Identifying Core Competencies— And Losing Them in Firm

At least three tests can be applied to identify core competencies in a company. First, a core competence provides potential access to a wide variety of markets. Competence in dis- play systems, for example, enables a company to participate in such diverse businesses as cal- culators, miniature TV sets, monitors for lap- top computers, and automotive dash- boards—which is why Casio’s entry into the handheld TV market was predictable. Second, a core competence should make a significant contribution to the perceived customer bene- fits of the end product. Clearly, Honda’s en- gine expertise fills this bill.

Finally, a core competence should be diffi- cult for competitors to imitate. And it will be difficult if it is a complex harmonization of indi- vidual technologies and production skills. A rival might acquire some of the technologies that comprise the core competence, but it will find it more difficult to duplicate the more or less comprehensive pattern of internal coordi- nation and learning. JVC’s decision in the early 1960s to pursue the development of a video- tape competence passed the three tests out- lined here. RCA’s decision in the late 1970s to develop a stylus-based video turntable system did not.

Few companies are likely to build world leadership in more than five or six fundamental competencies. A company that compiles a list of 20 to 30 capabilities has probably not pro- duced a list of core competencies. Still, it is probably a good discipline to generate a list of this sort and to see aggregate capabilities as building blocks. This tends to prompt the search for licensing deals and alliances through which the company may acquire, at low cost, missing pieces.

Most Western companies hardly think about competitiveness in these terms at all. It is time to take a tough-minded look at the risks they are running. Companies that judge competi- tiveness, their own and their competitors’, pri- marily in terms of the price/performance of end products are courting the erosion of core competencies—or making too little effort to enhance them. The embedded skills that give rise to the next generation of competitive prod- ucts cannot be ‘‘rented in’’ by outsourcing and OEM-supply relationships. In our view, too many companies have unwittingly surrendered core competencies when they cut internal in- vestment in what they mistakenly thought were just ‘‘cost centers’’ in favor of outside sup- pliers.

Consider Chrysler. Unlike Honda, it has tended to view engines and power trains as sim- ply one more component. Chrysler is becoming increasingly dependent on Mitsubishi and Hyundai: between 1985 and 1987, the number of outsourced engines went from 252,000 to 382,000. It is difficult to imagine Honda yield- ing manufacturing responsibility, much less de- sign, of so critical a part of a car’s function to an outside company—which is why Honda has made such an enormous commitment to For- mula One auto racing. Honda has been able to pool its engine-related technologies; it has par- layed these into a corporatewide competency from which it develops world-beating products, despite R&D budgets smaller than those of GM and Toyota.

Of course, it is perfectly possible for a com- pany to have a competitive product line up but be a laggard in developing core competen- cies—at least for a while. If a company wanted to enter the copier business today, it would find a dozen Japanese companies more than willing to supply copiers on the basis of an OEM pri- vate label. But when fundamental technologies changed or if its supplier decided to enter the market directly and become a competitor, that company’s product line, along with all of its in- vestments in marketing and distribution, could be vulnerable. Outsourcing can provide a short- cut to a more competitive product, but it typi- cally contributes little to building the people- embodied skills that are needed to sustain product leadership.

Nor is it possible for a company to have an intelligent alliance or sourcing strategy if it has not made a choice about where it will build competence leadership. Clearly, Japanese com- panies have benefited from alliances. They’ve used them to learn from Western partners who were not fully committed to preserving core competencies of their own. As we’ve argued in these pages before, learning within an alliance takes a positive commitment of resources—the travel, a pool of dedicated people, test-bed facil- ities, time to internalize and test what has been learned.2 A company may not make this effort if it doesn’t have clear goals for competence building.

Another way of losing is forgoing opportuni- ties to establish competencies that are evolving in existing businesses. In the 1970s and 1980s, many American and European companies— like GE, Motorola, GTE, Thorn, and GEC— chose to exit the color television business, which they regarded as mature. If by ‘‘mature’’ they meant that they had run out of new prod- uct ideas at precisely the moment global rivals had targeted the TV business for entry, then yes, the industry was mature. But it certainly wasn’t mature in the sense that all opportuni- ties to enhance and apply video-based compe- tencies had been exhausted.

In ridding themselves of their television businesses, these companies failed to distin- guish between divesting the business and de- stroying their video media-based competen- cies. They not only got out of the TV business but they also closed the door on a whole stream of future opportunities reliant on video-based competencies. The television industry, consid- ered by many U.S. companies in the 1970s to be unattractive, is today the focus of a fierce pub- lic policy debate about the inability of U.S. cor- porations to benefit from the $20-billion-a-year opportunity that HDTV will represent in the mid- to late 1990s. Ironically, the U.S. govern- ment is being asked to fund a massive research project—in effect, to compensate U.S. compa-nies for their failure to preserve critical core competencies when they had the chance.

In contrast, one can see a company like Sony reducing its emphasis on VCRs (where it has not been very successful and where Korean companies now threaten), without reducing its commitment to video-related competencies. Sony’s Betamax led to a debacle. But it emerged with its videotape recording compe- tencies intact and is currently challenging Mat- sushita in the 8mm camcorder market.

There are two clear lessons here. 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 improve- ment and enhancement that may span a de- cade or longer, a company that has failed to in- vest in core competence building will find it very difficult to enter an emerging market, un- less, of course, it will be content simply to serve as a distribution channel.

American semiconductor companies like Motorola learned this painful lesson when they elected to forgo direct participation in the 256k generation of DRAM chips. Having skipped this round, Motorola, like most of its American competitors, needed a large infusion of techni- cal help from Japanese partners to rejoin the battle in the 1-megabyte generation. When it comes to core competencies, it is difficult to get off the train, walk to the next station, and then reboard.

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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