Tuesday, October 2, 2007

Good Question

ars technica wrote an article yesterday that basically says Nintendo will not be able to ship its popular Wii game console fast enough to meet Christmas demand. John Gruber asks "What is wrong with Nintendo?"

This is a good question. In business, the problem generally is to find or create a product that customers are willing to pay more for than it costs you to make and deliver. Oh yeah, it also has to be better or cheaper than your competitor's product. In the simplest examples, we think about how much the parts costs, slap a little margin on for development costs, and maybe a little profit, and decide that is how much the product should cost.

In business school, we dig into this quite a bit, and find that there are lots of ways to optimize your business so it is more efficient, which translates into a lower price (and more sales), or to higher margins. Since there are lots of ways to improve efficiency, it follows that there are an equal number of ways to screw up efficiency, thus increasing the price (and reducing sales) or reducing margins.

With that in mind, here is a quote from the ars technica article:

"They ought to stop by on a frequent basis. We're going to flow hardware. It's not that it's going to show up only on one occasion. It's going to be constantly flowing in."
Nintendo of America President Reggie Fil-Aime
The phrase "constantly flowing in" stands out to me. Toy manufacturers have a classic problem related to the Christmas buying season. First, their revenues all come at one time during the year. If Nintendo sells 50% of their annual demand for their game console in one month, this means they will sell very little during all the other months. Second, the factory has to deal with this same spike.

Although this is a supply chain problem, lets talk about it in terms of our own lives. Imagine that you have a large extended family that includes 12 other households. That is, there are 12 other families that might want to come visit you in your house. Now you love your family, and you want them to stay with you when they visit, so you buy a house with a guest room. If they each visit one month per year, you are all set. But what if they all want to visit during the holidays? Should you build a house with 12 guest rooms, and leave them empty for 11 months out of the year? That is certainly not an efficient way to entertain relatives, and it is not an efficient way to run a business.

Nintendo is just saying that they cannot run their business efficiently by designing it to meet seasonal spikes. "Well, since you can never find a Wii on the shelf now, surely they can increase production another 10% or so." Another good point. But to do this, Nintendo will have to invest money -maybe a lot of money. For example, what if they are currently running at full capacity on one manufacturing plant, and to increase just a little, they will have to bring another plant on-line?

In any case, any change will probably require Nintendo to invest some money, and the first question to ask is "will we get that investment back?" There is lots of uncertainty in consumer goods - especially toys, but I am pretty sure that Nintendo has thought about this, and they are thinking that retooling their business for last-minute shoppers is not a good investment.

Doing things the Hard Way

I like to do things the hard way. Well, it's not so much that I like it, but after I have done something, it usually turns out to be the hard way. Part of the problem is that I have a pathological need to understand how things work. For example, in high school, I could never memorize the the rule-based procedures for solving a problem. Instead, I tried to understand the relationships at work, and then re-create the method as needed. This was cool for explaining the concept to the girls in the class, but it was murder on exam day. Eventually I realized that you just don't have time to reinvent the wheel on every problem. Still, I was never satisfied to have memorized a procedure that would produce the correct answer, without understanding all the moving parts.

A few years ago, I realized that this problem shows up in other areas of my life. I know that most men don't like to read instructions, but apparently I take this to an extreme. I didn't go to college right out of high school for a number of reasons, some good, some not so much. (As I get older, I move more of my reasons from the former category into the latter.) What I eventually realized was that deep in the dark crevasses of my subconscious, I believed that taking a class was an admission of failure. If I was really as smart as I thought I was, I should be able to figure things out for myself. You know, stuff like chemistry, and physics, and solid-state semiconductor theory. I'm not kidding. I worked on military and space-grade electronic systems for nearly 10 years with nothing but an associates degree. And not one of those trade-school degrees where they actually taught me some technical stuff - no, I studied Anthropology, Ecology, Psychology, History, and English. Sure, I took about 3 classes from the Electronics department, and a bunch of math, but half the math was to make up for what I didn't do properly in high school, and the other half was only sort-of useful.

From a fundamental perspective, Calculus was cool, but I am pretty sure that I have never had to calculate an integral outside of the classroom.

The funny thing is, most of my colleagues consider me to be a pretty hard-core engineer. Anyway, after 20 years of reasonable success in my career, I decided that maybe there was something to this whole idea of letting a teacher show me how to do something, instead of reinventing it for myself. So I found a reasonably good university that didn't laugh too hard at my previous attempt at an education, and managed to earn a BA degree. Of course, after significant work experience, a BA degree seems like pretty entry-level stuff, so my pathology of having to understand how things really work kicked in, and forced me into graduate school.

All of this is just a long-winded way of explaining how an uneducated, stubborn guy like me finds himself in top-tier MBA program. Some of the comments in this blog will come from the uneducated, stubborn guy, and some will come from a seasoned professional with a top-notch education. Which comments are which will be left a an exercise for the reader.