External Environmental Analysis
May 9, 2019
Strategic Management Project 3
May 9, 2019
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External Environmental Analysis

External Environmental Analysis

Running head: KONAMI 1

KONAMI 18

Project 1: External Environmental Analysis

Travis Smith

Dr. Andrew Wyner

UMUC University

16 April 2019

Company Overview
Konami Holdings was founded in 1969 and was the brainchild of Kagemasa Kozuki. The company operated in the digital entertainment segment of the industry and was operating in four different segments which helped in diversifying the business model of the company. These four segments included games, health, entertainment (digital), and pachislot & Pachinko. Each of its businesses operates in a different segment but in the digital domain which helps in diversifying the business. The company has been operating for several decades and remained successful in establishing its places in the market. It is known for the mobile games it creates mainly but card games along with arcade games are also its specialty. Its health segment has provided credible products and services to clients in the health and fitness segment of the market. Not only does the company provide digital fitness products but it also creates machines for fitness that are widely used.

The company was mainly founded to create products for amusement and entertainment of people as it found a gap in the market. The founder of the company realized that there were not many companies operating in the digital entertainment segment and hence, decided to seize this opportunity to enter the market. The company’s capital kept increasing over the years and by 1979, it was selling products in the US. Given that the company had a humble start in Osaka as a repair and gaming shop, it proved to be a success story many years later through its constant innovation and proper planning. Although the company is known by its founder and current chairman, Kagemasa Kozuki born in Osaka, Japan and he is son of it must be noted that a few other people by the names of Hiro Matsuda, Yoshinobu Nakama, and Shokichi Ishihara also played a crucial role in the progress of the company over the years. It is interesting to note that the company’s name is an amalgam of the first letters of the names of all these people which highlights their importance in the success and progress of the company.

The games produced by the company were very popular in Japan which encouraged the company to start selling them in other regions as well. Amongst the international markets targeted by the company, USA turned out to be the most profitable one as the demand in this market was good. With the changing times and the popularity of the internet, the company also decided to evolve its business landscape by producing computer games. Just like arcade games and other products, the company was able to make its place in the domain of computer games in no time. The most popular computer games produced by the company includes Fortune Trip and Teenage Mutant Ninja Turtle. Today, the company provides software for popular gaming consoles such as Nintendo Wii, and Playstation. Hence, the company has remained successful in this market by actively evolving its business model and changing with the times to provide the best quality products and services to its target audience.

The company has been doing well in financial terms as well. It can be seen from the financial statements of the company for the past several years that it has a steady stream of revenue and profits. For example, in the year 2018, the company earned a revenue of 239,497 million Japanese Yen (JPY) and in 2017, it earned 229,922 JPY. According to Bloomberg, the company has 4,706 employees presently.

General Environment (PESTLE)
The external environment in which Konami operates is becoming competitive with every passing day. With new companies striving to get a larger chunk of the market share, it has become necessary for the existing companies like Konami to constantly upgrade their products and services and never stop innovating. In order to understand the external environment of the company in a better way, the section below presents the PESTLE analysis which sheds light on the political, economic, social, technological, legal, and environmental landscape in which the company operates.

Political
According to Osaki (2019, p. 2), Japan’s political landscape is going to be ‘hectic’ as it will go through massive changes in the year of 2019 such as the end of Emperor Akihito’s era and the commencement of a new time for the country. While it sounds exciting and progressive, it must be noted that political changes always come with uncertainty which impacts the economic well-being and international standing of a country. It is expected that political tension is going to increase later in the year which is going to impact businesses operating in all industries. For Konami, this will be a tumultuous time as its products do not fall in the category of daily consumption of necessity but are rather more inclined towards luxury. When such a situation occurs, people stop or reduce the consumption of luxury products and services. Some can say that the company has both B2B and B2C consumers which makes it better prepared for such challenges. However, it must be noted that the company’s B2B customers are eventually targeting B2C market where the customer demand will fall. Hence, this will impact both segments and all industries and decrease the profits of the company.

Economic
As mentioned in the prior section, the economic well-being of a company is linked with the political stability of the country. Given that the political landscape of the country is going through changes in this year, there is definitely going to be an impact, possibly negative, on the economy of the country. According to Osaki (2019, p.3), there is going to be an increase in consumption tax in Japan following the elections which will increase the rates from 8% to 10%. This will have a huge impact on the consumption pattern of people and hence, negatively impact the business growth of the companies in all sectors. Baird (2019, p.1) states that the income of people is barely growing in Japan which, when paired with the anticipated economic risks, will bring an economic downturn of a few years for the country. However, the country is one of the top three strongest economies in the world which provides it a cushion to fall on in cases of economic downtimes.

Social
The country of origin of Konami is Japan which has a unique social structure and cultural norms. The country is mainly comprised of islands four of which are big ones and the rest of the country is formed by numerous small ones. The country touches the Pacific Ocean on one side as well. In addition to that, the country is located on a major fault lines which means that it frequently is targeted by earthquakes. On top of that, the country also has several volcanoes. This means that geographically, the country is situated in critical region which is poses several threats to the well-being of the nation. However, the country has managed to survive all the natural disasters over time. It must be noted that the country is mainly an urban sphere as a large chunk of its population dwells in urban areas. The main and official language spoken in the country is Japanese. The country made sure that it brought unity in the nation by having one official language and one main dialect. Now, education is also given in Japanese in the country and official language is also the same. The Japanese society is strongly connected to its cultural roots which are given importance in everyday life in the country. The Japanese cultural forms the basis of even business life and is grounded in feelings of love and respect for others (especially elders). The highly educated population of Japan makes it necessary for corporations like Konami to be truthful in their messaging as the consumers are knowledgeable. In addition to this, Japanese customers are known for their desire for high quality products which puts pressure on the corporations to come up with the right match of products and services with the consumer needs.

Technology
Japan is known for producing highly innovative products. It is the home of companies like Samsung which is competing against Apple Incorporation all over the world. The country has good environment for the growth and progress of new ventures on the basis of its strong technological system. The country is rapidly embracing new technological trends and moving towards the creation of a smart society where AI and IoT will prevail and guide consumer experience. The government is very supportive and is trying its best to facilitate the development of technological landscape of the country. This means that for companies like Konami, it is imperative to constantly innovate to stay aligned with the country’s and consumers’ goal of being technologically advanced in every possible manner. When it comes to the gaming industry, artificial intelligence and internet of things are the two major trends that are dominating the technology world and will have an impact on the gaming industry as well.

Legal
Konami is based in a country where the corporate taxation is higher as compared to that in the region. Although the taxation system is very transparent, it still is a cost burden on corporations. In addition to this, the country has strict laws regarding quality control and transparency of operations which requires corporations to be truthful in what they convey to the customers and through their advertisements. The country also has a strong legal system which keeps corporations under scrutiny for any misdemeanor and ensures that the consumers are protected. However, the country’s legal system also favors the growth and progress of businesses which are strong pillars of its economic system.

Environmental
According to Sumikura and Osborn (1998, p.1), the Environment Protection Agency was founded in 1971 in Japan in the wake of rapid development in the country which negatively impacted the environment and required immediate action in the years leading up to 1960s. Since then, the country has made sure to protect the environment with the help of a number of rules and regulations. The country has been growing rapidly in terms of economy which means that the growth of industrialization would have a severe impact on the environment. Realizing this, the government urged the Environment Protection Agency to play its part in conserving the environment. The country now has Basic Environment Law and is ensuring sustainable development. This means that companies like Konami have to follow these rules and play their part in conserving the environment. Konami Holdings is already working on this aspect of its business by streamlining its processes to reduce their impact on the environment. It is also taking care of the rights of its employees and customers to operate in a more sustainable manner. In the future, the company needs to align its processes more with the environmental conservation goals of the country and SDGs.

Trend Impacting the Gaming Industry
One trend which has the ability to impact the gaming industry on a massive scale is the rapid development of technology. Jha (2017, p.2) states that artificial intelligence has significantly impacted the gaming industry by giving life to virtual world of games. Artificial intelligence has been enhancing the experience of gamers through smart usage of data available. Soon, machine learning will become a part of the process too to further the experience of gamers. In addition to this, two dimensional games are going to be replaced by three dimensional games in the near future which will free the gaming world of the limitations posed by two dimensional technology. The impact of technology can be seen from the fact that games can now be played online with people participating from all over the world and creating a whole new world of interactive games. What previously used to be geographically limited is now accessible worldwide. Buff (2018, p. 2) states that the growth of gaming industry is dependent on technological advancements as it allows the gaming industry to broaden its perspective and develop new products that eventually leads to an increase in the revenue of the industry. Hence, the trend that will be the most impactful for the gaming industry is the change in technology.

Areas of Uncertainty Related to Trends
In light of the above-mentioned discussion, it can be seen that there are certain areas of uncertainty which can compel the company to change its strategy. The most important area of uncertainty arises out of political situation. Konami is based in Japan which is undergoing political changes that have given rise to uncertainty. These changes can impact economy of the country as well which can directly impact the well-being of corporations. In addition to this, economic changes can impact the strategies of the company as well. Konami is a global player in the gaming industry which means that economic changes happening beyond the border of Japan are also going to impact the well-being of Konami. Hence, if economic changes occur within or outside of Japan, the company will have to change its strategies accordingly. Furthermore, technological changes are happening rapidly which bring with them a lot of uncertainty. As the trends change, companies have to change the way they operate in the gaming industry as well. Therefore, Konami needs to be aware of current and anticipated technological advancements to mold its strategies accordingly.

Industry Evaluation
Although Konami has a strong base in Japan, it sells its products and services worldwide which makes it a global player in the gaming industry. The major competitors of Konami globally are Sony, Blizzard, and EA. The major regions where gaming software and services are popular include USA, Middle East, China, and Japan. The competitor analysis of the company discussed below.

Porter’s Five Forces
Mentioned below are the Porter’s Five Forces regarding the gaming industry in which Konami operates?

· Market competition: The competition in the gaming industry is high as can be seen from the big names that are a part of it globally. According to Wijman (2018, p.1), $137.9 billion was the anticipated revenue for the global gaming industry for the year 2018. Seeing the massive amount of revenue generated in this area, gaming industry receives several new players every year. These small players are not able to match the skills of established players like Konami and Sony. However, they do have the potential to collectively take away a substantial share of the revenue in this industry. In addition to this, the era of digitalization and smartphones has opened more avenues to gain revenue and hence, increased competitors. The number of mobile game players is increasing with every passing day which makes mobile games a new hot market. In the past few years, mobile games like Candy Crush and Temple Run gained popularity massively. Anderton (2017, p. 3) believes that in the coming years, there is going to be fierce competition in the gaming industry.

· Threat of new entrants: The threat of new entrants is high in the gaming industry. This can be seen especially in the mobile games segment where almost anyone can create a game and upload it on app store and play store for the masses to play. While the gaming software segment is a bit more complicated to enter, there is no barrier to entry as such for new entrants which makes it possible for new companies to enter the market with ease. Depersio (2018, p. 11) states that due to low entry barriers and lack of regulations, the threat of new entrants is high in the gaming software industry.

· Supplier power: Since games are considered a luxury especially the ones for Nintendo Wii and Playstations, the supplier power is high. The suppliers can negotiate better terms and high prices which is why the games and software for these products are expensive. However, if there are a number of suppliers for a company, their power is limited. Depersio (2018, p. 14) states that EA has a number of suppliers for its diversified business which reduces the power of suppliers.

· Buyer power: Since these games fall in the entertainment category and are luxury products, they are a bit pricey. There is no established rule or law to control the prices of such games. This makes the customers pickier about their purchases. Depersio (2018, p. 12) states that buyers care about the bundle offers they get and one wrong move of a game developing company can result in massive losses. According to Depersio (2018, p. 12), the gaming company Sega had to face this situation in the case of Dreamcast console which resulted in massive losses for the company. This shows that buyers want value for money and hence, the buyer power is high in this industry.

· Threat of substitutes: There are numerous substitutes for gaming software and services. Since these fall in the category of entertainment, people have numerous other options to entertain themselves. These options include but are not limited to movies, outdoor games, socializing, and much more. Even within the gaming domain, there are a number of options available to people these days. Depersio (2018, p. 13) states that people can now play app-based games on their smartphones which are very low in cost compared to video games. Hence, the threat of substitutes is high.

Competitor analysis
According to Cullen (2019, p.3), Sony is expected to bag a revenue of $2.8 billion by the end of first quarter of this year. The company is the maker of Play station which is loved by gamers all over the world. It has been constantly upgrading the gaming system over the decades which has not only enhanced consumer experience but has also made it possible to gain loyal customers. Another major competitor of Konami is EA sports which has been a major player in the gaming software industry for a long time. According to Statista (n.d., p.1), the company gained a revenue of $5.15 billion in the year 2018. It is expected to exponentially increase its revenue over the coming years as well. Blizzard is another major competitor in the gaming industry and is known for notable games in the past. The company made a revenue of $7.5 billion in 2018 due to its innovative products and services. From this information, it can be analyzed that the company has some serious competitors globally.

In terms of major games and features, EA is known for producing The Sims, Need for Speed, FIFA, and Battlefield. All these games are computer-based and are still played worldwide by people of all ages. The company produces computer games, mobile games, and online services for internet-based devices. In the case of Blizzard, the company is known for high quality products. It is popular for its game called The Lost Vikings. Sony is a producer of Playstations which gives it an advantage in the gaming arena. It produces both hardware and software of games.

Competitor Profile Matrix
For this matrix, five critical success factors have been chosen. These factors are chosen on the basis of the industry and the areas that the companies should be focusing on as a part of their business. According to Mohan (2018, p. 11), effective marketing management is a key success factor for a game development company as it ensures that the target audience is aware of the new products and services development by the company and brings more revenue. Companies can make use of digital marketing in order to reach out to as many people as possible to increase their customers and become more visible in the market. In addition to this, the quality of a game and its architecture is very important for its success. Mohan (2018, p. 16) is of the opinion that a sound gaming architecture ensures that the game is ready for deployment and gives a clear idea about the game’s quality. As mentioned in the prior sections, IT and technological development is crucial for the success of a gaming industry. Johnson (2018, p. 1) states that the technology is constantly changing and impacting the gaming industry the most. This makes IT capabilities an important success factor for a gaming industry. Given that the competition is high in this industry, it is important for game developers to retain customers. One way of doing so is through good customer service. Ransford (2016, p. 5) cites the results of a report produced by ‘Econsultancy Multichannel Customer Experience’ which states that gamers value good customer service which is an effective way to retain them. Hence, customer service is another critical success factor for companies in this industry.

On the basis of the importance of each critical success factor, weights have been assigned to them. IT capabilities appear to be the most crucial area which is why the highest weight of 0.4 is assigned to it. Marketing management, quality of architecture, and customer service are equally important, hence, weight of 0.2 is given to each. On the basis of analysis conducted in the competitor’s section, rating has been allocated to each of these success factors on the basis of the companies as shown below.

Critical Success Factor

Weight

EA

Blizzard

Sony

Rating

Score

Rating

Score

Rating

Score

Customer service

0.2

2

0.4

1

0.2

3

0.6

IT capabilities

0.4

4

1.2

2

0.6

4

1.2

Marketing Management

0.2

2

0.2

1

0.1

3

0.3

Quality of Architecture

0.2

2

0.4

1

0.2

4

0.8

Total

1

3

1.3

3.7

SWOT Analysis(Partial OT)
Opportunities

· It can expand in the growing markets of Turkey, India, and other emerging markets.

· It can expand into mobile games segment.

· It can leverage IT advancements to enter segments like VR and IoT based games

Threats

· Political and economic instability is a major threat to the well-being of the company.

· Laws revolving around corporate taxation and environment protection are changing and are a constant threat.

EFE Matrix
Mentioned below is the EFE matrix for Konami. The weight and rating are assigned according with the significance of each of the listed factors. For example, for Konami, benefits from IT advancements are crucial to the growth of the company and hence, the weight and rating is high. For the company, it is high time to start investing in the development of games for smartphones. According to Statista (n.d., p. 2), App store gained 80% and Play store gained 90% of its total revenue in 2016 from gaming applications. In addition to this, Statista (n.d., p. 2) states that there were 2.8 billion average active users each month on mobile games all over the world. This shows the potential of mobile gaming apps and the revenue stream that can be generated from this segment. Based on this information, a weight of 0.2 has been assigned to this opportunity. As mentioned in the prior section, IT advancement is bringing more opportunities for gaming industry and hence, is very important for its development. A rating of 0.3 is assigned to benefits from IT advancement accordingly. Hagenmeier (2014, p. 3) states that emerging markets provide a good opportunity for growth for the gaming industry and China is a great example of that given that the country had a size of $20.5 billion in 2013 which has grown ever since. Therefore, a rating of 0.2 is assigned to this opportunity.

In terms of threats, political instability is one of the most significant ones at this time. As explained before, political instability impacts businesses and since Japan is going through a power shift at the moment, it is a major threat at this time. Therefore, a rating of 0.15 has been assigned to this threat. In the time to come, Japan is going to increase the tax imposed on corporations which is a big threat to the profitability of Konami. According to Kyodo (2018, p. 1), the prime minister of Japan confirmed the intention of a tax hike for the year 2019 in October 2018. In terms of economy, it is also going through an uncertain time due to political changes which increases the threat of an economic downtime. Hence, a rating of 0.1 has been assigned to it.

Opportunities

Weight

Rating

Total Weighted Score

Expanding smartphone games segment

0.2

2

0.4

Benefits from IT advancement

0.3

3

0.9

Expanding in emerging markets (Turkey, China, India)

0.2

2

0.4

Threats

Political instability

0.15

3

0.45

New taxes on corporations

0.05

2

0.1

Economic downturn

0.10

2

0.2

Total

1

2.45

Conclusion
Konami is a significant player in the gaming industry globally. The company has been operating since 1969 and has a track record of success over the decades. It faces a lot of competition in the market as can be seen from the presence of EA, Blizzard, and Sony as other significant producers of gaming software in the global gaming industry. The company has several strengths such as its presence in the market for several decades, loyal customer base, and good corporate relations with other companies such as Sony. It also has several weaknesses as well such as the company’s lack of presence in the mobile gaming industry. There are numerous opportunities in the global gaming industry which can be exploited by Konami such as expanding its presence in emerging markets like Turkey and benefiting from IT advancements. However, the threats to the company’s growth are also a lot. For example, the company will face political instability in 2019 in its country of origin which has the potential of impacting its revenues. Keeping all this in mind, it can be safely stated that the company has a bright future and will stay profitable if it continues to evolve with the changing times. The company has a diverse portfolio of products and services within the gaming industry which makes it stand shoulder to shoulder with EA which is the key competitor. It is doing well in terms of products and services when compared with Blizzard but appears to be at the same level as EA. However, it is lagging behind Sony which not only produces gaming software but has its own hardware in the form of gaming consoles. To stay profitable in future, Konami should focus on new avenues of growth such as expanding to emerging markets and developing mobile app-based games.

References

Abe says he’s going ahead with Japan’s consumption tax hike in October 2019 | The Japan Times. (2018). Retrieved from https://www.japantimes.co.jp/news/2018/10/15/business/economy-business/abe-says-hes-going-ahead-japans-consumption-tax-hike-october-2019/#.XLYnxSgzY2w

Anderton, K. (2017). The Business Of Video Games: A Multi Billion Dollar Industry [Infographic]. Retrieved from https://www.forbes.com/sites/kevinanderton/2017/04/29/the-business-of-video-games-a-multi-billion-dollar-industry-infographic/#7d89b2106d27

Buff, C. (2018). How will technology change the future of the gaming industry?. Retrieved from https://medium.com/buff-game/how-technology-will-change-the-future-of-the-gaming-industry-202be868240c

Company Overview of Konami Holdings Corporation. (2019). Retrieved from https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=880912

Cullen, J. (2019). PlayStation sales begin to slow, but Sony still rules the year in revenue. Retrieved from https://gamedaily.biz/article/566/playstation-sales-begin-to-slow-but-sony-still-rules-the-year-in-revenue

Depersio, G. (2018). Porter’s Five Forces and Electronic Arts (EA). Retrieved from https://www.investopedia.com/articles/markets/012716/analyzing-porters-five-forces-electronic-arts-ea.asp

Electronic Arts: net revenue 2018 | Statistic. Retrieved from https://www.statista.com/statistics/269696/revenue-of-electronic-arts-since-2005/

Environmental Protection Policy in Japan – Introduction [MOE]. Retrieved from https://www.env.go.jp/en/policy/plan/intro.html

HAGENMEIER, J. (2014). Invest In Video Gaming: A Booming Industry In Emerging Markets – Investing & Day Trading Education: Day Trading Academy. Retrieved from https://daytradingacademy.com/invest-video-games-booming-industry-emerging-markets/

Jha, B. (2017). How Does New Technology Impact The Gaming Industry?. Retrieved from https://www.gamasutra.com/blogs/BinayJha/20170221/291980/How_Does_New_Technology_Impact_The_Gaming_Industry.php

Johnson, Z. (2018). 5 Ways Technology And AI Are Changing The Gaming Industry. Retrieved from https://www.smartdatacollective.com/ways-technology-ai-changing-gaming-industry/

Mohan, N. (2018). The Complete List of Critical Success Factors For Gaming Producers. Retrieved from https://www.saviom.com/blog/complete-list-of-critical-success-factors-gaming-producers/

Osaki, T. (2019). Japan already in for politically hectic 2019, but may see ‘double election’ | The Japan Times. Retrieved from https://www.japantimes.co.jp/news/2019/01/02/national/politics-diplomacy/japan-already-politically-hectic-2019-may-see-double-election/#.XLYqsSgzY2x

Sumikura, I., & Osborn, D. (1998). A BRIEF HISTORY OF JAPANESE ENVIRONMENTAL ADMINISTRATION: A QUALIFIED SUCCESS STORY?. Journal Of Environmental Law, 10(2), 241-256. doi: 10.1093/jel/10.2.241

Wijman, T. (2018). Global Games Market Revenues 2018 | Per Region & Segment | Newzoo. Retrieved from https://newzoo.com/insights/articles/global-games-market-reaches-137-9-billion-in-2018-mobile-games-take-half/

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