Micro-economics of Innovation V

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Micro-economics of Innovation V

• The Core Competence of the Corporation
• Prahalad Hamel (1990)

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GTE vs. NEC 1

• In the early 1980s, GTE was poised to be a major
  player in IT industry, with a variety of
  businesses including telephones, switching and
  transmission systems, semiconductors, satellites
  and defense systems.
• GTEs entertainment products group produced
  Sylvania color TVs display technologies.
• In 1980 GTEs sales were 9.98 billion and net
  cash flow was 1.73 billion.

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GTE vs. NEC 2

• In 1980 NECs sales were 3.8 billion.
• It had comparable technological base and computer
  business, but no experience as telecom operating
  company.
• In 1988, GTEs sales were 16.46 billion and
  NECs were 21.89 billion.
• GTE became a telecom operating company, with
  positions in defense and lighting products. It
  divested all other businesses.
• NEC emerged as a global leader in semiconductors
  and in telecom products and computers. In telecom
  it went beyond switching systems to mobile
  phones, fax, etc.

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GTE vs. NEC 3

• NEC bridged the gap between telecom and office
  automation.
• NEC was the only company in the world to be in
  the top five in revenue in telecom,
  semiconductors and mainframes.
• Why these differences between GTE NEC?
• NEC conceived of itself in terms of core
  competencies, and GTE in terms of strategic
  business units (SBU).

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Rethinking the Corporation 1

• In the past, a diversified corporation could look
  at its business units at particular end product
  markets and try to become world leaders in those
  businesses.
• With the market boundaries changing ever more
  quickly, targets are elusive and capture is at
  best temporary (e.g. digital cameras, mobile
  phones).

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Rethinking the Corporation 2

• In 1970s, NEC articulated a strategic intent to
  exploit the convergence of communications and
  computing (CC).
• NEC constituted a CC Committee of top managers
  to oversee the development of core products and
  core competencies. It created the organizational
  architecture to implement its strategy
  successfully. Semiconductors to be the core
  product.
• Identified three inter-related streams of
  technological and market evolution 1) computing
  will evolve from mainframes to distributed
  processing 2) components from simple ICs to
  VLSI and 3) communications from mechanical
  cross-bar exchange to digital systems (ISDN).

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Rethinking the Corporations 3

• NEC reasoned, the computing, communications, and
  components businesses would overlap blurring the
  distinction between them.
• NEC entered into strategic alliances (over 100 in
  1987) aimed at building competencies rapidly and
  at low cost, with a goal of internalizing partner
  skills.
• Exhibit 1 Competencies the roots of
  competitiveness.
• 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 fruits are end products. The root
  system that provides nourishment is the core
  competence.

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Core Competencies 1

• Core competencies are the collective learning in
  the organization, especially how to coordinate
  diverse production skills and integrate multiple
  streams of technologies.
• For example, Casio must harmonize know-how in
  miniaturization, microprocessor design, material
  science and ultra-thin precision casing the
  same skills it applies in its miniature card
  calculators, pocket TVs, and digital watches.
• CC is also about the organization of work and the
  delivery of value (e.g. to bring miniaturization
  to its products, Sony must ensure that
  technologists, engineers and marketers have a
  shared understanding of customer needs and
  technological possibilities).

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Core Competencies 2

• CC is communication, involvement and a deep
  commitment to working across organizational
  boundaries. It involves many levels of people and
  functions.
• CC does not diminish with the use, but it still
  needs to be nurtured and protected.
• CC is an engine for new business development.
  Patterns of diversification and market entry may
  be guided by them, not just by the attractiveness
  of markets (e.g. 3Ms competence with sticky
  tape led to Post-it notes, magnetic tape,
  photographic film, pressure-sensitive tapes, and
  coated abrasives).

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Core Competencies 3

• Three tests can be applied to identify core
  competencies in a company
• 1) A CC provides potential access to a wide
  variety of markets (e.g. competence in display
  systems).
• 2) A CC should make a significant contribution to
  the perceived customer benefits of the end
  product (e.g. Hondas engine expertise).
• 3) A CC should be difficult for competitors to
  imitate. A rival may acquire some of the
  technologies that comprise the CC, but it will
  find it difficult to duplicate more or less
  comprehensive pattern of internal coordination
  and learning.
• Few companies are likely to build world
  leadership in more than 5 or 6 fundamental
  competencies.

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Core Competencies 4

• Chrysler, unlike Honda considered its engines and
  power trains as simply another component and
  started outsourcing. It became dependent on
  Mitsubishi and Hyundai for engines (from 252,000
  in 1985 to 382,000 in 1987 outsourced engines).
• The tangible link between core competencies and
  end products is the core product the physical
  embodiments of one or more CCs.
• Core product thinking forces a firm to
  distinguish between the brand share it achieves
  in end product markets and the manufacturing
  share it achieves in any particular core product
  (Cannon has 84 of world manufacturing share in
  desktop laser printer engines, while its brand
  share for laser printers is miniscule).

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Core Competencies 5

• SBU thinking leads to
• 1) underinvestment in developing CCs and core
  products
• 2) imprisoned resources (a CC remains within the
  business unit)
• 3) bounded innovation.

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Core Competencies 6

• Developing Strategic Architecture
• A strategic architecture is a road map of the
  future that identifies which CCs to build and
  their constituent technologies (think of the firm
  like a tree). It provides a logic for product and
  market diversification.
• Learning from alliances can reduce the time and
  costs (e.g. NEC).
• Resource allocation priorities should be made
  transparent to the entire organization.
• How long could we preserve our competitiveness in
  the business, if we did not control this
  particular CC? How central is this CC to
  perceived customer benefits? What future
  opportunities would be lost if we lose this CC?

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Core Competencies 7

• Redeploying to Exploit Competencies
• CC should not be held hostage by any particular
  business. SBU should bid for a CC the same way it
  does for capital (top management).
• Send a signal to middle managers that CCs are
  corporate resources and could be reallocated by
  the corporate management.
• SBUs are entitled to the services of individual
  employees so long as they show effective pay-off.
  
• The key employees should be weaned away from
  thinking that they permanently belong to a
  particular SBU.
• Exhibit 2 Cannon.