The Core Competence of the Corporation

The Core Competence of the Corporation By C.K. Prahalad and Garry Hamel – Harvard Business Review May-June 1990 Group 7 Minh Nguyen Tanin Pinket Pannada Lertsaengpetch Sutta Nitikankool Gina Herrera MKTG 5320 February 03, 2009 Texas A & M University – Corpus Christi

GTE and NEC (early 1980s) • GTE : • Positioned to become a major player in the IT industry • Specialized in a variety of business (telephone, semiconductors, defense systems, switching and transmission systems, etc) • NEC : • Had an equivalent technological base and computer businesses • Had no experience in telecom operating field

GTE and NEC (1988) • GTE : • Became a telephone operating company • Positioned in defense and lighting products • Closed down semiconductors • NEC : • Became the world leader in semiconductors • “First-tier player” in telecommunications & CPU • Top five of the world in revenue in telecommunications, semiconductors, and mainframes

Comparing sales (Source : The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel – Harvard Business Review – May-June 1990)

GTE and NEC Lesson from GTE and NEC • GTE : - Had no clear strategic intent - Focused on managing independent business units • NEC : - Had an effective strategic architecture - Focused on developing core competencies

Rethinking the Corporation • In a quickly changing market, companies have changed their focus from strategic business units (SBUs) at end products to core competencies => Require a primary change in the management of a corporation : - Top managements must bear the responsibility in acquiring core competencies - Core competencies must be developed throughout the corporation

Rethinking the Corporation NEC example • NEC ‘s top managers built an appropriate strategic architecture to strengthen its core products and develop its core competencies • NEC targeted 3 markets : • Computing market • Communication market • Component market • Identifying semiconductors as one of the most important core products, NEC’s core competencies during 1970s - 1980s was a “much quicker and cheaper” use of foreign technology without a necessity to “develop new idea”

Roots of Competitive Advantage • A short-term competitiveness of a corporation can be the price/performance of current products • A long-term competitiveness of a corporation is an ability : - To build core competencies creating “unanticipated products” - To strengthen core products => Need a management’s ability to reinforce core skills and integrate them into core competencies that can empower business units to adapt quickly to the changing market.

Core Competency (Source : The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel – Harvard Business Review – May-June 1990)

Core Competency • The collective learning maintained within an organization • Integration into technology, work organization, value delivery • Communication, involvement and an engagement to working at the entire corporate level • Not decline with use but be enhanced during the time of applying and sharing within the corporation Need to be cultivated and preserved

How Not to Think of Competence • Not just making products • But finding core competencies by overseeing the portfolio of business including customers, distribution channels, merchandising strategy, etc • NEC “Digital Technology especially VLSI” • Honda “Engines and Power Trains” • Canon “Optics, Imaging, and Microprocessor Controls” • Philips “Optical-Media”(Laser Disc)

How Not to Think of Competence • Not just making products • But finding core competencies by overseeing the portfolio of business including customers, distribution channels, merchandising strategy, etc • Developing Core Competencies does notmean: • Outspending competitors on R&D • Sharing manufacturing and operating costs • Vertical Integration

Identifying Core Competencies • Provide gateway to a wide variety of markets • Casio “Hand-Held TV Market” • Contribute super value to end products that benefit consumers • Honda “Esteemed Product” • Be complex to imitate : Complicated harmonization of technologies and production skills • JVC vs. RCA

Losing Core Competencies Competitiveness relying on the price/performance of end products • Outsourcing and OEM “Cost Centers” (Chrysler vs. Honda) • Suppliers become competitors • Lack of “people-embodied” skills • Lack of a clear goal in building core competencies ->“Intelligent alliance” or “sourcing strategy” • Forgoing opportunities to develop competencies that are growing in existing businesses • Give up with the existing competencies

Costs of Losing Core Competencies • Hardly to predict in advance • Difficult to enter an emerging market

Core Products The brand share only in end product markets The manufacturing share in any core product To maintain the market = To maximize the company’s leadership manufacturing share in core products

Core Products JVC’s decision in the mid-70s : The core product of JVC was VCR in the electronics machine which sustained the market share for JVC in Asia, Europe,and USA. VCR supply relationships with the electronics companies in Europe and USA established JVC

Focus on rivals in the market Stress on business units’ performance The Tyranny of the SBU Decentralize commanding by each business Allocate a lot of money to advertise brand name

Two Concepts of the Corporation:SBU vs. Core Competence (Source : The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel – Harvard Business Review – May-June 1990)

The disadvantages to corporation from the SBU’s distortion SBU’s distortion Imprisoned Resources Bounded Innovation Underinvestment in Developing Core Competencies & Core Products

Vickers • The Origin of Vickers • A division of Trinova Corporation • The Elements of Transformation • Technologies • Customer Needs • The New Concept’s Goals • Development of the Capability of Competition • Certainty of the present market in the future • The new market preemption

Strategic Architecture Help to identify which core competencies to build. Motivate companies in learning from alliances and create efforts for internal development Provide a logic for product and market diversification. Help organizations to identify and engage in the technical and production linkages across SBUs creating competitive advantage

Strategic Architecture • Different for every company • Must be clear with resource allocation priorities within the organization • Difficult to be imitated by competitors

Strategic Architecture A tool for communicating with customers and other external relative units.

Deploying Core Competencies • Core competencies are from company’s resources and reallocated by board of governance • People carrying core competencies are corporate assets to be utilized by corporate management, not by any particular business unit • Contribution of SBU managers should be clear in equality across the company

Deploying Core Competencies • Process of building core competencies must be recorded and appreciated • Core competencies should be shared and employed within the organization • Responsibility of top management in establishing strategic architecture to build core competence

Conclusion Suggestions from Prahalad and Hamel • Core competence should be recognized and concentrated in a corporate strategy • Companies need to acknowledge the “hierarchy” of core competence, core product, and business units with market focus in a strategy with an aim of strengthening capabilities to compete in a quickly changing market • It is the responsibility of top management to build a strategic architecture for a direction in acquiring core competencies

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The Core Competence of the Corporation