The Core Competence: Roots of Competitive Advantage of the Corporation

The distinction we observed in the way NEC and GTE conceived of themselves—a portfo- lio of competencies versus a portfolio of busi- nesses—was repeated across many industries. From 1980 to 1988, Canon grew by 264%, Honda by 200%. Compare that with Xerox and Chrysler. And if Western managers were once anxious about the low cost and high quality of Japanese imports, they are now overwhelmed by the pace at which Japanese rivals are inventing new markets, creating new products, and enhancing them. Canon has given us personal copiers; Honda has moved from motorcycles to four-wheel off- road buggies. Sony developed the 8mm cam- corder, Yamaha, the digital piano. Komatsu developed an underwater remote-controlled bulldozer, while Casio’s latest gambit is a small-screen color LCD television. Who would have anticipated the evolution of these van- guard markets?

In more established markets, the Japanese challenge has been just as disquieting. Japanese companies are generating a blizzard of features and functional enhancements that bring tech- nological sophistication to everyday products. Japanese car producers have been pioneering four-wheel steering, four-valve-per-cylinder en- gines, in-car navigation systems, and sophisti- cated electronic engine-management systems. On the strength of its product features, Canon is now a player in facsimile transmission ma- chines, desktop laser printers, even semi-con- ductor manufacturing equipment.

In the short run, a company’s competitive- ness derives from the price/performance at- tributes of current products. But the survivors of the first wave of global competition, West- ern and Japanese alike, are all converging on similar and formidable standards for product cost and quality—minimum hurdles for contin- ued competition, but less and less important as sources of differential advantage. In the long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products. The real sources of ad- vantage are to be found in management’s abil- ity to consolidate corporatewide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.

Senior executives who claim that they can- not build core competencies either because they feel the autonomy of business units is sac- rosanct or because their feet are held to the quarterly budget fire should think again. The problem in many Western companies is not that their senior executives are any less capable than those in Japan nor that Japanese compa- nies possess greater technical capabilities. In- stead, it is their adherence to a concept of the corporation that unnecessarily limits the abil- ity of individual businesses to fully exploit the deep reservoir of technological capability that many American and European companies pos- sess.

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, suste- nance, and stability is the core competence. You can miss the strength of competitors by looking only at their end products, in the same way you miss the strength of a tree if you look only at its leaves. (See the chart ‘‘Competen- cies: The Roots of Competitiveness.’’)

Core competencies are the collective learn- ing in the organization, especially how to coor- dinate diverse production skills and integrate multiple streams of technologies. Consider Sony’s capacity to miniaturize or Philips’s opti- cal-media expertise. The theoretical knowledge to put a radio on a chip does not in itself assure a company the skill to produce a miniature radio no bigger than a business card. To bring off this feat, Casio must harmonize know-how in miniaturization, microprocessor design, ma- terial science, and ultrathin precision casing— the same skills it applies in its miniature card calculators, pocket TVs, and digital watches.

If core competence is about harmonizing streams of technology, it is also about the orga- nization of work and the delivery of value. Among Sony’s competencies is miniaturiza- tion. To bring miniaturization to its products, Sony must ensure that technologists, engi- neers, and marketers have a shared under- standing of customer needs and of technologi- cal possibilities. The force of core competence is felt as decisively in services as in manufactur- ing. Citicorp was ahead of others investing in an operating system that allowed it to partici- pate in world markets 24 hours a day. Its com- petence in systems has provided the company the means to differentiate itself from many fi- nancial service institutions.

Core competence is communication, in- volvement, and a deep commitment to work- ing across organizational boundaries. It in-volves many levels of people and all functions. World-class research in, for example, lasers or ceramics can take place in corporate laborato- ries without having an impact on any of the businesses of the company. The skills that to- gether constitute core competence must coa- lesce around individuals whose efforts are not so narrowly focused that they cannot recognize the opportunities for blending their functional expertise with those of others in new and inter- esting ways.

Core competence does not diminish with use. Unlike physical assets, which do deterio- rate over time, competencies are enhanced as they are applied and shared. But competencies still need to be nurtured and protected; knowl- edge fades if it is not used. Competencies are the glue that binds existing businesses. They are also the engine for new business develop- ment. Patterns of diversification and market entry may be guided by them, not just by the attractiveness of markets.

Consider 3M’s competence with sticky tape. In dreaming up businesses as diverse as ‘‘Post- it’’ notes, magnetic tape, photographic film, pressure-sensitive tapes, and coated abrasives, the company has brought to bear widely shared competencies in substrates, coatings, and adhe- sives and devised various ways to combine them. Indeed, 3M has invested consistently in them. What seems to be an extremely diversi- fied portfolio of businesses belies a few shared core competencies.

In contrast, there are major companies that have had the potential to build core competen- cies but failed to do so because top manage- ment was unable to conceive of the company as anything other than a collection of discrete businesses. GE sold much of its consumer elec- tronics business to Thomson of France, arguing that it was becoming increasingly difficult to maintain its competitiveness in this sector. That was undoubtedly so, but it is ironic that it sold several key businesses to competitors who were already competence leaders—Black & Decker in small electrical motors, and Thom- son, which was eager to build its competence in microelectronics and had learned from the Jap- anese that a position in consumer electronics was vital to this challenge.

Management trapped in the strategic busi- ness unit (SBU) mind-set almost inevitably finds its individual businesses dependent on ex- ternal sources for critical components, such as motors or compressors. But these are not just components. They are core products that con- tribute to the competitiveness of a wide range of end products. They are the physical embodi- ments of core competencies.

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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