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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