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.

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