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The Core Competence of the Corporation
C.K. Prahalad and Gary Hamel
The
most
powerful
way
to
prevail
in
global
competition
is
still
invisible
to
many
companies.
During
the
1980s,
top
executives
were
judged
on
their
ability
to
restructure, declutter, and delayer
their corporations. In the 1990s, they'll be
judged on
their ability to identify,
cultivate, and exploit the core competencies that
make growth
possible indeed, they'll
have to rethink the concept of the corporation
itself.
Consider
the
last
ten
years
of
GTE
and
NEC.
In
the
early
1980s,
GTE
was
well
positioned to become a major player in
the evolving information technology industry.
It
was
active
in
telecommunications.
Its
operations
spanned
a
variety
of
businesses
including
telephones,
switching
and
transmission
systems,
digital
PABX,
semiconductors, packet switching,
satellites, defense systems, and lighting
products.
And GTE's Entertainment
Products Group, which produced Sylvania color TVs,
had a
position in related display
technologies. In 1980, GTE's sales were $$9.98
billion, and
net cash flow was $$1.73
billion. NEC, in contrast, was much smaller, at
$$3.8 billion in
sales. It had a
comparable technological base and computer
businesses, but it had no
experience as
an operating telecommunications company.
Yet look at the
positions of GTE and NEC in 1988. GTE's 1988 sales
were $$16.46
billion,
and
NEC’s
sales
were
considerably
higher
at
$$21.89
billion.
GTE
has,
in
effect, become a
telephone operating company with a position in
defense and lighting
products.
GTE's
other
businesses
are
small
in
global
terms.
GTE
has
divested
Sylvania
TV
and
Telenet,
put
switching,
transmission,
and
digital
PABX
into
joint
ventures, and closed
down semiconductors. As a result, the
international position of
GTE has
eroded. Non U.S. revenue as a percent of total
revenue dropped from 20% to
15% between
1980 and 1988.
NEC has emerged as the world leader in
semiconductors and as a first tier player in
telecommunications
products
and
computers.
It
has
consolidated
its
position
in
mainframe
computers.
It
has
moved
beyond
public
switching
and
transmission
to
include such lifestyle products as
mobile telephones, facsimile machines, and laptop
computers bridging the gap between
telecommunications and office automation. NEC
is
the
only
company
in
the
world
to
be
in
the
top
five
in
revenue
in
telecommunications,
semiconductors, and mainframes. Why did these two
companies,
starting with comparable
business portfolios, perform so differently?
Largely because
NEC conceived of itself
in terms of
Rethinking the Corporation
Once, the diversified corporation could
simply point its business units at particular
end product markets and admonish them
to become world leaders. But
with
market
boundaries
changing
ever
more
quickly,
targets
are
elusive
and
capture
is
at
best
temporary. A few
companies have proven themselves adept at
inventing new markets,
quickly
entering
emerging
markets,
and
dramatically
shifting
patterns
of
customer
choice
in
established
markets.
These
are
the
ones
to
emulate.
The
critical
task
for
management is to create an organization
capable of infusing products with irresistible
functionality
or,
better
yet,
creating
products
that
customers
need
but
have
not
yet
even
imagined.
This
is
a
deceptively
difficult
task.
Ultimately,
it
requires
radical
change
in
the
management
of
major
companies.
It
means,
first
of
all,
that
top
managements
of
Western
companies
must
assume
responsibility
for
competitive
decline.
Everyone
knows
about
high
interest
rates,
Japanese
protectionism,
outdated
antitrust
laws,
obstreperous
unions,
and
impatient
investors.
What
is
harder
to
see,
or
harder
to
acknowledge, is how little added
momentum companies actually get from political or
macroeconomic
created a drag
on our forward motion. It is the principles of
management that are in
need of reform.
NEC
versus
GTE,
again,
is
instructive
and
only
one
of
many
such
comparative
cases we
analyzed to understand the changing basis for
global leadership. Early in the
1970s,
NEC articulated a strategic intent to exploit the
convergence of computing and
communications,
what
it
called
Success,
top
management
reckoned,
would
hinge
on
acquiring
competencies,
particularly
in
semiconductors.
Management
adopted
an
appropriate
archi
tecture,
summarized
by
C&C,
and
then
communicated its intent to the whole
organization and the outside world during the
mid 1970s.
NEC constituted a
of core
products and core competencies. NEC put in place
coordination groups and
committees that
cut across the interests of individual businesses.
Consistent with its
strategic
architecture,
NEC
shifted
enormous
resources
to
strengthen
its
position
in
components and central processors. By
using collaborative arrangements to multiply
internal resources, NEC was able to
accumulate a broad array of core competencies.
NEC
carefully
identified
three
interrelated
streams
of
technological
and
market
evolution.
Top
management
determined
that
computing
would
evolve
from
large
mainframes
to
distributed
processing,
components
from
simple
ICs
to
VLSI,
and
communications from mechanical cross
bar exchange to complex digital systems we
now
call
ISDN.
As
things
evolved
further,
NEC
reasoned,
the
computing,
communications,
and components businesses would so overlap that it
would be very
hard to distinguish among
them, and that there would be enormous
opportunities for
any company that had
built the competencies needed to serve all three
markets.
NEC
top
management
determined
that
semiconductors
would
be
the
company's
most important
of
1987
aimed
at
building
competencies
rapidly
and
at
low
cost.
In
mainframe
computers, its
most noted relationship was with Honeywell and
Bull. Almost all the
collaborative
arrangements
in
the
semiconductor
component
field
were
oriented
toward
technology
access.
As
they
entered
collabor
ative
arrangements,
NEC’s
operating
managers
understood
the
rationale
for
these
alliances
and
the
goal
of
internalizing
partner
skills.
NEC's
director
of
research
summed
up
its
competence
acquisition during the 1970s and 1980s
this way:
was much quicker and cheaper
to use foreign technology. There wasn't a need for
us
to develop new ideas.”
No
such
clarity
of
strategic
intent
and
strategic
architecture
appeared
to
exist
at
GTE.
Although
senior
executives
discussed
the
implications
of
the
evolving
information technology industry, no
commonly accepted view of which competencies
would
be
required
to
compete
in
that
industry
were
communicated
widely.
While
significant
staff
work
was
done
to
identify
key
technologies,
senior
line
managers
continued
to
act
as
if
they
were
managing
independent
business
units.
Decentralization made
it difficult to focus on core competencies.
Instead, individual
businesses
became
increasingly
dependent
on
outsiders
for
critical
skills,
and
collaboration became a
route to staged exits. Today, with a new
management team in
place, GTE has
repositioned itself to apply its competencies to
emerging markets in
telecommunications
services.
The Roots of Competitive
Advantage
The
distinction we observed in the way NEC and GTE
conceived of themselves a
portfolio of
competencies versus a portfolio of businesses was
repeated across many
industries. From
1980 to 1988, Canon grew by 264%, Honda by 200%.
Compare that
with Xerox and Chrysler.
And if Western managers were once anxious about
the low
cost and high quality of
Japanese imports, they are now over;whelmed by the
pace at
which
Japanese
rivals
are
inventing
new
markets,
creating
new
products,
and
enhancing
them.
Canon
has
given
us
personal
copiers;
Honda
has
moved
from
motorcycles
to
four
wheel
off
road
buggies.
Sony
developed
the
8mm
camcorder,
Yamaha,
the
digital
piano.
Komatsu
developed
an
underwater
remote
controlled
bulldozer,
while
Casio's
latest
gambit
is
a
small
screen
color
LCD
television.
Who
would have anticipated the evolution of
these vanguard markets?
In more established markets,
the Japanese
challenge has
been just as
disquieting.
Japanese companies are generating a
blizzard of features and functional enhancements
that bring technological
sophistication to everyday products.
Japanese car producers
have
been
pioneering
four
wheel
steering,
four
valve-per
cylinder
engines,
in
car
navigation systems, and sophisticated
electronic engine management systems. On the
strength
of
its
product
features,
Canon
is
now
a
player
in
facsimile
transmission
machines, desktop laser printers, even
semiconductor manufacturing equipment.
In the short run, a
company's competitiveness derives from the
price/performance
attributes of current
products. But the survivors of the first wave of
global competition,
Western and
Japanese alike, are all converging on similar and
formidable standards
for product cost
and quality minimum hurdles for continued
competition, but less and
less
important as sources of differential advantage.
In the long run, competitiveness
derives from an ability to build, at
lower cost and more speedily than competitors, the
core competencies that spawn
unanticipated products. The real sources of
advantage
are to be found in
management's ability to consolidate corporatewide
technologies and
production
skills
into
competencies
that
empower
individual
businesses
to
adapt
quickly to changing
opportunities.
Senior
executives
who
claim
that
they
cannot
build
core
competencies
either
because they feel the
autonomy of business units is sacrosanct or
because their feet
are held to the
quarterly budget fire should think again. The
problem in many Western
companies is
not that their senior executives are any less
capable than those in Japan
nor that
Japanese companies possess greater technical
capabilities. Instead, it is their
adherence
to
a
concept
of
the
corporation
that
unnecessarily
limits
the
ability
of
individual
businesses
to
fully
exploit
the
deep
reservoir
of
technological
capability
that many American and European
companies possess.
The
diversified
corporation
is
a
large
tree.
The
trunk
and
major
limbs
are
core
products, the smaller branches are
business units; the leaves, flowers, and fruit are
end
products. The root system that
provides nourishment, sustenance, and stability is
the
core competence. You can miss the
strength of competitors by looking only at their
end products, in the same way you miss
the strength of a tree if you look only at its
leaves. (See the chart
Competitiveness.”)
Core
competencies are the collective learning in the
organization, especially how to
coordinate
diverse
production
skills
and
integrate
multiple
streams
of
technologies.
Consider
Sony's
capacity
to
miniaturize
or
Philips's
optical
media
expertise.
The
theoretical knowledge to
put a radio on a chip does not in itself assure a
company the
skill to produce a
miniature radio no bigger than a business card. To
bring off this feat,
Casio must
harmonize know how in miniaturization,
microprocessor design, material
science, and ultrathin precision casing
the same skills it applies in its miniature card
calculators, pocket TVs, and digital
watches.
If
core competence is about harmonizing streams of
technology, it is also about the
organization
of
work
and
the
delivery
of
value.
Among
Sony's
competencies
is
miniaturization.
To
bring
miniaturization
to
its
products,
Sony
must
ensure
that
technologists,
engineers,
and
marketers
have
a
shared
understanding
of
customer
needs
and
of
technological
possibilities.
The
force
of
core
competence
is
felt
as
decisively in services as in
manufacturing. Citicorp was ahead of others
investing in
an operating system that
allowed it to participate in world markets 24
hours a day. Its
competence
in
provided
the
company
the
means
to
differentiate
itself
from
many
financial service institutions.
Core
competence
is
communication,
involvement,
and
a
deep
commitment
to
working across organizational
boundaries.
It involves many levels of
people and all
functions. World class
research in, for example, lasers or ceramics can
take place in
corporate
laboratories
without
having
an
impact
on
any
of
the
businesses
of
the
company.
The
skills
that
together
constitute
core
competence
must
coalesce
around
individuals whose
efforts are not so narrowly focused that they
cannot recognize the
opportunities for
blending their functional expertise with those of
others in new and
interesting ways.
Core
competence
does
not
diminish
with
use.
Unlike
physical
assets,
which
do
deteriorate over time, competencies are
enhanced as they are applied and shared. But
competencies still need to be nurtured
and protected; knowledge fades if it is not used.
Competencies are the glue that binds
existing businesses. They are also the engine for
new
business
development.
Patterns
of
diversification
and
market
entry
may
be
guided by
them, not just by the attractiveness of markets.
Consider 3M's
competence with sticky tape. in dreaming up
businesses as diverse
as
it
notes,
magnetic
tape,
photographic
film,
pressure
sensitive
tapes,
and
coated
abrasives,
the
company
has
brought
to
bear
widely
shared
competencies
in
substrates, coatings, and adhesives and
devised various ways to combine them. Indeed,
3M
has
invested
consistently
in
them.
What
seems
to
be
an
extremely
diversified
portfolio of businesses belies a few
shared core competencies.
In
contrast,
there
are
major
companies
that
have
had
the
potential
to
build
core
competencies but failed to do so
because top management was unable to conceive of
the company as anything other than a
collection of discrete businesses. GE sold much
of
its
consumer
electronics
business
to
Thomson
of
France,
arguing
that
it
was
becoming
increasingly
difficult
to
maintain
its
competitiveness
in
this
sector.
That
was undoubtedly so, but it is ironic
that it sold several key businesses to competitors
who were already competence leaders
Black & Decker in small electrical motors, and
Thomson,
which
was
eager
to
build
its
competence
in
microelectronics
and
had
learned
from
the
Japanese
that
a
position
in
consumer
electronics
was
vital
to
this
challenge.
Management
trapped
in
the
strategic
business
unit
(SBU)
mind
set
almost
inevitably
finds
its
individual
businesses
dependent
on
external
sources
for
critical
components, such as
motors or compressors. But these are not just
components. They
are
core
products
that
contribute
to
the
competitiveness
of
a
wide
range
of
end
products.
They are the physical embodiments of core
competencies.
How Not to Think of
Competence
Since
companies
are
in
a
race
to
build
the
competencies
that
determine
global
leadership,
successful
companies
have
stopped
imagining
themselves
as
bundles
of
businesses making products. Canon,
Honda, Casio, or NEC may seem to preside over
portfolios
of
businesses
unrelated
in
terms
of
customers,
distribution
channels,
and
merchandising strategy.
Indeed, they have portfolios
that may seem
idiosyncratic
at
times:
NEC
is
the
only
global
company
to
be
among
leaders
in
computing,
telecommunications, and semiconductors
and to have a thriving consumer electronics
business.
But looks are deceiving. In NEC,
digital technology, especially VLSI and systems
integration skills, is fundamental. In
the core competencies underlying them, disparate
businesses
become
coherent.
It
is
Honda's
core
competence
in
engines
and
power
trains
that
gives
it
a
distinctive
advantage
in
car,
motorcycle,
lawn
mower,
and
generator
businesses.
Canon's
core
competencies
in
optics,
imaging,
and
microprocessor
controls
have
enabled
it
to
enter,
even
dominate,
markets
as
seemingly
diverse
as
copiers,
laser
printers,
cameras,
and
image
scanners.
Philips
worked for more than 15 years to
perfect its optical media (laser disc) competence,
as
did
JVC
in
building
a
leading
position
in
video
recording.
Other
examples
of
core
competencies
might
include
mechantronics
(the
ability
to
marry
mechanical
and
electronic
engineering), video displays,
bioengineering, and microelectronics.
In the
early
stages
of
its
competence
building,
Philips
could
not
have
imagined
all
the
products that would be
spawned by its optical media competence, nor could
JVC have
anticipated
miniature
camcorders
when
it
first
began
exploring
videotape
technologies.
Unlike
the
battle
for
global
brand
dominance,
which
is
visible
in
the
world's
bro
adcast and print media
and is aimed at building global
to
build
world
class
competencies
is
invisible
to
people
who
aren't
deliberately
looking
for
it.
Top
management
often
tracks
the
cost
and
quality
of
competitors'
products,
yet
how
many
managers
untangle
the
web
of
alliances
their
Japanese
competitors
have
constructed
to
acquire
competencies
at
low
cost?
In
how
many
Western
boardrooms
is
there
an
explicit,
shared
understanding
of
the
competencies
the company must build for world
leadership? Indeed, how many senior
executives
discuss the crucial
distinction between competitive strategy at the
level of a business
and competitive
strategy at the level of an entire company?
Let us be
clear. Cultivating core competence does not mean
outspending rivals on
research and
development. In 1983, when Canon surpassed Xerox
in worldwide unit
market share in the
copier business, its R&D budget in reprographics
was but a small
fraction
of
Xerox's.
Over
the
past
20
years,
NEC
has
spent
less
on
R&D
as
a
percentage
of sales than almost all of its American and
European competitors.
Nor does
core
competence mean shared
costs, as when two or more SBUs use
a
common facility a plant,
service facility, or sales force or share a common
component.
The gains of sharing may be
substantial, but the search for shared costs is
typically a
post hoc effort to
rationalize production across existing businesses,
not a premeditated
effort to build the
competencies out of which the businesses
themselves grow.
Building
core
competencies
is
more
ambitious
and
different
than
integrating
vertically, moreover. Managers deciding
whether to make or buy will start with end
products
and look
upstream
to
the
efficiencies of the supply
chain
and downstream
toward
distribution
and
customers.
They
do
not
take
inventory
of
skills
and
look
forward
to
applying
them
in
nontraditional
ways.
(Of
course,
decisions
about
competencies
do
provide
a
logic
for
vertical
integration.
Canon
is
not
particularly
integrated
in
its
copier
business,
except
in
those
aspects
of
the
vertical
chain
that
Support the competencies it regards as
critical.)
Identifying Core
Competencies And Losing Them
At least three tests can be
applied to identify core competencies in a
company. First,
a
core
competence
provides
potential
access
to
a
wide
variety
of
markets.
Competence in
display systems, for example, enables a company to
participate in such
diverse businesses
as calculators, miniature TV sets, monitors for
laptop computers,
and automotive
dashboards which is why Casio's entry into the
handheld TV market
was predictable.
Second, a core competence should make a
significant contribution to
the
perceived customer benefits of the end product.
Clearly, Honda's engine expertise
fills
this bill.
Finally,
a
core
competence
should
be
difficult
for
competitors
to
imitate.
And
it
will
be
difficult
if
it
is
a
complex
harmonization
of
individual
technologies
and
production skills.
A rival
might
acquire some of the technologies that
comprise the
core
competence,
but
it
will
find
it
more
difficult
to
duplicate
the
more
or
less
comprehensive
pattern
of
internal
coordination
and
learning.
JVC’s
decision
in
the
early
1960s
to
pursue
the
development
of
a
videotape
competence
passed
the
three
tests outlined here. RCA’s
decis
ion in the late 1970s to develop a
stylus based video
turntable system did
not.
Few
companies
are
likely
to
build
world
leadership
in
more
than
five
or
six
fundamental competencies. A company
that compiles a list of 20 to 30 capabilities has
probably
not
produced
a
list
of
core
competencies.
Still,
it
is
probably
a
good
discipline
to generate a list of this sort and to see
aggregate capabilities as building
blocks.
This
tends
to
prompt
the
search
for
licensing
deals
and
alliances
through
which the company
may acquire, at low cost, the missing pieces.
Most Western
companies hardly think about competitiveness in
these terms at all. It
is
time
to
take
a
tough
minded
look
at
the
risks
they
are
running.
Companies
that
judge
competitiveness,
their
own
and
their
competitors',
primarily
in
terms
of
the
price/performance of end
products are courting the erosion of core
competencies
–
or
making too little effort to enhance
them. The embedded skills that give rise to the
next
generation
of
competitive
products
cannot
be
in
by
outsourcing
and
OEM-supply
relationships.
In
our
view,
too
many
companies
have
unwittingly
surrendered
core
competencies
when
they
cut
internal
investment
in
what
they
mistakenly thought were just
Consider
Chrysler. Unlike Honda, it has tended to view
engines and power trains as
simply
one
more
component.
Chrysler
is
becoming
increasingly
dependent
on
Mitsubishi and Hyundai:
between 1985 and 1987, the number of outsourced
engines
went
from
252,000
to
382,000.
It
is
difficult
to
imagine
Honda
yielding
manufacturing
responsibility, much less design, of so critical a
part of a car's function
to an outside
company which is why Honda has made such an
enormous commitment
to
Formula
One
auto
racing.
Honda
has
been
able
to
pool
its
engine
related
technologies;
it has parlayed these into a corporate
wide competency from
which it
develops world beating products,
despite R&D budgets smaller than those of GM and
Toyota.
Of course, it is perfectly possible for
a company to have a competitive product line
up but be a laggard in developing core
competencies at least for a while. If a company
wanted to enter the copier business
today, it would find a dozen Japanese companies
more than willing to supply copiers on
the basis of an OEM private label. But when
fundamental
technologies
changed
or
if
its
supplier
decided
to
enter
the
market
directly and become a competitor, that
company's product line, along with all of its
investments
in
marketing
and
distribution,
could
be
vulnerable.
Outsourcing
can
provide a shortcut to a more
competitive product, but it typically contributes
little to
building the people embodied
skills that are needed to sustain product
leadership.
Nor
is it possible for a company to have an
intelligent alliance or sourcing strategy
if it has not made a choice about where
it will build competence leadership. Clearly,
Japanese companies have benefited from
alliances. They've used them to learn from
Western partners who were not fully
committed to preserving core competencies of
their own. As we've argued in these
pages before, learning within an alliance takes a
positive
commitment
of
resources-
travel,
a
pool
of
dedicated
people,
test
bed
facilities,
time
to
internalize
and
test
what
has
been
learned.
A
company
may
not
make this effort if it
doesn't have clear goals for competence building.
Another way of
losing is forgoing opportunities to establish
competencies that are
evolving
in
existing
businesses.
In
the
1970s
and
1980s,
many
American
and
European companies like GE, Motorola,
GTE, Thom, and GEC chose to exit the color
television
business,
which
they
regarded
as
mature.
If
by
they
meant
that
they
had
run
out
of
new
product
ideas
at
precisely
the
moment
global
rivals
had
targeted the TV business for entry,
then yes, the industry was mature. But it
certainly
wasn't
mature
in
the
sense
that
all
opportunities
to
enhance
and
apply
video
based
competencies had been exhausted.
In
ridding
themselves
of
their
television
businesses,
these
companies
failed
to
distinguish
between
divesting
the
business
and
destroying
their
video
media
based
competencies. They not only got out of
the TV business but they also closed the door
on a whole stream of future
opportunities reliant on video based competencies.
The
television
industry,
considered
by
many
U.S.
companies
in
the
1970s
to
be
unattractive, is today the focus of a
fierce public policy debate about the inability of
U.S. corporations to benefit from the
$$20 billion a year opportunity that HDTV will
represent in the mid to late 1990s.
Ironically, the U.S. government is being asked to
fund
a
massive
research
project
in
effect,
to
compensate
U.S.
companies
for
their
failure to preserve
critical core competencies when they had the
chance.
In
contrast,
one
can
see
a
company
like
Sony
reducing
its
emphasis
on
VCRs
(where it has not been very successful
and where Korean companies now threaten),
without reducing its commitment to
video related competencies. Sony's Betamax led
to a debacle. But it emerged with its
videotape recording competencies intact and is
currently challenging Matsushita in the
8mm camcorder market.
There are two clear lessons here.
First, the costs of losing a core competence can
be
only partly calculated in advance.
The baby may be thrown out with the bath water in
divestment decisions. Second, since
core competencies are built through a process of
continuous
improvement
and
enhancement
that
may
span
a
decade
or
longer,
a
company
that
has
failed
to
invest
in
core
competence
building
will
find
it
very
difficult to, enter an emerging market,
unless, of course, it will be content simply to
serve as a distribution channel.
American
semiconductor companies like Motorola learned this
painful lesson when
they
elected
to
forgo
direct
participation
in
the
256k
generation
of
DRAM
chips.
Having skipped this round, Motorola,
like most of its American competitors, needed a
large
infusion
of
technical
help
from
Japanese
partners
to
rejoin
the
battle
in
the
1
megabyte generation. When it comes to
core competencies, it is difficult to get off the
train, walk to the next station, and
then reboard.
From Core Competencies to
Core Products.
The tangible link between identified
core competencies and end products is what
we
call
the
core
products-
the
physical
embodiments
of
one
or
more
core
competencies.
Honda's
engines,
for
example,
are
core
products,
linchpins
between
design and development skills that
ultimately lead to a proliferation of end
products.
Core
products
are
the
components
or
subassemblies
that
actually
contribute
to
the
value
of
the
end
products.
Thinking
in
terms
of core
products
forces
a
company
to
distinguish between the brand share it
achieves in end product markets (for example,
40% of the U.S. refrigerator market)
and the manufacturing share it achieves in any
particular core product (for example,
5% of the world share of compressor output).
Canon
is
reputed
to
have
an
84%
world
manufacturing
share
in
desktop
laser
printer
even
though
its
brand
share
in
the
laser
printer
business
is
minuscule.
Similarly,
Matsushita
has
a
world
manufacturing
share
of
about
45%
in
key VCR components, far
in excess of its brandshare (Panasonic, JVC, and
others) of
20%.
And
Matsushita
has
a
commanding
core
product
share
in
compressors
worldwide,
estimated at 40%, even though its brand share in
both the air conditioning
and
refrigerator businesses is quite small.
It is
essential to make this distinction
between core competencies, core
products,
and end products because
global competition is played out by different
rules and for
different
stakes
at
each
level.
To
build
or
defend
leadership
over
the
long
term,
a
corporation will probably
be a winner at each level. At the level of core
competence,
the
goal
is
to
build
world
leadership
in
the
design
and
development
of
a
particular
class
of
product
functionality
be
it
compact
data
storage
and
retrieval,
as
with
Philips's optical media
competence, or compactness and ease of use, as
with Sony's
micromotors and
microprocessor controls.
To sustain leadership in their chosen
core competence areas, these companies seek
to
maximize
their
world
manufacturing
share
in
core
products.
The
manufacture
of
core
products
for
a
wide
variety
of
external
(and
internal)
customers
yields
the
revenue and market feedback that, at
least partly, determines the pace at which core
competencies
can
be
enhanced
and
extended.
This
thinking
was
behind
JVC's
decision in the mid 1970s to establish
VCR supply relationships with leading national
consumer
electronics
companies
in
Europe
and
the
United
States.
In
supplying
Thomson, Thorn,
and Telefunken (all independent companies at that
time) as well as
U.S. partners, JVC was
able to gain the cash and the diversity of market
experience
that ultimately enabled it
to outpace Philips and Sony. (Philips developed
videotape
competencies in parallel with
JVC, but it failed to build a worldwide network of
OEM
relationships that would have
allowed it to accelerate the refinement of its
videotape
competence through the sale
of core products.)
JVC's success has not been lost on
Korean compames like Goldstar, Sam Sung, Kia,
and Daewoo, who are building core
product leadership in areas as diverse as
displays,
semiconductors,
and
automotive
engines
through
their
OEM
supply
contracts
with
Western companies. Their avowed goal is
to capture investment initiative away from
potential
competitors,
often
U.S.
companies.
In
doing
so,
they
accelerate
their
competence building efforts while
competence
and
embedding
it
in
core
products,
Asian
competitors
have
built
up
advantages
in
component
markets
first
and
have
then
leveraged
off
their
superior
products to move
downstream to build brand share. And they are not
likely to remain
the low cost suppliers
forever. As their reputation for brand leadership
is consolidated,
they may well gain
price leadership. Honda has proven this with its
Acura line, and
other Japanese car
makers are following suit.
Control over core products is critical
for other reasons. A dominant position in core
products
allows a company to
shape the evolution
of
applications
and end markets.
Such compact audio disc related core
products as data drives and lasers have enabled
Sony
and
Philips
to
influence
the
evolution
of
the
computer
peripheral
business
in
optical media storage. As a company
multiplies the number of application arenas for
its
core
products,
it
can
consistently
reduce
the
cost,
time,
and
risk
in
new
product
development. In short, well targeted
core products can lead to economies of scale and
scope.
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
businesses related in product-market
terms Portfolio of competencies, core products,
and businesses Status of the business
unit Autonomy is sacrosanct; the SBU “owns”
all
resources
other
than
cash
SBU
is
a
potential
reservoir
of
core
competencies
Resource
allocation
Discrete
businesses
are
the
unit
of
analysis,
capital
is
allocated
business
by
business
Businesses
and
competencies
are
the
unit
of
analysis:
top
management allocates capital and talent
Value added of top management Optimizing
corporate returns through capital
allocation trade-offs among businesses Enunciating
strategic architecture and building
competencies to secure the future
The
Tyranny of the SBU
The new terms
of
competitive engagement cannot
be
understood using analytical
tools
devised to manage the diversified corporation of
20 years ago, when competition
was
primarily domestic (GE versus Westinghouse,
General Motors versus Ford) and
all
the
key
players
were
speaking
the
language
of
the
same
business
schools
and
consultancies. Old prescriptions have
potentially toxic side effects. The need for new
principles
is
most
obvious
in
companies
the
corporation
are
summarized
in
Concepts of the Corporation:
SBU or Core Competence.”
Obviously, diversified
corporations have a portfolio of products and a
portfolio of
businesses. But we believe
in a view of the company as a portfolio of
competencies as
well. U.S. companies do
not lack the technical resources to build
competencies, but
their
top
management
often
lacks
the
vision
to
build
them
and
the
administrative
means
for
assembling
resources
spread
across
multiple
businesses.
A
shift
in
commitment
will
inevitably
influence
patterns
of
diversification,
skill
deployment,
resource
allocation priorities, and approaches to alliances
and outsourcing.
We have described the three different
planes on which battles for global leadership
are
waged
core
competence,
core
products,
and
end
products.
A
corporation
has
to
know whether it is
winning or losing on each plane. By sheer weight
of investment, a
company might be able
to beat its rivals to blue sky technologies yet
still lose the race
to build core
competence leadership. If a company is winning the
race to build core
competencies (as
opposed to building leadership in a few
technologies), it will almost
certainly
outpace
rivals
in
new
business
development.
If
a
company
is
winning
the
race
to capture world manufacturing share in core
products, it will probably outpace
rivals in improving product features
and the price/performance ratio.
Determining whether one is
winning or losing end product battles is more
difficult
because
measures
of
product
market
share
do
not
necessarily
reflect
various
companies'
underlying
competitiveness.
Indeed,
companies
that
attempt
to
build
market share by
relying on the competitiveness of others, rather
than investing in core
competencies
and
world
core-
product
leadership,
may
be
treading
on
quicksand.
In
the
race
for
global
brand
dominance,
companies
like
3M,
Black
&
Decker,
Canon,
Honda, NEC, and Citicorp have built
global brand umbrellas by proliferating products
out of their core competencies. This
has allowed their individual businesses to build
image, customer loyalty, and access to
distribution channels.
When you think about this
reconceptualization of the corporation, the
primacy of
the
SBU
an
organizational
dogma
for
a
generation
is
now
clearly
an
anachronism.
Where the SBU
is an article of faith, resistance to the
seductions of decentralization
can seem
heretical. In many companies, the SBU prism means
that only one plane of
the global
competitive battle, the battle to put competitive
products on the shelf today,
is visible
to top management. What are the costs of this
distortion?
Under investment in Developing Core
Competencies and Core Products. When the
organization is conceived of as a
multiplicity of SBUs, no single business may feel
responsible for maintaining a viable
position in core products nor be able to justify
the
investment
required
to
build
world
leadership
in
some
core
competence.
In
the
absence
of
a
more
comprehensive
view
imposed
by
corporate
management,
SBU
managers will tend to
under invest. Recently, companies such as Kodak
and Philips
have
recognized
this
as
a
potential
problem
and
have
begun
searching
for
new
organizational forms that will allow
them to develop and manufacture core products
for both internal and external
customers.
SBU
managers have traditionally conceived of
competitors in the same way they've
seen themselves. On the whole, they've
failed to note the emphasis Asian competitors
were
placing
on
building
leadership
in
core
products
or
to
understand
the
critical
linkage
between
world
manufacturing
leadership
and
the
ability
to
sustain
development
pace
core
competence.
They've
failed
to
pursue
OEM
supply
opportunities or to look across their
various product divisions in an attempt to
identify
opportunities for coordinated
initiatives.
Imprisoned Resources. As an SBU
evolves, it often develops unique competencies.
Typically, the people who embody this
competence are seen as the sole property of
the business in which they grew up. The
manager of another SBU who asks to borrow
talented people is likely to get a cold
rebuff. SBU managers are not only unwilling to
lend
their
competence
carriers
but
they
may
actually
hide
talent
to
prevent
its
redeployment in the
pursuit of new opportunities. This may be compared
to residents
of an underdeveloped
country hiding most of their cash under their
mattresses. The
benefits
of
competencies,
like
the
benefits
of
the
money
supply,
depend
on
the
velocity of their circulation as well
as on the size of the stock the company holds.
Western
companies have traditionally had an advantage in
the stock of skills they
possess.
But,
have
they
been
able
to
reconfigure
them
quickly
to
respond
to
new
opportunities?
Canon,
NEC,
and
Honda
have
had
a
lesser
stock
of
the
people
and
technologies
that
compose
core
competencies
but
could
move
them
much
quicker
from
one
business
unit
to
another.
Corporate
R&D
spending
at
Canon
is
not
fully
indicative of the size of Canon's core
competence stock and tells the casual observer
nothing about
the velocity
with
which Canon is
able to
move core competencies to
exploit opportunities.
When competencies become
imprisoned, the people who carry the competencies
do
not get assigned to the most
exciting opportunities, and their skills begin to
atrophy.
Only by fully leveraging core
competencies can small companies like Canon afford
to
compete with industry giants like
Xerox. How strange that SBU managers, who are
perfectly willing to compete for cash
in the capital budgeting process, are unwilling to
compete
for
people
the
company's
most
precious
asset.
We
find
it
ironic
that
top
management devotes so much attention to
the capital budgeting process yet typically
has
no
comparable
mechanism
for
allocating
the
human
skills
that
embody
core
competencies. Top managers are seldom
able to look four or five levels down into the
organization, identify the people who
embody critical competencies, and move them
across organizational I boundaries.
Bounded
Innovation. If core competencies are not
recognized, individual SBUs will
pursue
only
those
innovation
opportunities
that
are
close
at
hand
marginal
product
line
extensions
or
geographic
expansions.
Hybrid
opportunities
like
fax
machines,
laptop
computers,
hand
held
televisions,
or
portable
music
keyboards
will
emerge
only when managers
take off their SBU blinkers. Remember, Canon
appeared to be in
the camera business
at the time it was preparing to become a world
leader in copiers.
Conceiving of the
corporation in
terms
of core
competencies widens the
domain of
innovation.
Developing Strategic Architecture
The
fragmentation
of
core
competencies
becomes
inevitable
when
a
diversified
company's
information systems, patterns of communication,
career paths, managerial
rewards,
and
processes
of
strategy
development
do
not
transcend
SBU
lines.
We
believe
that
senior
management
should
spend
a
significant
amount
of
its
time
developing
a
corporatewide
strategic
architecture
that
establishes
objectives
for
competence
building.
A
strategic
architecture
is
a
road
map
of
the
future
that
identifies which core competencies to
build and their constituent technologies.
By
providing
an
impetus
for
learning
from
alliances
and
a
focus
for
internal
development
efforts, a strat
egic architecture like
NEC’s C&C can dramatically reduce
the
investment needed to secure future market
leadership. How can a company make
partnerships intelligently without a
clear understanding of the core competencies it is
trying
to
build
and
those
it
is
attempting
to
prevent
from
being
unintentionally
transferred?
Of course, all of this begs the
question of what a strategic architecture should
look
like. The answer will be different
for every company. But it is helpful to think
again
of
that
tree,
of
the
corporation
organized
around
core
products
and,
ultimately
core
competencies.
To
sink
sufficiently
strong
roots,
a
company
must
answer
some
fundamental
questions:
How
long
could
we
preserve
our
competitiveness
in
this
business
if
we
did
not
control
this
particular
core
competence?
How
central
is
this
core competence to perceived customer
benefits? What future opportunities would be
foreclosed if we were to lose this
particular competence?
The architecture provides a logic for
product and market diversification, moreover.
An
SBU
manager
would
be
asked:
Does
the
new
market
opportunity
add
to
the
overall goal of becoming the best
player in the world? Does it exploit or add to the
core competence? At Vickers, for
example, diversification options have been judged
in the context of becoming the best
power and motion control company in the world
(see the insert
The strategic architecture should make
resource allocation priorities transparent to
the
entire
organization.
It
provides
a
template
for
allocation
decisions
by
top
management.
It
helps
lower
level
managers
understand
the
logic
of
allocation
priorities
and
disciplines
senior
management
to
maintain
consistency.
In
short,
it
yields
a
definition
of
the
company
and
the
markets
it
serves.
3M,
Vickers,
NEC,
Canon, and Honda all qualify on this
score. Honda knew it was exploiting what it had
learned
from
motorcycles
how
to
make
high
revving,
smooth
running,
lightweight
engines when it entered the car
business. The task of creating a strategic
architecture
forces
the
organization
to
identify
and
commit
to
the
technical
and
production
linkages across
SBUs that will provide a distinct competitive
advantage.
It
is
consistency
of
resource
allocation
and
the
development
of
an
administrative
infrastructure
appropriate
to
it
that
breathes
life
into
a
strategic
architecture
and
creates
a
managerial
culture,
teamwork,
a
capacity
to
change,
and
a
willingness
to
share resources, to protect proprietary
skills, and to think long term. That is also the
reason the specific architecture cannot
be copied easily or overnight by competitors.
Strategic architecture is a tool for
communicating with customers and other external
constituents. It reveals the broad
direction without giving away every step.
Redeploying to Exploit Competencies
If the
company's core competencies are its critical
resource and if top management
must
ensure that competence carriers are not held
hostage by some particular business,
then it follows that SBUs should bid
for core competencies in the same way they bid
for capital. We've made this point
glancingly. It is important enough to consider
more
deeply.
Once
top
management
(with
the
help
of
divisional
and
SBU
managers)
has
identified
overarching
competencies,
it
must
ask
businesses
to
identify
the
projects
and people closely
connected with them. Corporate officers should
direct an audit of
the location,
number, and quality of the people who embody
competence.
This
sends
an
important
signal
to
middle
managers:
core
competencies
are
corporate resources and may be
reallocated by corporate management. An individual
business
doesn't
own
anybody.
SBUs
are
entitled
to
the
services
of
individual
employees
so
long
as
it
is
pursuing
yields
the
highest
possible
pay
off
on
the
investment
in
their
skills.
This
message
is
further
underlined
if
each
year
in
the
strategic
planning or budgeting process, unit managers must
justify their hold on the
people who
carry the company's core competencies.
Elements
of
Canon's
core
competence
in
optics
are
spread
across
businesses
as
diverse as cameras,
copiers, and semiconductor lithographic equipment
and are shown
in
at Canon.”
When Canon identified an opportunity in digital
laser printers, it gave SBU managers
the right to raid other SBUS to pull together the
required pool of talent.
When Canon's reprographics products
division undertook to
develop
microprocessor-controlled
copiers,
it
turned
to
the
photo
products
group,
which had developed
the world's first microprocessor controlled
camera.
Also,
reward systems that focus only on product line
results and career paths that
seldom
cross
SBU
boundaries
engender
patterns
of
behavior
among
unit
managers
that
are
destructively
competitive.
At
NEC,
divisional
managers
come
together
to
identify
next
generation
competencies.
Together
they
decide
how
much
investment
needs to be made
to build up each future competency and the
contribution in capital
and
staff
support
that
each
division
will
need
to
make.
There
is
also
a
sense
of
equitable exchange. One division
may make a disproportionate
contribution or may
benefit less from
the progress made, but such short term
inequalities will balance out
over the
long term.
Incidentally, the positive contribution
of the SBU manager should be made visible
across the company. An SBU manager is
unlikely to surrender key people if only the
other business (or the general manager
of that business who may be a competitor for
promotion)
is
going
to
benefit
from
the
redeployment.
Cooperative
SBU
managers
should
be
celebrated
as
team
players.
Where
priorities
are
clear,
transfers
are
less
likely to be seen as
idiosyncratic and politically motivated.
Transfers
for
the
sake
of
building
core
competence
must
be
recorded
and
appreciated
in
the
corporate
memory.
It
is
reasonable
to
expect
a
business
that
has
surrendered core skills on behalf of
corporate opportunities in other areas to lose,
for a
time,
some
of
its
competitiveness.
If
these
losses
in
performance
bring
immediate