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The net - net managerial takeaways from NOKIA and SHINSEI Bank CASE - 1: NOKIA.

1. Nokia made significant investments into R&D (10% revenue, 30% manpower) 2. Came up with the first smart-phone 3. YET did not become the market leaders - possibly due to internal politics (often happens power struggle between marketing people - operations guys - finance whizkids etc.) 4. SO WHAT WERE the Options open to the management 5a. May be initiate an internal witch-hunt - very risky and demoralizing affair - GAINS to None 5b. Punish the perceived wrong doers (even more demoralizing - if the good guy is made the scapegoat by the bad-guys - again a hard reality) 5c. Prolong the life of the (innovative) product - which had consumed so much money - and cut the losses if not gain supernormal profits 6. Option 5c being the path of least resistance - Nokia chose that. 7. Mechanism - Incremental Innovation (superficial modification/minimal investment in technology) - Penetration strategy (both in developed and emerging economies) 8. The management knows that in this approach - has finite horizon (wont have Free Cash Flows after say 3/4 years) 9. Viable alternative - Sell to a willing customer - who may find some residual value/prolong the life - in this case Microsoft.

CASE - 2: SHINSEI BANK.

1. Shinsei is on the other end of the spectrum - to begin with it HAD NO MONEY for R&D 2. It just got revived - on someone else's doles. 3. But that generous (donation!!!) which it had received had to be used in an efficient & cost effective manner 4. Old businesses will suck up the money - with no concomitant returns - SO WHAT ARE THE OPTIONS to the CEO - well there is only ONE OPTION - with sequential steps 5a. Enter New Business Domains (Pros) Lucrative Option (Cons) But current employees and the systems/processes are NOT Synchronized to that (But we learnt Multi-Tasking from the Japanese - Right?)
Dr. S. Basu Page 1

The net - net managerial takeaways from NOKIA and SHINSEI Bank 5b. Acquire New Competencies (Pros) Will help in expanding the business(s) - sustain the business for a longer time (Cons) - Easier said than done; Would be extremely costly - the owners of those new competences will bargain hard and take away all the values/gains/profits, time consuming to build up (remember Prahalad's Core competences - time consuming to build up - hence difficult to imitate) 5c. Finally CEO sought help from his old CITIBANK colleague - Dwivedi - CEO bringing in his own team. 6. Dwivedi's - Terms of Reference (TOF) were very clear - help set up systems and processes that are CHEAP and SCALABLE - without disrupting the existing systems, structure, process, people, culture etc. 7. Dwivedi chose - Modular Innovation: 7(a) Froze the Business Domain(s) and the requirements 7(b) Break down (present and targeted/proposed) business requirements/process flows - into the simplest possible modules/simplest possible activity levels 7(c) Compare and contrast the various options (available in the market) - with respect to the simplest module 7(d) Buy (including outsourcing) modules - that FITS OPTIMALLY into the overall design Compatibility is the main issue 7(e) Overall efficiency of the structure = Sum of efficiencies of the individual modules (this is actually very fundamental and simple - Consider Functions F(x) whose individual components are x1=1, x2=2, x3=4. Therefore the overall value of F(x) = x1+x2+x3=7. Now replace x2=2 with x7=10. Assuming x2 and x7 are compatible, the new value of F(xnew) = x1+x7+x3 = 15 > F(x)=7. In other words, the improvements at the level of the individual components drive the overall improvement. This improvement can be scale of operation, customer satisfaction, business response time, cost efficiency etc.) 8. The tradeoff/compromise in the above philosophy - is that (i) It is centralized/had to be centrally managed/monitored to ensure continued efficiency gains - e.g. of such systems - ERP. ERP (a modularly innovative system) works best - if the need is well defined. 9. The whole set up (i.e. the Modularly innovative IT Infrastructure) fully cared to the business needs of SHINSEI Bank. 10. Unfortunately, the CEO Changed. New CEO does not want to live under the shadow of the old CEO (To get credits - he must break new grounds).

Dr. S. Basu

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The net - net managerial takeaways from NOKIA and SHINSEI Bank 11. He can take the Bank only in the direction - which he KNOWS from past experience. He needs to BRING IN HIS OWN TEAM. 12. But he cannot touch the Japanese Staffs - who are anyways protected in their job. 13. Therefore the EXPENDABLES are the OUTSOURCED operations and people - headed by Dwivedi 14. But he cannot AXE the guy who literally turned around the organization and gave its distinct identity. 15. Therefore finesse is required and the route taken was - REQUEST TO INTEGRATE A SEMI INDEPENDENT MODULE - that is incompatible and may pose security threats to the whole business. 16. This move highlights - the inherent weakness in the approach adopted by Dwivedi - which worked perfectly well under certain given conditions. 17. Please note that UNLIKE THE NOKIA CASE, the business potential of Shinsei Bank's existing Businesses were NOT EXHAUSTED - but it is the change in CEO's Focus/Intention and approach - that created the crisis - which Modular Type Innovations cannot handle. 18. Restarting the restructuring exercise - would be time consuming, risky and may not even prove to be optimal. Therefore for Dwivedi - its best to call QUITS and preserve his reputation rather than risk it by a potential failure.

WELCOME TO THE WORLD OF MANAGERIAL INTRIGUES AND CONSPIRACY THEORIES!!!!!!

While the above is the managerial story, it is important that you know the exact mechanism used in modular type of innovation and the possible problems that you may encounter if you adopt modular innovation. Then you shall not get into the trap that Dwivedi got into.

Dr. S. Basu

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