To be fair, Sega managed as well as they could, and there really isn’t any scenario where they could have survived as a hardware company into the new century. Certainly not when major players like Sony ($30 billion) and Microsoft ($ infinity) have entered the market. You can’t survive in that poker match. All your Rivas have to do is start a price war and squeeze you out. Just ask Jack Tramiel about that.
If Okawa-San was actively considering exiting the console market in 1993, I’d have to assume it was after the Sony PlayStation specs were leaked. It certainly was a possible option, as they knew at that point they were facing a rival that knew what they were doing, had done their homework and was serious about conquering the living room (videogames were, as always, the Trojan horse). At that point, Sega is in a lot of trouble, surely not an insurmountable challenge, but they’re in for the fight of their life.
Fast forward two years and Microsoft unveils Windows 95, marking their entry into the gaming market. A home console was only a matter of time. And if Sony was large enough to buy Sega for less than a rounding error, Microsoft could swallow Sony. At this point, Sega is actively looking to get the hell out.
In order to survive, Sega would need a) another hardware company to partner with and shoulder the burden of expensive consoles, b) new revenue streams, c) guaranteed blockbuster hits, or d) exit the hardware wars and go third-party. Sega of America was scrambling on the first two points, going so far as attempting to kill the Saturn (in classic MN passive-aggressive behavior, no less) in 1995 and replace it with a new 64-but console in 1996, first the Lockheed Martin Real 3D and then the 3DO M2. They nearly succeeded in buying 3DO, but they could never convince Matsushita (who were worth $100 billion) to make an exclusive partnership. The latter party had no real interest in videogames & just wanted to license the M2 to multiple parties, like the original 3DO.
Heck, if it weren’t for VF2, Virtua Cop & Sega Rally, Kalinske’s plan might have succeeded. But that’s a long and, strangely, overlooked story. The news reports were everywhere, yet nobody ever put 2 and 2 together at the time.
The problem with Saturn wasn’t its hardware specs (I’ve disproven the “can’t doo three-dee” shtick well enough, don’t make me tap the sign), it was its cost. At that time, what Sega, Nintendo and Sony needed was a box they could sell for $149. That’s the mass market price—we’ll call it the “Kalinske rule.” With its Complex architecture and off-shelf parts, Saturn could never reach $149 at the same time as Sony (who could eat their hardware losses) and Nintendo (who launched N64 at $200).
This leaves only one avenue left: software. On that front, Sega was entering a golden age. Unfortunately, the kids never bothered to notice. Hardly anything sold: Panzer Dragoon, Nights, Powerslave, Tomb Raider, Dragon Force—mother luvin’ Dragon Force!!—nothing. Anything 2D? Forget it. Those killer arcade hits? Nada. Anything that arrived after Super Mario 64? Don’t make me laugh.
All of which is to say that our beloved Sega, despite any cheers from the few true diehard fans, was doomed by 1995. But, hey, the first Velvet Underground album only sold 30,000 copies and we know how that turned out.
I think there was another option for Sega, one that they didn't necessarily begin to seriously explore until it was a bit too late: fully synergize their arcade and home console models into a properly unified business chain.
Nintendo survived Sony entering the market because they realized both very early and due to working with Sony previously on both the SNES sound chip and Play Station, that they could not
compete with Sony's resources head-on. So they doubled down on their niches, those being handheld gaming and consoles with unique controller/multiplayer features. Combined with the strength of their IPs and the impending megaton of Pokemon, it was enough to see them carve out some healthy marketshare, tho it'd of been less if Sega were operating as a coherent whole during that period.
Like Nintendo, Sega should've realized that they could not
have competed directly with Sony, but unlike Nintendo they probably lacked particularly close working relations with Sony Japan, because IIRC Sony Imagesoft was an American publishing label, not a Japanese one. Sega probably also saw how systems like the 3DO were struggling and felt that if a company in that type of project like Panasonic/Matsushita, or as a better example, the struggle and failure of PC-Engine in the West and PC-FX in Japan by NEC (who were also a very big company at that time), they could've expected similar mistakes and failure from a similar electronics mega-conglomerate like Sony. The pattern was already there, only hindsight shows how they were wrong to assume such.
If Sega were more cognizant of those facts, they probably could've stopped the internal conflict and bleeding between East & West divisions, and focused on what they were excelling at. They could've found some inventive ways to tie their arcade projects and initiatives, perhaps by working with various arcade and family entertainment chains, into their Saturn initiative and create some type of a virtually unified ecosystem between the two. Maybe even changing the design target of the Saturn from a mass-market console, to a smaller-market specialty console, maybe essentially a consolized Model 2 system, where you could play Model 2 games both at the arcades and at home. A (for the time) modernized Neo-Geo approach, basically.
Meanwhile, they could've focused on what the Neptune was essentially going to be, a combined Genesis/32X system, but also
added CD-ROM functionality partially for Sega CD BC (and maybe two cartridge ports instead of one if technically possible; the first for Genesis games (and Neptune games that would've came in cart/CD combo packs), the second for expansion carts like a SVP 2), and use that as a pseudo next-gen "mainstream" system they could've focused on additional 1P software for which would've also been compatible for those with a combination of Genesis/32X/CD type of setups, earning goodwill, being cheaper in terms of BOM and production costs, and technically supporting those platforms especially the Genesis which was by far their most popular device at the time. Such a device I think, wouldn't of needed to cost any more than $199 MSRP, maybe even cheaper than that. I think they would've needed to focus on original 1P software for the Neptune and that device combo setup for the gen, at least for a few years, and selectively resign themselves into a 3P-like relationship with Sony and Nintendo, porting some of those games over to one or both platforms a couple years or so after they appeared on the Neptune.
The Neptune, in that scenario, I think would've been lucrative enough to justify supporting, and you'd get 3P licensees like Capcom to support it as well at least with games like Street Fighter, Darkstalkers etc. It would basically be Sega carving out a lower-end entry-level product for the nextgen market, similar to what we've seen Microsoft do now with Series S, but almost three decades earlier. Meanwhile, Sega could've taken some of those Neptune 1P exclusives and, in addition to making ports for some of them to PS1 and/or N64 a couple years later, also developed versions of some of those games for Model 2 hardware in the arcades, with game settings and modes friendly for an arcade environment. These versions could've been upgraded with advanced graphics, basically among some of the first "remakes" of games in the industry really, especially among 3D games, and also maybe get some arcade-exclusive content added to them. By the time Sega could've ported those games to a PS1 or N64, they'd also be able to bring the arcade-exclusive content to those versions as well, and the Neptune version, which would've been available for cheaper since it'd just be something like an expansion disc and could use save data from the original version released on the system prior.
The same way Neo-Geo allowed save transfer between home and arcade, I think this hypothetical Sega Neptune (with a built-in CD drive) and "Model 2 home console" could've allowed this as well. Other benefits too, like special token discounts redeemable for prizes, special memberships at participating chains for people with Sega consoles, etc. The "Model 2 home console" could've been something provided exclusively through partnered arcade chains for patrons wanting to play those games on a home system with the exact same specs, in a rental fashion (likely tied to credit card and bank for payments). Sega'd probably need to design some lockout features to where arcade operators wouldn't of been able to use a Model 2 home console as an arcade cabinet, at least not without Sega's approval, but hopefully you can see where I'm going with this.
Basically, Sega needed to think outside the box and probably consider their brand and products as more of an ecosystem with some hardware-agnostic degree. They'd of been able to establish a pretty healthy loop between a featured Neptune, Genesis/CD/32X combo unit setups, Model 2 cabinets, Model 2 home consoles, and even PS1 & N64. However, all of this would've required Sega to admit that they would not have been able to compete head-on with Sony, would've needed to establish a niche the way Nintendo cleverly did, and most importantly, be united
as a corporation in order to see any of this in the first place and be inventively proactive instead of stagnantly reactive.
Sadly those things didn't happen and while the Saturn (and Dreamcast) have some absolutely amazing classics, Sega as a platform holder could've been a lot more IMHO. Lots of untapped potential.
Part of the problem with their arcade ports to Saturn was that they were forcing magnitudes-superior Model 2 games onto the Saturn hardware. Down-porting those games to Saturn was always going to cause problems. What they should've done, was prioritized games like Daytona, Virtua Fighter 2 etc.