We can define two types of supplier: the hardware supplier and the software supplier. The hardware suppliers providing the elements needed to build the consoles have a low bargaining power because there have very low switching costs and there are a lot of them. On the other hand, the software suppliers (developers) have a high bargaining power because they choose and set the conditions to work with each console. Entry Barriers Entry barriers are high because of high R&D costs and the high capital investment needed to start a business in the console industry.
Internal Rivalry There is high internal rivalry among competitors because the core player market is growing slowly, competitors have high exit barriers and the products developed turn obsoletes in less than 5 years due to the fast progress of technology. The players in the industry are: Sony, XBOX and Nintendo. Buyer Power The bargaining power of buyers is high because there are many options with very low switching costs. Substitutes Low substitute power because they are not very similar (like TV or other entertainment device) and don’t fulfill the same exact purpose.
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Sony has few competitors due to high barriers-to-entry and startup costs but buyers and suppliers (game developers) have high bargaining power and low switching costs. Sony should target a new market as Nintendo did. We could call this market the casual players market. In order to get in this new segment, Sony will have to develop a more interactive way of using their console without dropping the numerous features to avoid losing their core player market share.
The key of success for Sony is to adapt a new technology such as Nintendo did with Wii that will enable the company to target a broader market and not only the males from 16-36 years old. The advantage of entering those two markets with one console is that Sony will enter a bigger market with bigger returns and consequently bigger economies of scales. Also, entering the casual player market is important for the company to avoid falling behind its competitors in both markets since this new segment will enhance the brand exposure and recognition.
The risk associated to this option is to turn this high performing console in a low performing console (as Nintendo did) and lose the core players customers that are very important to Sony financial stability and growth. A big challenge for this new console will be to cut costs in order to make it more accessible to customers, since the casual players market will definitely be “guided” by price. Vis-a-vis the Five Forces, if Sony were to pursue this option, the company will be competing in the core player market and on the casual player market.
On the casual player market the substitutes will have more power. Sony will compete with other activities such as watching TV, watching a movie and others living room activities. The main “purpose” of this market is entertainment in general while the core player market is about playing video games. Update: Sony and Microsoft had already implemented advanced interactive technologies. Nowadays, Microsoft has the most advanced software and hardware that don’t need controllers anymore, just your body.