Case analysis

rose111

corecompetencyoforganizationsweek6.pdf

Home >Business & Finance homework help >Operations Management homework help >Case analysis

www.hbr.org

A R T I C L E

The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel

Included with this full-text Harvard Business Review article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

1 Article Summary

2 The Core Competence of the Corporation

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

15 Further Reading

Product 6528

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=6528

http://www.hbr.org

The Idea in Brief The Idea in Practice

The Core Competence of the Corporation

C O

P Y

R IG

H T

0 0

3 H

A R

V A

R D

B U

S IN

E S

S S

C H

O O

L P

U B

L IS

H IN

G C

O R

P O

R A

T IO

N . A

L L

R IG

H T

S R

E S

E R

V E

D .

lig

fit

Diversified giant NEC competed in seem-

gly disparate businesses—semiconduc-

rs, telecommunications, computing, and

nsumer electronics—and dominated

em all.

ow? It considered itself not a collection of

rategic business units, but a portfolio of

re competencies—the company’s collec-

ve knowledge about how to coordinate di-

rse production skills and technologies.

EC used its core competencies to achieve

hat most companies only attempt: Invent

w markets, exploit emerging ones, de-

ht customers with products they hadn’t

en imagined—but definitely needed.

ink of a diversified company as a tree:

e trunk and major limbs as core products,

aller branches as business units, leaves

d fruit as end products. Nourishing and

abilizing everything is the root system:

re competencies.

cusing on core competencies creates

ique, integrated systems that reinforce

among your firm’s diverse production

d technology skills—a systemic advan-

ge your competitors can’t copy.

CLARIFY CORE COMPETENCIES

When you clarify competencies, your entire or-

ganization knows how to support your compet-

itive advantage—and readily allocates re-

sources to build cross-unit technological and

production links. Use these steps:

Articulate a strategic intent that defines your

company and its markets (e.g., NEC’s “exploit

the convergence of computing and communi-

cations”).

Identify core competencies that support that

intent. Ask:

• How long could we dominate our business if

we didn’t control this competency?

• What future opportunities would we lose

without it?

• Does it provide access to multiple markets?

(Casio’s core competence with display sys-

tems let it succeed in calculators, laptop

monitors, and car dashboards.)

• Do customer benefits revolve around it?

(Honda’s competence with high-revving,

lightweight engines offers multiple con-

sumer benefits.)

BUILD CORE COMPETENCIES

Once you’ve identified core competencies, en-

hance them:

Invest in needed technologies. Citicorp

trumped rivals by adopting an operating sys-

tem that leveraged its competencies—and let it

participate in world markets 24 hours a day.

Infuse resources throughout business units to outpace rivals in new business development.

3M and Honda won races for global brand dom-

inance by creating wide varieties of products

from their core competencies. Results? They

built image, customer loyalty, and access to dis-

tribution channels for all their businesses.

Forge strategic alliances. NEC’s collaboration

with partners like Honeywell gave it access to

the mainframe and semiconductor technolo-

gies it needed to build core competencies.

CULTIVATE A CORE- COMPETENCY MIND-SET

Competency-savvy managers work well across

organizational boundaries, willingly share re-

sources, and think long term. To encourage this

mind-set:

Stop thinking of business units as sacrosanct. That imprisons resources in units and moti-

vates managers to hide talent as the company

pursues hot opportunities.

Identify projects and people who embody the firm’s core competencies. This sends a mes-

sage: Core competencies are corporate—not

unit—resources, and those who embody them

can be reallocated. (When Canon spotted op-

portunities in digital laser printers, it let man-

agers raid other units to assemble talent.)

Gather managers to identify next-generation competencies. Decide how much investment

each needs, and how much capital and staff

each division should contribute.

page 1 of 15

The Core Competence of the Corporation

by C.K. Prahalad and Gary Hamel

C O

P Y

R IG

H T

9 9

0 H

A R

V A

R D

B U

S IN

E S

S S

C H

O O

L P

U B

L IS

H IN

G C

O R

P O

R A

T IO

N . A

L L

R IG

H T

S R

E S

E R

V E

D .

harvard business review • may–june 1

The most powerful way to prevail in global competition is still invisible to many compa- nies. During the 1980s, top executives were judged on their ability to restructure, declut- ter, and delayer their corporations. In the 1990s, they’ll be judged on their ability to identify, cultivate, and exploit the core com- petencies that make growth possible—indeed, they’ll have to rethink the concept of the cor- poration 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 informa- tion technology industry. It was active in tele- communications. Its operations spanned a vari- ety of businesses including telephones, switching and transmission systems, digital PABX, semiconductors, packet switching, satel- lites, defense systems, and lighting products. And GTE’s Entertainment Products Group, which pro-duced Sylvania color TVs, had a posi- tion 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 oper- ating 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 Syl- vania TV and Telenet, put switching, transmis- sion, 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 tele- communications products and computers. It has consolidated its position in mainframe computers. It has moved beyond public switch- ing and transmission to include such lifestyle

990 page 2 of 15

The Core Competence of the Corporation

harvard business review • may–june

C.K. Prahalad

is professor of corporate strategy and international business at the University of Michigan.

Gary Hamel

is lecturer in business policy and management at the London Busi- ness School. Their most recent HBR arti- cle, ‘‘Strategic Intent’’ (May–June 1989), won the 1989 McKinsey Award for ex- cellence. This article is based on re- search funded by the Gatsby Charitable Foundation.

products as mobile telephones, facsimile ma- chines, 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 tele- communications, semiconductors, and main- frames. Why did these two companies, starting with comparable business portfolios, perform so differently? Largely because NEC conceived of itself in terms of ‘‘core competencies,’’ and GTE did not.

Rethinking the Corporation Once, the diversified corporation could simply point its business units at particular end prod- uct markets and admonish them to become world leaders. But with market boundaries changing ever more quickly, targets are elu- sive 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 or- ganization capable of infusing products with irresistible functionality or, better yet, creat- ing products that customers need but have not yet even imagined.

This is a deceptively difficult task. Ulti- mately, it requires radical change in the man- agement of major companies. It means, first of all, that top managements of Western compa- nies must assume responsibility for competi- tive decline. Everyone knows about high inter- est rates, Japanese protectionism, outdated antitrust laws, obstreperous unions, and impa- tient investors. What is harder to see, or harder to acknowledge, is how little added momen- tum companies actually get from political or macroeconomic ‘‘relief.’’ Both the theory and practice of Western management have created a drag on our forward motion. It is the princi- ples 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 artic- ulated a strategic intent to exploit the conver- gence of computing and communications, what it called ‘‘C&C.’’ 1 Success, top manage- ment reckoned, would hinge on acquiring com- petencies, particularly in semiconductors. Man- agement adopted an appropriate ‘‘strategic

architecture,’’ summarized by C&C, and then communicated its intent to the whole organiza- tion and the outside world during the mid- 1970s.

NEC constituted a ‘‘C&C Committee’’ of top managers to oversee the development 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 multi- ply internal resources, NEC was able to accu- mulate 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 distrib- uted 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, communica- tions, and components businesses would so overlap that it would be very hard to distin- guish 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 ‘‘core product.’’ It entered into myr- iad strategic alliances—over 100 as 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 en- tered collaborative arrangements, NEC’s oper- ating 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: ‘‘From an invest- ment standpoint, it 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 strate- gic architecture appeared to exist at GTE. Al- though senior executives discussed the implica- tions of the evolving information technology industry, no commonly accepted view of which

1990 page 3 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

competencies would be required to compete in that industry were communicated widely. While significant staff work was done to iden- tify key technologies, senior line managers con- tinued to act as if they were managing indepen- dent business units. Decentralization made it difficult to focus on core competencies. In- stead, individual businesses became increas- ingly dependent on outsiders for critical skills, and collaboration became a route to staged ex- its. Today, with a new management team in place, GTE has repositioned itself to apply its competencies to emerging markets in telecom- munications services.

The Roots of Competitive Advantage The distinction we observed in the way NEC and GTE conceived of themselves—a portfo- lio of competencies versus a portfolio of busi- nesses—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 overwhelmed 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 cam- corder, 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 van- guard 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 tech- nological sophistication to everyday products. Japanese car producers have been pioneering four-wheel steering, four-valve-per-cylinder en- gines, in-car navigation systems, and sophisti- cated electronic engine-management systems. On the strength of its product features, Canon is now a player in facsimile transmission ma- chines, desktop laser printers, even semi-con- ductor manufacturing equipment.

In the short run, a company’s competitive- ness derives from the price/performance at- tributes of current products. But the survivors

of the first wave of global competition, West- ern and Japanese alike, are all converging on similar and formidable standards for product cost and quality—minimum hurdles for contin- ued 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 ad- vantage are to be found in management’s abil- ity 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 can- not build core competencies either because they feel the autonomy of business units is sac- rosanct 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 compa- nies possess greater technical capabilities. In- stead, it is their adherence to a concept of the corporation that unnecessarily limits the abil- ity of individual businesses to fully exploit the deep reservoir of technological capability that many American and European companies pos- sess.

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, suste- nance, 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 ‘‘Competen- cies: The Roots of Competitiveness.’’)

Core competencies are the collective learn- ing in the organization, especially how to coor- dinate diverse production skills and integrate multiple streams of technologies. Consider Sony’s capacity to miniaturize or Philips’s opti- cal-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, ma- terial science, and ultrathin precision casing— the same skills it applies in its miniature card

90 page 4 of 15

The Core Competence of the Corporation

harvard business review • may–june

Competencies: The Ro

Compe

The corporation, like a tree, gr end products.

calculators, pocket TVs, and digital watches. If core competence is about harmonizing

streams of technology, it is also about the orga- nization of work and the delivery of value. Among Sony’s competencies is miniaturiza- tion. To bring miniaturization to its products, Sony must ensure that technologists, engi- neers, and marketers have a shared under- standing of customer needs and of technologi- cal possibilities. The force of core competence is felt as decisively in services as in manufactur- ing. Citicorp was ahead of others investing in an operating system that allowed it to partici- pate in world markets 24 hours a day. Its com- petence in systems has provided the company the means to differentiate itself from many fi- nancial service institutions.

Core competence is communication, in- volvement, and a deep commitment to work- ing across organizational boundaries. It in-

volves many levels of people and all functions. World-class research in, for example, lasers or ceramics can take place in corporate laborato- ries without having an impact on any of the businesses of the company. The skills that to- gether constitute core competence must coa- lesce 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 inter- esting ways.

Core competence does not diminish with use. Unlike physical assets, which do deterio- rate over time, competencies are enhanced as they are applied and shared. But competencies still need to be nurtured and protected; knowl- edge fades if it is not used. Competencies are the glue that binds existing businesses. They are also the engine for new business develop- ment. Patterns of diversification and market

ots of Competitiveness

tence Competence

Competence

Core Product 2

Core Product 1

1 2 3 4 5 6 7 8 9 10 11 12

Business

End Products

ows from its roots. Core products are nourished by competencies and engender business units, whose fruit are

1990 page 5 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

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 ‘‘Post- 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 adhe- sives and devised various ways to combine them. Indeed, 3M has invested consistently in them. What seems to be an extremely diversi- fied portfolio of businesses belies a few shared core competencies.

In contrast, there are major companies that have had the potential to build core competen- cies but failed to do so because top manage- ment was unable to conceive of the company as anything other than a collection of discrete businesses. GE sold much of its consumer elec- tronics 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 Thom- son, which was eager to build its competence in microelectronics and had learned from the Jap- anese that a position in consumer electronics was vital to this challenge.

Management trapped in the strategic busi- ness unit (SBU) mind-set almost inevitably finds its individual businesses dependent on ex- ternal sources for critical components, such as motors or compressors. But these are not just components. They are core products that con- tribute to the competitiveness of a wide range of end products. They are the physical embodi- ments of core competencies.

How Not to Think of Competence Since companies are in a race to build the competencies that determine global leader- ship, 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 semi- conductors and to have a thriving consumer

electronics business. But looks are deceiving. In NEC, digital tech-

nology, especially VLSI and systems integra- tion skills, is fundamental. In the core compe- tencies underlying them, disparate businesses become coherent. It is Honda’s core compe- tence 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 micropro- cessor 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) compe- tence, 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 cam- corders when it first began exploring videotape technologies.

Unlike the battle for global brand domi- nance, which is visible in the world’s broadcast and print media and is aimed at building global ‘‘share of mind,’’ the battle 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 competi- tors’ products, yet how many managers untan- gle the web of alliances their Japanese compet- itors 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 ex- ecutives discuss the crucial distinction between competitive strategy at the level of a business and competitive strategy at the level of an en- tire company?

Let us be clear. Cultivating core competence does not mean outspending rivals on research and development. In 1983, when Canon sur- passed Xerox in worldwide unit market share in the copier business, its R&D budget in repro- graphics 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.

90 page 6 of 15

The Core Competence of the Corporation

harvard business review • may–june

Nor does core competence mean shared costs, as when two or more SBUs use a com- mon 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 ef- fort 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 ambi- tious 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 nontradi- tional ways. (Of course, decisions about compe- tencies do provide a logic for vertical integra- tion. 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 dis- play systems, for example, enables a company to participate in such diverse businesses as cal- culators, miniature TV sets, monitors for lap- top computers, and automotive dash- boards—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 bene- fits of the end product. Clearly, Honda’s en- gine expertise fills this bill.

Finally, a core competence should be diffi- cult for competitors to imitate. And it will be difficult if it is a complex harmonization of indi- vidual 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 coordi- nation and learning. JVC’s decision in the early 1960s to pursue the development of a video- tape competence passed the three tests out- lined here. RCA’s decision 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 pro- duced 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, 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 competi- tiveness, their own and their competitors’, pri- marily 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 prod- ucts cannot be ‘‘rented in’’ by outsourcing and OEM-supply relationships. In our view, too many companies have unwittingly surrendered core competencies when they cut internal in- vestment in what they mistakenly thought were just ‘‘cost centers’’ in favor of outside sup- pliers.

Consider Chrysler. Unlike Honda, it has tended to view engines and power trains as sim- ply 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 yield- ing manufacturing responsibility, much less de- sign, 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 For- mula One auto racing. Honda has been able to pool its engine-related technologies; it has par- layed these into a corporatewide 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 com- pany to have a competitive product line up but be a laggard in developing core competen- cies—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 pri- vate label. But when fundamental technologies

1990 page 7 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

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 in- vestments in marketing and distribution, could be vulnerable. Outsourcing can provide a short- cut to a more competitive product, but it typi- cally 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 com- panies 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—the travel, a pool of dedicated people, test-bed facil- ities, time to internalize and test what has been learned.2 A company may not make this effort if it doesn’t have clear goals for competence building.

Another way of losing is forgoing opportuni- ties to establish competencies that are evolving in existing businesses. In the 1970s and 1980s, many American and European companies— like GE, Motorola, GTE, Thorn, and GEC— chose to exit the color television business, which they regarded as mature. If by ‘‘mature’’ they meant that they had run out of new prod- uct 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 opportuni- ties to enhance and apply video-based compe- tencies had been exhausted.

In ridding themselves of their television businesses, these companies failed to distin- guish between divesting the business and de- stroying their video media-based competen- cies. 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, consid- ered by many U.S. companies in the 1970s to be unattractive, is today the focus of a fierce pub- lic policy debate about the inability of U.S. cor- porations to benefit from the $20-billion-a-year opportunity that HDTV will represent in the mid- to late 1990s. Ironically, the U.S. govern- ment is being asked to fund a massive research project—in effect, to compensate U.S. compa-

nies 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 compe- tencies intact and is currently challenging Mat- sushita 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 improve- ment and enhancement that may span a de- cade or longer, a company that has failed to in- vest in core competence building will find it very difficult to enter an emerging market, un- less, 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 techni- cal 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 embodi- ments of one or more core competencies. Honda’s engines, for example, are core prod- ucts, linchpins between design and develop- ment skills that ultimately lead to a prolifera- tion 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).

90 page 8 of 15

The Core Competence of the Corporation

harvard business review • may–june

Canon is reputed to have an 84% world man- ufacturing share in desktop laser printer ‘‘en- gines,’’ even though its brand share in the laser printer business is minuscule. Similarly, Mat- sushita has a world manufacturing share of about 45% in key VCR components, far in ex- cess of its brand share (Panasonic, JVC, and oth- ers) 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 be- tween 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 leader- ship 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 com- pactness and ease of use, as with Sony’s micro- motors 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 prod- ucts for a wide variety of external (and inter- nal) customers yields the revenue and market feedback that, at least partly, determines the pace at which core competencies can be en- hanced and extended. This thinking was be- hind JVC’s decision in the mid-1970s to estab- lish VCR supply relationships with leading national consumer electronics companies in Europe and the United States. In supplying Th- omson, Thorn, and Telefunken (all indepen- dent 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 net- work of OEM relationships that would have al- lowed it to accelerate the refinement of its vid- eotape competence through the sale of core products.)

JVC’s success has not been lost on Korean companies like Goldstar, Sam Sung, Kia, and Daewoo, who are building core product leader- ship in areas as diverse as displays, semiconduc-

tors, and automotive engines through their OEM-supply contracts with Western compa- nies. Their avowed goal is to capture invest- ment initiative away from potential competi- tors, often U.S. companies. In doing so, they accelerate their competence-building efforts while ‘‘hollowing out’’ their competitors. By fo- cusing on 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 sup- pliers 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 evolu- tion 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 com- puter-peripheral business in optical-media stor- age. As a company multiplies the number of ap- plication arenas for its core products, it can consistently reduce the cost, time, and risk in new product development. In short, well-tar- geted core products can lead to economies of scale and scope.

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 prima- rily domestic (GE versus Westinghouse, Gen- eral Motors versus Ford) and all the key play- ers were speaking the language of the same business schools and consultancies. Old pre- scriptions have potentially toxic side effects. The need for new principles is most obvious in companies organized exclusively according to the logic of SBUs. The implications of the two alternate concepts of the corporation are sum- marized in ‘‘Two Concepts of the Corporation: SBU or Core Competence.’’

Obviously, diversified corporations have a portfolio of products and a portfolio of busi- nesses. 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

1990 page 9 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

Two Concepts of the C

Basis for competition

Corporate structure

Status of the business unit

Resource allocation

Value added of top managem

to build competencies, but their top manage- ment often lacks the vision to build them and the administrative means for assembling re- sources spread across multiple businesses. A shift in commitment will inevitably influence patterns of diversification, skill deployment, re- source 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 tech- nologies yet still lose the race to build core com- petence leadership. If a company is winning the race to build core competencies (as op- posed to building leadership in a few technolo- gies), it will almost certainly outpace rivals in new business development. If a company is winning the race to capture world manufactur- ing share in core products, it will probably out- pace rivals in improving product features and the price/performance ratio.

Determining whether one is winning or los- ing end product battles is more difficult be- cause measures of product market share do not necessarily reflect various companies’ underly- ing competitiveness. Indeed, companies that attempt to build market share by relying on the competitiveness of others, rather than invest- ing in core competencies and world core-prod- uct leadership, may be treading on quicksand. In the race for global brand dominance, compa- nies like 3M, Black & Decker, Canon, Honda, NEC, and Citicorp have built global brand um- brellas by proliferating products out of their core competencies. This has allowed their indi-

vidual businesses to build image, customer loy- alty, and access to distribution channels.

When you think about this reconceptualiza- tion of the corporation, the primacy of the SBU—an organizational dogma for a genera- tion—is now clearly an anachronism. Where the SBU is an article of faith, resistance to the seductions of decentralization can seem hereti- cal. 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 manage- ment. What are the costs of this distortion?

Underinvestment in Developing Core Compe- tencies and Core Products. When the organiza- tion 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 compe- tence. In the absence of a more comprehen- sive view imposed by corporate management, SBU managers will tend to underinvest. Re- cently, companies such as Kodak and Philips have recognized this as a potential problem and have begun searching for new organiza- tional forms that will allow them to develop and manufacture core products for both inter- nal 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 in core compe- tence. They’ve failed to pursue OEM-supply op- portunities or to look across their various prod-

orporation: SBU or Core Competence

SBU Core Competence

Competitiveness of today's products Interfirm competition to build competencies

Portfolio of businesses related in product- Portfolio of competencies, core products, and market terms businesses

Autonomy is sacrosanct; the SBU “owns” all SBU is a potential reservoir of core resources other than cash competencies

Discrete businesses are the unit of analysis; Businesses and competencies are the unit of capital is allocated business by business analysis: top management allocates capital

and talent

ent Optimizing corporate returns through capital Enunciating strategic architecture and allocation trade-offs among businesses building competencies to secure the future

90 page 10 of 15

The Core Competence of the Corporation

harvard business review • may–june

uct divisions in an attempt to identify opportunities for coordinated initiatives.

Imprisoned Resources. As an SBU evolves, it often develops unique competencies. Typi- cally, the people who embody this compe- tence are seen as the sole property of the busi- ness in which they grew up. The manager of another SBU who asks to borrow talented peo- ple is likely to get a cold rebuff. SBU managers are not only unwilling to lend their compe- tence carriers but they may actually hide tal- ent 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 mat- tresses. 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 com- pose core competencies but could move them much quicker from one business unit to an- other. 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 op- portunities.

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 com- panies like Canon afford to compete with in- dustry giants like Xerox. How strange that SBU managers, who are perfectly willing to com- pete for cash in the capital budgeting process, are unwilling to compete for people—the com- pany’s most precious asset. We find it ironic that top management devotes so much atten- tion to the capital budgeting process yet typi- cally has no comparable mechanism for allocat- ing the human skills that embody core competencies. Top managers are seldom able to look four or five levels down into the organi- zation, identify the people who embody critical competencies, and move them across organiza- tional boundaries.

Bounded Innovation. If core competencies

are not recognized, individual SBUs will pur- sue only those innovation opportunities that are close at hand—marginal product-line ex- tensions or geographic expansions. Hybrid op- portunities like fax machines, laptop comput- ers, 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 corpora- tion in terms of core competencies widens the domain of innovation.

Developing Strategic Architecture The fragmentation of core competencies be- comes inevitable when a diversified com- pany’s information systems, patterns of com- munication, career paths, managerial rewards, and processes of strategy develop- ment do not transcend SBU lines. We believe that senior management should spend a sig- nificant amount of its time developing a cor- poratewide strategic architecture that estab- lishes objectives for competence building. A strategic architecture is a road map of the fu- ture 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 strategic architecture like NEC’s C&C can dramatically reduce the investment needed to secure future market leadership. How can a company make partnerships intelli- gently without a clear understanding of the core competencies it is trying to build and those it is attempting to prevent from being un- intentionally transferred?

Of course, all of this begs the question of what a strategic architecture should look like. The answer will be different for every com- pany. 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 competitive- ness 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

1990 page 11 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

Vickers Learns

The idea that top management sh velop a corporate strategy for acqui deploying core competencies is r new in most U.S. companies. There exceptions. An early convert was (previously Libbey Owens Ford), a based corporation, which enjoys wide position in power and motion and engineered plastics. One of its m visions is Vickers, a premier suppli draulics components like valves, pu tuators, and filtration devices to ae marine, defense, automotive, earth and industrial markets.

Vickers saw the potential for a mation of its traditional business application of electronics disciplines bination with its traditional techn The goal was ‘‘to ensure that change nology does not displace Vickers customers.’’ This, to be sure, was i defensive move: Vickers recognized less it acquired new skills, it could tect existing markets or capitalize growth opportunities. Managers a attempted to conceptualize the like tion of (a) technologies relevant power and motion control busin functionalities that would satisfy e customer needs, and (c) new comp needed to creatively manage the m of technology and customer needs.

Despite pressure for short-term e top management looked to a 10- to time horizon in developing a map o ing customer needs, changing techn and the core competencies that w necessary to bridge the gap betw two. Its slogan was ‘‘Into the 21st C (A simplified version of the overall ture developed is shown here.) V

and market diversification, moreover. An SBU manager would be asked: Does the new market opportunity add to the overall goal of becom- ing 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 ‘‘Vickers Learns the Value

of Strategic Architecture’’). The strategic architecture should make re-

source 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 se- nior management to maintain consistency. In short, it yields a definition of the company and

the Value of Strategic Architecture ould de- ring and elatively are a few Trinova

Toledo- a world- controls

ajor di- er of hy- mps, ac- rospace, -moving,

transfor- with the in com- ologies. in tech- from its nitially a that un- not pro-

on new t Vickers ly evolu- to the ess, (b)

merging etencies arriage

arnings, 15-year

f emerg- ologies, ould be een the entury.’’ architec- ickers is

currently in fluid-power components. The architecture identifies two additional com- petencies, electric-power components and electronic controls. A systems integration ca- pability that would unite hardware, soft- ware, and service was also targeted for devel- opment.

The strategic architecture, as illustrated by the Vickers example, is not a forecast of specific products or specific technologies but a broad map of the evolving linkages between customer functionality requirements, potential technologies, and core competencies. It as- sumes that products and systems cannot be defined with certainty for the future but that preempting com- petitors in the development of new markets requires an early start to building core competencies. The strategic architecture developed by Vickers, while describing the future in competence terms, also provides the basis for making ‘‘here and now’’ decisions about prod- uct priorities, acquisitions, alliances, and recruitment.

Since 1986, Vickers has made more than ten clearly targeted acquisitions, each one focused on a specific component or technology gap identified in the overall architecture. The architec- ture is also the basis for in- ternal development of new competencies. Vickers has

undertaken, in parallel, a reorganization to enable the integration of electronics and electrical capabilities with mechanical- based competencies. We believe that it will take another two to three years before Vick- ers reaps the total benefits from developing the strategic architecture, communicating it widely to all its employees, customers, and investors, and building administrative sys- tems consistent with the architecture.

Vickers Map of Competencies Electronic Controls

Valve amplifiers Logic

Motion Complete machine

and vehicle

Systems Packages Components Service Offering

Training

Focus Markets Factory automation Automotive systems

Plastic process

Off-highway Commercial aircraft

Military aircraft

Missiles/Space Defense vehicles

Marine

Electric Power AC/DC Servo

Stepper

Electric Products Actuators

Fan packages Generators

Electrohydraulic Pumps

Control valves Cartridge valves

Actuators Package systems

Pneumatic products Fuel/Fluid transfer

Filtration

Sensors Valve/Pump

Actuator Machine

System Engineering Application focus Power/Motion

Control Electronics Software

Fluid Power

90 page 12 of 15

The Core Competence of the Corporation

harvard business review • may–june

Core Com

Basic camera Compact fashi Electronic cam EOS autofocus V ideo still cam Laser beam pri Color video pr Bubble jet prin Basic fax Laser fax Calculator Plain paper co Battery PPC Color copier Laser copier Color laser cop NAVI Still video syste Laser imager Cell analyzer Mask aligners Stepper aligne Excimer laser a

Every Canon p

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 pro- vide a distinct competitive advantage.

It is consistency of resource allocation and the development of an administrative infra- structure appropriate to it that breathes life into a strategic architecture and creates a man- agerial 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 archi- tecture cannot be copied easily or overnight by competitors. Strategic architecture is a tool for communicating with customers and other ex- ternal constituents. It reveals the broad direc- tion 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 compe- tencies in the same way they bid for capital. We’ve made this point glancingly. It is impor- tant enough to consider more deeply.

Once top management (with the help of di- visional and SBU managers) has identified overarching competencies, it must ask busi- nesses to identify the projects and people closely connected with them. Corporate offic- ers should direct an audit of the location, num- ber, and quality of the people who embody competence.

This sends an important signal to middle managers: core competencies are corporate re- sources 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 SBU man- agement can demonstrate that the opportunity 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 strate- gic planning or budgeting process, unit manag- ers must justify their hold on the people who carry the company’s core competencies.

Elements of Canon’s core competence in op- tics are spread across businesses as diverse as cameras, copiers, and semiconductor litho- graphic equipment and are shown in ‘‘Core Competencies at Canon.’’ When Canon identi- fied an opportunity in digital laser printers, it gave SBU managers the right to raid other SBUs to pull together the required pool of tal- ent. When Canon’s reprographics products di- vision undertook to develop microprocessor- controlled copiers, it turned to the photo prod- ucts 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 sel- dom cross SBU boundaries engender patterns of behavior among unit managers that are de- structively competitive. At NEC, divisional managers come together to identify next-gen- eration competencies. Together they decide how much investment needs to be made to build up each future competency and the con- tribution in capital and staff support that each

petencies at Canon

Precision Fine Micro- Mechanics Optics electronics

on camera era camera era nter inter ter

pier

ier

rs ligners

roduct is the result of at least one core competency

1990 page 13 of 15

The Core Competence of the Corporation

harvard business review • may–june 19

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 sur- render key people if only the other business (or the general manager of that business who may be a competitor for promotion) is going to ben- efit 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 com- petence must be recorded and appreciated in the corporate memory. It is reasonable to ex- pect a business that has surrendered core skills on behalf of corporate opportunities in other areas to lose, for a time, some of its competi- tiveness. If these losses in performance bring immediate censure, SBUs will be unlikely to as- sent to skills transfers next time.

Finally, there are ways to wean key employ- ees off the idea that they belong in perpetuity to any particular business. Early in their ca- reers, people may be exposed to a variety of businesses through a carefully planned rota- tion program. At Canon, critical people move regularly between the camera business and the copier business and between the copier busi- ness and the professional optical-products busi- ness. In mid-career, periodic assignments to cross-divisional project teams may be neces- sary, both for diffusing core competencies and for loosening the bonds that might tie an indi- vidual to one business even when brighter op- portunities beckon elsewhere. Those who em- body critical core competencies should know that their careers are tracked and guided by corporate human resource professionals. In the early 1980s at Canon, all engineers under 30 were invited to apply for membership on a

seven-person committee that was to spend two years plotting Canon’s future direction, includ- ing its strategic architecture.

Competence carriers should be regularly brought together from across the corporation to trade notes and ideas. The goal is to build a strong feeling of community among these peo- ple. To a great extent, their loyalty should be to the integrity of the core competence area they represent and not just to particular businesses. In traveling regularly, talking frequently to cus- tomers, and meeting with peers, competence carriers may be encouraged to discover new market opportunities.

Core competencies are the wellspring of new business development. They should con- stitute the focus for strategy at the corporate level. Managers have to win manufacturing leadership in core products and capture global share through brand-building programs aimed at exploiting economies of scope. Only if the company is conceived of as a hierarchy of core competencies, core products, and mar- ket-focused business units will it be fit to fight.

Nor can top management be just another layer of accounting consolidation, which it often is in a regime of radical decentralization. Top management must add value by enunciat- ing the strategic architecture that guides the competence acquisition process. We believe an obsession with competence building will char- acterize the global winners of the 1990s. With the decade underway, the time for rethinking the concept of the corporation is already over- due.

1. For a fuller discussion, see our article, ‘‘Strategic Intent’’ HBR May–June 1989, p. 63.

2. ‘‘Collaborate with Your Competitors and Win,’’ HBR Jan- uary–February 1989, p. 133, with Yves L. Doz.

Reprint 90311; Harvard Business Review OnPoint 6528 To order, see the next page or call 800-988-0886 or 617-783-7500 or go to www.hbr.org

90 page 14 of 15

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=90311

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=6528

http://www.hbr.org

The Core Competence of the Corporation