Class Lectures Core Competencies Session-8

8/22/2019 Class Lectures Core Competencies Session-8

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Core Competencies

Session 8

Based on The Core Competencies of theCorporation by CK Prahalad & Garry

Hamel


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Then and Now

A diversified corporation used to be able to simplypoint business units at particular end productmarkets.

With market boundaries changing ever morequickly, targets are elusive and capture is at besttemporary.

Two alternative concepts: A portfolio of businessesvs a portfolio of competencies.

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NEC vs GTE -- an excellent contrast

NEC

strategic intent to exploit theconvergence of computing andcommunications.

Success would hinge on acquiringcompetencies, esp. in semiconductors.

Shifted enormous resources tostrengthen its position in componentsand central processors.

Accumulated a broad array of corecompetencies

Three interrelated streams oftechnological and market evolution convergence of communication,computing & component business.

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NEC vs GTE

Decided semiconductors to be thecompany's most important "coreproduct."

Strategic alliances--over 100 as of 1987--aimed at building competenciesrapidly and at low cost.

All their collaborations were orientedtoward technology access

"From an investment standpoint, itwas much quicker and cheaper to useforeign technology. There wasn't aneed for us to develop new ideas."

GTE

No such clarity of strategic intent andstrategic architecture appeared to exist

No commonly accepted view of whichcompetencies would be required tocompete in the IT industry

Line managers continued to act as ifthey were managing independent

business units.

Decentralization made it difficult toconcentrate on core competencies.

Instead, individual business unitsbecame increasingly dependent onoutsiders for critical skills,

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Result In 1980

GTE Sales $ 9.98 Billion

NEC Sales - $ 3.8 Billion

In 1988 GTE sales - $ 16.46 Billion

NEC sales - $ 21.89 Billion

NEC a world leader in semiconductors, telecom products and

computers. GTE a telephone operating co. Other biz are small globally.

Other biz divested

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What are core competencies?

Core competencies are the skills, characteristics, andassets that set your company apart fromcompetitors.

They are the intangible tangibles that you own andyour competitors do not

They are the fuel for innovation and the roots ofcompetitive advantage.

True Differentiation


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Core competence -- The roots ofcompetitive advantage

Real sources of advantage is the ability toconsolidate corporate-wide technologies andproduction skills into competencies to enable SBUs

to adapt quickly to changing opportunities

However, senior executives feel the autonomy ofbusiness units is sacrosanct (a challenge to overcome in

many companies)

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SBUs Vs. Core Competencies

Old

Diversified corporation is aportfolio of strategicbusiness units (SBUs)

within a similar product orcustomer category.

Each SBUs goal is to putcompetitive products on theshelf today.

Speed hence lack ofinnovation

Todays

Competitiveness bydeveloping corecompetencies.

These competenciesdetermine the strategicarchitecture of the firm(7S?).

Competencies musttranslate into core products,which significantlycontribute to the firms endproducts.

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The Competitive DiversifiedCorporation

You can miss the strengthof a competitor by lookingonly at their end products

The diversified organizationis like a large tree. The trunkand major limbs are coreproducts, smaller branchesare business units, the leaves,the flowers and fruit are end

products. The root systemprovides nourishment,sustenance and stability isthe core competence.


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From these core productscome the new strategicbusiness units. These SBUscan be in completelyseparate markets.

These businesses each haveend products that containthe core products.

In each SBU, outsourcingmay be considered foreverything except the coreproducts andcompetencies.


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In the short run,

competitiveness = the price/performance attributesof current products.

In the long run,

competitiveness = ability to build the corecompetencies that spawn unanticipated products, at

lower cost and more speedily than competitors

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The roots of competitive advantage

Core competencies are the collective learning in theorganization, diverse production skills and integratemultiple streams of technologies (other resources).

Core competence is communication, involvement, and adeep commitment to working across organizationalboundaries.

Core competence does not diminish with use.

Unlike physical assets, competencies are enhanced as theyare applied and shared.

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The roots of competitive advantage

Core competencies need to be nurtured and protected, asknowledge fades if it is not used.

Competencies are the glue that binds existing businesses andalso the engine for new business development

Many companies had the potential to build core competenciesbut failed because of collection of discreet businesses thatcould not work coherently.

Management trapped in the SBU mind-set almost inevitablyfinds its individual businesses dependent on external sourcesfor critical component (Old cos like JK, ..)

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Why Competencies?

Even good marketing wont make a me too firmcompetitive in the long run.

Competencies are enhanced with time.

Make or buy decisions are simplified.

Non-competencies can be supplemented withstrategic alliances and licensing agreements (Eg BPOs in India largely handle non core operations of large

organizations like GM)

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Competencies are not

Battle for global brand dominance, they are the battle tobuild world-class competencies which remains invisibleto many management.

Cost and quality of competitor products that the topmanagement often tracks; it is the web of alliances theircompetitors may have constructed to acquirecompetencies at low cost. (Honda, Toyota)

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Competencies Do Not Mean:

Competitive strategy at the SBU level ( it iscompetitive strategy at the level of an entire company)

Outspending rivals on R&D or sharing costs

between SBUs.

Integrating vertically. (Though it may help take that

decision)

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Identifying core competencies, andlosing them

Three tests can be applied to identify core competencies:

A core competence provides potential access to a wide varietyof markets. (e.g. Competence in display systems opens up toTVs, calculators, monitors, auto dashboards- Casio)

A core competence should make a significant contribution tothe perceived customer benefits of the end products. (e.g.Honda's engines fit this bill.)

A core competence should be difficult for competitors to

imitate. And it will be difficult if it is a complexharmonization of individual technologies and productionskills (Reliance Inds project management skills consideredglobally the finest)

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You cannot have more than 5 6 competencies

A company that compiles a list of 20-30 capabilities hasprobably not produced a list of core competencies.

However, it is probably good discipline to generate a list ofthis sort and to see the aggregate capabilities as buildingblocks.

Companies that judge competitiveness, their own and theircompetitors, in terms of the price/performance of endproducts are eroding the core competencies

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Embedded skills that give rise to next generation competitiveproducts cannot be "rented in" by outsourcing and OEMsupply relationships

In CK Prahalad's view--too many companies have unwittinglysurrendered core competencies when they cut investment in whatthey mistakenly thought were just "cost centres" in favour ofoutside suppliers.

Example Philips, GE, Indian retailers.

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Two clear lessons

First, the costs of losing a core competence can be only partlycalculated in advance. The baby may be thrown out with thebath water in divestment decisions.

Second, since core competencies are built through a process ofcontinuous improvement and enhancement that can span adecade or longer, a company that has failed to invest in corecompetence building will find it very difficult to enter anemerging market, unless of course, it will be content simply toserve as a distribution channel

Ex. P&G, Coke, Pepsi, IBM, Kraft ; what core competency of theirsallowed them the leverage in the Indian market?

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From Core Competencies to CoreProducts

Core products are the tangible evidence of our corecompetencies. They contribute to the customer

benefits received from the end product. Honda: Small gas engines

Canon: Desktop laser printer engines

3M: Adhesives and substrates

3 different planes : core competence, core products,and end products.

To sustain leadership in chosen core competence areas,strongest companies seek to maximize their world-manufacturing share in core products.

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Control over core products is criticalfor several reasons:

Can build up advantages in component markets first and thenleverage off their superior products to move downstream to buildbrand share.

As their reputation for brand leadership is consolidated, they maywell gain price leadership.

A dominant position in core products allows a company to shapethe evolution of applications and end markets.

As a company multiplies the number of application arenas for itscore products, it can reduce the cost, time, and risk in new productdevelopment. (economies of scale)

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Why SBU is not a great Idea

Important to know whether winning or losing on corecompetence, core products, or end products.

The SBU means that only one plane of the globalcompetitive battle, the battle to put competitive productson the shelf today, is visible to top management.

Under investment in developing core competencies andcore products (Ex.MAA Group)

Imprisoned resources

Bounded innovation

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The bottom line

Core competencies are the source of new businessdevelopment

Only if a company is conceived of as a hierarchy of

core competencies, core products, and market-focused business units, will it be fit to fight.

In the final analysis--Top management adds valueby enunciating the strategic architecture that guides

the competence acquisition process (BusinessDesign)

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Every end product offered byCanon has at least one coreproduct that makes a significant

contribution to the perceivedcustomer benefits.

How could Canon beat Xerox?

Canon people move between

SBUs carrying ideas andcompetencies

Example:


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Manufacturing Share

With core products, the focus shifts from marketshare to manufacturing share.

Matsushita owns Panasonic, JVC, and others. Their brandshare for VCRs is about 20%.

Their world manufacturing share of VCR components is 45%.

Canon owns a large share of world manufacturing off copiers,whereas Xerox failed to see the rationale

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Exercise: Identifying Your CoreCompetencies

Compile a list of capabilities.

What do you excel at at?

Think of your most skilled employees.

What products have been your past winners?


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The Test

Does this competence provide potential access to awide variety of markets?

Does this competence make a significantcontribution to the perceived customer benefits ofthe end product?

Is this competence difficult for competitors toimitate?

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Variety of Markets

What do miniature cardcalculators, pocket TVs, anddigital watches have incommon?

They are all the result ofCasios know-how inminiaturization,microprocessor design,

material science, andultrathin precision casing.


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Customer Benefit

Do these competenciesadd to the perceivedcustomer benefits of theend product?

Fit this in your pocket


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Easy to Imitate?

Philips is a market leader in TVs. Have you ever seen aPhilips mini TV? Miniaturization is not one of Philipscompetencies. They could put one on the market byoutsourcing the design and production.

Would this give them any manufacturing share? Or justtemporary market share?

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This could lead to

If you dont know what your core competencies are, youmay spin off a business unit that contains your mostcompetitive skills, employees, or core products.

Long term strategy involves constant innovation. Corecompetencies provide a market position that allows acompany to influence what products will be available inthe future.

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Developing strategic architecture

Prahalad believes that senior management should spenda significant amount of time developing a corporate-wide strategic architecture that establishes objectives forcompetence building.

A strategic architecture = a road map of the future thatidentifies which core competencies to build and theirconstituent technologies

Two things critical for strategic architecture to come to

life: Consistency of resource allocation.

Development of an administrative infrastructure that enablesconsistency of resource allocation

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Strategic Architecture

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A companys future is determined by its corecompetencies. These competencies define thearchitecture and characteristics of the globalcompetitive firm.


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Boundaryless Organization

In the old diversified corporation, ideas andtechnologies are reluctantly shared from one SBU tothe next, if at all.

Boundaries seem transparent when SBUs share corecompetencies and core products. These resourcescome from the firm.

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Resource Allocation

When core competencies are the roots of the firm,specialized employees and core products can beallocated to various SBUs.

At Canon, specialized employees move betweencamera and printer products regularly.

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Innovation

Using core competencies, new technologies can bedeveloped without heavy R&D costs.

Casio: Small-screen LCD TV Canon: Personal copier

Honda: Off-road buggy

Sony: 8mm camcorder

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Competence Building

The focus of todays global firm should be incompetence building.

Constantly improving competencies provides fornew integrated technologies.

Competencies provide focus for long-term goals.

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Competitive Advantage

Short-term market sharecan be won by anyonewith a good idea.

Race to get products onthe shelf.

Long-term successinvolves competencystructured organizations,innovation, and market

consistency.

Same core products,integrated into new endproducts, creating new

markets.

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Ask

How long could we dominate our biz if we did notcontrol this competency?

What future opportunities do we lose without it?

Does it provide access to multiple markets? (Casio)

Do customer benefits revolve around it? (Hondascompetence with high revving, lightweight enginesoffer multiple consumer benefits cars, gensets..)

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Summary

Learn your competencies

Develop your competencies

Structure your organization around yourcompetencies

Involve core products in all end products

Outsource non-competencies with strategic alliancesand licensing.

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Readings

Gary Hamel and C. K. Prahalad, (1990) "The Core Competence of the Corporation", Harvard Business Review, vol.68, no. 3, May-June 1990, pp 79-93.

Galunic, D.C. and Rodan, S. (1998). "Resource recombinations in the firm: knowledge structures and the potentialfor Schumpeterian innovation". Strategic Management Journal vol 19. p. 1193-1201.

Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading MultinationalCompanies", California Management Review, vol 40, no. 4, pp. 117-132.

"Core Competencies." QuickMBA. Internet Center for Management and BusinessAdministration, Inc. 18 Nov. 2005 .

Gamonal, Paula. "Core Competencies Working Smarter, Not Harder." Ravenwerks.Ravenwerks. 21 Nov. 2005 .

"strategy - core competencies." Tutor2u. Tutor2u. 16 Nov. 2005.

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Class Lectures Core Competencies Session-8

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