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The Core Competence of the Corporation

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1 The Core Competence of the Corporation
Prahalad, C.K., Gary Hamel (1990), “The Core Competence of the Corporation,” Harvard Business Review, May-June,

2 Authors Coimbatore K. Prahalad Gary Hamel
Graduate of Harvard School of Business Professor at Univ. of Michigan School of Business Advocate of Core Competency Focus for Businesses Business Consultant HBR-“He was one of the foremost business thinkers of our time” Coimbatore K. Prahalad Graduate of University of Michigan School of Business Visiting Professor of London Business School Ranked as the “World’s most influential business thinker” by the Wall Street Journal Business Consultant and Media Contributor Gary Hamel Present

3 Background A turbulent time:
1987 – stock market crash 1989 – Berlin Wall fell 1990 – dissolution of the Soviet Union 1970’s- 1980’s: unchecked growth in corporations Becoming large, inefficient conglomerates Acquired what they “needed”: strategic business units (SBUs) US Corporate (philosophical) Growth 1980s- SBUs 1990s-Core Competence 2001-Networking

4 Outline of the Article The article emphasizes the importance of core competence of a corporation and asks management to develop their organization based on core competence Rethinking the Corporation The Roots of Competitive Advantage How Not to Think of Competence Identifying Core Competencies – And Losing Them From Core Competencies to Core Products The Tyranny of the SBU Developing Strategic Architecture Redeploying to Exploit Competencies

5 Rethinking the Corporation
“The critical task for management is to create an organization capable of infusing products with irresistible functionality or, better yet, creating products that customers but have not yet even imagined.” (P&H-p.80)

6 GTE vs. NEC Example GTE NEC Industry Position 1980
Sales $9.98B, Net Cash Flow $1.73B Well positioned to become major player in information technology industry Active in telecommunications Sales $3.8 B Comparable technological base and computer business No experience in telecommunications Management Concepts No strategic intent or architecture Senior Managers continued to function as individual business units Strategic Focus to bridge gap between telecommunications and office automation Core Competency - Semiconductors “C&C” – Computing and Communications Committee Business Moves Divested Sylvania TV and Telenet Joint Ventures for switching, transmission and digital PABX Closed down semiconductors Consolidated position in mainframe computers Moved beyond switching and transmission to include mobile phones, fax machines Execution Increasingly dependent on outsiders for critical skills Used collaborative arrangements (strategic alliances) to build knowledge Industry Position 1988 Sales $16.46B Telephone operating company with position in defense and lighting Sales $21.89 B World leader in semiconductors and first-tier in telecommunications Result “Portfolio of Businesses” “Portfolio of Competencies”

7 Roots of Competitive Advantage
“The diversified corporation is a large tree.... The root system that provides nourishment, sustenance, and stability is the core competence.” (P&H-p. 82) Companies using competencies experience rapid growth: Canon, Honda outpaced rivals Sony, Casio, Yamaha invented new devices Consolidating corporate-wide technologies and resources into competencies is the key to success

8 Diversified corporation as a large tree
Leaves, Flowers and Fruit = End Products Trunk and Major Limbs = Core Products Root System = Core Competency provides nourishment, sustenance and stability

9 The Root of Competitiveness

10 Core Competence Core competence is….
the collective learning in the organization a bundle of skills integrated to make a company unique the organizational culture based on people, their skills and knowledge make a company competitive the engine for new business development created from the coordination, integration and harmonization of diverse skills and multiple streams of technologies communication, involvement, and working across organizational boundaries Unlike physical assets, competencies do not deteriorate as they are applied and shared. They grow.

11 How Not to Think of Competence
Companies consider themselves as bundles of product making businesses (remember Marketing Myopia!) and is focused on price/performance attributes of current products Building core competencies is different from integrating vertically….have no detailed plan on what, where, how to build an organization Cultivating core competence does not mean outspending rivals on R&D or getting businesses to become more vertically integrated

12 Identifying Core Competencies–And Losing Them
At least three tests can be applied to identify core competencies in a company. They are: core competencies provide potential access to a variety of markets make a significant contribution to perceived customer benefits of the end product should be difficult for competitors to imitate Core competency can be lost… through outsourcing (Honda vs. Chrysler) by giving up opportunities to establish competencies of existing businesses (color television perceived as a mature product)

13 From Core Competencies to Core Products

14 End Products Smartphones Laptops Gaming TV’s Cameras

15 The Tyranny of the SBU What is a Strategic Business Unit (SBU)?
US Corporate (philosophical) Growth 1980s- SBUs 1990s-Core Competence 2000s-Networking Ineffectiveness of SBU model Underinvestment in developing core competencies or core products Imprisoned Resources Bounded Innovation

16 SBU vs. Core Competence

17 Developing Strategic Architecture
A strategic architecture is a road map of the future that identifies core competencies to build and their constituent technologies. A strategic architecture should aim at building competencies. Training helps. Creates a managerial culture of team work, capacity to change, and willingness to share resources Protects proprietary skills, offers consistency in resource allocation and allows us to think long term around that Reduces the investment needed to secure future market leadership Provides logic for product and market diversification

18 Strategic Architecture
The Strategic Architecture should make resource allocation priorities transparent to the whole organization

19 Redeploying to Exploit Competencies
Identify competencies and the projects and people connected with them. Recognize that core competencies are corporate recourses and may be reallocated as needed. Divisional managers come together and decide the needed investment to build each competency. Cooperative SBU managers must be recognized for their team work. Expose people by using a rotation program. End goal: Strong feeling of community and customer focus.

20 Core Competencies at Canon

21 Conclusion A very timely article, a radical breakthrough in management thinking Sustaining core competence-what can be done Individual vs. national core competence-do we really have any?

22 Discussion Questions What is a “core competence” of a corporation? Why core competencies do not diminish in an organization? What do the authors mean by “the tyranny of the SBU?” In what ways the two concepts of the corporation, SBU and core competence, differ? Explain. What would be your (individual) core competence? How would you relate that to your personal development and goals in life?

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