Core competence of corporation

C.K.Prahalad and Gary Hamel

 core competency
core competency is a specific factor that a business sees as
being central to the way it, or its employees, works. It fulfills
two key criteria:
• It is not easy for competitors to imitate
• It can be leveraged widely to many products and markets.
A core competency can take various forms, including
technical/subject matter know-how, a reliable process
and/or close relationships with customers and suppliers.[1] It
may also include product development or culture, such as
employee dedication.
 NEC vs. GTE - an excellent contrast

• NEC
– In early 70s, articulated strategic intent to exploit the convergence of computing and
communications.
– Success, management reckoned, would hinge on acquiring competencies, particularly
in semiconductors.
– Constituted a "C&C Committee" of top managers to oversee development of core
products and competencies.
– Put in place coordination groups and committees that cut across the interests of
individual businesses.
– Carefully Identified three interrelated streams of technological and market evolution.
– Reasoned computing, communications, and components businesses would so overlap
that it would be very hard distinguish among them, and there would be enormous
opportunities for a company that had built the competencies needed to serve all three
markets.
– Determined that semiconductors would be the company's most important "core
product."
NEC vs GTE - an excellent contrast
GTE
– No such clarity of strategic intent and strategic
architecture appeared to exist at GTE.
– No commonly accepted view of which competencies
would be required to compete in the information
technology industry was communicated widely.
– While significant staff work was done to identify key
technologies, senior line managers continued to act as if
they were managing independent business units.
– Decentralization made it difficult to concentrate on core
competencies.
 Core competence -- The roots of competitive
advantage
– In the short run, a company's competitiveness derives from the price/performance attributes of current
products.
–In the long run, competitiveness derives from the ability to build, at lower cost and more speedily than
competitors, the core competencies that spawn unanticipated products.
–Real sources of advantage are to be found in management's ability to consolidate corporate-wide
technologies and production skills into competencies that empower individual business to adapt quickly
to changing opportunities.
–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 fruit are end products. The root system that provides
nourishment, sustenance, and stability is the core competence.
–You can miss the strength of a competitor by looking only at their end products.
–Core competencies are the collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technologies.
–If core competence is about harmonizing streams of technology, it is also about the organization of work
and the delivery of value.
–Core competence does not diminish with use. Unlike physical assets, which deteriorate over time,
competencies are enhanced as they are applied and shared.
–Core competencies need to be nurtured and protected, as knowledge fades if it is not used.
–Competencies are the glue that binds existing businesses and also the engine for new business
development.
Roots of competitive Advantage
How not to think about competence
– Top management often tracks cost and quality of competitor products,
yet how many managers untangle the web of alliances their competitors
may have constructed to acquire competencies at low cost?  
– In how many Western boardrooms is there an explicit, shared
understanding of the competencies the company must build for
leadership?
– How many senior executives discuss the crucial distinction between
competitive strategy at the SBU level and competitive strategy at the
level of an entire company?
– Cultivating core competence does not mean outspending rivals on R&D
or sharing costs between SBUs.
– Building core competence is more ambitious and different than
integrating vertically.
 Identifying core competencies
Three tests can be applied to ID core competencies in a company:
• A core competence provides potential access to a wide variety
of markets. (e.g. Competence in display systems opens up to
TVs, calculators, monitors, auto dashboards.)

• A core competence should make a significant contribution to the

perceived customer benefits of the end products. (e.g. Honda's
engines fit this bill)

• A core competence should be difficult for competitors to

imitate. And it will be difficult if it is a complex harmonization of
individual technologies and production skills.
 Losing core competency
Two clear lessons to consider :
• First, the costs of losing a core competence can be only
partly calculated in advance. The baby may be thrown
out with the bath water in divestment decisions.
• Second, since core competencies are built through a
process of continuous improvement and enhancement
that can span a decade or longer, a company that has
failed to invest in core competence building will find it
very difficult to enter an emerging market, unless of
course, it will be content simply to serve as a distribution
channel.
From core competencies to core products
 3 different planes on which battles for global (or any business)
leadership are waged: core competence, core products, and end
products.
  Core products - the physical embodiment of one or more core
competencies.
Core products - the components or subassemblies that actually
contribute to the value of the end products.
Thinking in terms of core products forces a company to
distinguish between brand share it achieves in end product
markets and manufacturing share it achieves in any particular
core product.
To sustain leadership in chosen core competence areas, strongest
companies seek to maximize their world-manufacturing share in
core products.
From core competencies to core products
• Control over core products is critical for several reasons:
• Manufacture of core products for a wide variety of external(and internal)
customers yields revenue and market feedback that, at least partly, determines
the pace at which core competencies can be enhanced and extended.
• By focusing on competence and embedding it in core products, businesses can
build up advantages in component markets first and have them leveraged off their
superior products to move downstream to build brand share. And they are not
likely to remain low cost suppliers forever. As their reputation for brand leadership
is consolidated, they may well gain price leadership.
• A dominant position in core products allows a company to shape the evolution of
applications and end markets.
• As a company multiplies the number of application arenas for its core products, it
can consistently reduce the cost, time, and risk in new product development. In
short, well-targeted core products can lead to economies of scale and scope.
 The tyranny of the SBU
– Old prescriptions have toxic side effects. The need for new prescriptions is most
obvious in companies organized exclusively according to the logic of SBUs.
– A diversified corporation obviously has a portfolio of businesses and of products; but
we must also learn to think in terms of a portfolio of core competencies as well.
– US companies don't lack technical resources to build competencies, but top
management often lacks the vision to build them and the administrative means for
assembling resources spread across multiple businesses.
– It is important for a company to know whether it is winning or losing on each of the 3
planes of competition – core competence, core products, or end products. It can be
difficult to measure, as market share doesn't always indicate sustainability of a
position (e.g.--if you are relying on others core competence, rather than your own to
build an end product position, you could be in quick sand.)
– The primacy of the SBU -- an organizational dogma for a generation -- is now clearly
an anachronism. The SBU prism (in many companies) means that only one plane of
the global competitive battle, the battle to put competitive products on the shelf
today, is visible to top management.
Developing strategic architecture
– a. Fragmentation of core competencies becomes inevitable when a
diversified company's information systems, patterns of
communication, career paths, managerial rewards, and processes of
strategy development do not transcend SBU lines.
– b. Prahalad believes that senior management should spend a
significant amount of time developing a corporate-wide strategic
architecture that establishes objectives for competence building.
– c. A strategic architecture = a road map of the future that identifies
which core competencies to build and their constituent technologies.
– d. Key question for senior management: How can a company make
partnerships intelligently without a clear understanding of the core
competencies it is trying to build and those it is attempting to
prevent from being unintentionally transferred?
 Redeploying to exploit competencies
– a. Premise -- if core competencies are a company's critical resource and if top
management must ensure that CCs aren't held hostage by a particular unit, it follows
that SBU managers should bid for core competencies in the same way they bid for
capital.
– b. Once overarching competencies are ID'd by top management (with SBU help), they
must ID the projects and people connected with them. (A thorough audit.)
– c. This sends a clear message to middle managers: core competencies are corporate
resources and may be re-allocated by corporate management. Individual businesses
don't own the people. SBUs are entitled to the services of an individual so long as it can
be demonstrated that their utilization is yielding the highest possible pay-off.
– d. Progress enabling questions:
– i. Reward systems - how can they be adjusted to support this thinking?
– ii. How does senior management recognize the contribution of SBU managers who give
up the talent?
– iii. How does a corporation build into its thinking an allowance for a dip in performance
from the unit that gives up the talent? Censure in times like this can cause serious
damage.
•  
 The bottom line
– a. Core competencies are the wellspring of new
business development and should constitute the
focus for strategy at the corporate level.
– b. Only if a company is conceived of as a hierarchy
of core competencies, core products, and market-
focused business units, will it be fit to fight.
• c. In the final analysis--Top management adds
value by enunciating the strategic architecture
that guides the competence acquisition process
 Google- Core competency

• While google has many different products. its primary products are Search and Adwords. Adwords is what generates nearly all of their income.

In order to run a large scale search engine they have to crawl billions of webpages. store and index those pages, and be able to retrieve them in response to queries. It takes
tens of thousands of specially built PCs to do these tasks.

The ranking algorithm--part of the indexing processs- uses a huge matrix of webpage links from which every url gets a PageRank--a score that indicates how important the
page is, based on how many other quality site link to it. Hundreds of other factors are also included, and results only considered fromt the set of pages containing the words
in the search query (occasionally also abbreviations, homonyms, and spelling differences).

Adwords is somewhat similar, but instead of webpages, the documents are small ads created by companies. The companies bid for placement instead of ranking algorithms,
but they only show up in alongside relevant search results
• What is Google’s core competency? I would argue that it’s harvesting the value from massively scaled, complex human activity, i.e. millions of websites linking to each other
and hundreds of thousands of advertisers bidding on key word and experimenting with ad creative, clickthrough rates, and conversion rates. The other critical element of this
core competency is a natural feedback loop, e.g. the “relevancy” of a search results page or an online business’ cost of sales through paid search advertising.
• The reason that Google has struggled to apply this core competency to offline media, i.e. magazines, newspapers, and now TV, is that these media lack both the scaled of
activity and the natural feedback loop that enables Google to create efficiencies by harnessing these market dynamics.
• If you read Google’s press release about its new TV ad system, it’s clear that they are aiming to pump as much feedback data and activity into the system as possible:
• Advances in set-top-box technologies make it possible to report aggregate statistics on how many times an ad was viewed and whether it was watched through to the end.
As part of this trial, we will be working with partners to use aggregate, anonymized set-top-box metrics to deliver timely and accurate viewing reports. Advertisers can use
this data to understand the effectiveness of their TV ad campaigns and use this information to provide more relevant ads to viewers.
• The problem is that the “sensitivity” and “specificity” of the data and the scale of activity (i.e. number of advertisers using the system and the number of bids per advertiser)
don’t even begin to compare to what exists in search. First, the number of advertisers who will be able to create video ads is likely to be dwarfed for some time to come by
the number of advertisers who have created text ads. Second, the ability to track, at the individual user level, the performance of each text ad for each keyword AND,
critically, the ability to track that individual user’s behavior on a site AFTER they click doesn’t even begin to compare to “aggregate statistics on how many times an ad was
viewed and whether it was watched through to the end.”
• The irony here is that Google is running in the completely opposite direction with its cost-per-action advertising program, which provides the ultimate feedback loop.
• Back in the days of mass marketing of mass products, i.e. when everyone was a potential customer, TV was an immensely efficient medium because reaching everybody was
the objective. As consumer audiences and product target markets fragmented, TV became more and more inefficient, to the point where the entire system is now propped
up by the inertia of deeply entrenched economic interests. While Google will no doubt introduce greater efficiency into the TV ad sales system, it will have the net effect of
driving money out of the system.
• Of course, if that money is driven into the more efficient online marketing space, Google will ultimately be the beneficiary — perhaps the whole foray into offline media is all
a strategy to crush the competition from other media by completely disrupting each medium’s core advertising market, and thereby freeing up those dollars to flow into
Google’s online coffers.
• Rather than create new money-making machines, wouldn’t it be far more efficient for Google to find new ways to feed the one it already has?
 Apple Inc- Core competency

• Apple's core competency is innovative design and technology

•  
• It's no surprise that Apple (Nasdaq: AAPL) crushed its fourth-quarter earnings estimate. The company delivered earnings of $1.67 billion, up 47% from last year on an earnings-per-share basis. To
understand why Apple's crushed earnings predictions were no shock, take a look at the business model that telegraphed the punches behind what Apple called its most profitable quarter ever.

Think different
Apple's core competency is innovative design and technology. That's the spirit behind its famous "Think Different" ad campaign. Apple introduces products that truly wow the market. Think back
to the Macintosh in 1984 -- the first affordable computer with a graphical user interface (GUI). Today, the iPhone challenges the definition of a phone, by combining a portable digital media
player, Internet client, GPS navigator, camera, and ... um ... oh yeah, a phone. Not only does Apple wow consumers, but it changes the way we think about consumer electronics.

Buy different
Apple doesn't just want you to think differently about their products. It wants you to redefine the buying experience. Visit an Apple store, and you'd almost think that it was designed more to
create a clubhouse for Apple enthusiasts than to actually sell the company's products. Consumers enter a store, check out Apple's new products, attend a workshop, and sit in on a presentation
or in-store concert. Get immersed in the Apple culture, and when you're ready, Apple will sell you a piece of the experience to take with you. Microsoft (Nasdaq: MSFT) wants to create a similar
experience with its own chain of stores. Good luck with that, Mr. Softy.
• Lower the entry barrier
The real innovation of Apple's business model exposed itself when the company focused its core competencies on lower-priced products. Introductory Apple products like the iPod series have
had great mass-market appeal, which directly addressed the perception that Apple only catered to high-end markets. Instead of cannibalizing its high-end products with lower-cost product
offerings, Apple is capitalizing on an inverse effect.
• The cash machine
Apple sold 3.05 million Macs this quarter, an increase of 17% year over year. This increase can be attributed in part to the halo effect, and partly to customer switching costs associated with
Apple's iPod and iPhone customer base. Brand loyalty will keep growing as Apple continues to suck in the mass market through its introductory products.
• In addition, more and more customers continue to purchase proprietary digital media and apps for Apple's products. As of September, Apple has sold more than 8.5 billion songs through its
iTunes Store. On its latest conference call, the company also announced that users have downloaded 2 billion iPhone apps. How likely do you think these customers would be to ditch their
proprietary Apple digital media and apps for a competitor's product?
• Opportunities
Apple's business model is as innovative as its products. The company is a dominant force in the consumer electronics industry, but it still hasn't established a firm grip in global mobile market
share. With competitors like Research in Motion (Nasdaq: RIMM) looking to strengthen their foothold against Apple, and Verizon (NYSE: VZ) and Motorola (NYSE: MOT) on the attack with their
anticipated launch of the cryptic Droid smartphone, Apple will need to quickly increase its presence domestically and abroad to keep up its lofty growth rates. However, recent announcements
that mobile carriers like Vodafone (NYSE: VOD), Orange, and China Mobile (NYSE: CHL) will start carrying the iPhone are a good indication that Apple is priming its business for the rest of the
world. If Apple's iPhone can succeed beyond the U.S., you can be sure that any market-share gains will spill over to fuel continuing growth in its Macintosh line as well.
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