If I could try and flaw Iwata's direction of Nintendo from the perspective of a casual observer, in relation to market performance, I'd say that Iwata dedicates a lot of his perception of Nintendo towards pleasing fans of Nintendo and those already invested in their products. His focus is keeping customers happy. Produce good software, and always delay it if there's worries of quality. Profusely apologise for software droughts. Manage a series of e-video that communicate directly with fans. Offer incentives and bonuses like ambassador games and NES anniversary discounts. Announce a bunch of things and so on.
If you're a fan of Nintendo, own the hardware, and have a bit of patience, this kind of stuff is great. Yeah, it's annoying having no games to play. But anybody already invested would obviously take a good game over a poor game, and so the delays kind of speak for themselves.
Issue is, what does this mean to everybody else? You know, those people that
don't own Nintendo consoles, but
need to own Nintendo consoles in order to boost sales? They're not watching Nintendo Direct. They probably haven't even heard of it. They don't care about apologies for software delays, they just see no software. They don't care about bonus titles, because these push for a three figure hardware investment.
Sometimes I think Iwata's direction is noble and honest for gamers who already put their money down, but it's not particularly viable in selling hardware and convincing people on the fence to jump in. For them it's just a case of marketing and software, and too often the software comes too late, is too niche, or just doesn't have the market appeal of other bigger titles in the market.
And when you're fighting two consoles, that's a pretty rough position to be in.
I like Iwata and don't want to see him have to go but I do think Nintendo in general needs a bit of a shakeup. NCL is way too Japan oriented for the fact Japan makes up such a small portion of the overall pie. NCL would really benefit from a more diverse leadership that includes some non Japanese.
Nintendo is always designing everything with Japan in mind and hoping the rest of the world buys in. Need to start designing with a more global outlook and work on convincing Japan to buy in.
Nintendo's problem is an "in house" problem. They're pretty wary and at times ignorant towards an industry, market, culture, and technology moving and evolving around them, that they're a part of and refuse to acknowledge. If they didn't invent it, or they don't see a specific use for it within their own projections, they tend to ignore it. And it's not a good attitude to have, especially in the global market where (as you noted) a Japan oriented company is not going to kill it in the West.
They need to find a balance. Start accepting the world is a bit different these days and make concessions where appropriate. Their failures in online are a perfect example of their behaviour and stubbornness negatively impacting the perception of their systems in the market, as well as the usability for people who own them.