Core competency of company - Venkat

8/7/2019 Core competency of company - Venkat

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Core competence of corporation

C.K.Prahalad and Gary Hamel


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core competency

core competency is a specific factor that a business seesas being central to the way it, or its employees, works. Itfulfills two key criteria:

It is not easy for competitors to imitate It can be leveraged widely to many products and

markets.

A core competency can take various forms, including

technical/subject matter know-how, a reliable processand/or close relationships with customers andsuppliers.[1] It may also include product development orculture, such as employee dedication.


3/17

NEC vs. GTE - an excellent contrast

NEC In early 70s, articulated strategic intent to exploit the convergence of

computing and communications.

Success, management reckoned, would hinge on acquiring competencies,particularly in semiconductors.

Constituted a "C&C Committee" of top managers to oversee development ofcore products and competencies.

Put in place coordination groups and committees that cut across the interestsof individual businesses.

Carefully Identified three interrelated streams of technological and marketevolution.

Reasoned computing, communications, and components businesses would so

overlap that it would be very hard distinguish among them, and there wouldbe enormous opportunities for a company that had built the competenciesneeded to serve all three markets.

Determined that semiconductors would be the company's most important"core product."


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NEC vs GTE - an excellent contrast

GTE

No such clarity of strategic intent and strategicarchitecture appeared to exist at GTE.

No commonly accepted view of which competencieswould be required to compete in the informationtechnology industry was communicated widely.

While significant staff work was done to identify keytechnologies, senior line managers continued to act asif they were managing independent business units.

Decentralization made it difficult to concentrate oncore competencies.


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Core competence -- The roots of

competitive advantage In the short run, a company's competitiveness derives from the price/performance

attributes of current products.

In the long run, competitiveness derives from the ability to build, at lower cost and morespeedily than competitors, the core competencies that spawn unanticipated products.

Real sources of advantage are to be found in management's ability to consolidatecorporate-wide technologies and production skills into competencies that empowerindividual business to adapt quickly to changing opportunities.

The diversified corporation is a large tree. The trunk and major limbs are core products,the smaller branches are business units, the leaves, flowers, and fruit are end products.The root system that provides nourishment, sustenance, and stability is the corecompetence.

You can miss the strength of a competitor by looking only at their end products.

Core competencies are the collective learning in the organization, especially how tocoordinate diverse production skills and integrate multiple streams of technologies.

If core competence is about harmonizing streams of technology, it is also about theorganization of work and the delivery of value.

Core competence does not diminish with use. Unlike physical assets, which deteriorateover time, competencies are enhanced as they are applied and shared.

Core competencies need to be nurtured and protected, as knowledge fades if it is notused.

Competencies are the glue that binds existing businesses and also the engine for newbusiness development.


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Roots of competitive Advantage


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How not to think about competence

Top management often tracks cost and quality ofcompetitor products, yet how many managers untanglethe web of alliances their competitors may haveconstructed to acquire competencies at low cost?

In how many Western boardrooms is there an explicit,shared understanding of the competencies the companymust build for leadership?

How many senior executives discuss the crucial distinctionbetween competitive strategy at the SBU level andcompetitive strategy at the level of an entire company?

Cultivating core competence does not mean outspendingrivals on R&D or sharing costs between SBUs.

Building core competence is more ambitious and differentthan integrating vertically.


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Losing core competency

Two clear lessons to consider :

First, the costs of losing a core competence can beonly partly calculated in advance. The baby may bethrown out with the bath water in divestment

decisions. Second, since core competencies are built through a

process of continuous improvement andenhancement that can span a decade or longer, acompany that has failed to invest in core competence

building will find it very difficult to enter an emergingmarket, unless of course, it will be content simply toserve as a distribution channel.


10/17

From core competencies to core products

3 different planes on which battles for global (or anybusiness) leadership are waged: core competence, coreproducts, and end products.

Core products - the physical embodiment of one or morecore competencies.

Core products - the components or subassemblies thatactually contribute to the value of the end products.

Thinking in terms of core products forces a company todistinguish between brand share it achieves in end product

markets and manufacturing share it achieves in anyparticular core product.

To sustain leadership in chosen core competence areas,strongest companies seek to maximize their world-manufacturing share in core products.


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From core competencies to core

products Control over core products is critical for several reasons:

Manufacture of core products for a wide variety of external(andinternal) customers yields revenue and market feedback that, at leastpartly, determines the pace at which core competencies can beenhanced and extended.

By focusing on competence and embedding it in core products,businesses can build up advantages in component markets first andhave them leveraged off their superior products to move downstreamto build brand share. And they are not likely to remain low costsuppliers forever. As their reputation for brand leadership isconsolidated, they may well gain price leadership.

A dominant position in core products allows a company to shape theevolution of applications and end markets.

As a company multiplies the number of application arenas for its coreproducts, it can consistently reduce the cost, time, and risk in newproduct development. In short, well-targeted core products can leadto economies of scale and scope.


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The tyranny of the SBU

Old prescriptions have toxic side effects. The need for new prescriptions ismost obvious in companies organized exclusively according to the logic ofSBUs.

A diversified corporation obviously has a portfolio of businesses and ofproducts; but we must also learn to think in terms of a portfolio of corecompetencies as well.

US companies don't lack technical resources to build competencies, but topmanagement often lacks the vision to build them and the administrativemeans for assembling resources spread across multiple businesses.

It is important for a company to know whether it is winning or losing on eachof the 3 planes of competition core competence, core products, or endproducts. It can be difficult to measure, as market share doesn't alwaysindicate sustainability of a position (e.g.--if you are relying on others core

competence, rather than your own to build an end product position, you couldbe in quick sand.)

The primacy of the SBU -- an organizational dogma for a generation -- is nowclearly an anachronism. The SBU prism (in many companies) means that onlyone plane of the global competitive battle, the battle to put competitiveproducts on the shelf today, is visible to top management.


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Developing strategic architecture

a. Fragmentation of core competencies becomes inevitablewhen a diversified company's information systems, patterns ofcommunication, career paths, managerial rewards, andprocesses of strategy development do not transcend SBU lines.

b. Prahalad believes that senior management should spend a

significant amount of time developing a corporate-widestrategic architecture that establishes objectives forcompetence building.

c. A strategic architecture = a road map of the future thatidentifies which core competencies to build and theirconstituent technologies.

d. Key question for senior management: How can a companymake partnerships intelligently without a clear understanding ofthe core competencies it is trying to build and those it isattempting to prevent from being unintentionally transferred?


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Redeploying to exploit competencies

a. Premise -- if core competencies are a company's critical resource and if topmanagement must ensure that CCs aren't held hostage by a particular unit, itfollows that SBU managers should bid for core competencies in the same waythey bid for capital.

b. Once overarching competencies are ID'd by top management (with SBU help),they must ID the projects and people connected with them. (A thorough audit.)

c. This sends a clear message to middle managers: core competencies are

corporate resources and may be re-allocated by corporate management.Individual businesses don't own the people. SBUs are entitled to the services ofan individual so long as it can be demonstrated that their utilization is yieldingthe highest possible pay-off.

d. Progress enabling questions:

i. Reward systems - how can they be adjusted to support this thinking?

ii. How does senior management recognize the contribution of SBU managers

who give up the talent? iii. How does a corporation build into its thinking an allowance for a dip in

performance from the unit that gives up the talent? Censure in times like thiscan cause serious damage.


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The bottom line

a. Core competencies are the wellspring of newbusiness development and should constitute thefocus for strategy at the corporate level.

b. Only if a company is conceived of as a hierarchyof core competencies, core products, and market-focused business units, will it be fit to fight.

c. In the final analysis--Top management adds

value by enunciating the strategic architecturethat guides the competence acquisitionprocess


16/17

Google- Core competency

While googlehas many different products. its primary products are Search and Adwords. Adwords is what generates nearly all of their income.

In order to run a large scale search engine they have to crawl billions of webpages. store and index those pages, and be able to retrieve them in response toqueries. It takes tens of thousands of specially built PCs to do these tasks.

The ranking algorithm--part of the indexing processs- uses a huge matrix of webpage links from which every url gets a PageRank--a score that indicates howimportant the page is, based on how many other quality site link to it. Hundreds of other factors are also included, and results only considered fromt the set ofpages containing the words in the search query (occasionally also abbreviations, homonyms, and spelling differences).

Adwords is somewhat similar, but instead of webpages, the documents are small ads created by companies. The companies bid for placement instead of rankingalgorithms, but they only show up in alongside relevant search results

What is Googles core competency? I would argue that its harvesting the value from massively scaled, complex human activity, i.e. millions of websites linking toeach other and hundreds of thousands of advertisers bidding on key word and experimenting with ad creative, clickthrough rates, and conversion rates. Theother critical element of this core competency is a natural feedback loop, e.g. the relevancy of a search results page or an online business cost of sales throughpaid search advertising.

The reason that Google has struggled to apply this core competency to offline media, i.e. magazines, newspapers, and now TV, is that these media lack both thescaled of activity and the natural feedback loop that enables Google to create efficiencies by harnessing these market dynamics.

If you read Googles press release about its new TV ad system, its clear that they are aiming to pump as much feedback data and activity into the system aspossible:

Advances in set-top-box technologies make it possible to report aggregate statistics on how many times an ad was viewed and whether it was watched throughto the end. As part of this trial, we will be working with partners to use aggregate, anonymized set-top-box metrics to deliver timely and accurate viewingreports. Advertisers can use this data to understand the effectiveness of their TV ad campaigns and use this information to provide more relevant ads to viewers.

The problem is that the sensitivity and specificity of the data and the scale of activity (i.e. number of advertisers using the system and the number of bids peradvertiser) dont even begin to compare to what exists in search. First, the number of advertisers who will be able to create video ads is likely to be dwarfed forsome time to come by the number of advertisers who have created text ads. Second, the ability to track, at the individual user level, the performance of eachtext ad for each keyword AND, critically, the ability to track that individual users behavior on a site AFTER they click doesnt even begin to compare toaggregate statistics on how many times an ad was viewed and whether it was watched through to the end.

The irony here is that Google is running in the completely opposite direction with its cost-per-action advertising program, which provides the ultimate feedbackloop.

Back in the days of mass marketing of mass products, i.e. when everyone was a potential customer, TV was an immensely efficient medium because reachingeverybody was the objective. As consumer audiences and product target markets fragmented, TV became more and more inefficient, to the point where theentire system is now propped up by the inertia of deeply entrenched economic interests. While Google will no doubt introduce greater efficiency into the TV adsales system, it will have the net effect of driving money out of the system.

Of course, if that money is driven into the more efficient online marketing space, Google will ultimately be the beneficiary perhaps the whole foray into offlinemedia is all a strategy to crush the competition from other media by completely disrupting each mediums core advertising market, and thereby freeing up thosedollars to flow into Googles online coffers.

Rather than create new money-making machines, wouldnt it be far more efficient for Google to find new ways to feed the one it already has?


17/17

Apple Inc- Core competency

Apple's core competency is innovative design and technology

It's no surprise that Apple (Nasdaq: AAPL) crushed its fourth-quarter earnings estimate. The company delivered earnings of $1.67 billion, up 47% from last year on an earnings-per-sharebasis. To understand why Apple's crushed earnings predictions were no shock, take a look at the business model that telegraphed the punches behind what Apple called its mostprofitable quarter ever.

Think differentApple's core competency is innovative design and technology. That's the spirit behind its famous "Think Different" ad campaign. Apple introduces products that truly wow the market.Think back to the Macintosh in 1984 -- the first affordable computer with a graphical user interface (GUI). Today, the iPhone challenges the definition of a phone, by combining a portabledigital media player, Internet client, GPS navigator, camera, and ... um ... oh yeah, a phone. Not only does Apple wow consumers, but it changes the way we think about consumerelectronics.

Buy differentApple doesn't just want you to think differently about their products. It wants you to redefine the buying experience. Visit an Apple store, and you'd almost think that it was designed

more to create a clubhouse for Apple enthusiasts than to actually sell the company's products. Consumers enter a store, check out Apple's new products, attend a workshop, and sit in ona presentation or in-store concert. Get immersed in the Apple culture, and when you're ready, Apple will sell you a piece of the experience to take with you. Microsoft (Nasdaq: MSFT)wants to create a similar experience with its own chain of stores. Good luck with that, Mr. Softy.

Lower the entry barrierThe real innovation of Apple's business model exposed itself when the company focused its core competencies on lower-priced products. Introductory Apple products like the iPod serieshave had great mass-market appeal, which directly addressed the perception that Apple only catered to high-end markets. Instead of cannibalizing its high-end products with lower-costproduct offerings, Apple is capitalizing on an inverse effect.

The cash machineApple sold 3.05 million Macs this quarter, an increase of 17% year over year. This increase can be attributed in part to the halo effect, and partly to customer switching costs associatedwith Apple's iPod and iPhone customer base. Brand loyalty will keep growing as Apple continues to suck in the mass m arket through its introductory products.

In addition, more and more customers continue to purchase proprietary digital media and apps for Apple's products. As of September, Apple has sold more than 8.5 billion songs throughits iTunes Store. On its latest conference call, the company also announced that users have downloaded 2 billion iPhone apps. How likely do you think these customers would be to ditchtheir proprietary Apple digital media and apps for a competitor's product?

OpportunitiesApple's business model is as innovative as its products. The company is a dominant force in the consumer electronics industry, but it still hasn't established a firm grip in global mobilemarket share. With competitors like Research in Motion (Nasdaq: RIMM) looking to strengthen their foothold against Apple, and Verizon (NYSE: VZ) and Motorola (NYSE: MOT) on the

attack with their anticipated launch of the cryptic Droid smartphone, Apple will need to quickly increase its presence domestically and abroad to keep up its lofty growth rates. However,recent announcements that mobile carriers like Vodafone (NYSE: VOD), Orange, and China Mobile (NYSE: CHL) will start carrying the iPhone are a good indication that Apple is priming itsbusiness for the rest of the world. If Apple's iPhone can succeed beyond the U.S., you can be sure that any market-share gains will spill over to fuel continuing growth in its Macintosh lineas well.

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Core competency of company - Venkat