The Core Competence of the Corporation

by C.K. Prahalad and Gary HamelHarvard Business Review

May-June 1990

Article Review Presented by:Sushil PallemoniTiffany RamonFredy Chandra

I Lin ChungLiu Yanan

Shuang Yao

Case Study: NEC vs GTE

In 1980

GTE was major IT company with Sales of $9.98 Billion

NEC was a smaller company with Sales of $3.8 Billion

In 1988

GTE’s sales were $16.46 Billion and its international position eroded

NEC’s sales were $21.89 Billion. Became a world leader in Semiconductors and Top-tier company in Telecommunication products and Computers

NEC conceived itself in terms of Core Competencies while GTE did not.

Case Study: NEC vs GTENEC ( In 1970s) GTE

Articulated a Strategic Intent to exploit the convergence of

Computing and Communications (“C&C”)

No Strategic Intent or Architecture appeared to exist at GTE

Constituted a “C&C” Committee of Top Managers for to oversee

development of core products and core competencies.

Even though senior executives discussed the implications of the growing IT industry there was no

commonly accepted view.

Shifted enormous resources to strengthen its position in components and central

processors.

Seniors line managers continued to act as if they were managing independent business units

Formed Strategic Alliances (over 100) for building competencies at

low cost

Decentralization made it difficult to focus on core competencies

Core CompetenceCore competence is a mix of skills, knowledge and technologies that enables a company to provide particular benefit to customers.

Examples: Sony – benefit is pocketability

core competence is miniaturization

Federal Express – benefit is on time delivery

core competence is logistics management

To qualify as a core competence it must meet

following three tests:Customer Value: A Core competence must enable an organization to provide a fundamental customer benefit (It provides consumer benefits)

Competitor Differentiation: A Core competence must be unique and superior to competitors. (It is not easy for competitors to imitate )

Extendibility: A core competence must be a source of creating an array of services and products in the future. (It can be leveraged widely to many products and markets. )

Core Competence : Tree Model

Business1

1 2 3

End products

Core

competences

43 21

Core product2

Core product1

Business4

1 2 3

Business2

1 2 3

Business3

1 2 3

Competencies: The Roots of Competitiveness

Core ProductsServe as a link between competencies and end products.

They enable value creation of end products.

Examples

Black & Decker – Small Electric Motors

Canon – Laser printer subsystems

NEC – Semiconductors

Honda – Gasoline powered engines

Core products are used to launch a variety of end products. Honda uses its engines in automobiles, motorcycles, lawnmowers and generators.

Why are core competencies important?

They are the skill sets your organization possesses that set it apart from its peers.

They are what make your organization unique.

They are sources of competitive advantage.

They are the building blocks to future opportunities and earned income ventures.

How Not to Think of Competence

Competence is not built by companies viewing themselves

as bundles of businesses making products

Focusing solely on a competitor’s cost and quality of products

Outspending rivals on research and development

SBU’s sharing costs or common components

Ignoring the skills in the organization, or how to use them for future benefit

Cultivating Core Competence

“In the core competencies underlying them, disparate businesses become coherent.”

Examples: Canon, Honda, Casio, NEC

Unrelated businesses in terms of customers, distribution channels, and merchandising strategy

Leaders in various industries due to core competencies

Building Core Competencies

More ambitious than vertical integration:

Distribution/Customers

Supply Chain/End Product

Takes inventory of skills and apply forward in non-traditional ways, rather than looking at vertically

Identifying Core Competencies

Three tests to identify core competencies:

1) Provides potential access to a wide variety of markets

2) Makes a significant contribution to the perceived customer benefits of the end product

3) Should be difficult for competitors to imitate

Few companies are likely to build world leadership in more than five or six fundamental competencies.

How to Lose Core Competencies

Companies judge competitiveness primarily in terms of price/performance of end product

Cutting internal investment

Outsourcing

No clear goals for competence building

Forgoing opportunities to establish competencies that are evolving in existing businesses

Lessons to learnCosts of losing core competence can be only partly calculated in advance.

Company that has failed to invest in core competence building will find difficulty entering into emerging market

Core Competencies End Products =

Core Products

Forces a company to distinguish between brand share achieved in end product market

Yields revenue and market feedback that helps determine pace at which core competencies can be enhanced/extended

Allows company to shape the evolution of applications and end markets

Relative Goal of Core Products

Build world leadership in design and development of a particular class of product functionality

The tyranny of the SBU

Three Global Leadership Planes

Core CompetenceSpecific factor that a business sees as being central to the way it (e.g. Apple Innovation)

Core ProductsCompany's products which are most directly related to their core competencies (e.g. Mac)

End productsFinal product ( e.g. Programs integrated w/ Mac )

Two concepts of the Corporation

SBU Core CompetenceBasis for

competition Competitiveness of today's products

Interfirm competition to build competencies

Corporate StructurePortfolio of business related in

product-market termsPortfolio of competencies, core

products, and business

Status of the Business Unit

Autonomy is sacrosanct; the SBU ''owns" all resources other

than cashSBU is a potential reservoir of

core competencies

Resource Allocation

Discrete business are the unit of analysis; capital is allocated

business by business

Businesses and competencies are the unit of analysis: top

management allocates capital and talent

Value Added of Top Management

Optimzing corporate return through capital allocation

trade-offs among businesses

Enunciating strategic architecture and buildiong

competencies to secure the future

SBU’s Problem

Only pursuing in putting competitive products on the shelf today.

Underinvestment in Developing Core Competencies

Each SBU didn’t feel responsible for building core competenciesOverlook various divisions' products for coordinating opportunities

SBU’s Problem (cont.)

Imprisoned ResourcesUnwilling to share competent people with other SBUFailed to identify people with critical competence

Bounded InnovationUnrecognized Core Competencies

Will only pursue innovation that is close at hand

Failed to widen the domain of innovation

Core Competencies

BenefitsOutpace rivals in:New business development

Improving product features

Price/Performance ratio

Building company image, customer loyalty, & access to distribution channels.

Developing Strategic Architecture

•“road map of the future” -identifies which core competencies to build fromtheir constituent technologies.

•For example:NEC’s C&C can reduce investment needed by-learning from alliances-focus on internal development efforts

Core CompetenceIt’s impossible

---for a company to make a partnership intelligently without a clear understanding of its core competencies.

What needs to be known?

-what a strategic architecture should look like?

-How long could we preserve our competitiveness in this business if no core competence?

-How important is this core competence to perceived customer benefits?

Strategic ArchitectureProvides a logic for

---- product and market diversification.

Makes resource allocation priorities transparent to the entire organization.

Top management

-provides a model for allocation decisions

Lower level managers

-understand the logic of allocation priorities and disciplines.

Strategic Architecture

Yields a definition of

---the company and the markets .

For example: Honda, 3M, Vickers, NEC, and Canon.

Honda

A strategic architecture forces to link technical and production across SBUs.

Is a tool for communicating

Reveals the broad direction

VickersA division of Trinova, and a Toledo-based corporation

A premier supplier of hydraulics components

Eg. Valves, pumps, actuators and filtration devices

Evolution of technology

Innovating technologies related to power and motion control

Trying to satisfy emerging customer demands

New competencies have to make a bridge between technology and customers need.

Two additional competenciesElectric-power

Electronic control

Vickers’ Strategic Architecture

A map of relationship between customer functionality requirements, potential technologies and core competencies.

Basis of making decisions about product priorities, acquisitions, alliances, and recruitment

Vickers Map of Competencies

Reallocated corporate resources

Avoid conflict between SBU managers

Redeploying to Exploit Competencies

Identify the core competencies

SBU managers have the right to raid other SBUs

Reallocated corporate resources

Short-term inequalities will balance out over the long-term

Positive contribution should be made visible

Employees do not belong to any particular business

Reduction conflicts between SBU managers

Questions1. What is a “core competence” of a corporation?

Why do core competencies not diminish in an organization?

2. What do the authors mean by “the tyranny of the SBU”? In what ways do the two concepts of the corporation, SBU, and core competencies differ? Explain.

3. What would be your (individual) core competence? How would you relate that to your future development and personal goals in life?