The Core Competence of the
Corporation
PRAHALAD, C.K., GARY HAMEL (1990), “THE
CORE COMPETENCE OF THE CORPORATION,”
HARVARD BUSINESS REVIEW, MAY-JUNE,
79-91.
Authors
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Graduate of Harvard School of Business
Professor at Univ. of Michigan School of Business
Advocate of Core Competency Focus for Businesses
Business Consultant
HBR-“He was one of the foremost business thinkers of our
time”
Coimbatore K. Prahalad
1941-2010
Graduate of University of Michigan School of Business
 Visiting Professor of London Business School
 Ranked as the “World’s most influential business
thinker” by the Wall Street Journal
 Business Consultant and Media Contributor
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Gary Hamel
1954 - Present
Background
 A turbulent time:
 1987 – stock market crash
 1989 – Berlin Wall fell
 1990 – dissolution of the Soviet Union
 1970’s- 1980’s: unchecked growth in corporations
 Becoming large, inefficient conglomerates
 Acquired what they “needed”: strategic business units (SBUs)
 US Corporate (philosophical) Growth
 1980s- SBUs
 1990s-Core Competence
 2001-Networking
Outline of the Article
The article emphasizes the importance of core
competence of a corporation and asks management to
develop their organization based on core competence
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Rethinking the Corporation
The Roots of Competitive Advantage
How Not to Think of Competence
Identifying Core Competencies – And Losing Them
From Core Competencies to Core Products
The Tyranny of the SBU
Developing Strategic Architecture
Redeploying to Exploit Competencies
Rethinking the Corporation
“The critical task for management is to create an
organization capable of infusing products with
irresistible functionality or, better yet, creating
products that customers but have not yet even
imagined.” (P&H-p.80)
GTE vs. NEC Example
GTE
NEC
Industry
Position 1980
• Sales $9.98B, Net Cash Flow $1.73B
• Well positioned to become major player in
information technology industry
• Active in telecommunications
• Sales $3.8 B
• Comparable technological base and computer
business
• No experience in telecommunications
Management
Concepts
• No strategic intent or architecture Senior
Managers continued to function as
individual business units
• Strategic Focus to bridge gap between
telecommunications and office automation
• Core Competency - Semiconductors
• “C&C” – Computing and Communications
Committee
Business Moves
• Divested Sylvania TV and Telenet
• Joint Ventures for switching, transmission
and digital PABX Closed down
semiconductors
• Consolidated position in mainframe
computers
• Moved beyond switching and transmission to
include mobile phones, fax machines
Execution
• Increasingly dependent on outsiders for
critical skills
• Used collaborative arrangements
(strategic alliances) to build knowledge
Industry
Position 1988
• Sales $16.46B
• Telephone operating company with position
in defense and lighting
• Sales $21.89 B
• World leader in semiconductors and first-tier
in telecommunications
Result
“Portfolio of Businesses”
“Portfolio of Competencies”
Roots of Competitive Advantage
 “The diversified corporation is a large tree.... The
root system that provides nourishment, sustenance,
and stability is the core competence.” (P&H-p. 82)
 Companies using competencies experience rapid
growth:
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Canon, Honda outpaced rivals
Sony, Casio, Yamaha invented new devices
 Consolidating corporate-wide technologies and
resources into competencies is the key to success
Diversified corporation as a large tree
Leaves, Flowers and Fruit = End Products
Trunk and Major Limbs = Core Products
Root System = Core Competency
provides nourishment, sustenance and
stability
The Root of Competitiveness
Core Competence
 Core competence is….
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the collective learning in the organization
a bundle of skills integrated to make a company unique
the organizational culture based on people, their skills and
knowledge make a company competitive
the engine for new business development
created from the coordination, integration and harmonization of
diverse skills and multiple streams of technologies
communication, involvement, and working across
organizational boundaries
 Unlike physical assets, competencies do not deteriorate as
they are applied and shared. They grow.
How Not to Think of Competence
 Companies consider themselves as bundles of
product making businesses (remember Marketing
Myopia!) and is focused on price/performance
attributes of current products
 Building core competencies is different from
integrating vertically….have no detailed plan on
what, where, how to build an organization
 Cultivating core competence does not mean
outspending rivals on R&D or getting businesses to
become more vertically integrated
Identifying Core Competencies–And Losing Them
 At least three tests can be applied to identify core
competencies in a company. They are:
core competencies provide potential access to a variety of
markets
 make a significant contribution to perceived customer
benefits of the end product
 should be difficult for competitors to imitate
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 Core competency can be lost…
 through outsourcing (Honda vs. Chrysler)
 by giving up opportunities to establish competencies of
existing businesses (color television perceived as a mature
product)
From Core Competencies to Core Products
Core Competencies
Build world
leadership in the
design and
development of a
particular class of
product
functionality
Core Products
End Products
Embed
competencies in
core products.
Maximize the
world
manufacturing
share in core
products -> shape
the evolutions of
end products
First, build up
advantages in
component
markets. Then,
leverage off
superior products
to build brand
share
Smartphones
Laptops
Gaming
End Products
TV’s
Cameras
The Tyranny of the SBU
 What is a Strategic Business Unit (SBU)?
 US Corporate (philosophical) Growth
 1980s- SBUs
 1990s-Core Competence
 2000s-Networking
 Ineffectiveness of SBU model
 Underinvestment in developing core competencies or core
products
 Imprisoned Resources
 Bounded Innovation
SBU vs. Core Competence
Two Concepts of the Corporation:
SBU or Core Competence
Basic for competition
Corporate structure
Status of the business unit
Resource allocation
Value added of top management
SBU
Competitiveness of today’s products
Portfolio of businesses related in productmarket terms
Autonomy is sacrosanct, the SBU “owns” all
resources other than cash
Core Competence
Interfirm competition to build competencies
Portfolio of competencies, core products,
and businesses
SBU is potential reservoir of core
competencies
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
Optimizing corporate returns through capital Enunciating strategic architecture and
allocation trade-offs among businesses
building competencies to secure the future
Figure source: Prahalad, C.K., Hamel, G. (1990). “ The Core Competence of the Corporation”. Harvard Business Review, 86.
Developing Strategic Architecture
 A strategic architecture is a road map of the future that
identifies core competencies to build and their constituent
technologies. A strategic architecture should aim at
building competencies. Training helps.
 Creates a managerial culture of team work, capacity to
change, and willingness to share resources
 Protects proprietary skills, offers consistency in resource
allocation and allows us to think long term around that
 Reduces the investment needed to secure future market
leadership
 Provides logic for product and market diversification
Strategic Architecture
The Strategic
Architecture
should make
resource
allocation
priorities
transparent
to the whole
organization
Redeploying to Exploit Competencies
 Identify competencies and the projects and people
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connected with them.
Recognize that core competencies are corporate recourses
and may be reallocated as needed.
Divisional managers come together and decide the needed
investment to build each competency.
Cooperative SBU managers must be recognized for their
team work.
Expose people by using a rotation program.
End goal: Strong feeling of community and customer focus.
Core Competencies at Canon
Conclusion
 A very timely article, a radical breakthrough in
management thinking
 Sustaining core competence-what can be done
 Individual vs. national core competence-do we really
have any?
Discussion Questions
 What is a “core competence” of a corporation? Why
core competencies do not diminish in an
organization?
 What do the authors mean by “the tyranny of the
SBU?” In what ways the two concepts of the
corporation, SBU and core competence, differ?
Explain.
 What would be your (individual) core competence?
How would you relate that to your personal
development and goals in life?