Sega's Decline...

Despite originally disputing the rumours stating that Sega were to cease hardware production and retire from hardware development, on January 31st 2001, Sega of America released a statement confirming that they would become a solely 3rd party software developer. This news came with the admittance that they would cease Dreamcast production, though support would continue for the console, and came just over a week after Sega of Japan released the news stating that under a 'New Management Policy' the company were in talks to begin producing software for the 'Playstation 2' and 'GameBoy Advance'. The strategy proposed to help re-establish Sega as a gaming giant contained 3 main points, all designed to maximize profit and help re-build the company's foundations. This three-pronged approach was as follows:

1. Sega became a 'platform-agnostic', 3rd party game developer and publisher.
2. Sega decided to license and sell the Dreamcast chipset.
3. Sega would continue to focus on network strengths such as SegaNet.
   

The above graph shows the financial troubles that would have lead to justify Sega's big decision. With 5 consecutive years below the profit margin, it wasn't until the company had made the decision to stop developing hardware that they began to rebuild. The company was even given a massive $730 million cash 'gift' from CSK chairman, and once Sega President, Isao Okawa, just a week after the decision to leave console manufacturing, in order to help the company return to profitability. The hardware market itself is a treacherous road to tread.
'The decision to get out of the hardware market is mainly due to the shortening hardware cycle and the loss that hardware manufacturers absorb in order to keep prices reasonable. According to Moore, companies lose between $50-250 per hardware unit sold, and Sega could not continue to accept such losses.' http://www.gamesfirst.com/articles/shawn/sega_announcement/sega_strategy.htm
Many claim that it was the Dreamcast that eventually lead to Sega's ruin. While this is true in some respects, it was not the main factor behind Sega's financial worries. The Dreamcast actually did exceptionally well at first, breaking sales records during it's opening term. It was later crushed by the hype juggernaut, the 'Playstation 2'. And even if the Dreamcast was not as commercially successful as Sega needed to remain afloat, it was considered a massive success by console gamers themselves, creating a huge fan-base, and essentially pioneered online gaming. The damaged Sega foundation had been laid years prior to the Dreamcast.
Since the days of the 'Mega Drive', Sega began to lose money and popularity with each move made to try and regain it. Missing the mark in the major regions of N. America and Japan to competitor Nintendo put the company on the back foot, leaving them constantly struggling to gain the upper hand. Every move made seemed almost like an act of desperation right up until the days of the Dreamcast. The development of the 'Mega-CD', while selling okay in Japan, eventually proved a loss. The 'Mega-CD' was a Mega Drive add-on intended to prolong the lifespan of the console, pushing it into the world of the newly emerged compact disk. It was considered a flop in the U.S.
This was followed a few years later by SOA's production of the '32x' unit, another Genesis add-on intended to further challenge the SNES' superiority, and to bring 'next-gen' gaming to those unable to afford a new console. The 32x made 32-bit gaming possible on the the Mega Drive, which at the time was important. Atari had released it's 32-bit 'Jaguar' and there were rumours that Nintendo planned to develop a 32-bit CD based console with electronics company Phillips. The 32x unit itself was riddled with design flaws. Due to the release of different versions of the Mega Drive, the box containing the unit was also filled with adapting spacers and cables for compatibility. This unit sold even less than the Mega-CD. Both of these products, based on the price of retail (the Mega-CD retailed at about $299, the 32-x at about $159), were significant investments made by Sega in order to climb back to the top of the gaming ladder. This price range also meant that upon failing they could not really be dismissed as mere peripheral. The company failed to renew the funds that they had spent on these projects. The main failure of these two add-ons though is not in their commercial staleness.
The Mega-CD and the 32-x were released within 2 years of each other. A year after the 32-x, the superior Sega 'Saturn' was released. The Saturn was essentially a combination of both of the above add-ons, was advertised with all of Sega's weight, and it's release so soon after the 32-x served to annoy Sega's customers. All of those that bought the 32-x felt cheated and betrayed, spending a significant amount of money on a product that became basically redundant after a year as it was obvious which hardware would still be catered for in 2 years time. Decisions such as these served to alienate fans rather than attract customers. The failure of the expensive add-ons became renowned amongst gamers of the time, American TV show 'Saturday Night Live' even did a sketch based upon the failure of the 32-x. This distrust damaged the consoles already unstable fan-base in the U.S and eventually metaphorically seeped into the Sega name itself. Many see it as the beginning of the end.
There are also talks of internal disputes within the company itself that could have had a detrimental effect upon it's efficiency. A lack of communication and understanding between Sega of America and Sega of Japan grew to such a level that SOJ wouldn't even inform it's American branch of product development. Both branches had the power to develop and market hardware and software for their respective territories, but with SOJ essentially being the 'boss', SOA found themselves lacking the responsibilities it believed it deserved, and an unspoken resentment developed.
'The rivalry, distrust and lack of respect between SOJ and SOA contributed to multiple issues regarding how the products were marketed, supplied, manufactured and launched.' http://gamerlimit.com/2009/03/untold-stories-pt-1-the-decline-of-sega-the-mega-mistakes/
Undoubtedly this is counter-productive, and fits hand-in-hand with the Easts reported contempt for Western influence. Stories such as these contrast to those reported featuring the Nintendo team. Their strong team spirit and communication between their international branches being quite the opposite of Sega.
The move to dedicated software developer was at the time however considered an exciting new prospect. Shares actually went up a considerable amount, and fans were curious and filled with anticipation. After the move Sega began talks with companies such as Microsoft and Nintendo to begin considering the possibility of merger. Eventually the shares from CSK Holdings were purchased by Japanese company Sammy Corporation, a company that specializes in Pachinko and Pachislot machines, extremely popular in Japan. Sega are still major developers to this day and work strongly with once rivals Nintendo, with many of their most successful modern games being developed for the Wii. Once bitter competition, who would have thought it would have ended up like this...