1 Become Familiar with case substance: What are the facts? What is happening? Is all the relevant information available to you?

2 Determine Central Issues: What decisions need to be made? Who is responsible for making decisions? What factors, issues and consequences need to be taken into account?

3 Identify objectives and goals to be achieved: What outcomes are possible? Which are desirable? Which objectives are most important to whom?

4 Ascertain resources and constraints: Which forces support and oppose which actions? Which resources can be marshaled in support of actions? What are the major obstacles?

5 Ascertain the nature of conflicts: What is the substance of conflicts? Can conflicting positions and plans be reconciled?

6 Identify dynamics of behavior: Who is exercising leadership? Are there interpersonal conflicts? Are the persons involved effective in support of their respective positions?

7 Determine major alternatives: Are there ideas and strategies that have not been presented? Is compromise possible? Are the alternatives complimentary or mutually exclusive?

8 Assess consequences of likely decisions and actions: What actions are likely to result from the decisions made? What unintended consequences might emerge? What are the short and long term consequences for the individuals and the institutions?

9 Consider appropriate strategies and policies: What are the most effective ways of achieving and implementing the objectives and decisions? Are there intermediate steps or stages?

Power Play (B): Sega in 16-bit Video Games

"I don't like the idea of one company monopolizing an industry."

Hayao Nakayama, president, Sega Enterprises, Ltd.

"We don't regard Sega as a competitor in the US."

-Hiroshi Yamauchi, president, Nintendo Co., Ltd.

The US firm Atari pioneered home video gaming systems in the mid-1970s. After experiencing boom and bust in the early 1980s, the industry was revitalized in the mid-1980s by the Japanese company Nintendo. With an 8-bit video game system known as the Famicom ("Nintendo gained a strong position in a much-enlarged home video game market with the Family Computer and the Nintendo Entertainment System (NES).

New 16-bit home video game technology hit the market in 1987. NEC, a large Japanese electronics manufacturer, was the first to launch a next-generation system. Sega, the leader in the Japanese arcade game sector and an unsuccessful player in the booming home video game market, was the second to release a 16-bit system.

NEC, headquartered in Tokyo, Japan, was a major international provider of electronics equipment. The corporation structured its operations around the "C&C idea, which integrates computers and communications." On the computer front, NEC produced semiconductor devices, provided mainframes, and controlled over half of the Japanese personal computer market. NEC's primary communications products were central office switches, microwave systems, PBXs, and fiber optics.

NEC aspired to establish a significant presence in the higher-ticket areas of the consumer electronics market in the mid-1980s. It then refocused its efforts on the "home theater" idea, with a particular emphasis on projection televisions and video gaming systems. NEC entered the home video game industry in October 1987, with the release of the 16-bit PC Engine in Japan. The installed base of PC Engines had reached a modest 1.5 million units by mid-1989.

NEC Entry into the U.S.

NEC brought the TurboGrafx-16, an enhanced 16-bit system, to the US market in the fall of 1989. The device, which costed$200, wasaimed at children aged 8 to 16. The TurboGrafx had higher-quality visuals and audio, as well as quicker action than 8-bit computers. Kazuya Watanabe, executive vice president of NEC, detailed his company's entry into the home video game market: "We used to believe Nintendo was in an entirely different industry than us. But now we understand how they are linked. The lines have grown hazy" from "Nintendo Defies Persistent Challengers," The Wall Street Journal, June 27, 1989, p. A12.

To paraphrase NEC Senior Vice President Keith Schaefer who spoke about the TurboGrafx:

We are creating the technical framework for a genuine home computer with this device, which will be an important, if not the centerpiece, of tomorrow's home entertainment and information system. NEC is unique among consumer electronics and video game makers in having experience in a wide range of related technologies.We are a computer and semiconductor firm with a diverse history in audio and visual technologies, from "NEC Sees TurboGrafx-16 as a Major Growth Area," Home Furnishings Daily, November 27, 1989, p. 66.

Concurrent with the release of the TurboGrafx, two NEC businessesInformation Systems and Home Electronicsmerged to establish NEC Technologies. Their mission was to hasten the transition of computer technology to household electronics.

NEC relied on third-party software organizations to provide games for the TurboGrafx. However, software programmers discovered that the NEC system offered just a minor technological advantage over 8-bit systems. There were just a few game titles available for the TurboGrafx, and many of them were deemed unimaginative. Through the end of 1990, just 500,000 TurboGrafx machines were sold.

In the winter of 1990, NEC released the $300 Turbo Express portable system. The TurboExpress had a color display and cartridges that were compatible with TurboGrafx cartridges.

Sega

In 1951, two Americans established Sega ("Service Games") in Tokyo to supply arcade games and jukeboxes to US military posts in Japan. A few years later, American entrepreneur David Rosen, who was stationed in Japan with the US Air Force at the time, began importing entertainment equipment. Sega Enterprises was formed in 1965 when the two companies merged. The next year, Sega released Periscope, a game in which the user launched light-beam "torpedoes" at a series of cardboard cutout submarines. Sega decided to sell Periscope to Europe and the United States, where it became the first 25-cent arcade game. (Previously, games were five or ten cents.) Sega was acquired by the American corporation Gulf + Western in 1969 and expanded to become the top operator of arcade facilities in Japan by the early 1980s.

SubRoc-3D, Sega's first three-dimensional arcade game, was released in 1982. Sega decided to enter the home video game market in 1983 with the Japanese release of the SG-1000, an 8-bit home video game system. Following the collapse of the home video game business in the United States the following year, Gulf + Western sold Sega's U.S. assets to arcade game manufacturer Bally Manufacturing.

Hayao Nakayama, a Japanese arcade game entrepreneur who had been enlisted as Sega's president in Japan, and CSK, a prominent Japanese software firm, agreed to acquire Sega's Japanese assets for 38million dollars. Sega Enterprises was reborn, with an emphasis on the development, production, and distribution of arcade and home video games, as well as the operation of arcade facilities in Japan and abroad.

Sega created a subsidiary in the United States, Sega of America, in Redwood City, California, in 1986. The next year, Sega began marketing their 8-bit system, dubbed the Master System, through the American toy firm Tonka. However, Sega's 8-bit system was a commercial failure, selling fewer than 2 million copies in Japan and the United States.

Beginning in the mid-1980s, Sega wanted to revamp the appearance of their arcade facilities. Instead of the dark, cramped early centers, it began building large, brightly-lit, spacious arcades in shopping areas and outfitting them with games for the entire family to enjoy in July 1988, when it opened its first two large-scale high technology centers, Joy Square and Hi-Tech Sega, both in Japan.

The Mega Drive/Genesis system

Sega released the 16-bit Mega Drive home video game system in October 1988, priced at 721,000 yen ($165) and aimed at Japanese 12- to 34-year-olds. The Mega Drive, adapted from Sega's arcade machines, featured 512 colors, high-quality sound, and the capacity to show several layers of backdrop, among other advantages over 8-bit devices. The Mega Drive was intended to be expanded into a home office with add-ons such as a keyboard, printer, and modem. Another add-on allowed Mega Drive users to play SG-1000 games.

Sega transferred a lot of arcade games to the Mega Drive. However, it had difficulties convincing third-party software firms to create games for its new system. The Mega Drive sold just 200,000 units in its first year on the market.

Hiroshi Yamauchi, Nintendo's president, was unimpressed by NEC's and Sega's incentive moves: "What we are considering is not other companies, but the prospect of developing a network with our gaming terminals in the United States.

Sega's 16-bit system debuted in the US home market in September 1989. David Rosen elaborated: "We bring a coin-operated capability into the house. The Sega system, dubbed the Genesis, cost $190, with games ranging from $40 to $70. The older Master System games may be played on the Genesis due to a $40 adaptor. Other games, such as the graphically violent Altered Beast, were converted from Sega's range of arcade games for the United States market. Sega also negotiated an agreement with pop icon Michael Jackson to collaborate on the development of Moonwalker, a video game in which Jackson defeated foes through his dancing abilities.

A license agreement with Disney resulted in titles starring Mickey Mouse. Specialty software stores Electronics Boutique, Babbages, and Software Etc., which were late to the video gaming scene, avidly marketed the Genesis. Nonetheless, sales were slow.

Sega created a European business in 1986 and began selling their 16-bit Mega Drive system there in 1990.

Development of Software

Nakayama actively engaged in game creation, breaking with Japanese convention ofpaying head-hunters to hire the best and brightest from Japan's premier technological firms. As an inducement to join Sega, high salaries and huge development budgets were provided.

Electronic Arts, which had mostly missed the Nintendo bandwagon, was Sega's first outside game developer in the United States. Electronic Arts had reverse-engineered the Genesis and threatened to distribute games for it with or without Sega's permission. It entered into a licensing arrangement with Sega in 1920, paying lesser royalties than Nintendo licensees and granting it the freedom to produce its own cartridges. Electronic Arts then used the Genesis platform to adapt their successful line of very realistic 16-bit personal computer sports games. Tengen was another early Sega licensee. Other software companies began to sign on as well. Sega provided these latter licensees conditions that were nearly identical to Nintendo's, with the exception of a slightly higher price and the absence of an exclusive clause.

By 1993, Sega of America had grown to 200 in-house developers and 1,500 freelancers. The balance between in-house and third-party game development was around 50-50.

Sonic the Hedgehog

In 1990, Nakayama appointed Tom Kalinske, the former CEO of Matchbook International and a 15-year Mattel veteran, to manage Sega of America. Kalinske recruited competitor Nintendo's public relations director, Bill White, to launch an aggressive new campaign in 1991. Kalinske approached Nakayama with a quick new game produced by a freelance team under contract to Sega: "We need to cut the Sega Genesis pricing by $50. We must include our greatest software - Sonic the Hedgehog - and demonstrate to the world that we are superior to the competitors." Nakayama acquired Kalinske's idea, and the Genesis, along with Sega's game featuring the blue hedgehog Sonic, went on sale for $150 in June 1991. The Sega system gained a "cool" reputation among teens after being promoted with the phrase "Genesis does what Nintendon't." Sales soared, and software companies rushed to get on board.

By September of that year, the Genesis had 130 software titles available.

Game Equipment

Sega's foray into the handheld market, with a color display similar to the NEC TurboExpress, was the $150 Game Gear, which was released in April 1991. Columns, a Tetris clone, was included with the Game Gear.

Nintendo in 16-bit Processors

Nintendo had been working on a 16-bit video game system since the late 1980s. One question for the engineers was whether the new system would be able to play existing Nintendo 8-bit games. In the end, they chose without backward compatibility in order to keep the cost of the new hardware as low as possible. The new system improved on the old 8-bit system in various ways, including the capacity to create many more colors, high-quality sound, and layered backdrops. It had a math co-processor (to help with game creation) and an improved security mechanism.

Nintendo Entertainment System/Super Famicom

In late 1989, Nintendo announced the Japanese release of the 32,000 yen ($200, 16-bit Super Famicom) and began distributing the devices in late November 1990. At the same time, Miyamoto launched Super Mario World, a 16-bit game. Within five months, Super Famicom sales had surpassed those of competing 16-bit systems. Yamauchi stated that the success of the Super Famicom proved that "the name of the game is the games."

Nintendo did not appear to be in a hurry to release their 16-bit system in the United States. "The Nintendo idea is that we haven't maxed out the 8-bit hardware yet," Nintendo f America's Bill White revealed. According to one industry observer, "Nintendo will be starting from scratch when it debuts its 16-bit system... and it will compete equally with Sega and NEC." Opinions ranged on what would happen to the 8-bit market after Nintendo released their new 16-bit system. Some commentators predicted a meltdown: stretched by the longer development durations required for 16-bit games, software firms would quit the 8-bit market, merchants would stop assigning shelf space to 8-bit titles and devalue those they did sell, and Nintendo would cease advertising 8-bit games. Others portrayed a more optimistic picture: The 30 million pieces of 8-bit Nintendo hardware created enormous prospects for more 8-bit software sales, and with 3 million to 4 million US children becoming eight years old each year, additional sales of entry-level hardware might be expected as well.

The $200 16-bit Super Nintendo Entertainment System (Super NES) was ultimately released in the United States in September 1991, accompanied by a $25 million TV advertising campaign, several promotions, and a large write-up in Nintendo Power.

The Super NES games ranged in price from $50 to $80. The 8-bit industry felt the impacts. Only 75 new 8-bit titles were released in 1991 (less than half the amount in previous years), and 8-bit cartridges were now selling for as little as $20 to $40.

Despite the fact that Nintendo had been selling its 8-bit NES and handheld Game Boy in Europe through distributors, it was notuntil 1990 that Nintendo created a European company, Nintendo of Europe, located in Frankfurt. Before releasing 16-bit computers, the idea was to wean European customers off the same 8-bit technology that was already maturing in Japan and the United States. "We still need to grow the game players here," said Ron Judy, a former NOA executive who handled Nintendo's European distributorship. The 8-bit system is still selling well, despite the fact that it has not reached its peak. The larger the 8-bit base, the greater the number of prospective buyers for 16-bit devices.

Licensing

NOA surreptitiously distributed a note to its software developers in early October 1990, revealing changes to its licensing policy. Certain of the smaller licenses would be permitted to make their own games, but they would have to buy proprietary chips from Nintendo for $1 each and pay a 20 percent fee on every game cartridge sold. Developers would also be permitted to distribute the same title on the Nintendo and Sega Genesis platforms without waiting the two years stipulated under the former exclusivity clause. NOA claimed that the contractual modifications were feasible because it had been successful in managing the quality of NES games, and that licensees who continued to produce high-quality titles would continue to get high-profile recognition in Nintendo Power.

NOA strengthened its license conditions with the launching of their 16-bit system. There was no exclusive reason for 16-bit titles, but NOA regained control of the cartridge manufacture. The royalty on 16-bit cartridges was raised over Sega's previous amount. Over time, Nintendo and Sega increased 16-bit royalties to about $20 per produced cartridge, which licensees subsequently doubled to retailers. Licensees had to pay $500,000 in development costs for each 16-bit gaming title.

The Battle of 16-Bits

The market now had three incompatible 16-bit systems: the NEC TurboGrafx-16, the Sega Genesis, and the Nintendo Super NES. The competition between the Genesis and the Super NES drew the most attention.

By the end of 1991, over 125 game titles were available for the Genesis, compared to 25 games for the Super NES, and NOA claimed that sales of the Super NES were approaching two million units. Sega disputed, arguing that NOA had only sold one million devices, but the Genesis installed base had surpassed two million. NOA launched a $60 million advertising campaign and predicted sales of an extra six million Super NES devices by the end of the year at the January 1992 Consumer Electronics Show. The Legend of Zelda: A Link to the Past, Super Mario Paint, and Capcom's Street Fighter 2 (adapted from the most popular arcade game since Pac-Man.) NOA also shifted their retailer billing to September. Sega replied by launching its own TV advertising campaign and working to extend Genesis availability beyond the 8,000 retailers that already soldthe system.

Sega secured an injunction against Accolade in April, removing the developer's current titles from the market and prohibiting it from launching any new ones. Accolade had already reverse engineered the Genesis system and was selling unlicensed Genesis-compatible games.

NOA decreased the price of the Super NES to $150 in May. At the time, Sega claimed a 63 percent share of the 16-bit market in the United States, while NOA claimed a 60 percent share. Both firms began selling stripped-down versions of their 16-bit computers for less than $100 in the same month. According to NOA, 90% of Super NES sales went to those who already owned a Nintendo system. Sega reported that 58% of Genesis purchasers had a Nintendo system.

In 1992, Nintendo determined that the European market was ready for the Super NES.

Sega's Genesis game library had 320 titles by January 1993, with a projected 110 titles to be added during the year. Nintendo's Super NES catalog now stoodat 130 titles, with an additional 70 titles expected to be released during theyear.

Peter Main, CEO of NOA, remarked on his company's position in the 16-bit war, saying, "We're extremely certain we're going to win the fight, but we're not taking anything for granted." Sega of America's Tom Kalinske retorted: "I will not be pleased until we have achieved dominance."According to a 1990 study, Nintendo's Mario remained more popular than Mickey Mouse among US youngsters, but Sega's Sonic was now the most popular emblem of all.

Sega, with the help of the Hedgehog, was gaining ground on Nintendo, The Wall Street Journal, November 5, 1993, p. B1.