The Core Competence of the Corporation

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Presented by:

Perspective of Core Competence

Concept of Core Competence :- C. K. Prahalad

Professor of corporate strategy and international business at University of Michigan.

Gary Hamel: Lecturer in business and policy

management at London Business School.

Introduction: Main Idea

Idea: The evolution of global management and the emergence/importance of Competency-minded management Rethinking the Corporation The Roots of Competitive Advantage Identifying Core Competencies – And

Losing Them The Tyranny of the SBU Developing Strategic Architecture

Core Competence

What is Core Competence??

Core Competence is :

a bundle of skills integrated to make a company unique.

the engine for new business development, underlying component of a company’s competitive advantage.

created from the coordination, integration and harmonization of diverse skills and multiple streams of technologies.

Video by Prahlad

http://www.youtube.com/watch?v=WfP-VICbLRA

Rethinking the Corporation

Build product for customers need but have not yet even imagined.

Requires radical change in the management of major companies.

Understand the changing basis for global leadership.

Analyze the Case

Strategic architecture: to exploit the convergence of computing and communicating(“C & C”).

Acquired competencies in semiconductors.

Used collaborative arrangements to multiply internal resources.

Now a world leader in consumer electronics

Image source: NEC

GTE

No strategic Architecture existed. Decentralization made it difficult to

focus on core competence. Senior managers worked as if they

were managing independent business unit.

No mutual decision was made.

Roots of Competitive Advantage

Portfolio of companies versus portfolio of Business: Canon(personal copiers), Honda(from

bikes to four wheelers). Sony, Casio, Yamaha,Komatsu invented

new devices. Consolidating corporate-wide

technologies and resources into competencies.

Cont..

In Short Run companies,its competitiveness derives from price/performance attributes of current products.

In Long Run companies,its competitiveness derives from an ability to build at lower cost and more speedily than competitors.

Western companies “stuck” in old mentality.

Diversified corporation is a “large tree”.

Identifying Core Competencies – And losing them

How to identify: Accessibility: provide potential access to

a variety of markets Value-creation: make a significant

contribution to perceived customer benefits of the end product

Uniqueness: Be difficult for competitors to imitate

Identifying Core Competencies – And losing them

How to lose:A Core Competency is lost:

Through outsourcing/OEM-supply relationships

=> Example: Chrysler vs Honda Through giving up opportunities to

establish competencies that are evolving in existing businesses

=> Example: television business

The Tyranny of the SBUTwo Concepts of the Corporation: SBU or Core Competence SBU Core Competence Basic 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 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

Figure source: Prahalad, C.K., Hamel, G. (1990). “ The Core Competence of the Corporation”. Harvard Business Review, 86.

The Tyranny of the SBU

The ineffectiveness of SBU model: Underinvestment in Developing Core

Competencies and Core Products Imprisoned Resources Bounded Innovation A shift in management is inevitable.

Developing Strategic Architecture

A strategic architecture: Establish objectives for competence building A road map of the future that identifies which

core competencies to build and related technologies

Create a managerial culture, team work, a capacity to change, and a willingness to share resources, to protect proprietary skills, and to think long term

Consistency of resource allocation, administrative infrastructure

Developing Strategic Architecture

Benefits of Strategic Architecture Reduce the investment needed to secure

future market leadership Provide a logic for product and market

diversification

Developing Strategic Architecture

Management duties: To identify and commit to technical and

production linkages across SBUs that will provide a distinct competitive advantage. Top management: make resource

allocation priority decision Lower level of management: understand

and maintain consistency with top management’s decision and disciplines.

Vickers Learns the Value of Strategic Architecture

Redeploying to Exploit Competencies

SBUs should bid for core competencies in the same way they did for capital.

How to exploit: SBUs must defend why they need

certain talents SBUs must sacrifice short term in return

for long term benefits Rotation

Conclusion

The article is a radical breakthrough in management.

Strengths of the article: Timely, ground-breaking, forward-

looking Weakness of the article:

Difficult to read and understand fully