1. The Core Competence of the
Corporation
P R A H A L A D , C . K . , G A R Y H A M E L ( 1 9 9 0 ) , “ T H E
C O R E C O M P E T E N C E O F T H E C O R P O R A T I O N , ”
H A R V A R D B U S I N E S S R E V I E W , M A Y - J U N E ,
7 9 - 9 1 .
2. Authors
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”
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
Gary Hamel
1954 - Present
Coimbatore K. Prahalad
1941-2010
3. 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
4. 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
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
5. 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)
6. 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”
7. 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:
Canon, Honda outpaced rivals
Sony, Casio, Yamaha invented new devices
Consolidating corporate-wide technologies and
resources into competencies is the key to success
8. Diversified corporation as a large tree
Trunk and Major Limbs = Core Products
Leaves, Flowers and Fruit = End Products
Root System = Core Competency
provides nourishment, sustenance and
stability
10. Core Competence
Core competence is….
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.
11. 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
12. 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
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)
13. Core Competencies Core Products End Products
Build world
leadership in the
design and
development of a
particular class of
product
functionality
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
From Core Competencies to Core Products
15. 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
17. 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
19. Redeploying to Exploit Competencies
Identify competencies and the projects and people
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.
21. 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?
22. 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?
