Illustrative case Study – Sonic Scores Sega Success

In 1990 when Sega Enterprises entered the video game market in the United States, Nintendo held between 80 percent and 90 percent of the $3.5 billion industry. By November 1993, however, Nintendo found it self locked in ‘moral combat” with Sega for market dominance with every point counting. How was it that an upstart company such as Sega came to threaten the dominance of such a clear market leader?

What Sonic brought to Sega was a hook something to link the customer with the technology through the company. Nintendo had Mario; Sega needed a mascot. So in June 1991, Sega began packaging the new “Sonic the Hedgehog” game with its Genesis system. The character attracted an immediate following and transformed Sega into a serious competitor virtually overnight. By Christmas of that year Sonic had become so popular that Sega was not able to meet the demand for its new Genesis systems. During the next three years Sonic’s popularity continued to soar. A 1993 Q-study by Marketing Evaluation Inc., placed Sonic the Hedgehog in close competition with Arnold Schwarzenegger and Michael Jordan as the favorite personality of boys aged six to eleven. That same study credited Sonic as the most popular video game character; Tells, Sonic’s partner in “Sonic the Hedgehog II came in second in the study. Mario lagged behind in 24th place.

As obvious as it may seem in retrospect, the need for a company icon was not initially recognized. Indeed, Sega made several unsuccessful attempts at gaining market share before hitting upon a winning solution. Unlike later efforts that recognized the importance of image and brand recognition, early efforts were centered around technological advances. In 1986, Sega introduced its Master System, which offered superior graphics to Nintendo’s own Nintendo Entertainment System (NES), but failed to gain more than a toehold in the US market. In 1989, Sega developed the genesis system, armed with a more powerful microprocessor chip that allowed for far superior graphics and more sophisticated sound; nevertheless Nintendo was still able to hold on to 85 percent of the market with its technologically inferior system. It was not until the introduction of Sonic that Sega was finally able to taste success.

Sega’s success was not due to Sonic’s popularity alone. Also working in Sega’s favor was its decentralized organizational structure. Nintendo experienced trouble responding to the market as a result of its intricate company bureaucracy. While Nintendo was notorious for requiring Hiroshi Yamauchi, president of Nintendo of America to spend countless hours in telephone conversations with his superiors in Japan in order to make strategic decisions regarding the US market, Thomas Kalinske chief executive of Sega America has operated with a free rein. In fact, parent company Sega Enterprises was initially put off by the idea of taking on Nintendo at all, considering how Nintendo’s 1990 worldwide sales of $2 billion dwarfed Sega’s $680 million. Kalinske was confident however that Sega could best Nintendo so he set out to convince Hayao Nakayama, president of Sega Enterprises. When Kalinske was through, Nakayama responded, “I hired you to make the decisions in the US so do whatever you want”. And he did.

Initially, Kalinske targeted two areas for action. First was the need for a character icon – hence “Sonic” was born. Actually, Sonic was the brainchild of Nakayama, who recognized the need for a company character even before Kalinske came on board [A] lot of animals – mice, dogs, ducks and cats – had already bee taken by other companies, recalled Kalinske. Mr Nakayama decided that a hedgehog might have tremendous potential. And to make him totally different, he decided to turn him blue ‘A blue hedgehog’. It was such a funny idea. But it has turned into a hit. At the same time, Kalinske identified cost as a problem. In the eyes of the customer, Genesis’ technological superiority did not justify its price being nearly double that of the standard NES. Kalinske immediately dropped the price of Genesis down $50 from $199 to $149 to make it more competitive with the $100 NES.

With price reductions and Sonic’s booming popularity, Mario was on the ropes, but Kalinske was not about to lessen his grip. Kalinske recognized Sega’s need to have good software to support its now rapidly moving hardware and quickly signed up video game guru Electronic Arts to help design games for the Genesis system. In order to make Sega more attractive to other programmers, he also lowered the royalties that Sega received – sometimes even as much as 15 percent below that which Nintendo received.

Kalinske’s plan worked. By 1993, Sega had positioned itself as a potential market leader. Within three years Sega’s market share had climbed from 7 percent to nearly 50 percent, while Nintendo’s 90 percent share had dropped to just above 50 percent. Sega’s sales in the United States went from $280 million to $1 billion during this time. Sega’s success clearly exemplifies the importance of the manager’s role for it was only through the initiative and creativity at Kalinske, coupled with the independence granted by his superiors, that Sega was able to reach, the next level.