Consumer Trends Organization Strategy

Nintendo’s latest supply chain disaster: What can we learn?

By on January 12, 2017

Nintendo: the most recognizable brand in videogames. A company with dozens of iconic characters and a long legacy of exciting products that have been keeping millions of gamers of all ages happy for generations. Nintendo is also credited with rescuing the industry after the North American video game crash of 1983 by positioning the Nintendo Entertainment System (NES), as something completely different from predecessors in one of the greatest marketing campaigns of all time (a story deserved of its own blog post). While they have had their fair share of misfires (like the recent Wii-U console which was discontinued after less than four years in the market), they are usually great at coming up with innovative hardware and software ideas that elate their fans and confuse their competition.

 

However, they are no longer good at launching new products. I should clarify that: They are still great at conceiving product ideas. They are fantastic at marketing and generating demand for their products. They have a rabid fanbase of loyal followers that lap up every one of their product announcements, even if they are little more than a rehash of something they’ve already done many times over. What they continually fail to do is to produce enough of their products to meet the demand at launch and in the months following. It has become a regular occurrence for consumers to be disappointed and for scalpers to find ways of obtaining large quantities of the products only then to flip them and charge inordinate prices for them. It happened with their Amiibos several times (for the un-anointed – these are real figurines you buy and then you can use them in your games), and with the Wii U. But perhaps an even worse disaster was what they did this past holiday season with NES Classic edition.

 

The NES Classic Edition disaster

 

The NES Classic Edition was announced to great fanfare mid-2016. The retro video game market has been on a steady ascent the last five to ten years, and gamers that were too young (or not even born) when the NES was first launched in the mid 80’s have been indoctrinated into the the ways of the 8-bit fandom. The NES classic edition promised an impressive library of inbuilt games in a cute package, for a very reasonable price. The issue was that they were impossible to find when it launched in November 2016. Now, in January 2017 they are still almost impossible to find at any retailer. In the end, Nintendo only sold a few hundred thousand of these consoles in 2016. This included the most important time of the year for them – the holiday season. They should have sold millions. Some like to praise Nintendo for creating this scarcity around their product launches which in their eyes serves to drive up the demand, like it is a deliberate strategy and a business masterstroke. This is complete nonsense. That line of thinking represents a fundamental misunderstanding of marketing and demand generation. These ham-fisted launches are caused by catastrophic failures in Nintendo’s supply chain. Where the bottleneck is – nobody knows. Likely, product development struggles to meet unreasonable deadlines set by upper management to appease investors, and could explain limited quantities at launch, but it cannot explain why availability of their product remains scarce for months after that.

 

What is really concerning for Nintendo is that they have a new flagship console, the Nintendo Switch launching some time in Q1 2017 (exact date announced later today, Jan 12th). It comes at a precarious time for the company where mobile gaming has gone more and more to smartphones, impacting their handheld sales so much they have recently released a game – Super Mario Run – on Apple devices for the first time. After the Wii-U failure, some are wondering how if they still have what it takes to compete in the home console market. What is for certain is that they loyal fan base wants this product, and they should be able to move several million of them a short time after the launch. But to do that, Nintendo need to dramatically improve their supply chain and operations.

 

Strategies for Nintendo to improve their supply chain and operations

  • Pre-commerce: Just like Kickstarter works and how Tesla gained 400,000 pre-orders for the model 3, sell the product and take orders long before it is even produced.   Unfortunately this would disrupt their traditional brick-and-mortar-based distribution model through retailers, but they could get creative in how orders are fulfilled and how money is distributed so that everyone gets their piece of the action.
  • Go back to the drawing board: When is the last time they re-architected their supply chain process design? I’d chance that their current process is based off a decades-old plan, tweaked and updated in the interim. Perhaps approaching it from scratch and a Design Thinking mindset will unlock new ideas to enable them to re-imagine their end-to-end process.
  • The dreaded re-organization topic: I know, I know. This is old-school MBA 101… the easy answer. But what I think most Japanese entertainment companies have failed to grasp is the increasing relevance of foreign markets. For Nintendo, the American market has always been important, but today it is absolutely critical;  Japan is a distant 3rd behind China and the USA in terms of video game market size. At least the USA could be addressed relatively easily whereas China is difficult due to ongoing diplomatic tensions based off centuries old conflicts. The thing is, like most multi-nationals the important functions at Nintendo are still run out the home base in Japan. So why not give the regions more power to help improve new product development, marketing strategy and execution speed & accuracy?

 

Secondly, why not borrow a page from their contemporaries?

  • Apple: Tim Cook and Apple are the hi-tech supply chain masters and rarely miss a beat when it comes to a product launch. Nintendo, whom like Apple contract manufacturing through Foxconn, should analyze how Apple engages with them to understand where they come up short. Partner & supplier management is key and there could be failing here. Is it a lack of collaboration, planning, personnel on the ground, personal relationships, KPIs? Something else?
  • Zara: Specifically on sourcing and supplier management, Nintendo could take a look at how Zara and their agile supply chain use a broad network of suppliers to fulfil demand. Also, look at how Zara employs different strategies per region to get products to consumers faster. They can get a product from concept into stores in weeks. This strategy changed fashion, what could it mean for Nintendo?
  • Toyota: Japanese car manufacturers famously invented LEAN principles that most industries have now taken onboard. But  in such a turbulent industry and with new innovations (electric, hybrids, fuel cells) they have certainly updated their strategies, tools and processes that Nintendo and others could learn from.


The state of business agility for Japanese enterprises

I could also focus on critically analyzing the state of process innovation in Japanese companies as a segement. We know their reputation in automotive, but in the videogame industry many have gone from the undisputed leaders to bordering on irrelevance.  They are  notorious for being hierarchical, conservative and slow to respond to customer preferences outside of their domestic market. With an aging population and an economy that seems forever stuck in the doldrums, few are prepared to make radical changes and partake in risk taking. This is likely a significant factor affecting the likes of Nintendo and their peers.


What’s next? For now: More of the same…

What does all this mean for the Nintendo Switch launch? Unfortunately, consumers should expect scarcity. Once again, the launch feels rushed, and that final development finished not long before the world found out about the console. It is likely that the only way to obtain one on launch will  be via a pre-order through a retailer (which are not necessarily guaranteed to be fulfilled). The months after the launch is also likely to be full of the re-seller nonsense on eBay that has surrounded every Nintendo launch in recent history.

And for the NES classic? They will probably release a v2 this year with a refreshed game library and some minor improvements, like they always seem to with other products. There are already rumours of a Super Nintendo Classic Edition (a mini version of perhaps their greatest ever console). Either way, they have many tried and true tactics at their disposal to make sure that they get one in every retro gamer’s stocking next year, providing they ramp up production. Of course, they may be worried that these classic consoles could cannibalize sales of the Switch and decide to stop producing them altogether. There, Nintendo would all but stamp the NES Classic Edition as one of the most collectible videogame sales flops of all time.

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Nick Milani
Redwood City, CA

Hi, I'm Nick. My career has been built on working with tech inside large enterprises. Here I write about it. Outside of work, I love the outdoors, big engines, gaming, writing, heavy metal and 80s action movies. BSc, MBA. This is a personal weblog. The opinions expressed here represent my own and not those of my employer.

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