From Core Competencies to Core Products of the Firm

The tangible link between identified core competencies and end products is what we call the core products—the physical embodi- ments of one or more core competencies. Honda’s engines, for example, are core prod- ucts, linchpins between design and develop- ment skills that ultimately lead to a prolifera- tion of end products. Core products are 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 the brand share it achieves in end product markets (for example, 40% of the U.S. refrigerator market) and the manufacturing share it achieves in any particular core product (for example, 5% of the world share of compressor output).

Canon is reputed to have an 84% world man- ufacturing share in desktop laser printer ‘‘en- gines,’’ even though its brand share in the laser printer business is minuscule. Similarly, Mat- sushita has a world manufacturing share of about 45% in key VCR components, far in ex- cess of its brand share (Panasonic, JVC, and oth- ers) of 20%. And Matsushita has a commanding core product share in compressors worldwide, estimated at 40%, even though its brand share in both the air-conditioning and refrigerator businesses is quite small.

It is essential to make this distinction be- tween core competencies, core products, and end products because global competition is played out by different rules and for different stakes at each level. To build or defend leader- ship over the long term, a corporation will probably be a winner at each level. At the level of core competence, the goal is to build world leadership in the design and development of a particular class of product functionality—be it compact data storage and retrieval, as with Philips’s optical-media competence, or com- pactness and ease of use, as with Sony’s micro- motors and microprocessor controls.

To sustain leadership in their chosen core competence areas, these companies seek to maximize their world manufacturing share in core products. The manufacture of core prod- ucts for a wide variety of external (and inter- nal) customers yields the revenue and market feedback that, at least partly, determines the pace at which core competencies can be en- hanced and extended. This thinking was be- hind JVC’s decision in the mid-1970s to estab- lish VCR supply relationships with leading national consumer electronics companies in Europe and the United States. In supplying Th- omson, Thorn, and Telefunken (all indepen- dent companies at that time) as well as U.S. partners, JVC was able to gain the cash and the diversity of market experience that ultimately enabled it to outpace Philips and Sony. (Philips developed videotape competencies in parallel with JVC, but it failed to build a worldwide net- work of OEM relationships that would have al- lowed it to accelerate the refinement of its vid- eotape competence through the sale of core products.)

JVC’s success has not been lost on Korean companies like Goldstar, Sam Sung, Kia, and Daewoo, who are building core product leader- ship in areas as diverse as displays, semiconduc-tors, and automotive engines through their OEM-supply contracts with Western compa- nies. Their avowed goal is to capture invest- ment initiative away from potential competi- tors, often U.S. companies. In doing so, they accelerate their competence-building efforts while ‘‘hollowing out’’ their competitors. By fo- cusing on competence and embedding it in core products, Asian competitors have built up advantages in component markets first and have then leveraged off their superior products to move downstream to build brand share. And they are not likely to remain the low-cost sup- pliers forever. As their reputation for brand leadership is consolidated, they may well gain price leadership. Honda has proven this with its Acura line, and other Japanese car makers are following suit.

Control over core products is critical for other reasons. A dominant position in core products allows a company to shape the evolu- tion of applications and end markets. Such compact audio disc-related core products as data drives and lasers have enabled Sony and Philips to influence the evolution of the com- puter-peripheral business in optical-media stor- age. As a company multiplies the number of ap- plication arenas for its core products, it can consistently reduce the cost, time, and risk in new product development. In short, well-tar- geted core products can lead to economies of scale and scope.

Source: Prahalad C.K., Hamel G. (1990), “The core competence of the corporation”, Harvard Business Review (v. 68, no. 3) pp. 79–91.

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