Micro-economics of Innovation
V
The Core Competence of the
Corporation
Prahalad & Hamel (1990)
GTE vs. NEC 1
• In the early 1980s, GTE was poised to be a
major player in IT industry, with a variety of
businesses including telephones, switching and
transmission systems, semiconductors, satellites
and defense systems.
• GTE’s entertainment products group produced
Sylvania color TVs & display technologies.
• In 1980 GTE’s sales were $9.98 billion and net
cash flow was $1.73 billion.
GTE vs. NEC 2
• In 1980 NEC’s sales were $3.8 billion.
• It had comparable technological base and computer
business, but no experience as telecom operating
company.
• In 1988, GTE’s sales were $16.46 billion and NEC’s
were $21.89 billion.
• GTE became a telecom operating company, with
positions in defense and lighting products. It divested all
other businesses.
• NEC emerged as a global leader in semiconductors and
in telecom products and computers. In telecom it went
beyond switching systems to mobile phones, fax, etc.
GTE vs. NEC 3
• NEC bridged the gap between telecom and
office automation.
• NEC was the only company in the world to be in
the top five in revenue in telecom,
semiconductors and mainframes.
• Why these differences between GTE & NEC?
• NEC conceived of itself in terms of ‘core
competencies’, and GTE in terms of ‘strategic
business units’ (SBU).
Rethinking the Corporation 1
• In the past, a diversified corporation could
look at its business units at particular end
product markets and try to become world
leaders in those businesses.
• With the market boundaries changing ever
more quickly, targets are elusive and
capture is at best temporary (e.g. digital
cameras, mobile phones).
Rethinking the Corporation 2
• In 1970s, NEC articulated a strategic intent to exploit the
convergence of ‘communications and computing’ (C&C).
• NEC constituted a ‘C&C Committee’ of top managers to
oversee the development of core products and core
competencies. It created the organizational architecture
to implement its strategy successfully. ‘Semiconductors’
to be the ‘core product’.
• Identified three inter-related streams of technological and
market evolution: 1) computing will evolve from
mainframes to distributed processing; 2) components
from simple ICs to VLSI; and 3) communications from
mechanical cross-bar exchange to digital systems
(ISDN).
Rethinking the Corporations 3
• NEC reasoned, the computing, communications, and
components businesses would overlap blurring the
distinction between them.
• NEC entered into strategic alliances (over 100 in 1987)
aimed at building competencies rapidly and at low cost,
with a goal of internalizing partner skills.
• Exhibit 1 Competencies: the roots of competitiveness.
• 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 fruits are end
products. The root system that provides nourishment is
the ‘core competence’.
Core Competencies 1
• Core competencies are the collective learning in the
organization, especially how to coordinate diverse
production skills and integrate multiple streams of
technologies.
• For example, Casio must harmonize know-how in
miniaturization, microprocessor design, material science
and ultra-thin precision casing – the same skills it applies
in its miniature card calculators, pocket TVs, and digital
watches.
• CC is also about the organization of work and the
delivery of value (e.g. to bring miniaturization to its
products, Sony must ensure that technologists,
engineers and marketers have a shared understanding
of customer needs and technological possibilities).
Core Competencies 2
• CC is communication, involvement and a deep
commitment to working across organizational
boundaries. It involves many levels of people and
functions.
• CC does not diminish with the use, but it still needs to be
nurtured and protected.
• CC is an engine for new business development. Patterns
of diversification and market entry may be guided by
them, not just by the attractiveness of markets (e.g. 3M’s
competence with ‘sticky tape’ led to Post-it notes,
magnetic tape, photographic film, pressure-sensitive
tapes, and coated abrasives).
Core Competencies 3
• Three tests can be applied to identify core competencies
in a company:
• 1) A CC provides potential access to a wide variety of
markets (e.g. competence in display systems).
• 2) A CC should make a significant contribution to the
perceived customer benefits of the end product (e.g.
Honda’s engine expertise).
• 3) A CC should be difficult for competitors to imitate. A
rival may acquire some of the technologies that comprise
the CC, but it will find it difficult to duplicate more or less
comprehensive pattern of internal coordination and
learning.
• Few companies are likely to build world leadership in
more than 5 or 6 fundamental competencies.
Core Competencies 4
• Chrysler, unlike Honda considered its engines and power
trains as simply another component and started
outsourcing. It became dependent on Mitsubishi and
Hyundai for engines (from 252,000 in 1985 to 382,000 in
1987 outsourced engines).
• The tangible link between core competencies and end
products is the core product – the physical embodiments
of one or more CCs.
• Core product thinking forces a firm to distinguish
between the brand share it achieves in end product
markets and the manufacturing share it achieves in any
particular core product (Cannon has 84% of world
manufacturing share in desktop laser printer ‘engines’,
while its brand share for laser printers is miniscule).
Core Competencies 5
• SBU thinking leads to:
• 1) underinvestment in developing CCs and
core products;
• 2) imprisoned resources (a CC remains
within the business unit);
• 3) bounded innovation.
Core Competencies 6
• Developing Strategic Architecture:
• A strategic architecture is a road map of the future that
identifies which CCs to build and their constituent
technologies (think of the firm like a tree). It provides a
logic for product and market diversification.
• Learning from alliances can reduce the time and costs
(e.g. NEC).
• Resource allocation priorities should be made
transparent to the entire organization.
• How long could we preserve our competitiveness in the
business, if we did not control this particular CC? How
central is this CC to perceived customer benefits? What
future opportunities would be lost if we lose this CC?
Core Competencies 7
• Redeploying to Exploit Competencies:
• CC should not be held hostage by any particular
business. SBU should bid for a CC the same way it does
for capital (top management).
• Send a signal to middle managers that CCs are
corporate resources and could be reallocated by the
corporate management.
• SBUs are entitled to the services of individual employees
so long as they show effective pay-off.
• The key employees should be weaned away from
thinking that they permanently belong to a particular
SBU.
• Exhibit 2 Cannon.