Vital Speeches of the Day VOL. LVI APRIL 1, 1990 NO. 12 The Changing Nature of Worldwide Competition REVERSING THE UNITED STATE'S DECLINE By C. K. PRAHALAD, Professor of Corporate Strategy and International Business, The University of Michigan School of Business Administration Delivered at The Carnegie Council on Ethics & International Affairs, World View Breakfast, New York, New York, December 6, 1989 research that I've been doing on globalization of indus- tries and the emerging patterns of global competition. The relative position of Western firms in the United States has dramatically changed over the last 10 years. If you create an artificial time frame, say, from 1970 to 1975, and look at a variety of industries and companies in those industries who were global leaders, and then look at the same industries in the time frame of 1980 to 1985, you can see that just in a short space of 10 years, there has been a dramatic shift in relative leadership positions of firms. Not in one industry, but maybe in 15 different industries. Let me just take a few industries to illustrate the shift in global leadership. If you considered the automotive industry in 1970-'75, General Motors and Ford were unquestionably the world’s leaders. But if ou look at leadership in the automotive industry today, you have to include Toyota, Nissan and Honda. If you look at the semiconductor industry, the leaders were unquestionably Texas Instruments and Motorola during 70-75. But today, NEC is number one, Toshiba and Fujitsu are number ‘two, Hitachi number three, Motorola is fourth and TI is fifth Ifyou look at the tire industry, Goodyear and Firestone were the leaders. Today, Goodyear isstill in a leadership position, but I: delighted to be here, to share with you some of the certainly being challenged by Michelin and Bridgestone In the financial services industry, Bank of America, Chase and Citicorp were leaders. Today, however, we have t0 add a ‘whole bunch of financial service institutions like Nomura and many others, We can add to the list and the list of industries undergoing competitive transformation is a very long list. It is Caterpillar and Komatsu, it is Xerox and Cannon, Kodak and Fuji, and so on, ‘So one can ask the question, “In a very short space of 10 years, how did the leadership positions of some of the largest companies in the United States get challenged?” The second point that is emerging as a clear issue for us to consider is this. Good quality and low cost are not sufficient conditions for global competitiveness. The idea that emphasis ‘on cost reduction and improvement of quality would lead to market share is no longer true, Customers now expect good quality and good prices, or what may be called a strong price- performance relationship. This has become a necessary but not a sufficient condition, Increasingly, the nature of competition is shifting toward new product development. The ability of our competitors to create new products and new businesses is quite different from our own ability. Audio and video products (like Walkman), POLICY OF VITAL SPEECHES ‘The publishers of Vital Speeches believe thatthe important addresses of the recognized leaders of public opinion constitute the best expression ot contemporary thought in America and tats extremely important fo the welfare of the nation that thes speeches be permanently recorded and disseminated The publishes have no axe to grind. Vital Speeches will be found authentic and constructive Tei the policy ofthe publishers to cover Both sides of public questions and to prin all speeches (ul, Whete ts necessary to condense a speech for reasons ot unasal length or the use of extrancous matte, i wil be 40 stated When printing. They feel that i sony in the unedited and unexpurgated speech thatthe Fear ean best tain the view of the speaker “This material gies the reader the best thoughls ofthe best minds on current national problems. I aso offers the student of pubic speaking examples of the effective sposch of tay of those who have ataned leadership im the elds of economic, pits, eeston, socolgs,govethment muna. Hance iiines taxon, ah aw, ior ee Ths the stent ple speaking obtain the Rei textbook mater with a sound knowledge of public questions. Subscribers are urged 4 call the Editors attntion to any specches which have impressed them as outstanding so that copies may be secured lor review VITAL SPEECHES OF THE DAY is published twice « month ty the CITY NEWS PUBLISHING CO. (ne. 1911), 389 Highway 17 By-Pass, Box 127 Mount Pleasant, SC. 28465. Telephone 82-881-8733, Geneviewe T, Daly Presigen, Joyce Fox, Vice-President, Thomas F. Dal Il Secretay-Treasir VITAL SPEECHES (ISSN 0042-742X) Corporate Identification #130596754 Subscription Rates September 1, 1988: $30.00 a year. Foreign one year $35.00 Single copies $2.00. Back issues if available, within wo years $3.25 copy Microfilm and microfiche editions $35.00 per volume plus postage, siteeribers only On order unde $2280, remittance must accompany order. Clams or fondelivery of fsucs must be made within two months of Ue date of the sue ‘Vital Speeches s Indexed in The Reader's Guide to Periodical Litecitue. An annual index is printed cach November and distributed to all ubserbers Cumulative Index. Volumes 1-25, $5000 per copy plus postage. Velume Binder for Vital Speeches $10.00 pls postage. Vial Speeches wil be found on fie in thousands of publi, college and high schoo! lbraisthroughout the United Stats. ‘Second Class postage ail at Mount Pleasant, S.C. and additional mailing ofcs. POSTMASTER: § nd address changes to: 389 Highway 17 By-Pass, Box 1247, Mount Pleasant, SC 29465,C.K. PRAHALAD consumer lifestyle products like personal copiers, facsimile equipment, and now, high definition TV, (which has become quite controversial in the United States) are examples of new products and businesses created by Japanese firms. Our competitors are growing at a much faster rate because of their ability to develop innovative new products. I recently Jooked at the numbers — Canon, Honda and NEC all grew at, a rate somewhere between 250-350 percent — two to three and a half times, over an eight-year period. ‘Now ask the question, “What is the rate of internally gen- erated growth, not growth through acquisition, but the rate of internally generated growth for many of the larger U.S. com- panies?” And then ask, “What percentage of U.S. sales over the last five years came from products which did not exist five years ago?” T'm afraid that the answers for many U.S. companies, with a few exceptions like 3M, are not very reassuring, If you look at what has been the typical response of most USS. companies to this emerging competitive battle, based on new product development it has been, at best, band-aid solu- tions. U.S. firms do not see this emerging battle as a funda- mental problem, We have done many things; top management spends a lot of timé worrying about operational efficiency symbolized by ini tiatives such as quality circles, just-in-time manufacturing, automation, outscourcing and in many cases, alliances. But there has not been a fundamental re-thinking of the nature of the decline and the causes for this dectine. Many of the things that have been done like down-sizing needed to be done, but unless we fundamentally re-think the reasons for the decline, and unless we are willing 10 accept a paradigm shift in the way we manage the large company, the decline will continue. In many cases, this has become an invis- ible process. In our research, we looked at companies which started with resource disadvantages — meager resources in terms of tribution coverage, manufacturing capabilities orjust the sheer size of the company. We asked ourselves, “How does a small company like Canon challenge Xerox?” Or, “How does Komatsu challenge Caterpillar?” “How does NEC challenge ATT, IBM and GTE?” “What is this process?” Tt seems that there are two underlying issues that permeate ‘most of these dramatic changes in competitive positions. One, the companies which have effectively challenged global lead- ers over the last ten years seem to have, what we cal, a strategic intent. And what I mean by strategic intent is not a strategic plan, but rather, an obsession with winning that permeates the total organization and is nurtured and sustained for a long period of time. This isa critical issue. One, itis an obsession with winning, not just vague desire. Two, it permeates all levels of the organization. It is not just a belief held by a very small group of people at the top of the organization. It is something that, ‘goes all the way down from the chairman of the board to the lowest level employee. And each employee believes in and. shares the same fundamental competitive agenda. ‘And finally itis an obsession that must be sustained for a long period of time. It's not a one-year program, because glo- bal leadership is not won in one year. It takes a long time. Top managers have to maintain the enthusiasm in the organization for a significant period of time. These characteristics, an obsession for winning and a long- 355 term commitment, are the underlying characteristic ofall the companies which have successfully challenged established glo- bal leaders during the period 1970/75 to 1980/85. How many organizations in the United States have this obsession for winning? And at how many organizations do people at all levels share the same agenda? Yes, they may have to make highly differentiated contributions based on their skills, based on what they know and their positions in the company, but they must all recognize that the enemy is out- side. Without such a shared competitive agenda and a clear view of the enemy, we end up taking extraordinarily bright people to create a certain collective paralysis ‘Another part of the problem is the tremendous amount of debate in the United States about a level playing field. I think a level-playing field is a fundamentally wrong notion. Strategy is not about a level-playing field. Strategy is about differential advantage. When people ask for a level-playing field, I think they're basically asking a question which a strategist should not ask. You are always going to have people who are differently endowed. To a South Korean company looking at the United ates in the year 1975, did the playing field look level, did the world look fair? In 1970, when Japanese companies were look- ing at the United States, did the field look level? It did not. Japanese and South Korean firms have, during 1960-89, effec- tively used government support and non-tariff barriers as effective counter moves to the resource-based advantages of US. firms. ‘We must start with the assumption that your competitors are differently endowed and will try to create different sources of advantages including protectionism. We must then ask the question, “How do I change the rules of the game in my busi- ness so that I hold the high ground on a non-level playing field?” So, how do you get obsession in the organization? How do you get creativity in the organization to fundamentally change the way the industry operates and to change the rules of the industry? ‘A good illustration of this approach is Canon's efforts in the reprographics business. Their success did not come from big machines or from centralized copying, but from changing the game to create personalized and distributed copying. And they Used this new business concept basis for entry into a market, dominated by Xerox. In order to do what Canon did with meagre resources, we have to re-examine some of the “dogmas” within U.S. firms. We need to focus on one issue that we have taken for granted as an article of faith — radical decentralization, Most Amer- ican companies have tried to radically decentralize their oper- ations, often breaking the firm into strategic business units (SBUs) or lines of business (LOB). This then becomes the basis of strategic analysis, resource allocation and people man- agement within the large company. Without dampers, radical decentralization in a high tech company, may be dangerous because I believe that the com- petition may be shifting dramatically from competition for end products, services and markets to core products and core competencies. Let me give you some examples. Look, for example, at the market share of Matsushita in the United States. They are not a player in the U.S. appliance market. They have negligible market share in such products as refrigerators, air conditions, and so on. But, if you look at the356 core product which goes into almost all large appliances — compressors, then you see that Matsushita has a very signti- cant market share. Look at Sony's market share in VCRs. It is declining as Betamax has essentially lost out But look at the market shares Sony has in video disks or data drives or laser drives, the internal components of VCRs, and compact dise players and you get totally different view. ‘Most of you probably use a desktop laser printer. If you look at it, most of them say “Hewlett Packard” or “Apple” or what- ever else on the outside. You don't see the name Canon on most of the laser printers, but they probably have 85 percent of the world share in the imaging engines for laser printers. So the first thing we have 10 recognize 1s that the competi- tion might have shifted from end product and services (mea- sured as market share) to core products which provide func- tionality in the products. Share in core products leads to manufacturing share as distinct from market share for end products Look at the automotive industry. You could say that Mit- subishi has a fainly low share of the United States’ market. Is, true, But if you really look at what their share is by looking at all the cars and power trains that they supply to Chrysler, its ‘not a trivial share So we have to separate market share, a traditional measure cof market power and leadership, from manufacturing share, which is quite different. The next round of competition may have very little to do with market shares in end products and services per se, and everything to do with ability to control core competencies, or the skills to make the core products Do we look at VCRs or do we look at video decks? Do we Jook at laser printers, or do we look at laser printer engines? Do we look at appliances, or do we look at Compressors? ‘The U.S. managers may not be ready to answer these ques tions, Most American companies are already outsourcing core products. We may operate under the assumption that it “is, only a component.” If we outsource core products for a period of time, we lose our ability to create new businesses. For example, let's look at high definition TV. Everybody in the U.S. scems to be saying, “If the government gives us lots of money, we should be all right.” The government may give a Jot of money to help American companies compete for HDTV. bbut the truth is, we don’t have companies in the United States which have the skills to make the core products that go into a high definition TV system. The entire U.S. supply base in this area has either disappeared or been destroyed. We are not secing the costs of a preoccupation with radical -nlralization into business units and the cost of a preoc- rket share in end products. We might be losing the capacity to create new functionalities. We ought to re-think the way we look at the governance structure in large companies. In addition to our concern with business units, we should be concerned about critical compe tencies and core products. I we start with that premise, then conglomerate-type diversification does not make sense in the slobal market place: For example, let's look at two companies, General Electric and Canon. GE isthe darling of lots of people, especially those 6on Wall Street. But look at what has happened to them in a variety of industries! Their significant share of the United States consumer electronics market has been systemically dec- imated, They sold their small domestic appliances to Black de VITAL SPEECHES OF THE DAY ‘and Decker and their entire consumer electronic business to ‘Thompson. Their semiconductor business is being phased out They're still a very big player in materials. engineered plastics, jet engines, and so on. but their entire consumer electronics business is gone. ‘On the other hand, look at Canon, They used to be very small 10 years ago. But then they went from cameras to cal- cculators to personal copiers, to fax to laser printer engines to lithography and then on to medical diagnosties. And you can ask the question, “What is the underlying logic in Canon's strategy compared to GE's? “What is the underiying logic in NEC compared to GTE? Look at GTE in 1980, They had everything that it takes to make a very good and successful office automation company. They could count on a whole array of businesses. — television, PABX, packet switching, semiconductors, telephone oper: tions, and transmissions, Today, all of them are gone. GTE has become a telephone operations company. At NEC it is the opposite If you Took at companies like Canon and NEC, the tunda mental basis for diversification is core competencies and core products. Canon has realized that inside a fax and inside a laser printer there is the same basic cartridge. That is a core product. Diversification should be based on internal, technical, and market logic rather than on a pure financial logic. The com: pany that is an outstanding example of this type of thinking in the Linited States is 3M. From “Post-It Notes,” whieh all of us use, 10 magnetic tape, to high pressure sensitive tape for auto: motive applications, there is « unifying logic within 3M: what call the “sticky tape logic” that transcends the tremendous product diversity at 3M. If we understand substrates, adhesives and coatings. we understand the entire product proliteration at 3M. And if we take the top S00 people at 3M, probably 400 of them have backgrounds in chemical engineering or chemistry and about 150 have Ph.D.s in chemical engineering. So while there is enormous variety at one level, autonomy for business units there is also a lot of commonality, core competence and unity within 3M. ULS. companies must ask, “How far should unrelated diver: sification go? And, “How much autonomy for the business unit?” What holds a diverse set of businesses together? Yet another dimension to the revitalization effort is based ‘on changing the way companies view their global operations, American companies have been global for a lot longer than Japanese companies. Singer was the first real large multi: national company. They went to England to make sewin machines over 100 years ago. Ford has been abroad for at least 8ycurs. And there are a lot of other companies with long-term ‘global experiences; NCR, IBM, Goodyear, Firestone. Kellog. and Dow The problem is, U.S. companies have always treated sub sidiaries as independent stand-alone units with the exception Of some like IBM and Dow. Very few companies have really leveraged the extraordinary resources that they have in their subsidiaries. We have to re-think the relative role of subsid- ities and the role of headquarters as well. For example, products developed in the U.S.. in the head- quarters have to be modified to suit the requirements of the rest of the world, I still hear people in product design groups saying things like, "Why do we have to have both 110 and 220C.K. PRAHALAD volts?” That to me is such an archaic view of the global market, lace. PI We must simultaneousY think in terms ofthe whole world in product development, and at the same time consider prod- uct adaptation in approaching key markets. We must also go beyond a preoccupation with adapting what is developed here for other markets. We must focus on the reverse flow of ideas — try to understand how to leverage what is going on in other parts of the company, especially in key subsidiaries. Philips provides a good example. They are a Dutch company whose center of competence for television is the Netherlands. But their British subsidiary developed a video text capability with the British Ministry of Telecommunications. After a period of time, the subsidiary became a very competent group in the development of video text, and now Philips considers that one of their core competencies. Even though this com- petence is in a subsidiary, itis leveraged on a world-wide basis. So the real task is in taking local initiatives and leveraging them globally. Most of the time in the United States we take “headquarters initiative” and try to see how we can use it in various subsidiaries, rather than taking local initiatives from subsidiaries and applying them worldwide. LM. Ericson provides another example. They have a fairly significant position in Australia, and they developed a tele- phone switch for rural applications. LLM. Ericson now uses Australia as a center of excellence for the global development of remote rural switches, even though it’s but one of their subsidiaries. In the next round of competition, the debate about whether a company is global or local may be totally irrelevant. We should strive for global integration or strategy and local adaptation of, products. We must start looking at subsidiaries as sources of competence to be exploited rather than as colonies that have to be managed and tolerated. ‘And the advantage that U.S. companies have is that they already have the global infrastructure of developed subsidiar- ies, Most Japanese companies are still busy building an infra- structure. So the question becomes, “How do we exploit our infrastructure?” We have an advantage if we just are willing to re-think how to use it effectively. ‘One change that is required to create such a perspective calls for all employees broadly understanding the goals of the company. Top managers must spend the time and effort to make this clearly understood by all. For example, at NCC, they have a fairly simple statement of ‘what their long-term destiny is, Iti called “C and C” — Com- puters and Communications, They believe that computers and communications will converge and that NEC will par- ticipate in all the key model points of technology and space. This will enable NEC to be a“C and C” company. And they make sure all publics — employees, customers, suppliers, investors — know that they are focused on C&C covering & wide product range, from laptops to satellite dishes. Iti very 357 clearly understood both inside and outside the organization. ‘Most U.S. companies need a rallying cry akin to "C and C.” And the battle cry needs to be heard, translated, and under- stood all the way up and down the organization. U.S. companies also need a broad road map. Not a detailed strategic plan, not a product plan, but a road map for com- petency acquisition. They need to ask themselves, “What are the new skills and capabilities that we need in order to meet our destiny 10 or 15 years down the road?” And, “How do we ‘generate the enthusiasm inside the organization for both indi- Vidual and collective contribution?” ‘Another issue that needs to be focused on is our attitude toward middle management. We have essentially looked at middle management as a problem. There was a famous arti- cle in Business Week about middle managers as a vanishing species. However, when one starts to look at companies as portfolios of competencies rather than as portfolios of businesses, one’s attitude toward middle managers changes. Where does com- petency — market knowledge, technical knowledge, manufac- turing knowledge — reside in the organization? Not at the very top. Not on the shop floor. But in middle management. What we may be doing by eliminating layers of middle ‘management is eliminating the very core competence we need to revitalize the company. I'm not suggesting that we keep middle-managers who don't contribute, only that we stop mindlessly eliminating a whole group of people because of concerns with head count reduction to improve profitability in the short run, Instead of looking at middle managers as fat to dispense with, I suggest that we look at them as Engines of Change. ‘We may also want to re-think the value-added of different levels of management, And it’s not clear to me that examina- tion has been done. So, the next round of competition is going to be about com- petence. People are going to be a lot more concerned with the capacity to create new businesses rather than being efficient in existing businesses. Competence is going to provide compa- nies with the differential advantage. Competition is not about technology. It’s not about re- sources, it’s not about size, it’s not about regulation, it’s not about subsidies, it’s not about investor pressures. It’s about ideas. And the next round of competition is going to be about ideas ~ ideas about how to govern a large com- pany. What is the value-added of senior management? And how do we use a different mental template to look at the shifting patterns of competition? ‘The one thing we have not done very wel is re-think the way we manage our companies. It’s an internal challenge. And I would suggest that the more introspective we become about the way we manage, the better off we will be. That's the real challenge for the businessman, and certainly for academics and consultants as well. MICROFILM and MICROFICHE are now available $25.00 per volume. Subscribers only.Copyright © 2003 EBSCO Publishing