Idea 9 - Core competence (50 Management ideas you really need to know)

Idea 9 - Core competence

Michael Porter and his five forces of competition looked out across the corporate battlements to survey the competitive landscape beyond. Gary Hamel and C.K. Prahalad looked within, in search of the 'core competencies' that they argued were the true source of competitive advantage. It was time, they said, for top executives to rethink the concept of the corporation.
Hamel and Prahalad were reacting against the decentralized business portfolio strategy being followed by many large corporations. Instead of a portfolio of businesses, housed in more or less standalone 'strategic business units' (SBUs), companies should think of themselves as a portfolio of competences, they urged in a highly influential 1990 Harvard Business Review article, 'The core competence of the corporation'.
The industrial backdrop against which they were writing was one in which Western companies had begun to steady themselves against the low cost and high quality ofJapanese imports. But now their Japanese competitors were outflanking them with wave upon wave of new products in new markets. Honda had invented the four-wheel off-road buggy and Yamaha the digital piano. Sony was cutting a swathe with its 8 mm camcorder. In the automobile market Japanese manufacturers were leading the way with in-car navigation systems and electronic engine management systems. They were maintaining their cost and quality standards, but Western companies were catching up in this department, so these were less compelling sources of competitive advantage than they had been. The problem in many Western companies was not that they had worse management or less technical capability than the Japanese, Hamel and Prahalad insisted. It was that their top management lacked the vision to exploit the deep reservoirs of technological capability which they undoubtedly possessed.

A core competence is something that you do better than anyone else. Indeed, the large companies at which this theory is directed should be doing it to world-class standards. It produces a core product or an efficiency, which is not an end product, but is a vital component of a range of end products. Black & Decker's core competence is making small electric motors, for example. These sit at the heart of a wide range of end products, from chain saws and lawnmowers to vacuum cleaners and automatic can openers. Canon has core competencies in optics and precision mechanics, which it transferred hugely successfully from cameras to copiers and now laser printers. Honda's core competence is in engines and power trains, which gives it an advantage in making and selling cars, motorcycles, tractor mowers and generators. 3M is world class at stickiness.
Test of competence So core competencies open the way to many different markets. And as companies think about how to exploit these competencies, they are more likely to come up with innovations. Hamel and Prahalad laid down three tests to identify a core competence:
it provides potential access to a wide variety of markets;
it makes a significant contribution to perceived customer benefits of the end product;
it is difficult to imitate.
Being world class at making a rather ordinary component, something that many others produce, will not bestow competitive advantage. A core competence makes a disproportionate contribution to customer value and must be judged relative to the competition. It should be something your competitors wish they had. It is not about outspending your rivals in research and development. (One of the distinguishing practices of innovative Japanese manufacturers was the way in which they formed strategic alliances to obtain technologies or competencies they lacked.) It is not about shared costs between SBUs - they may be a result, but they shouldn't be a reason. And it is not about vertical integration though, again, some degree of vertical integration may result.
A firm is unlikely to have more than five or six basic competencies. If its list contains 20 items, it hasn't got the definition quite right. Companies can lose core competencies unknowingly in the name of cutting cost. Hamel and Prahalad saw how Chrysler regarded engines and power trains as just another component, which it often outsourced. They found it hard to imagine Honda surrendering manufacturing and design responsibility for so critical a part of a car's function. 'Outsourcing can provide a short cut to a more competitive product,' they observed, 'but it typically contributes little to building the people-embodied skills that are needed to retain product leadership.' Hamel and Prahalad saw decentralization and 'the tyranny of the SBU' as the enemy of core competence. In an organization made up of many SBUs, no single unit may feel responsible for nurturing core competence. SBUs tend to be locked in the present, concentrating on maximizing today's sales. While they may have built up competencies, they are often inclined to hoard them, and may be reluctant to lend talented people to another SBU to pursue new opportunities. If core competence is not shared or recognized, innovations flowing from SBUs will tend to be incremental.
Architects of the future Management's job, therefore, is to develop an organization-wide 'strategic architecture', a road map of the future that identifies which competencies to build and what technologies they need. Core competencies should become corporate resources and SBUs should have to bid for them just as they have to bid for capital resources. Reward systems and career paths should break out of SBU silos and key employees should be weaned off the idea that they belong to one particular business. Interestingly, one of the main planks of Jack Welch's famous General Electric makeover, well under way by this time, was the idea of the 'boundary less company'.
The diversified corporation, according to Hamel and Prahalad, is a large tree, with trunk and limbs as its core products, the smaller branches as business units and the leaves, flowers and fruit as the end products. The root system that nourishes, sustains and stabilizes is the core competence. If you look only at the leaves of a tree, they said, you won't notice its strength. In the same way, you may fail to see the strength of competitors if you look only at their end products.

Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling

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