The Core Competence of the Corporation

Afzaal Ali

C.K. Prahalad

Coimbatore Krishnarao Prahalad◦ Doctorate from Harvard Business School

◦ Professorships in University of Michigan, INSEAD, and IIM

◦ Co-founder of Praja Inc., where he tried his wings as an entrepreneur

◦ Corporate strategy, the role of management in diversified multinational corporations

Gary HamelGary Hamel

◦ Doctorate from the University of Michigan

◦ Professorship in London School of Economics

◦ Founder and president of Strategos, an international management consultancy

◦ Core competence, strategic intent, industry revolution

Basic Theme

A core competency can take various forms, including

technical/subject matter know how, a reliable process,

and/or close relationships with customers and

suppliers. It may also include product development or

culture, such as employee dedication.

Fundamental knowledge ability or expertise in a specific subject area or skill set

A bundle of skills integrated to make a company unique.

The engine for new business development, underlying component of a company’s competitive advantage.

Created from the coordination, integration and harmonization of diverse skills and multiple streams of technologies.

Core Competence

NEC

Telephone

Switching & transmission

systems

Digital PABX

Semi-conductors

Packet Switching

GTE

Defense system

Lighting products

Satellite

Telenet

Sylvania TV

Business Portfolios in 1980

Only comparable in technological base and computer business

While NEC had no experience of telecommunication

Comparison between sales revenues of NEC & GTE

1980 1988

NEC

21.89

3.8

NEC

1980 1988

Series 1

9.98

16.46

GTE

1980 1988

NEC

21.89

3.8

NEC

Telephone

Switching & trans.

systems

Digital PABX

Semi-conductors

Packet Switching

GTE

Defense system

Lighting products

Satellite

Telenet

Sylvania TV

Business Portfolios in 1988

World Leader (NEC)Semi-conductors

First Tier Player1. Telecommunication

Products2. Computers

New Entries1. Mobile Telephones2. Laptop computers3. Facsimiles machines

Why ?

Strategic intent and Strategic architecture of “C & C” (computing and communication)

Constituted a “C & C” committee

Identify three interrelated streams of technology and market evolution

Care about “core product “and built strategic alliances

Used collaborative arrangements to multiply internal resources.

Now a world leader in consumer electronics

Image source: NEC

GTE Why not?

No strategic Architecture existed.

Decentralization made it difficult to focus on core competence.

Senior managers worked as if they were managing independent business unit.

No mutual decision was made.

The Roots of Competitive Advantage

From 1980 to 1988, the achievements of Japanese companies—

Low cost and High quality

Inventing new markets, creating new products and enhancing them in

Vangured markets

Also in established markets they also made great challenge to Western

Companies. Many examples are given in this articles:

Canon (personal copiers), Honda (from bikes to four wheelers).

Sony, Casio, Yamaha, Komatsu invented new devices.

A Portfolio of competencies

A Portfolio of Business across many industries

VS

GTENEC

WHAT’S THE PROBLEM IN MANY WESTERN COMPANIES

?

The Problem in many Western Companies?

Their senior executives are less capable than those in Japan

They limit the ability of individual businesses to fully exploit the deep technological capabilities

Japanese companies possess greater technical capabilities

In the long run, competitiveness derives from an abilityto build the core competencies at the lower cost andfaster than competitors

Corporation

Core

Competencies

Core Products

Business Units

End Products

Provides nourishment, sustenance, and stability

The Characteristics of Core Competencies

Core

competencies

are collective

learning in the

organization,

especially how

to coordinates

diverse

production

skills and

integrate

multiple

streams of

technologies

Core

competencies

are

communication

, involvement,

and deep

commitment to

working across

organizational

boundaries.

Involves many

level of people

and all

functional units

It is also

about the

organization

of the work

and the

diversity of

the value

Does not

diminish with

use. And core

competencies

are also the

engine for

new business

development.

Identifying Core Competencies – Three Tests

Core Competency Identify

Accessibility: Provide potential access to a wide variety of markets

Value-creation: make a significant contribution to perceived customer benefits of the end product

Uniqueness: Be difficult for competitors to imitate

Losing Core Competencies

Core Competency lose

Outsourcing the core competencies

Having an Alliance

Forgoing opportunities to establish core competencies

Losing Core Competencies

Outsourcing the core competencies

Having an Alliance

Forgoing opportunities to establish core competencies

Key Lessons

The costs of loosing core competency can be onlypartly calculated in advance.

A company has failed to invest in core competencebuilding will find it very difficult to enter an emergingmarket.

Throw out a baby with bath water in divestment decision

When it comes to core competencies, it is difficult to get off the train, walk to the station, and then reboard e.g. Motorola

From Core Competencies to Core Products

Core Competence

Core Product End Product

SBU or Core Competence

Core Competence

Inter-firm competition to build competencies.

Portfolio of competencies, core products, and businesses.

SBU is potential reservoir of core competencies.

Businesses and competencies are the unit of analysis: top management allocates capital and talent.

Articulating strategic architecture and building competencies to secure the future.

Competitiveness of today’s products.

Portfolio of businesses related in product market terms.

Autonomy is valued, the SBU “owns” all resources other than cash.

Discrete businesses are the unit of analysis, capital is allocated business by business.

Optimizing corporate returns through capital allocation trade-offs among businesses.

Strategic Architecture

A road map of the future that identifies

which core competencies to build and their

constituent Technologies

What’s is the strategic architecture

Advantages:

Motivate organizations to learn from alliances Help organizations to ensure internal development efforts Reduced the investment needed to secure future market leadership Help companies to find a distinct competitive advantage A tool for communicating with customers and other external constituents

Conclusion People critical to core competencies are corporate assets to be deployed

by corporate management.

Core Competencies are wellspring of new Business Development.

Only if the company is conceived of as a hierarchy of core competencies,

core product and market-focused business will it be fit to fight.

Top management must add value by articulating the strategic architecture

that guides the competence acquisition process

Core Competencies of Corporations

Past Present Future

Core Competencies of Corporations