They were already being impacted in Japan by the sudden success of NEC's PC Engine (TurboGrafx-16 in the West) which, while not actually 16-bit, was a noticeable technical improvement from the Famicom, which was underpowered even for its time. Nintendo were complacent with their success and dragging their feet on developing a 16-bit system, which was the arcade standard at the time. The hold of the NES/Famicom was too strong, and the Master System wasn't advanced enough to topple the juggernaut. While the Sega Master System was a decent success in Europe and South America, it failed to make any strong dents in the North American and Japanese markets.
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