Case Interview Questions #00067: The CEO of Nintendo Co. Ltd., a large diversified entertainment corporation has asked a McKinsey team to examine the operations of a subsidiary of his company that manufactures video games. Specifically, he needs to know if he should approve a $200 million capital request for tripling the video game division’s capacity.
You are a member of the McKinsey team assigned to this project. Assume you and I are at the first team meeting. What are the critical issues we should plan to examine to determine if the video game industry is an attractive one for continued investment and why?
Additional Information: (to be provided if asked)
The following information may be given if requested by the candidates though you should focus on having the candidate identify issues, not obtain more information.
Nintendo’s video game division is the third largest manufacturer of hardware in the video game industry with 10 percent market share. Top two producers have 40 and 35 percent market share (think about Nintendo Wii competing with Microsoft’s Xbox and Sony’s PlayStation). Remainder is divided by small producers. Division sells to broad range of consumers.
- Division sales have increased rapidly over last year from a relatively small base. Current estimate is annual sales of 500,000 units.
- Current estimate of industry hardware sales is 5,000,000 units annually. Industry growth has been strong though over last few months, sales growth has slowed.
- Divisions current sales price for the basic unit is $45 per unit.
- Division remains less than 20 percent of parent company sales.
- Top two competitors also develop, manufacture and sell software/games though division sells only licensed, software.
- Industry growth of software continues to increase.
- Division estimates current cost is $30 fully loaded. Requested expansion should reduce the cost by 5 to 7 percent and triple production of the hardware units.
- Top two computers are estimated to have a 10 to 15 percent cost advantage currently.
- Main costs are assembly components and labor.
- Division estimates much of initial target market (young families) has now purchased the video game hardware Nintendo Wii.
- No large new user segments have been identified.
Primarily outlets of distribution are top end electronics stores.
Division currently exceeds corporate return requirements; however, margins have recently been falling.
Hardware standards have been established by the industry leaders.
Product features constantly developed (e.g., new remote joy stick), to appeal to market segments.
Note to the Interviewer
The main purpose of the case is to determine whether the candidate is able to structure a basic industry analysis. The primary issue of the case is to determine if the industry is attractive and, especially, if our client’s position in that industry is sustainable. The candidate should identify issues which are necessary for assessing both the industry and our client’s position, but should not be expected to solve the problem.
If the candidate begins to discuss too deeply a specific issue, before having covered the key issues overall, bring them back to discuss the industry more broadly by asking “what other issues must be examined?”
If the candidate is discussing issues which seem irrelevant to the attractiveness of the industry, ask “how will that analysis help to assess the attractiveness of the industry or our client’s position”. Then, ask the candidate to identify other issues which must be examined.
The following issues would need to be covered for the candidate to have done an acceptable job: