Marketing Project 05BSP069

An Analysis Of

SONY COMPUTER ENTERTAINMENT inc.

BY

Ioannis Samaras ID:A589718 Word count:9500

Contents

Introduction…………………….. …………………………...………… Page 4

Strategic Standpoint………………………………………...………… Page 4

Situation Analysis……………….…………...………………….….… Page 5

Environmental Analysis……….………...…………………………...… Page 5

Political factors………………………………………………… Page 5

Economic factors…………...……..…………………………… Page 6

Socio-cultural factors…..………………………………...…… Page 6

Technological factors…………………………………………… Page 7

Environmental factors………………………………………… page 8

Key Macro success factors……………………………………… page9

Porter’s Five Forces………………...………………………………..… Page 9

Intensity of Rivalry Among Existing Competitors……….. Page 10 Threats of new entrants……………………………………. Page 11 Threat of substitutes………………………………………. Page 11

Bargaining power of suppliers…………………………….. Page 12 Bargaining Power of Buyers……………………………….. Page 12

Downe’s Three Force........................................................................... Page 13

Digitalistion……………………………………………………... Page 13

Deregulation…………………………………………………….. Page 13

Globalisation…………………………………………………… Page 14

Strategic Group Analysis….…………….…………………………… Page 15

Sony…………………………………………………………….. Page 15

Microsoft……………………………………………………….. Page 16

Nintendo………………………………………………………… Page 17

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Internal Analysis……………………………………………………… Page 18

Product Life Cycle………………………………………………. Page 18

Corporate Portfolio........................................................................ Page 19

BCG Matrix………………………………………………. Page 19

Market Attractiveness…………………………………… Page 19

Strategy Guidelines………………………………………. Page 20

Strategic Capabilities and Resources…………………… Page 21

SWOT Analysis……………………………………………………. Page 22

Strengths…………………………………………………….. Page 22

Weaknesses…………………………………………………. Page 23

Opportunities………………………………………………. Page 23

Threats……………………………………………………… Page 24

Marketing Strategy……………………………………………… Page 24

STP Approach to Segmentation………………………… Page 25

Strategic Options Analysis……………………………………….. Page 27

Implementation and Control…................................................... Page 28

Marketing Mix…………………………………………… Page 28 Organisation……………………………………………… Page 29 Control…………………………………………………… Page 30

Conclusion……………………………………………………… Page 30

Appendix………………………………………………………... Page 31

References ……………………………………………………… Page 34

Bibliography …………………………………………………… Page 36

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Introduction

Sony Computer Entertainment Inc is the company which manufactures,

distributes, markets and sells Playstation. Sony Computer Entertainment is a division

of the Sony Corporation. Sony Computer Entertainment Inc is based in Tokyo, Japan

with subsidiary divisions in America, Europe, Korea, China and Japan.¹ Playstation is

the leader in market share and PlayStation 2 is the most popular gaming platform in

North America, Europe/PAL territories and Japan/Asia, the only gaming platform to

enjoy such widespread global success.²

Key competitors of SCE are Microsoft and Nintendo. Industry is facing the

change, that the new generation consoles will bring with Playstation 3, from SCE, the

already launched XBOX 360 from Microsoft, and REVOLUTION from Nintendo.

The electronic game industry is in the middle of a transformation as it has

evolved from a niche industry into one of the most dominant sector in the media and

entertainment business³. Capitalising on technological advances SCE can exploit this

spectacular growth that has the potential to continue through the end of the decade.

The aim of this project is to analyze the external and internal environment of

Sony Computer Entertainment and create a SWOT analysis to assess where marketing

strategies could improve SCE’s positioning and competitive advantage. BAP 1

coursework studied the video game industry more generally and gave an overview of

the environment in which the key players deploy their strategies. This study will take

a deeper view assessing the internal and external environment of one key player Sony

Computer Entertainment inc..

I chose the specific company because of its rich and unique brand personality

but also because of the growth the company can achieve exploiting and interpreting

the external environment, better than the competitors.

Strategic standpoint

Sony as a company has a very clear mission statement: “Sony is a company that

is deeply involved with culture, it is our mission to pursue the dreams and emotions of

our individual customers, in addition to bringing them advanced technology and

economic value

4

Individuals' creativity is an essential ingredient to realize these objectives”4. The clear

nature of the statement helps Sony be consistent with its mission. Every decision it

makes and every business objective it sets, is based on this idea of pursuing the

dreams and emotions of consumers. The focus of Sony in these principles help it be a

market leader and innovator for many years and it should adhere to them in the future

as well.

Situation Analysis

Environmental Analysis

The remote environment of a company is the an area that a business has no

significant control over, but which heavily affects the way a company operates. 5 An

analysis of the remote environment of a company is really important because it can

bring changes to the way it operates. This is where trends and strategic issues start

from. PESTEL is a strategic tool, useful in modelling the macro-environment of SCE

and identify factors that can have influence on its strategic directions.

Political factors

There are two major political issues in the video game industry that create

implications for SCE. The first is the debate on whether video games are harmful for

children due to ultra violent content. There have been many efforts on the part of state

and local legislative bodies to regulate access to games. However, the courts have

ruled seven times in five years “that computer and video games are protected speech,

and efforts by these legislative bodies to ban or limit access to or the sale of games

they find objectionable will inevitably run afoul of the First Amendment of the United

States Constitution”.6 SCE and the industry as a whole tries to prove the unsoundness

of this accusation by promoting stats and debates that stress for example that the

average American video game player is 33 years old and  The average game buyer

is 40 years old or that the Violent crime, particularly among the young, has decreased

dramatically during since the early 1990s while video games have steadily increased

in popularity and use. However this doesn’t seem to have affected the industry in

terms on sales at all. Additionally to my opinion, the broadening of the demographic

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and the family targeted orientation of SCE and the rest of the industry leads to more

family-friendly game content with more socialization and less violence.

The second issue that the industry has to confront is the piracy issue. SCE has won

a landmark case in the British High Court, with a judge ruling that “the sale of mod

chip devices for the Playstation 2 is illegal under the UK's implementation of the new

European Union Copyright Directive”.7The chips circumvented the built-in protection

of the PS2 and allowed the console to play pirate and imported games. According to

the president of SCE, “SCE is sending a clear message to manufacturers and

distributors of mod chips throughout the PAL territories that it will continue to pursue

legal action against them”8. Furthermore the industry has shown will and

effectiveness in dealing with piracy issues which had, since now, very little impact

on sales and industry rather acts proactively and wisely.

Economic factors

For Sony Computer entertainment it is imperative to analyze macroeconomic

and micro economic factors to analyze key strategic issues, problem areas, and

opportunities. The economic factors determine the nature of the competition within

local and global markets.

Macroeconomic stability - Macroeconomic stability is the major factor that affects

the potential of console sales and console game sales. Low interest rate creates a

strong stimulus for consumer spending, whereas high interest rate creates a strong

stimulus for saving. Long term macroeconomic stability leads to a strong consumer

confidence and this is one of the major sales drivers. The gaming industry depends on

economic state as it affects inflation rate, interest rate and disposable income of the

consumer. In terms of marketing strategy the economic factors determine the future

market value and might influence the budget allocation for promotion activities and

new product development of SCE.

6

Socio- Cultural factors

In my opinion the first element of the industry that changed over the years is that

video games is not a niche market any more. Video games are now standard part of

our culture. Twenty years of video game history behind us forged a huge video game

generation (90 millions in U.S alone), supporting an industry which is in the centre of

the new mainstream and not the “geek haven” as many might have assume. Video

games has become a central ,defining part of growing up for many millions of people

.I believe that this realization is very important for the industry to understand ,as

Porter notes, not only “the competitor’s assumption about it self “ and the

competitor’s assumption about other companies” ,but in sociological terms ,to

understand the huge impact that it has to the society.

Price sensitivity –Price has become a key determinant of purchase choice. Various

consumer groups have used to various offers and always look for the best price

opportunities.

MMO games - The recent vast development of Massive Multiplayer Online games

shows that games become the new communication media. At the same time, both

game publishers and PC and console hardware companies might use various

opportunities to maximise sales and increase the customer loyalty.

Fashion - More and more consumers are becoming fashion conscious. Their choice of

product strongly depends on the appeal of product mix and its congruence with their

self-concept.

Broadening of demographic - A marketing refocus by Sony with greater emphasis

towards club culture and "twenty-somethings" resulted in a much older initial

PlayStation user-base than pervious consoles had achieved and this resulted in a

broader social acceptance. This led to a broadening of demographic with appeal to

female gamers and baby boomers.

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Technological factors

Next generation consoles – The introduction of new generation consoles will change

the preferences of different customer segments. At the same time, is certain that it will

require certain time till the proper market adoption of new generation consoles will

take place. Not only it will have to do with the process of market adoption of new

product, but with mere availability of sufficient range of games for new consoles.

New distribution channels - The continuous technological development, especially

in the area of digital and communication technologies create new operating

opportunities such as new marketing mix channels, new service encounter

environment (online sales) and new market research tools. According to Mintel

(2004)9 more and more retailers and switch to new cost-saving distribution channels.

Internet usage – The current penetration of Internet creates the stimulus for the

increase use of Internet as information and transaction zone. The major issue is the

current tendencies towards Internet consumption which vary respective of a country

of operations. For instance Internet transactions in EU countries account for 10%,

while in US it is 30%. It means that with the further increase of Internet as transaction

area distributors with well-developed e-capabilities will have increased sales and

market coverage.

New information requirements - The introduction of new technologies have

changed the nature of customers’ expectations, creating new zones of tolerance.

Today, customers expect more flexibility, speed and dependability from retailers, than

before the introduction of web-based technologies.

Cheapness of Computing Power- As processors have dropped in price, both

consoles and PCs have added high-end CPUs and graphics chips. All gaming

hardware is now fast enough to meet any requirements that game developers may

have .Processing power is no longer a restraint in the development of more advanced

graphics and sounds in games.

Environmental factors

8

Two environmental concerns are commonly associated with console games:

Health related concerns First is a general perception that impact of frequent gaming

on young people’s health. Players have complained of eyestrain, headaches, chest

pain, fatigue and mood swings (Tazawa et al. 1997). However this perception may

subject to change as research shows contrasting outcomes that there is the view that

considers such side-effects to be ‘relatively minor or temporary’ (Griffiths 2002) and

that finds playing computer games is comparable to a mild intensity exercise: with

normal use, playing may neither improve nor harm physical fitness (Emes 1997).

The compliance with safety requirements– Sony Europe shall resolve the issue

regarding the possible threat of fire hazards and overheating of PlayStation 2

Adapters. Sony plans to counter this ecological factor by not only ensuring heat

resistant technology but also continuous recalling of complained adapters all from

everywhere possible to assess the potential effects and respond to this problem

effectively by renewing adapter technology.

Key macro success factors On the basis of the macro environmental analysis the following key macro success

factors can be defined:

-The importance of price as the important determinant of the positive sales

decision,

-The importance of fashion trends for Product Mix,

-The impact of Internet in terms of MMO games as Product and Promotion Mix,

and the importance of new distribution channels for Place Mix,

-The compliance with censorship regulations especially when doing co-marketing

activities with leading game publishers,

-The consideration of ecological issues when developing both Product and

Promotion Mix. Sony needs to make sure that it products comply with the health

and safety standards and that consumers are aware about that.

Porter’s Five Forces

9

When studying a company in an industry it is very important to asses its operating

environment,10 industry structure has a strong influence in determining the competitive

rules of the game as well as the strategies potentially available to a firm this area will

analyze the five key forces that porter highlights and affect SCE‘s strategies. These

forces determine the intensity of the industry competition and profitability. (Porter,

1980, Pg3).

Intensity of Rivalry Among Existing Competitors

Rivalry occurs when one or more competitors either feels the pressures or sees

the opportunity to improve position and this can be done by products introductions,

advertising battles or price competition (Porter, 1980, Pg.17). Video game industry is

marked by an oligopolistic control over hardware (consoles) by the three key players

and tremendous competition. Sony and Microsoft seem to follow the second path of

competitive strategy through offensive strategic moves in an attempt to differentiate

its products with innovations in marketing and technology. Nintendo seems to have

lost its competitive edge and sheets back and waits the moves of the two players since

it is the weakest of the players. However each firms core strategy is based on the same

basic business principle: the money is in the software because development and

manufacturing costs keep consoles at a break-even sale price in most consumers price

points. The incentive to sell consoles below cost is created by the need of a large

installed user-base. In order to generate the required profits to compensate for the

losses from the console sales manufacturers must have a critical mass of possible

users to take advantage of significant network effects.

Despite the findings of H-H index measurements that the US market benefits

when there are more viable players (Dimitri Williams, the international journal of

media management, vol. 4,p. 44), The proprietary nature of the console market

decreases the chance for any spirit of cooperation between the oligopolistic firms.

Video games are now a standard –based industry, with the expected importance of

first mover advantage, mass acceptance of the product and technical innovation.

(Gallagher and Park,2002).On this Microsoft hopes to exploit the first mover

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advantage with its launch of XBOX 360. The only common interest the players have

is not in each other but in the health of the industry. In fact they have a disincentive in

doing this because their fighting over the same potential user base. One firm’s gain

in network effect is likely another’s loss, so the drive to acquire the consumers first is

of defining significance.

Threats of new entrants

The console market segment is highly competitive and requires significant

capital for entry. In fact since Nintendo and SEGA popularized consoles in the late

80’s, only SONY and MICROSOFT have been able to enter the market successfully,

Sony technology know-how and marketing resources gave them the advantage to

enter the market and dominate it. Technology changes with each generation of

consoles, so relationships with suppliers such as CPU and graphics chip makers are

critical. Without similar resources, it will be difficult for a new player to repeat such

an entry. New entrants would also have to face the battle of an installed base of users

and software that current players possess. Sony and Microsoft also had arguably

weaker rivals (Nintendo and Sega) to defeat than an entrant today would have. On the

other hand the three players have posed significant brand barriers by building their

brands through marketing and advertising. Additionally new entrants will have to

confront long-term relationships of the players with the retailers and matured

distribution channels.

.The dynamics of the handheld market are similar to those in console gaming,

where significant capital and infrastructure are needed to challenge the market

entrants. Sony will have to base its strategy in this segment on the positioning of the

product in that to aim a different target market through software titles or content of

the games since NINTENDO DS aims the a broader segment with no appeal to hard-

core gamer.

Sony has a very strong product differentiation Which means that it has a very

strong brand identification and customer loyalty, which comes from past advertising,

customer service, product differences or simply being first into the industry.

(Porter,1980, Pg 9) .This means that there are very strong barriers to entry for new

companies that will have to create a new brand from scratch and risk their

investments.

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Threat of substitutes

Sony competes in two different areas. The first area is the direct competition

with the rest of the players where Sony tries to persuade new customers to buy its

consoles (handheld or normal) rather than a substitute and broadens its installed base

(market penetration). The other indirect competition occurs in broader context where

Sony competes on the entertainment consumer expenditure for substitute products as

CD’s, DVD’s and PC games. Substitute products limit the potential return of the

industry by controlling the prices that can be charged. People will buy substitute

products if they are cheaper and have a similar effect (Porter, 1980, Pg 23). Sony

however, with great amount of investment in marketing and advertising has achieved

an outstanding level of brand loyalty. Along with the cutting–edge content of its

software titles and strategic price cuts in consoles have achieved to eliminate the

impact of other substitute and gain a huge market share in all markets.

Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an industry by

threatening to raise prices or reduce the quality of goods or service (Porter, 1980, Pg

27). In the video game industry the most important suppliers are the suppliers of

processor chips because there lays the power of each machine to handle more

information and richer content. With the advance in the specific field of the last years

the success of each machine will depend upon the power of the chip every machine

wears .Sony Microsoft are trying to develop the quantum leap in computer power

and graphics that gamers have come to expect with each new generation of console

Technology. Given the massive investment required in the new generation of console

technology is unlikely more than two will survive. Sony plans to take the lead in the

new generation with and along with Toshiba and IBM created a new chip called “cell”

which it is said that it will revolutionize the industry. These kind of collaborations

will significantly increase the cost of Sony’s cost over the life of the product but it

will keep making money from software titles. The high technology nature of the

industry and the cost inducted tend to favour rather a collaborative way of working

with supplier’s because they of unique importance for the life of the industry.

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Bargaining Power of Buyers

There are two main buyers of SCEE products: retail outlets that buy consoles

and software titles to sell into the second section of buyers ,consumers. In the light of

the fierce competition and wide variety of substitutes consumers enjoy a strong

bargaining power. At the same time, Game Industry specialists claim that the

development of specific game communities might create strong consumer attachment

both to a specific game title and to a game platform.

Downe’s Three Forces

Downe’s identifies three new forces that require a new strategic framework and

a set of very different analytic and business design tools: digitalization, globalization,

and deregulation. This will be a compliment to Porter’s Five Forces as the changing

environment of the world demand a more up-to-date analysis.

Digitalization

As power of information technology grows, all players in a market will have

access to far more information, thus, totally new business models will emerge in

which even players from outside the industry are able to vastly change the basis of

competition in a market.11 The internet as a new distribution channel has a significant

impact in the industry. On line retailers have put a great pressure in the regular

retailers as they see the consumer moving towards the internet for

purchases .Furthermore the adoption of high speed Internet through DSL or Cable

modem connection. Services will increase the accessibility of on-line gaming, such as

massively multiplayer online gaming (MMOG). According to a study from ABI

Research12 the video game market will expand from $32.6 billion in 2005 to $65.9

13

billion in 2011 as a result of its fast-growing online and mobile gaming segments.

Sony is committing considerable resources to the development of online services for

their respective machines

Deregulation

Deregulation occurred over the last decade with governments removing their

influence in many industries due to industries to restructure.13 In video game industry

there was not a great deal of change in terms of restructuring but SCEE has seen the

possibility of transferring the video gaming on the internet enhancing its product by

exploiting the tastes of the gamers and advantages of playing online.

Globalization

Improvements in distribution logistics and communications have allowed nearly

all businesses to buy, sell and cooperate on a global level.14For a company to be

successful in the interactive entertainment business it must operate on a worldwide

basis. Sony was one of the pioneers in that sense and was the first global company in

the industry to have strong footholds in the three core markets: Japan, North America

and Europe. Sony’s performance till this moment shows that Sony will be able to

cope with the factor of globalisation in the future and even take advantage of it using

its valuable know-how.

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Strategic Group Analysis

Sony

As it strived to do with the original PlayStation, Sony has built up a considerable

support base of developers and publishers. Indeed, strong third party publisher

confidence underpins Sony's continued success and since most development projects

during the last two cycles have been PlayStation-led, Sony has been guaranteed a

consistent flow of software releases which in turn has lead to consistent hardware

sales. This momentum has given Sony doubtless leads during these cycles.

Despite having predicted the advent of online console gaming in 2001, and with a

many years of trials and service development behind it, Sony has been remarkably

slow to evolve its online proposition to a commercial stage, especially in Europe

where Microsoft beat them to a full launch and is widely acknowledged to maintain a

technical and strategic lead. Sony certainly views online as critically important to its

overall console business strategy but has not yet developed a commercial strategy.

Sony's PlayStation 3 console is expected to ship in mid or late 2006 and online

is expected to be a greater priority for the next cycle .”Sony is expected to lose market

share in the next cycle with its 67% peak market share of hardware sales in the last

cycle reduced to around 50% in the forthcoming cycle. Microsoft is expected to be the

sole beneficiary of this with its share of the overall market forecast to increase from

around17% to 36 %”.( Games Investor )15

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Sony has also now made its first major assault on the portable games market

with PlayStation Portable (PSP), launched in late 2004 (Japan) and 2005 (North

America and Europe). Third party publishers have rallied behind PSP as well as

movie companies looking to provide PSP-compatible versions of its major DVD

releases. PSP has already impacted the handheld market with 2005 shipments of the

product just below direct competitor Nintendo's DS. According to Games Investor 

PSP will take as much as 50% of the total handheld market in 2006-200716.

Nintendo

Nintendo has consistently failed to secure meaningful third party publisher

support alienating publishers either by using high cost/risk media or by offering

unattractive third party licensing terms and conditions. In addition, its restricted

support for third party developers and relative unwillingness to court third party

publishers is in contrast to Sony and Microsoft and has certainly contributed to its

console market collapse. A key tactical error has also been its failure to re-establish a

full publishing office in Europe (rather than just a sales and marketing department)

which has resulted in the underperformance of the territory relative to others.

Nintendo's decision is bizarre as the European games software market is now similar

in size to the North American market and considerably larger than the Asian market.

However, Nintendo shows no sign of changing its strategy.

Indeed, in the face of increased competition and further forecast market share

declines, Nintendo appears intent on retaining most of its major home console

strategies for its next-generation console, the Revolution. Revolution is due at some

point in 2006 and is not expected to compete directly with Xbox 360 and PS3. Whilst

Sony and Microsoft intend to use processing power as a key marketing battleground,

Revolution is relying upon a combination of low hardware price, innovation (such as

its movement-sensitive controller) and software to sell.  Nintendo aims to capture the

children and casual gamer market as a result. The problem with this approach is that it

will further alienate third party publishers and make Nintendo even more reliant on its

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own software than with previous consoles. Most third party publishers are focused on

the hard-core male gamer and regard new demographic targets as being of high risk.

At the same time, Revolution's relatively restricted processing power will likely limit

the porting potential for publishers creating multi-platform titles for Xbox 360 and

PS3. However, such is the strength of Nintendo's software, Revolution will

undoubtedly sell although I believe it will come a clear third in the new cycle.

Following the 10 year shelf-life of its original Game Boy handheld console,

Nintendo has released five different handheld platforms over the last six years. The

most recent machine, the Nintendo DS, a dual-screen, touch-sensitive and wireless

enabled handheld, launched in Japan and the USA in November 2004 and Europe in

early 2005 and was clearly designed to counter the threat posed by Sony's multi-

functional PSP. Nintendo's DS is currently outselling the PSP in most major territories

although according to DFC intelligence Sony will overtake the DS in 2006/2007.17

Microsoft

Microsoft has learned from the mistakes made with the original Xbox and has

created a console that can properly benefit from manufacturing economies of scale

and efficiency redesigns (which Microsoft struggled to do with the original Xbox) and

has improved the support it provides to third party developers and publishers. It is

expected for Microsoft to make some substantial market share gains, primarily at the

expense of Sony but also Nintendo. Xbox 360 is expected to double the market share

gained by Xbox to reach around 36% in 2009. (DFC Intelligence). It is believed that

Microsoft will surpass Sony primarily due to the continued underperformance of the

Xbox 360 in Japan.

One market in which Microsoft does have something of a lead over Sony and

Nintendo is the online console gaming market with Xbox Live enjoying a successful

US launch in late 2002 and a European launch in March 03. Microsoft has been first

to offer a revenue-generative online service with both subscription revenues as well as

micro-billing enabled premium content downloads. Third party publishers are already

17

generating useful incremental revenue from Xbox Live and this looks set to grow

substantially with Xbox 360.

Internal analysis

The internal analysis of a company enables managers to observe how the

company is functioning. This analysis is focused on the internal environment and

helps understand what are the strategic capabilities of the company ,what are the

recourses that can base its competitive advantage and what future strategies should be

pursued.

Product life cycle

Product life cycle is a useful tool for conceptualising the changes that may take

place during the time that a product is on the market18 and its phases are, introduction,

growth, maturity and decline. SCE in general follows the “video game cycles”. The

video game industry is characterised by cyclical patterns which are referred as “video

game cycles”. These cycles last 5 to 6 years and re-start when the new-generation of

hardware is introduced. The exhibit below depicts the video game hardware cycles.

Internally SCE has to manage two products that are in the second “video game

cycle” and it prepares it self for the launching of the PS3 .The two products that has to

manage at this point of time is PS2 and PSP (Portable Sony Playstation). The

cumulative worldwide shipment of PlayStation®2 had reached 100 million units as of

November 29th, 2005, breaking the record as the fastest computer entertainment

platform to reach this remarkable figure. This achievement comes within 5 years and

18

9 months since its launch in Japan in March 2000 with 37.14 million units (launch

date: November 24, 2000) in Europe/PAL territories only.19

PS2 is in the maturity stage since sales hasn’t fall only a couple of months

before the final stage of anticipation of PS3. But SCE makes still money from it by

introducing new software titles since PS3 is going to be backward compatible.

Moreover at this stage PS2 is supported by price cuts and introduction of new

enhanced models that keep the momentum of sales till the end of the cycle.

The PSP is in the growth stage of the product life cycle and had a record

penetration speed for SCE of 10000 Shipments worldwide 10 months after its

launching20 .

It has to be noticed that SCE since now never leaves a product to fall in the

decline stage before the introduction of a new generation console and finds ways for

keeping the momentum of sales.

Corporate Portfolio

Key decisions regarding corporate portfolio involve decision of choice of which

brands/product lines to build, hold, harvest or divest.21 At this point of time SCE has

to Strategic Business Units which are the PS2 and the PSP. These two SBU’s have

different market shares and the markets that are in are in different phases.

BCG Matrix.

The Boston Consulting Group Matrix highlights the relationship between market

share and market growth (Jonshon et all, Pg 315).PS2 is considered a ‘cash cow’ as it

is in the maturity stage, it has a very high market share of the console market but the

market growth is low. However the market is affected by the moves and the standards

of the new generation console of Microsoft, XBOX 360. PS2 loses market share from

XBOX 360, competes directly with it as it has the first mover advantage in the third

video cycle and creates new potential for market growth.

PSP is considered a ‘star’ product as it holds already a 28%22 of the handheld market,

albeit second in market share after Nintendo DS .However the PSP is a younger

system, and has been out less than a year, while Nintendo has been in the handheld

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market for over a decade. PSP is in the growth stage with high market share and high

growth of the market. PSP is expected to eat into Nintendo’s handheld dominance.

Market attractiveness

The directional policy matrix categorises business units into those with good

prospects and those with less good prospects.23 In this analysis we will consider PS3

as well to show the relative strength pf the whole portfolio.(According to new

announces PS3 will be launched with delay in march 2007).Appendix is used to

show the prospects of the two SBU’s of Sony, PS2, PSP and PS3. PS2 has a very

strong installed user-base but its already loses market share from XBOX 360.As an

SBU is in very strong position since it is the market leader in market share, it has

established relationships with distributors and a powerful brand name. In the market

attractiveness axis PS2 lies in the low market attractiveness as it is a ‘second video

cycle’ cosole and has a low profit potential ,it lacks in chip power and graphics in

comparison with XBOX 360 and it seems les attractive not only to XBOX 360 but

also to the forthcoming PS3.

PSP, in the SBU strength matrix has a very strong position because it has a market

share of around 30% and it is only a 1.5 year machine in comparison with Nintendo

which is in the handheld market for around 10 years. It has the potential to develop a

differential advantage through positioning and strong brand name and can also base

its ascendant in market share. In the market attractiveness axis PSP holds equally a

very high position as the market is in the growth stage and has a great profit potential

since it is a much more powerful machine than Nintendo DS, albeit DS is a highly

innovative and puts efforts to be the leader in handheld sector.

The new PS3 console is a very highly anticipated console in the market since it

will be the most powerful in the market. PS3 with a history of a market leader brand

expects to have a great appeal on the consumers and high sales. In the SBU strength

axis PS3 will be very high as it will be the console that it will revolutionize the market

with real-life graphics, great investments in R&D and an established distribution

20

network. Moreover it has a high market attractiveness as the market in the beginning

of a new cycle with high market growth.

Strategy Guidelines

The directional policy matrix provides a way of considering appropriate

corporate-level strategies, depending on how the business units are positioned in the

matrix (Jonshon et al, Pg 319). PS2 falls into the ‘cash cow’ category in the BCG

matrix and in the low market attractiveness- high SBU strength zone in the directional

policy matrix. Therefore Sony should defend PS2 and hold sales and market share

with new software titles and introduction of product improvements, for example PS2

ceramic white. The excess cash generated should be invested in ‘star’ PSP or in the

new PS3 whose R&D was supported by PS2 cash flows.

PSP falls into the ‘star’ category in BCG matrix and the high market

attractiveness- high SUB strength in the directional policy matrix so the strategic

objective should be to build sales and market share through advertising, promotions

and brand building. At this point of time PSP is second in the market but has great

potential to outsell Nintendo DS and that’s the strategy Sony should follow.

PS3 probably will be the new ‘star’ of Sony although it may find difficulties due

to the first mover advantage of Microsoft’s XBOX 360.Gradually Sony should start

focusing in the substantial marketing investment in PS3 after its launch and start

divesting PS2 .

Strategic Capability and Resources

Strategic capability is the adequacy and suitability of resources and

competences, of an organisation, for it to survive and prosper. Resources enable a

company to have competitive advantages depending on how resources are employed.

(Jonshon et al, Pg 117) this is more likely to happen when companies have unique

resources and core competences that others is difficult to imitate and are deployed in

such a way as to achieve competitive advantage.

Physical resources of Sony is the consoles that it produces and the software

titles for its consoles (some of them produced internally, some from other companies).

Sony since the beginning of its computer entertainment division set a very high

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standard of computing power and appealing game content. As it strived to do with the

original PlayStation, Sony has built up a considerable support base of developers and

publishers. Sony has been guaranteed a consistent flow of software releases which in

turn has lead to consistent hardware sales. This ability to produce appealing software

titles based on effective networking is a competitive advantage. Software plays a

considerably more important role than hardware in determining the long-term success

of a console. Few people buy consoles based on hardware alone; most buy consoles

based on software releases and a regular flow of high quality software (original

products and existing brands/licenses) is therefore essential. For console

manufacturers, the most effective software is that provided on an exclusive basis. By

securing the exclusive platform rights to key brands such as Tomb Raider and Gran

Turismo, Sony provided significant incentives for gamers to choose a PlayStation

over other consoles.

Alongside with software titles Sony has a core competence in creating the most

powerful consoles in the market by creating more advanced chips than competitors

and thus more compelling graphics .This competence gives the ability to Sony to

differentiate its product and gain a competitive advantage.

Intellectual capital and human resources is a very strong resource of Sony. The

video game industry is a knowledge-intensive, userbase-led industry which has

technology in its core. The innovatory capacity and commitment to high performance

is a competitive advantage. Another core competence of Sony based in the

organizational knowledge is the ability to create marketing strategies that match the

needs and aspirations of target markets but also the capability to create a world wide

admired brand whose value is essential for the future success for the company.

Financial resources at present are good considering that Sony hasn’t yet

launched its next generation console PS3. Sales in the SCE fell 6.5%24 due to fall in

hardware sales of PS2 and strategic cut prices but also due to start up costs for

Playstation Portable. Is very important for SCE to have a balanced portfolio so that it

can minimize risk. Finances of SCE are directly affected by sales in software and

Hardware but also from the Product Life Cycle each of its products is.

SWOT Analysis

22

SWOT analysis summarises the key issues from the business environment and

the strategic capability of an organisation that are most likely to impact on strategy

development (Jonshon et al, Pg148). SCE can see how its strengths can be exploited

and assess future courses of action.

Strengths

SCE has a great number of strength .One of the most important of these is that it

has great potential for the future .SCE have a very strong brand name which gives it

brand loyalty and credibility in business relationships. Its new console is anticipated

with great amazement and this imminent product launch gives SCE confidence for the

future.PS2 is a ‘cash cow’ but its software units hit a record high for PS225,something

which is very good because software tittles give SCE far greater profits than

hardware. Moreover SCE have a wide selection of software titles that can support the

widening of the demographics and a great number of exclusive titles based on the

effective support base of the publishers and developers.

With regards to the running of the company and the resources it possess, SCE

have a committed and competent management which can lead SCE to long- term

future success. Furthermore SCE have a highly innovative R&D department whose

relationships with hi-tech industry can lead to long term technical superiority. Finally

SCE have a balanced portfolio with a ’cash cow ‘ and a ‘star’ but also a strong and

successful parent company which is committed to create value for it.

Weaknesses

One of the most obvious weaknesses of SCE at the launching of all its products

prices are higher than that of competitors. Provided the price sensitivity of casual

gamers, the price is a certain competitive weakness of Sony and this might alienate

casual gamers and the importance of price as the important determinant of the positive

sales decision should not be underestimated. Moreover , despite having predicted the

advent of online console gaming, and with a many years of trials and service

development behind it Sony has been remarkably slow to evolve its online proposition

to a commercial stage, especially in Europe where Microsoft beat them to a full

23

launch and is widely acknowledged to maintain a technical and strategic lead. Sony

certainly views online as critically important to its overall console business strategy

but has not yet developed a commercial strategy. The underdevelopment of massively

multiplayer online gaming (MMOG) solutions is an important weakness for Sony.

Opportunities

There are a number of opportunities for Sony, which could help them improve

their position in the market. Firstly, it is the winning of the battle for the living room.

Sony has already realized that the biggest battles in the electronic game market will

take place for the living room –and not only for the TV screen. The objective of the

next generation consoles for Sony should be, not only dominance in the game market

but also to be a leader in the digital convergence that takes place in the living rooms

around the world. This opportunity should be matched and interrelated with the

broadening of the demographics so that can incorporate the whole family and the

industry will keep expanding. There would be fierce competition from Microsoft but

Sony can exploit its delay of PS3 to work better on this direction.

The adoption of high speed Internet through DSL or Cable modem connection.

Services will increase the accessibility of on-line gaming, such as massively

multiplayer online gaming (MMOG). Sony is already committing considerable

resources to the development of online services for their respective machines but this

should be done to comparison to Microsoft in order to benchmark and offer more

appealing solutions to the customers.

Threats

There is a number of influences from the external environment that can pose a

threat on Sony. The most obvious threat at this point of time is the first mover

advantage it has with its new generation console XBOX 360. There are a number of

reasons this advantage exists. Microsoft will be able to increase sales quickly and

reduce the average cost of the product, over Sony. This allows Microsoft to have more

flexibility with pricing, either reducing the price to make it less attractive for new

entrants (increasing barriers to entry) or increasing the margin and therefore profit

24

while prices remain fixed, this additional profit can then be used for further

innovation. If Microsoft is able to achieve a lock-in of its installed-base. It will be

more difficult for Sony to attract those customers away from Microsoft.

Moreover Sony has a disadvantage in online services which will bring various

MMOG solutions to customers due to the first mover advantage Microsoft has with

XBOX 360 .However Microsoft’s on-line service is on pay whereas PS3’s

forthcoming on-line service will be free and this will make the product mix of PS3

more appealing to customers.

Marketing Strategy

Marketing Strategy matches the activities of an organisation to the environment

it operates in and its own capabilities, it is used to determine how a company should

position itself in the target markets in order to gain a competitive advantage.

STP approach to segmentation

STP approach to segmentation is used to ensure that a product is positioned in

the correct manner depending on the market segment is targeting. Sony’s strategy

within the Second video game cycle and its marketing objectives was to persuade

casual gamers to buy PS2. With PSP Sony wanted to transfer the same experience in

the handheld market. Sony positions its console as entertainment centers and as

unique gaming experience. Both positioning statements are duly supported by Product

Mix elements and the efforts of software developers.

The most appropriate method for identifying market segments in the video game

industry is the age criteria but also very important is the adoption basis for

segmentation. This two criteria blended with behavioral criteria is the best approach

to segmentation. The major objective for PS2 is to attract late majority and laggard

adopters to buy consoles. Hence target customers are segmented not only on the

demographic basis, but also on the basis of adoption basis.

25

The profile of PlayStation 2 gamers is constantly changing as PlayStation tries to

broaden its appeal to a wider audience. Although the majority of gamers are male, the

percentage of female gamers in growing, as is the average age of gamers

Average age 23.5 yrs

Age profile upto10 11-14 15-17 18-24 25-34 35+

7.5% 16.8% 11.3% 22.2% 25.1% 14.9%

Females 8.7%

Sony Computer Entertainment Inc: http://www.scee.presscentre.com/Content/Detail.asp?

ReleaseID=2294&NewsAreaID=17

As we can see the most attractive segment and bigger of all is the 18-34 segment and

their characteristics are that they are casual gamers who would like to explore video

gaming experience, prefer to play famous game titles and enjoy community and

online community.

Sales figures indicate that there is clearly increased usage of game systems

within households. This means more households have several users, own multiple

systems and have a tendency to purchase more software per system (higher tie rates).  

It also means that the system targeted to the broadest demographic may be the most

attractive to the growing number of households with multiple users. The broadening

of the demographics must be towards the family. Sony must achieve the broadening

of the target market through its software titles which should be made to attract all ages

and all types of players. the demographics are changing profoundly. In the USA,

across all platforms (including online and mobile) 43% of gamers are now female;

72% are over 18 (19% are over 50). Married females in their 30s-40s easily

outnumber hard-core gamers playing online and mobile games. So the new female

26

player is becoming increasingly important to the industry. The female gamer wants

shorter, kid-friendly lifestyle games with more socialisation.

To meet growth targets Sony must broaden its appeal further, and learn lessons

from truly mass media such as television and film. If the industry fails to broaden the

addressable market of console owners, growth rates of games software will not be

sustainable, and investment in the industry will dry up. Over the next decade,

recognising and exploiting these fundamental changes will become not just a critical

success factor but possibly also a survival factor for every games company.

So if Sony wants to expand the gaming audience it has to target specific

audiences .The most attractive audiences for this marketing objective are, except the

18-34 male target group, the female segment which is continuously growing but also

the older consumers, baby boomers, people who never thought of playing a video

game. This objective should be achieved through matching the marketing mix with

the needs of this to big target markets.

Strategic Options Analysis

Ansoff’s Matrix is a useful framework for thinking about the ways in which

growth can be through product strategy (David Jobber, Principals and Practice of

marketing, 2004, Pg 325) and it will be used to assist Sony strategic decision .the

results are shown in Appendix 1.Sony has a portfolio of products and it has to make

decisions of how to achieve growth. Growth can come from 4 different strategies and

these are market penetration or market expansion, market development, product

development and diversification.

The first strategic option for Sony is market penetration. This can be done

through strategic cut prices of PS2 in order to convert customers to buy PS2 and not a

competitor’s product. Casual gamers are price sensitive and bargain –seekers (Mintel,

2004)26 so there is a basis for strategic cut prices. This can be done in order to protect

the position and share of PS2. Another option for PS2 is to increase usage rate which

means that it should aim for households to have several or own multiple systems and

27

purchase more software per system (higher tie rates). Concerning PSP Sony can

follow a market penetration strategy in order to build the market share  of PSP more

and make it a market leader. This can be done through more effective advertising

and the increase in promotional expenditure.

Product development is another strategic option for Sony. The product

development option involves.This can be done by the development of Product Mix for

existing customer segments to match the current popularity of MMO games. This will

be done with the new PS3 which will aim the further broadening of the demographic

and it will be positioned as the “one stop digital centre” of the modern living room.

Market development is the third option and is where existing products are sold

in new markets. New market areas in the video game industry is the targeting of

female gamer and the male group of 35-55.This can be done by the broad range of

software titles and the aiming of software titles specifically to these demographics.

Furthermore Sony can add new characteristics to PSP and PS2 in order to make them

appealing to new segments with different buying criteria such as status, style ,fashion

etc. For example the development of fashionable PS2 (slim type, new colours and

design elements) to maximize mass market appeal.

For a company to be successful in the interactive entertainment business it must

operate on a worldwide basis. Sony, with the PlayStation, was the first company to

build a solid business in all three core regions (Japan, North America and Europe). 

The next growth challenge for Sony will be to expand into emerging markets while

maintaining growth in core markets. Emerging markets include South Korea, Taiwan,

Singapore, mainland Asia, Australia, Eastern Europe and others. 

Implementation and control

According to Hooley27 there are three elements of implementation: marketing mix,

organization and control.

Marketing Mix

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Sony must develop and implement a marketing mix that will match the needs of

the target market better than the competitors. The development of the Marketing Mix

should be based on the understanding of the customers. Product, price, place and

promotion are the 4P’s areas marketers must manage (Jobber, page 18)

Product: The environmental analysis revealed the importance of Product Mix as a

strong appeal to customers. Casual gamers are looking for enhanced gaming

experience. At the same time, the influence of fashion trends set specific requirements

for the development of new designs. To attract casual gamers, Sony shall strive to

maximise overall customer experience by offering attractive bundles and enhancing

entertainment capabilities of all its consoles. Additionally, the development of MMO

games will attract hardcore gamers and might enable certain gamers to switch from

other consoles.

Price: The SWOT analysis revealed that the price is one of the weaknesses. Hence,

to attract casual gamers Sony needs to make the Price Mix of its products be

competitive against direct competitors.

Place: Pratten & Scoffield (2003) name location as one of major competitive

strengths. Sony shall maintain the strong relationships with major distributors to

secure the availability of its products.

Promotion: According to Kotler (2002) promotion decisions encompass the range of

communication and motivation instruments needed to raise awareness and precipitate

purchase of the product. Sony shall use various mass media tools, including celebrity

endorsement and events to increase the overall hardware and software sales. Mintel

(2004) stresses the importance of POS promotions such as price reductions, special

offers and special editions and the importance of word of mouth communication.

29

People & Process & Physical evidence:Provided that the Sony’sproducts are

mostly goods rather than services it is very hard to define Process Mix, People Mix

and Physical Evidence Mix components. At the same time, C2C online activities and

gaming experience create various opportunities for Sony to manage People Mix and

Process Mix. Using Game mastering, holding tournaments and online competitions,

supported by game communities Sony Entertainment can make use of People Mix,

Process Mix and Physical Evidence Mix. In this case the involvement of other gamers

will create additional emotional benefits for customers and create the tangible

advantages of Sony’s products.

Organisation

In order to succeed a marketing plan should have the full commitment and

entrepreneurial will of the marketing department .Additionally the business should

design an organization that has the capability of implementing the marketing plan

and resources must be managed correctly ,to ensure that they are used correctly across

the entire strategy and are integrated appropriately. Sony has very competent human

resources and especially the marketing department is accordingly organised with the

target objectives set each time. To reflect the importance that Sony places to its

products and brand names the marketing department is product-base organised and

divided to brand managers for each product so that issues of each product can be

managed more thoroughly and effectively.

Control

According to Hooley ( Pg 55) as the marketing strategy is being executed the

marketing department must monitor and control the effort. The performance is

monitored on the basis of marketing and financial performance. Sony must monitor

the appeal it has to the targeted demographic of female gamers and males 35 to 55 and

target sales must be set for the software titles aimed at this target market. Additionally

Sony must monitor the appeal it has in the family as a whole in its pursuit to conquer

the living room and measure the increase of usage rate since its aim must be to

30

CompetitorsHigh

New entrantsLow

Buyers (bargaining power)High

SubstitutesHigh

SuppliersLow

increase the software titles ratio per console. . The collection of the feedback

information will be done on the monthly basis to evaluate the effectiveness of the

suggested marketing strategy. In case no or flat response to promotional activities,

contingency measures will be employed.

Conclusion

This report has studied the external and internal environment of Sony Computer

Entertainment Inc. using the tools that I think are the most appropriate for the specific

task. The findings showed that Sony faces a very challenging external environment

which is in the stage of great changes. A children's market until the early 90s, the

mainstream computer and video game user-base is now well into the 18-35 market,

thanks to an ageing base of gamers, game aesthetics which a broader range of people

can associate with but perhaps most importantly, Sony's novel concept of targeting an

older demographic when PlayStation launched. Moreover Software plays a

considerably more important role than hardware in determining the long-term success

of a console. Few people buy consoles based on hardware alone; most buy consoles

based on software releases and a regular flow of high quality software is therefore

essential. Sony’s internal environment analysis showed that Sony has a great potential

for the future if it continues to show the same novelty in marketing, relationships and

technology.

Appendix 1

31

Adopted from Porter (1990)

Appendix 2

Video Game Industry Primer Piper Jaffray Equity Research, May 2004

32

33

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34

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