Strategic Management

April 14, 2009

Candace Weber
Srinivas Rao
Anne Lee
Yugo Hirano

Monday, April 20, 2009

 Agenda

• Activision Overview
• External Analysis
• Internal Analysis
• Strategic Alternatives
• Recommendations
• Q&A

Monday, April 20, 2009

 GAMING INDUSTRY OVERVIEW
Demographic Political
• Male 14-38 (globally) • Rating standards for games with violence/sexual content
• Growing female demographic • Federal laws(in progress)-requiring ID’s for game
purchase

Socio-cultural Global
• Web 2.0 (video sharing, blogs, wikis,web communities) • Online gaming
• Online Game tournaments • Piracy in China/India
• Interactive experiences have growing demand • Strict censorship laws in other countries
• Currency exchange rates

Technological Economic
• 7 Generations of gaming consoles • Recession-surge in gaming
• Developments in wireless telecommunications market • Video games provide more of an ROI than alternative
• Anti-piracy technology forms of entertainment

Source: Datamonitor, Games Software in the United States

Monday, April 20, 2009

 Porter’s 5 Forces
Threat of New Entrants:
LOW

Substantial startup costs

reduces the threat of new
entrants into the gaming
market

Bargaining power of buyers:

Bargaining power of suppliers:
HIGH
Need for computer programming
talent,Intellectual property rights, and
challenge to produce highly
differentiated games
COMPETITIVE RIVALRY:
HIGH
High development costs and
dependency on blockbuster
titles creates a highly
competitive environment
Retailers: buying power is diminished by the
need to provide titles from all publishers
Consumers: Have access to multiple titles on
multiple consoles, which results in limited
brand loyalty, and low switching costs
Console Manufacturers: They own one of the
major distribution channels so they have high
bargaining power

Threat of substitutes: HIGH

Music, movies, digital media, and all

other leisure activities that serve as a
form of entertainment are
substitutes

Monday, April 20, 2009

 SWOT ANALYSIS
STRENGTHS WEAKNESSES
• Guitar Hero Franchise • Brand awareness not high outside of target
• 2nd largest publisher in the industry audience
• Strong distribution channel (all consoles, multiple • Shelf life of games is short
retailers) • Dependency on console industry
• Exclusive relationships with movie studios

OPPORTUNITIES THREATS
• Console Development • Console manufacturers also act as publishers (i.e.
• International Expansion Microsoft, Nintendo)
• Growing Female Market • Digital piracy
• Partnerships with Cable/Broadcasters

Monday, April 20, 2009

 Organizational Goals
• Mission: Create great games that sell
• Develop multiple games across multiple genres (not
focused on developing epic games)
• Focus on shareholder value
• Will forego features & functions for profitability
• Develop breakthrough creative advertising to optimize
media plans

Monday, April 20, 2009

 Stakeholder Management
Rene Pennison, Chairman Activision Bobby Kotic, CEO Activision
Blizzard
Qualifications Qualifications

• Graduated from l’École Supérieure de Chimie in Lyon • Dropped out as Art History and Literature student at
with an engineering degree University of Chicago
• CEO of 4Kids Entertainment
• held important board positions with Aventis,
• Led turnaround for Activision after purchasing it in 1981
• Senior Executive Vice President of Human Resources
Aventis.
• Chairman Chief Executive Officer for Social Relations
and Organization of Vivendi Universal

Results Achieved Results Achieved

• Under his guidance Vivendi Games has increased the • Took bankrupt company in 1981 to revenues to the
revenues from 475 Million Euros in 2004 to 804 Million tune of $3 billion before the merger
Euros in 20061.

Source: http://arstechnica.com/gaming/news/2008/11/activision-if-we-cant-run-a-game-into-the-ground-we-dont-want-it.ars

Monday, April 20, 2009

 Activision Greenlight Process
Pre-Production Post-Production

Concept
Assessment Prototype First Playable Alpha
Review

purpose •Is the game concept valid • Does the game’s design • Based on the • Is production progressing • Is the game being completed in a
and marketable? prove the concept’s development of the according to budget, timely manner consistent with
validity, marketability and prototype, should the schedule, and quality creative and technical goals?
technical feasibility game be approved for
production

Game Design Overview • working prototype

• • First playable version of the • Alpha version of the game
deliverables • Game concept/treatment • First on screen overview • preliminary marketing game • Trade marketing summary
• Team Identification • Recommended plan and strategy • Final marketing plan • Final packaging/Rough TV boards
• Budget and Schedule marketing positioning • Final: game design, • Package/Advertising • Revised product P&L
Product P&L • Updated Budget production p&L , concept • Consumer play test results
• Product P&L budget and schedule • Revised: production
budget, product P&L

Harvard Business School Press: Kelly Slater Pro-Surfer

Monday, April 20, 2009
 Gaming Industry Value Chain
Capital/Publishing Production/Talent
Involved in paying for
development of new titles
and seeking returns through
licensing of the titles.
Monday, April 20, 2009
FINANCE
HUMAN RESOURCES
PROCUREMENT
Supporting Activities
Distribution layer End users
Includes developers, Or the "publishing" The users/players of the
designers and artists, who industry, involved in games
may be working under generating and marketing
individual contracts or as catalogs of games for retail
part of in-house and online distribution.
development teams.
Activision’s
Competitive
Advantage
Primary Activities
 ACTIVISION SUCCESS

• Tony Hawk's Pro Skater 2 was the best- selling video game in the U.S. for the PlayStation(R) game console during calendar
year 2000, according to NPD's TRSTS Data.
• The blockbuster action- sports game ranked #1 by both unit sales and revenue.
• Tony Hawk's Pro Skater 2 rocketed to the top spot just five days after its initial launch
• Ended the year as the #2 selling PlayStation game by unit sales for the week of December

•Guitar Hero(R) franchise set an industry record, surpassing $1 billion in North American retail sales in just 26 months, according
The NPD Group

• Guitar Hero(R) III: Legends of Rock(TM) was the #1 title in units and dollars for calendar year 2007, making it the #1 best-selling
video game of all time in a single calendar year

Monday, April 20, 2009

 Financial Analysis
Net revenues
3,000,000

2,250,000
($ thousands)

1,500,000

750,000

0
2004 2005 2006 2007 2008

Monday, April 20, 2009

 Financial Analysis
Net income (loss)
400,000

300,000
($ Thousands)

200,000

100,000

0
2004 2005 2006 2007 2008

Monday, April 20, 2009

 Financial Analysis

Total shareholders equity (deficit)

2,500,000

2,000,000
($ thousands)

1,500,000

1,000,000

500,000

0
2004 2005 2006 2007 2008

Monday, April 20, 2009

 Financial Analysis

Monday, April 20, 2009

 Financial Analysis
  Avg P/E Price/ Sales Price/ Book Net Profit Margin (%)
12/08 -126.3 2.7 0.97 -3.5
12/07 25.9 6.5 36.54 16.8
03/07 53.2 3.82 3.8 5.7
03/06 100.8 2.76 3.12 2.7
03/05 19.5 2.19 2.71 9.6
03/04 19.2 2.43 2.61 7.8
03/03 23.9 1.16 1.45 7.7
03/02 26.9 2.26 3.93 6.6
03/01 17.7 1.07 3.66 3.3

03/00 -10.3 0.52 2.37 -6

 
  Book Value/ Share Debt/ Equity Return on Equity (%) Return on Assets (%) Interest Coverage
12/08 $8.87 0 -0.9 -0.7 -77.7
12/07 $0.41 0 94.6 25.8 NA
03/07 $2.49 0 6.1 4.8 754.1
03/06 $2.21 0 3.3 2.8 58.1
03/05 $2.05 0 12.3 10.3 648.4
03/04 $1.71 0 8.9 7.6 300.4
03/03 $1.24 0 11.1 9.4 101.7
03/02 $0.95 0.01 12.1 9.4 67.8
03/01 $0.55 0.41 11.3 5.7 4.2
Monday, 03/00
April 20, 2009 $0.42 0.68 -25.8 -11 -3.2
 Financial Analysis
1. Short-term solvency, or liquidity, ratios
  Company Industry S&P 500 4. Profitability ratios
Current Ratio 2.4 2.2 1.4
Quick Ratio 2.3 2.1 1.1
  Company Industry S&P 500
Cash ratio 0.5    

2. Long-term solvency, or financial leverage, ratios Gross Margin 39.2 44.2 39.7
  Company Industry S&P 500
Return On Assets -1.4 -5.2 8.2
Total debt ratio 0.22    

Debt/Equity Ratio 0.00 0.06 1.02

Return On Equity -1.8 -8.3 28
Equity multiplier 1.28    

Interest Coverage -5.1 -5.2 30

Cash coverage ratio -7.2     5. Market value ratios
3. Asset utilization, or turnover, ratios
  Company Industry S&P 500
  Company Industry S&P 500
Inventory Turnover 13.6 12.9 12.2
Days' sales in inventory 26.8 28.3 29.9 P/E Ratio (TTM) -126.3 4.25 13.52

Receivable Turnover 4.6 5.7 15.8

Price/Book Value 0.97 1.49 2.97
Days' sales in receivables 79.3 64.0 23.1
Asset Turnover 1.16 0.6 1
Capital intensity 0.873    

Monday, April 20, 2009

 Key Strategic Issues
1. Activision needs to leverage the media mix to best
optimize the marketing plan for a game to reach the
greatest revenue
2. Activision lags in the global market, while EA Sports is
number one in international sales

Monday, April 20, 2009

 Strategic Alternatives
1. Related Diversification: Media Mix (leverage resources
across multiple game genres)
2.Related Diversification: Vertical Integration(Console
Manufacturing)
3.Broad Differentiation

Monday, April 20, 2009

STRATEGIC RECOMMENDATION
1. Related Diversification: Media Mix (leverage resources
across multiple game genres)
• Tactical level:
• Effectively utilize online marketing
• Partner with other developers of entertainment
products in the same genre as a particular video
game
• Leverage its own games as a medium for in-game
advertising

Monday, April 20, 2009

 Formulation and Implementation
• Develop Strategic alliances

• Alliances with broadband providers, wireless providers, and anti-piracy lobbies

• Strengthen existing alliances with studios to cross promote games in movies,

dvd's, etc. to optimize media mix

• Budget

• Allocate budgets for developing strategic partnerships

• Team Development

• Develop cross-functional teams globally and domestically

• Timeline

• Define necessary stages to test-market the strategy

Monday, April 20, 2009

 BALANCED SCORECARD
Business Perspective Customer Perspective

Goals: Measures: Goals: Measures:

Design internal employee retention
project team conduct a
effectiveness and impact of
consumer survey
its ads on point of purchase
within Big Box
retailers.

Operational Perspective Innovation and Learning

Perspective
Goals: Measures: Goals: Measures:

roll out
roll out the
the ROI Train project team
Continually train
ROI
diversification continually
project team time to market
diversification
strategy through
through improvements in rollouts
strategy
test markets
test markets

Monday, April 20, 2009

 QUESTIONS?

Monday, April 20, 2009