The Core Competence of Corporation
The Core Competence of The Corporation is Harvard Business Review about core competence of the corporation.
C.K. Prahalad is professor of corporate strategy and international business at the University of Michigan.
Gary Hamel is lecturer in business policy and management at the London Business School.
This article is based on research funded by the Gatsby Charitable Foundation.
The most powerful way to prevail in global competition is still invisible to many companies. During 1980s, top executives were judged by their ability to restructure, declutter and delayer their corporations. In 1990s, they’ll be judged on their ability to identify, cultivate and exploit the core competencies that make grow possible – indeed, they’ll have to rethink the concept of corporation itself.
In the early 1980s, GTE (General Telephone) was well positioned to become a major player in evolving information technology industry. NEC (Nippon Electric Corporation) had a comparable technological base and computer businesses, but it had no experience as operating telecommunications company.
In 1980, GTE’s sales were $9.98 billion while NEC’s $3.8 billion. In 1988, GTE’s sales were $16.46 billion and NEC’s sales were considerably higher at $21.89 billion. In the early 1980s, GTE was positioned to become a major player in the information technology industry. NEC was much smaller and had no experience as an operating telecommunications company. Today NEC is among the top five companies in telecommunications, semiconductors, and mainframes. GTE has become essentially a telephone company with a position in defense and lighting products.
Why did these two companies, starting with comparable business portfolios, perform so differently?
NEC built and nurtured a group of core competencies. GTE, on the other hand, couldn’t agree on which competencies to base its strategy. It organized itself around strategic business units, which by nature under-invest in core competencies, imprison resources, and bind innovation. A company’s competitiveness derives from its core competencies and core products (the tangible results of core competencies). NEC is the only company in the top five in revenue in telecommunications, semiconductors and mainframes.
Rethinking The Corporation
In 1970s, NEC articulated a strategic intent to exploit the convergence of computing and communications, it called “C&C”.
NEC constituted a “C&C Committee” of top managers to oversee the development of core products and core competencies.
NEC shifted enormous resources to strengthen its position in components and central processors.
NEC top management determined that semiconductor would be the company most important “core product”.
It entered into myriad strategic alliances – over 100 as of 1987 – aimed at building competencies rapidly at low cost.
No such clarity of strategic intent and strategic architecture appeared to exist at GTE.
No commonly acceptable view of which competencies would be required to compete in that industry were communicated widely.
Senior line managers continued to act if they were managing independent business unit.
Decentralization made it difficult to focus on core competencies.
The root of competitive advantage
In the sort run, a company competitiveness derives from the price/performance attributes of current products. In the long run, competitiveness derives from an ability to built, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products.
The real sources of advantage are to be found in management ability to consolidate corporatewide technologies and productions skills into competencies that empower individual business to adapt quickly to changing opportunities.
Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple stream of technologies.
Unlike physical assets, competencies do not deteriorate as they are applied and shared. They grow.
Core competence its also about the organization of work and the delivery of value.
Core competencies is communications, involvement and a deep commitment to working across organizational boundaries.
Core competence does not diminish with use.
How Not to Think of Competence
The battle to build world class competencies is invisible to people who aren’t deliberately looking for it. Top management often track the cost and quality of competitor’s products.
Cultivating core competence does not mean outspending rivals on R&D or getting business to become more vertically integrated. Over the past 20 years, NEC has spent less on R&D as a percentage sales than almost all of its American and European Competitors.
Building core competencies is more ambitious and different than integrating vertically, moreover. Managers deciding whether to make or buy will start with end products and look upstream to the efficiencies of the supply chain and downstream toward distribution and customers.
IDENTIFYING CORE COMPETENCIES
Most western companies hardly think about competitiveness in this term at all. it’s time to take a tough-minded look at the risks they are running. Of course, it is perfectly possible for a company to have a competitive product line up but be a laggard in developing core competencies – at least for a while. Nor is it possible for a company to have an intelligent alliance or sourcing strategy if it has not made a choices about where it will build competence leadership. A company may not make this effort if doesn’t have clear goals for competence building. Another way of loosing is forgoing opportunities to establish competencies that are evolving in existing business.
There are two clear lessons here:
First, the cost of loosing core competence can be only partly calculated in advance.
Second, since core competencies are built through a process of continuous improvement and enhancement that may span a decade or longer, a company that has failed to invest in core competence building will find it very difficult to enter an emerging market, unless or course it will be content simply to serve as a distribution channel.
From core Competencies to Core Products
Core products is the physical embodiments of one or more core competencies. Core products are the components or subassemblies that actually contribute to the value of the end products. To sustain leadership in their chosen core competence areas, these companies seek to maximize their world manufacturing share in core products. A dominant position in core products allows a company to shape the evolution of applications and end markets.
The tyranny of the SBU (strategic business unit)
SBUs tend to the present focusing on maximizing today’s sales, tending to be tactic not strategy led. What competencies they have tend to be hoarded and a reluctance to lend talented people to other SBUs develops. New opportunities are neither explored nor developed.
Underinvestment in Developing Core Competencies and Core Products. When the organizations in conceived of as multiplicity of SBUs, no single business may feel responsible for maintaining a viable position in core products nor be able to justify the investment required to build a world leadership in some core competence.
Imprisoned Resources. As an SBU evolves, it often develops unique competencies. Typically, the people who embody this competence are seen as the sole property of business in which they grow up. SBU managers are not only unwilling to lend their competence carriers but they may be actually hide talent to prevent its redeployment in pursuit of new opportunities.
Developing Strategic Architecture
The fragmentation of core competencies becomes inevitable when diversified company’s information system, patterns of communication, career paths, managerial rewards, and the processes of strategy development do not transcend SBU lines.
Senior management should spend a significant amount of its time developing a corporatewide strategic architecture that establishes objectives for competence building.
A strategic architecture is a road map of the future that identifies which core competencies to build and their constituent technologies.
A strategic architecture like NEC’s C&C can dramatically reduce the investment needed to secure future market leadership.
To sink sufficiently strong roots, a company must answer some fundamental questions:
Redeploying to Exploit Competencies
Once top management has identified overarching competencies, it must ask business to identify the projects and people closely connected with them.
Corporate officers should direct an audit of the location, number and quality of the people who embody competence.
This send an important signal to middle managers: core competencies are corporate resources and may be reallocated by corporate management. An individual business doesn’t own anybody.
Finally, there are ways to wean key employees off the idea that they belong in perpetuity to any particular business.
Core competencies are the wellspring of new business development. They should constitute the focus for strategy at the corporate level. Manager have to win manufacturing leadership in core products and capture global share through brand-building programs aimed at exploiting economics of scope. Only if the company is conceived of as hierarchy of core competencies, core products and market-focused unit will it be fit to fight.
The job of management should be to develop an organization-wide ‘strategic architecture’ – a road map to the future identifying which competencies to build and what technology they need. Core competencies are corporate resources and SBUs should have to bid for them just as they bid for capital resource. Reward systems and career paths should break free of SBU silos and key employees should be weaned off the idea that they belong to one particular strand (SBU) of the business.
summarized by Yuka Dwi Bantara