core competence ppt
TRANSCRIPT
The Core Competence
of the Corporation
C.K. Prahalad & Gary HamelHarvard Business Review,
May-June, 1990
COMPETITION
DIVERSIFICATION
CORE COMPETANCIES
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
CLARIFY CORE COMPETENCIESARTICLUATE A STRATEGIC INTENT
IDENTIFY CORE COMPETANCIES
CULTIVATE MINDSETSTOP THINKING BUSINESS AS SACROSANCT
IDENTIFY PEOPLE AND PROJECTS THAT EMBODY THE CC
BUILD CORE COMPETENCIESINVEST IN NEEDED TECHNOLOGIES
FORGE STRATEGIC ALLIANCES
A Japanese multinational IT company, NEC provides IT and network solutions to business enterprises, communications services providers and government.
Nippon Electric Company
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.http://www22.verizon.com/
General Telephone & Electronics Corporation
NEC - “Core Competency”
NECCommunications Equipment
•Radio broadcast
•Microwave communications technology
Semiconductors
•1958 Signed a technology licensing agreement with GE
•1960 established its Integrated Circuits Division
•1967 moved into VLSIsComputers
•1950 entered the computer industry
•1974 first Japanese microprocessor
•1979 developed it first PC
GTE-”Core Business”
Sell or transfer underperforming or non-core businesses
Focus on new and enhanced communication 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
Performance of NEC vs. GTESales
Sales in Millions of $'s NEC vs GTE
$-
$10,000
$20,000
$30,000
$40,000
$50,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
GTE
NEC
RETHINKING THE CORPORATION
1. Diversified corporation - point its business units at particular end product markets – Dominate
2. Changing market boundaries
3. A few companies have proven themselves adept at inventing new markets, entering emerging markets etc
4. 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.
5. Top managements of Western companies must assume responsibility for competitive decline.
A DIVERSIFIED ORGANISATION
CORE COMPETANCIES
CORE PRODUCTS
BUSINESS UNITS
END PRODUCTS
Core Competencies
“Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
Core Competencies
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.
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
1. C.C DOES NOT COME FROM MASSIVE R&D FUNDS
2. C.C DOES NOT EVEN MEAN SHARED COSTS
WHAT CORE COMPETANCE IS NOT
Identifying Core Competencies
1. •potential access to a wide varieties of market
2. •make a contribution to the perceived customer benefits of the end product.
3. •difficult for competitors to imitate.
Risks
Competencies ≠ price/performance of end
products
Competencies ≠ cost centers
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.
Lessons learned
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.
Core Product
Core Compete
ncy
Core Compete
ncy
Core Compete
ncy
End Product
Core Competencies
Honda’s internal
combustion engines
Thinking in terms of core products forces a
company to distinguish between the brand
share it achieves in end product markets
and the manufacturing share it achieves in
any particular core product.
Product
Example
Core Product ( Manufacturing Share)
End Product(Brand Share)
Canon Desktop Laser Printer-84%
Laser printer-minimum
Matsushita Compressors-40% 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.
The Tyranny of the SBU
There is a need for new principles in
companies organized exclusively according
to the SBUs.
Two Concepts of the Corporation: SBU or
Core Competence
SBU Core Competence
Basis for competition Competitiveness of today’s products
Interfirm competition to build competencies
Corporate structure Portfolio of business related in product-market terms
Portfolio of competencies, core products and business
Status of the business unit SBU “owns” all resources other than cash
SBU is a potential reservoir of core competencies
Resource allocation Discrete businesses are the unit of analysis
Businesses and competencies are the unit of analysis
Capital value added top management
Optimizing corporate returns through capital allocation, trade offs among business.
Enunciating strategic architecture and building competencies to secure the future.
Two Concepts of the Corporation: SBU or Core Competence
Diversified Corporations
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.
THE PRISM VIEW OF THE SBU
CORE COMPETANCE
CORE PRODUCTS
END PRODUCTS
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 underinvest in the absence of a
comprehensive view imposed by top management.
Imprisoned Resources
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.
Bounded Innovation
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
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 alliances .
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 diversification.
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
WHAT THE S.A DOES
It provides a framework to link
technical and production know-how
across SBUs. It will provide
competitive advantage.
It cannot be copied by competitors.
Strategic architecture
Consistency of resource allocation
Development of Admin.
Infrastructure
Managerial culture
Teamwork Capacity to
change
Share resources
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.
Identify overreaching competency
Ask business to identify projects and people
Direct an audit of location, No. , quality of people
Core Competencies are Corporate Resources
SBUs are entitled to an individuals performance only till it is able to yield the best pay-off.
SBU must justify their hold on the people who carry company’s core competency.
Reward system focusing on product
line results and career paths should
be eliminated.
Equitable exchange
Give recognition to SBU managers
Job rotation in early stage of
careers.
Periodic assignments and cross
divisional projects in mid careers to
diffuse competency
COMPETENCY CARRIERS Career tracking and guidance by
corporate HR professionals.
They should be bought together to
exchange notes and ideas.
A community feeling
CONCLUSION
Core competency should be the
focus of strategy at corporate level.
Build organization on the hierarchy
of core competency, core product
and end products
Top management must add value
via strategic architecture.
Rethink the concept of the corporation
THANK YOU