The Core Competence

of the Corporation

C.K. Prahalad & Gary HamelHarvard Business Review,

May-June, 1990

COMPETITION

DIVERSIFICATION

CORE COMPETANCIES

THE IDEA IN BRIEF

• Diversified giant NEC competed in seemingly disparate businesses

• It considered itself not a collection of strategic business units, but a

portfolio of core competencies

• Thinking of a diversified company as a tree

• Core competencies creates unique, integrated systems which is

difficult for competitors to imitate

THE IDEA IN PRACTICE

CLARIFY CORE COMPETENCIESARTICLUATE A STRATEGIC INTENT

IDENTIFY CORE COMPETANCIES

CULTIVATE MINDSETSTOP THINKING BUSINESS AS SACROSANCT

IDENTIFY PEOPLE AND PROJECTS THAT EMBODY THE CC

BUILD CORE COMPETENCIESINVEST IN NEEDED TECHNOLOGIES

FORGE STRATEGIC ALLIANCES

A Japanese multinational IT company, NEC provides IT and network solutions to business enterprises, communications services providers and government.

Nippon Electric Company

GTE was the largest of the independent US telephone companies started in 1913

Service: provided local telephone service to a large number of areas of the US

In 2000, GTE was bought by Bell Atlantic, renaming itself Verizon Communications.http://www22.verizon.com/

General Telephone & Electronics Corporation

NEC - “Core Competency”

NECCommunications Equipment

•Radio broadcast

•Microwave communications technology

Semiconductors

•1958 Signed a technology licensing agreement with GE

•1960 established its Integrated Circuits Division

•1967 moved into VLSIsComputers

•1950 entered the computer industry

•1974 first Japanese microprocessor

•1979 developed it first PC

GTE-”Core Business”

Sell or transfer underperforming or non-core businesses

Focus on new and enhanced communication businesses

Sold:•Television & radio manufacturing operations•Consumer communication products•GTE Sprint•Worldwide lighting, electronic product, space-based communications, and aircraft cellular phone business

•1990s The merger with Contel Corporation

•Agreements with Lycos, Qwest, and Cisco to enhance its position in “Internet-related business”

•Expand to foreign markets

Performance of NEC vs. GTESales

Sales in Millions of $'s NEC vs GTE

$-

$10,000

$20,000

$30,000

$40,000

$50,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

GTE

NEC

RETHINKING THE CORPORATION

1. Diversified corporation - point its business units at particular end product markets – Dominate

2. Changing market boundaries

3. A few companies have proven themselves adept at inventing new markets, entering emerging markets etc

4. The critical task for management is to create an organization capable of infusing products with functionality or products that customers need but not yet even imagined.

5. Top managements of Western companies must assume responsibility for competitive decline.

A DIVERSIFIED ORGANISATION

CORE COMPETANCIES

CORE PRODUCTS

BUSINESS UNITS

END PRODUCTS

Core Competencies

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

Core Competencies

Start from the inside, out.

What does our firm do best?

Porter’s Five Forces

Looks at the environment, and starts from the outside, in.

What is the competition

doing?

1. Core competence is communication, involvement, and a deep commitment to working across organizational boundaries.

2. The skills of individuals together constitute core competence and efforts should not so narrowly focused that they cannot recognize the opportunities for blending their functional expertise with those of others in new and interesting ways.

3. Core competence does not diminish with use.

4. But competencies still need to be nurtured and protected; knowledge fades if it is not used.

THE MISTAKES THAT ARE DONE NOW

• Top management often tracks the cost and quality of competitors’ products

• Yet managers fail to untangle the web of alliances their competitors have constructed to acquire competencies

• Looking at the fruit gives a deceptive image of the strength of the tree

1. C.C DOES NOT COME FROM MASSIVE R&D FUNDS

2. C.C DOES NOT EVEN MEAN SHARED COSTS

WHAT CORE COMPETANCE IS NOT

Identifying Core Competencies

1. •potential access to a wide varieties of market

2. •make a contribution to the perceived customer benefits of the end product.

3. •difficult for competitors to imitate.

Risks

Competencies ≠ price/performance of end

products

Competencies ≠ cost centers

Losing Core Competencies

Outsourcing provides only a short cut to a

competitive product.

Forgoing the opportunities to establish

competencies that are evolving in the

existing business.

Lessons learned

Cost of losing core competence can be

partly calculated in advance.

A company that has failed to invest in core

competence building will find it very

difficult to enter an emerging market.

Core Product

Core Compete

ncy

Core Compete

ncy

Core Compete

ncy

End Product

Core Competencies

Honda’s internal

combustion engines

Thinking in terms of core products forces a

company to distinguish between the brand

share it achieves in end product markets

and the manufacturing share it achieves in

any particular core product.

Product

Example

Core Product ( Manufacturing Share)

End Product(Brand Share)

Canon Desktop Laser Printer-84%

Laser printer-minimum

Matsushita Compressors-40% Air-conditioning & Refrigerator- minimum

Why the need for distinction

To build leadership, a corporation has to be a

winner at each level.

At the core competency level- build world

leadership in design and development of a

particular class of product.

Sustaining leadership.

As the company multiplies the number of application

arenas for its core product, it can reduce: Cost

Time

Risk

Well targeted core products lead to economies of

scale and scope.

The Tyranny of the SBU

There is a need for new principles in

companies organized exclusively according

to the SBUs.

Two Concepts of the Corporation: SBU or

Core Competence

SBU Core Competence

Basis for competition Competitiveness of today’s products

Interfirm competition to build competencies

Corporate structure Portfolio of business related in product-market terms

Portfolio of competencies, core products and business

Status of the business unit SBU “owns” all resources other than cash

SBU is a potential reservoir of core competencies

Resource allocation Discrete businesses are the unit of analysis

Businesses and competencies are the unit of analysis

Capital value added top management

Optimizing corporate returns through capital allocation, trade offs among business.

Enunciating strategic architecture and building competencies to secure the future.

Two Concepts of the Corporation: SBU or Core Competence

Diversified Corporations

Portfolio of products, Portfolio of

business, Portfolio of competencies.

Top management should have the

vision to build competencies and the

administrative means for assembling

resources spread across businesses.

Battle for Global Leadership

Cannot beat rivals in core competence

leadership by mere weight of investment i.e.

building leadership in few technologies.

Can outpace the rivals in new business

development by:

building core competencies,

winning the race to capture world manufacturing

share in core products.

Difficult to determine if one is winning or

loosing in the end product via market share.

Successful companies build global brand

umbrellas by proliferating products out of

their core competencies.

This help businesses to build image, customer

loyalty and access to distribution channels.

THE PRISM VIEW OF THE SBU

CORE COMPETANCE

CORE PRODUCTS

END PRODUCTS

Cost of distortions

Underinvestment in Developing Core

Competencies and Core products.

Imprisoned Resources.

Bounded Innovation.

Underinvestment in Developing Core Competencies and Core products

With multiplicity of SBUs, no one feels responsible

for maintaining a viable position in core products.

SBU manager tend to underinvest in the absence of a

comprehensive view imposed by top management.

Imprisoned Resources

SBUs develop unique competency.

SBU managers consider people who

embody these core competency as the

sole property of the business. They do not

lend them to other SBUs.

When competencies become imprisoned, the

people who carry the competencies do not get

assigned to the most exciting opportunities.

Only by leveraging core competency, small

companies can compete with industry giants.

Bounded Innovation

Core competency need to be recognized

to innovate beyond the SBU business.

Conceiving corporation in terms of core

competencies widens the domain of

innovation.

Developing Strategic Architecture

STRATEGIC ARCHITECTURE

It is a roadmap of the future that identifies which core competencies to build and their consistent technologies.

HOW DOES IT HELP

It provides an impetus for learning

from alliances .

A focus for internal development.

Reduce the investment needed to

secure future market leadership.

HOW SHOULD A S.A LOOK LIKE

It is different for different organization

It can draw idea from the competency tree.

It provides a logic for product and market diversification.

Resource allocation priorities transparent to the entire organization.

Provides understanding to the lower level managers regarding the logic of allocation priorities.

Disciplines senior management to maintain consistency

WHAT THE S.A DOES

It provides a framework to link

technical and production know-how

across SBUs. It will provide

competitive advantage.

It cannot be copied by competitors.

Strategic architecture

Consistency of resource allocation

Development of Admin.

Infrastructure

Managerial culture

Teamwork Capacity to

change

Share resources

Think long term

Redeploying to Exploit Competencies

Core competencies need to be spread across

the company.

SBUs should bid for the core competencies

as they bid for capital.

Identify overreaching competency

Ask business to identify projects and people

Direct an audit of location, No. , quality of people

Core Competencies are Corporate Resources

SBUs are entitled to an individuals performance only till it is able to yield the best pay-off.

SBU must justify their hold on the people who carry company’s core competency.

Reward system focusing on product

line results and career paths should

be eliminated.

Equitable exchange

Give recognition to SBU managers

Job rotation in early stage of

careers.

Periodic assignments and cross

divisional projects in mid careers to

diffuse competency

COMPETENCY CARRIERS Career tracking and guidance by

corporate HR professionals.

They should be bought together to

exchange notes and ideas.

A community feeling

CONCLUSION

Core competency should be the

focus of strategy at corporate level.

Build organization on the hierarchy

of core competency, core product

and end products

Top management must add value

via strategic architecture.

Rethink the concept of the corporation

THANK YOU