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The Core Competence of the Corporation
C.K. Prahalad & Gary Hamel
Harvard Business Review, May-June, 1990
By Dileep Bajaj Anshul Jain Kapil Sharma Anoop N Areeb Ahmed
Nippon Electric Company
A Japanese multinational IT company, NEC provides IT and network solutions to business enterprises, communications services providers to government.
General Telephone & Electronics Corporation
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.
NEC - “Core Competency”
Communications Equipment •Radio broadcast •Microwave communications technology Computers •1950 entered the computer industry •1974 first Japanese microprocessor •1979 developed it first PC
Semiconductors •1958 Signed a technology licensing agreement with GE •1960 established its Integrated Circuits Division •1967 moved into VLSIs
Sell or transfer underperforming or non-core 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 Focus on new and enhanced communication businesses
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
RETHINKING THE CORPORATION
1.Diversified corporation - point its business units at particular end product markets – Dominate 2. 3.Changing market boundaries 4. 5.A few companies have proven themselves adept at inventing new markets, entering emerging markets etc 6. 7.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. 8. 9.Top managements of Western companies must assume responsibility for competitive decline. 10.
The Root Of Competitiveness
A DIVERSIFIED ORGANISATION
BUSINESS UNITS CORE PRODUCTS
competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
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
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. 5.
CORE COMPETENCE : MISCONCEPTIONS
1.C.C DOES NOT COME FROM MASSIVE R&D FUNDS 2. 3.C.C DOES NOT EVEN MEAN SHARED COSTS
Identifying Core Competencies
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.
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.
Honda’s internal combustion engines
Product Example Canon
Core Product ( Manufacturing Share)
End Product (Brand Share)
Desktop Laser Printer-84%
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.
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.
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 under-invest in the absence of a comprehensive view imposed by top management.
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.
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
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
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
WHAT THE S.A DOES
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
It provides a framework to link technical
and production know-how across SBUs. It will provide competitive advantage.
It cannot be copied by competitors.
onsistency of resource allocation
Development of Admin. Infrastruc
Capacity to change
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.
Core Competencies are Corporate Resources
Reward system focusing on product line results and career paths should be eliminated.
recognition to SBU managers
Job rotation in early stage of careers. Periodic assignments and cross divisional projects in mid careers to diffuse competency
Career tracking and guidance by corporate HR professionals.
should be bought together to exchange
notes and ideas.
Core competency should be the focus of strategy at corporate level. organization on the hierarchy of
core competency, core product and end products
management must add value via
Rethink the concept of the corporation
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