The Core Competence of the Corporation

1. The Core Competence of the Corporation Article Review Presented by: SushilPallemoni Tiffany Ramon Fredy Chandra I Lin Chung Liu Yanan Shuang Yao by C.K. Prahalad and Gary Hamel Harvard Business Review May-June 1990

2. 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.

3. Case Study: NEC vs GTE

4. Core Competence • Core competence isa mixof 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

5. 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. )

6. Core Competence : Tree Model

7. End products 1 2 3 1 2 3 1 2 3 1 2 3 Business 1 Business 2 Business 3 Business 4 Core product2 Core product1 1 2 3 4 Core competences Competencies: The Roots of Competitiveness

8. Core Products • Serve 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.

9. 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.

10. How Not to Think of Competence

11. 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

12. 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

13. 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

14. 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.

15. 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

16. Lessons to learn • Costs 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

17. 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

18. Relative Goal of Core Products • Build world leadership in design and development of a particular class of product functionality

19. The tyranny of the SBU

20. Three Global Leadership Planes • Core Competence • Specific factor that a business sees as being central to the way it (e.g. Apple Innovation) • Core Products • Company's products which are most directly related to their core competencies (e.g. Mac) • End products • Final product ( e.g. Programs integrated w/ Mac )

21. Two concepts of the Corporation

22. 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 competencies • Overlook various divisions' products for coordinating opportunities

23. SBU’s Problem (cont.) • Imprisoned Resources • Unwilling to share competent people with other SBU • Failed to identify people with critical competence • Bounded Innovation • Unrecognized Core Competencies • Will only pursue innovation that is close at hand • Failed to widen the domain of innovation

24. Core Competencies Benefits • Outpace rivals in: • New business development • Improving product features • Price/Performance ratio • Building company image, customer loyalty, & access to distribution channels.

25. Developing Strategic Architecture “road map of the future” -identifies which core competencies to build from their constituent technologies. For example: NEC’s C&C can reduce investment needed by -learning from alliances -focus on internal development efforts

26. Core Competence • It’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?

27. Strategic Architecture • Provides 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.

28. 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

29. Vickers • A division of Trinova, and a Toledo-based corporation • A premier supplier of hydraulics components • Eg. Valves, pumps, actuators and filtration devices

30. 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 competencies • Electric-power • Electronic control

31. 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

32. Vickers Map of Competencies

33. Redeploying to Exploit Competencies • Reallocated corporate resources • Avoid conflict between SBU managers

34. Reallocated corporate resources • Identify the core competencies • SBU managers have the right to raid other SBUs

35. Reduction conflicts between SBU managers • Short-term inequalities will balance out over the long-term • Positive contribution should be made visible • Employees do not belong to any particular business

36. Questions • What is a “core competence” of a corporation? Why do core competencies not diminish in an organization? • 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. • What would be your (individual) core competence? How would you relate that to your future development and personal goals in life?