The Core Competence of the Corporation

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The Core Competence of the Corporation
C.K.Prahalad and Gary Hamel The leading
strategists of the 1990s
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Outline

• Intro technology Competence is important
• Rethink
• The Roots
• A model
• Identifying and losing Core Competence
• Core competence to Core Products
• Tyranny of SBUs
• Develop a plan

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Introduction

• Rethink of the concept of corporation is required
  to prevail in global competition
• In 1980s, top management were judged by their
  ability to restructure, their corporations
• In 1990s they should have been judged by the
  ability to identify, cultivate exploit core
  competencies
• Consider the case of GTE NEC,
• GTE folds after maintaining leadership in
  Information technology telecommunications.

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Introduction

• NEC expanded into a telecommunication company and
  in a decade emerged as a leader in semiconductor,
  telecommunications
• Only company to be in the top five revenue in
  telecommunications, semiconductor mainframes
• How did NEC achieve this?,
• By conceiving of itself in terms of core
  competencies instead of products

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Rethinking the Corporation

• Corporations think of themselves in terms of
  markets and products
• Think of themselves in terms of finance, size and
  may other issues
• This view of the firms looks at the technologies,
  innovation pathways of a firm, management
  practice centered around cultivated and
  exploiting technology as the basis of sustainable
  firm competitive advantage

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Rethinking the Corporation

• Radical change in the thinking of the top
  management
• Theory practice of Western management thought
  have created a drag on our forward motion
• Principles of management are in need of reform
• GTE vs NEC is one of the many comparative cases
  to understand the changing basis for global
  leadership

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Rethinking the Corporation

• In early 1970s, NEC articulated a strategic
  intent to exploit the convergence of computing
  communications (C C)
• A Strategic Architecture was devised to develop
  core competencies
• C C Committee oversaw the development of core
  products and competencies
• By collaborative arrangements,coordination, NEC
  was able to assemble a broad array of core
  competencies
• Competencies are technological in Nature
• Capabilities are the management practices around
  them

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Rethinking the Corporation

• NEC clearly identified three streams of market
  technological evolution
• NEC developed competencies so that they could
  serve all these markets with enormous
  opportunities
• NEC was successful in developing and successfully
  implementing the core competency strategy
• GTE on the other hand had no common view of
  competencies, totally market and financially
  driven

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The Roots of Competitive Advantage

• NEC thought of itself as a portfolio of
  competencies, whereas GTE thought of itself as a
  portfolio of businesses
• In the short run, a companys competitiveness
  derives from the price/performance attributes of
  current products
• In the long run, competitiveness derives from the
  ability to build core (unique) competencies that
  spawn unanticipated products, at lower cost, more
  faster than the competitors

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The Roots of Competitive Advantage

• Competence strategies try to exploit the deep
  reservoir of technological capability of their
  firms
• Competencies are the Firms collective learning
  for coordinate integrate diverse technology
  streams
• Competence strategies require commitment to
  working across organizational boundaries
• Competencies do not diminish over time

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The Roots of Competitive Advantage

• Competencies should be the glue that bind
  existing businesses in a diversified firm
• They guide patterns of diversification and market
  entry
• Core products/businesses contribute to a wide
  range of end products, thus it is vital to
  protect them from being acquired by a rival

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Think of competence as bundles
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Identifying Core Competencies- And Losing Them

• Three tests can be applied to identify core
  competencies in a company
• Core Competence provides potential access to a
  wide variety of markets ( Cross Industry Lines)
• Core Competence should make a significant
  contribution to the perceived customer benefits
  of the end product
• Core Competence should be difficult for a
  competitor to imitate

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Identifying Core Competencies- And Losing Them

• Cultivating Core competence does not mean
  outspending rivals on R D
• It is always difficult for a rival to duplicate
  the more or less comprehensive pattern of
  internal coordination and learning
• Building core competencies is more ambitious and
  different than integrating vertically
• Companies should probably generate a list of
  capabilities and view them as building blocks,
  this would enable them to push for acquiring new
  missing capabilities

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Identifying Core Competencies- And Losing Them

• Most companies judge competitiveness in terms of
  price/performance of end products
• Cost centers
• This measure leads to the erosion of core
  competencies or does not enhance them
• Embedded skills within the company that can give
  rise to core competitiveness in the market should
  not be viewed as cost centers and be culled

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Identifying Core Competencies- And Losing Them

• Chrysler depends on many firms for engines and
  power trains
• Honda on the other hand views its capabilities in
  engines and power trains as a core competency
• Outsourcing contributes little in terms of
  developing a core competency

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Identifying Core Competencies- And Losing Them

• Another way of losing
• Forgoing opportunities to establish competencies
  that are evolving in existing businesses
• US Manufacturers exited the TV Business in the
  1970s,which they regarded as mature!
• This destroyed their video based competencies

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Identifying Core Competencies- And Losing Them

• Costs of losing a core competence can only be
  partly calculated in advance
• Given the long time it takes to develop a core
  competency, a company that has failed in doing so
  will find it difficult to enter an emerging market

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From Core Competencies to Core Products

• Core products are directly linked top the core
  competence of the firm.
• Thinking in terms of core products forces a
  company to distinguish between
• the brand share it achieves in a end product
  market and
• the manufacturing share it achieves in any core
  product
• Global competition does not require your brand

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Winning at Three levels

• The Core competence level,
• the goal is to build a world leadership in the
  design and development of a particular class of
  product functionality
• To sustain leadership in core competence areas,
  companies should 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 other
  reasons
• Honda engines their for products go into a
  variety of end products
• A dominant position in core products allows a
  company to shape the evolution of applications
  and end markets

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The Tyranny of the SBU

• Most firms govern by practices that date to the
  1960s
• The need for new principles is most obvious in
  companies organized exclusively according to the
  logic of the SBUs
• US companies do not lack the technical resources
  to build core competencies, but lack the vision
  and the will to do so

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The Tyranny of the SBU

• If a company is winning the race to build core
  competencies, it will almost certainly outpace
  rivals in new business development
• Proliferation of products out of core competence
  may result in building a strong brand, image and
  customer loyalty
• Kind of the difference between
• Doing things Right and
• Doing the Right Thing

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Developing Strategic Architecture

• A strategic architecture is a roadmap of the
  future that identifies which core competencies to
  build and their constituent technologies
• A strategic architecture can dramatically reduce
  the investment need to secure future market
  leadership
• Strategic architecture will be different for
  different companies

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Developing Strategic Architecture

• The task of creating a strategic architecture
  forces the organization to identify and commit to
  the technical and product linkages across SBUs
• Strategic architecture is a tool for
  communicating with customers and other external
  constituents
• Its reveals the broad direction without revealing
  every step

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Redeploying to Exploit Competencies

• SBUs should be made to bid for core competencies,
  just like capital
• This would ensure that the competencies are not
  held hostage by one business
• Core competencies are resources that may be
  reallocated by the corporate management

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Conclusion

• Core competencies are the wellspring of new
  business development
• Rethink of the concept of corporation is overdue