in a non-aggressive manner to draw sales and market share away from rivals.  They were mainly only focusing on their own sales and market share.

Threat of Substitute Products or Services

There is high threat of substitutes in this strategic group due to the fact that consumers had very low brand recognition of the video game segment of these companies. 

Bargaining Power of Buyers

As the buyers are few, bargaining of buyer would be high and it will be a buyer market.

Bargaining Power of Suppliers

Suppliers are many as their bargaining power is low.