How Not to Think of Core Competence of the Corporation

Since companies are in a race to build the competencies that determine global leader- ship, successful companies have stopped imagining themselves as bundles of businesses making products. Canon, Honda, Casio, or NEC may seem to preside over portfolios of businesses unrelated in terms of customers, distribution channels, and merchandising strategy. Indeed, they have portfolios that may seem idiosyncratic at times: NEC is the only global company to be among leaders in computing, telecommunications, and semi- conductors and to have a thriving consumer electronics business.

But looks are deceiving. In NEC, digital tech- nology, especially VLSI and systems integra- tion skills, is fundamental. In the core compe- tencies underlying them, disparate businesses become coherent. It is Honda’s core compe- tence in engines and power trains that gives it a distinctive advantage in car, motorcycle, lawn mower, and generator businesses. Canon’s core competencies in optics, imaging, and micropro- cessor controls have enabled it to enter, even dominate, markets as seemingly diverse as copiers, laser printers, cameras, and image scanners. Philips worked for more than 15 years to perfect its optical-media (laser disc) compe- tence, as did JVC in building a leading position in video recording. Other examples of core competencies might include mechantronics (the ability to marry mechanical and electronic engineering), video displays, bioengineering, and microelectronics. In the early stages of its competence building, Philips could not have imagined all the products that would be spawned by its optical-media competence, nor could JVC have anticipated miniature cam- corders when it first began exploring videotape technologies.

Unlike the battle for global brand domi- nance, which is visible in the world’s broadcast and print media and is aimed at building global ‘‘share of mind,’’ the battle to build world-class competencies is invisible to people who aren’t deliberately looking for it. Top management often tracks the cost and quality of competi- tors’ products, yet how many managers untan- gle the web of alliances their Japanese compet- itors 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 world leadership? Indeed, how many senior ex- ecutives discuss the crucial distinction between competitive strategy at the level of a business and competitive strategy at the level of an en- tire company?

Let us be clear. Cultivating core competence does not mean outspending rivals on research and development. In 1983, when Canon sur- passed Xerox in worldwide unit market share in the copier business, its R&D budget in repro- graphics was but a small fraction of Xerox’s. Over the past 20 years, NEC has spent less on R&D as a percentage of sales than almost all of its American and European competitors.

Nor does core competence mean shared costs, as when two or more SBUs use a com- mon facility—a plant, service facility, or sales force—or share a common component. The gains of sharing may be substantial, but the search for shared costs is typically a post hoc ef- fort to rationalize production across existing businesses, not a premeditated effort to build the competencies out of which the businesses themselves grow.

Building core competencies is more ambi- tious and different than integrating vertically, moreover. Managers deciding whether to make or buy will start with end products and look upstream to the efficiencies of the supply chain and downstream toward distribution and customers. They do not take inventory of skills and look forward to applying them in nontradi- tional ways. (Of course, decisions about compe- tencies do provide a logic for vertical integra- tion. Canon is not particularly integrated in its copier business, except in those aspects of the vertical chain that support the competencies it regards as critical.)

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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