The Tyranny of the SBU of the Firm in Competence Perspective

The new terms of competitive engagement cannot be understood using analytical tools devised to manage the diversified corporation of 20 years ago, when competition was prima- rily domestic (GE versus Westinghouse, Gen- eral Motors versus Ford) and all the key play- ers were speaking the language of the same business schools and consultancies. Old pre- scriptions have potentially toxic side effects. The need for new principles is most obvious in companies organized exclusively according to the logic of SBUs. The implications of the two alternate concepts of the corporation are sum- marized in ‘‘Two Concepts of the Corporation: SBU or Core Competence.’’

Obviously, diversified corporations have a portfolio of products and a portfolio of busi- nesses. But we believe in a view of the company as a portfolio of competencies as well. U.S. companies do not lack the technical resources to build competencies, but their top manage- ment often lacks the vision to build them and the administrative means for assembling re- sources spread across multiple businesses. A shift in commitment will inevitably influence patterns of diversification, skill deployment, re- source allocation priorities, and approaches to alliances and outsourcing.

We have described the three different planes on which battles for global leadership are waged: core competence, core products, and end products. A corporation has to know whether it is winning or losing on each plane. By sheer weight of investment, a company might be able to beat its rivals to blue-sky tech- nologies yet still lose the race to build core com- petence leadership. If a company is winning the race to build core competencies (as op- posed to building leadership in a few technolo- gies), it will almost certainly outpace rivals in new business development. If a company is winning the race to capture world manufactur- ing share in core products, it will probably out- pace rivals in improving product features and the price/performance ratio.

Determining whether one is winning or los- ing end product battles is more difficult be- cause measures of product market share do not necessarily reflect various companies’ underly- ing competitiveness. Indeed, companies that attempt to build market share by relying on the competitiveness of others, rather than invest- ing in core competencies and world core-prod- uct leadership, may be treading on quicksand. In the race for global brand dominance, compa- nies like 3M, Black & Decker, Canon, Honda, NEC, and Citicorp have built global brand um- brellas by proliferating products out of their core competencies. This has allowed their indi-vidual businesses to build image, customer loy- alty, and access to distribution channels.

When you think about this reconceptualiza- tion of the corporation, the primacy of the SBU—an organizational dogma for a genera- tion—is now clearly an anachronism. Where the SBU is an article of faith, resistance to the seductions of decentralization can seem hereti- cal. In many companies, the SBU prism means that only one plane of the global competitive battle, the battle to put competitive products on the shelf today, is visible to top manage- ment. What are the costs of this distortion?

Underinvestment in Developing Core Compe- tencies and Core Products. When the organiza- tion is conceived of as a multiplicity of SBUs, no single business may feel responsible for maintaining a viable position in core products nor be able to justify the investment required to build world leadership in some core compe- tence. In the absence of a more comprehen- sive view imposed by corporate management, SBU managers will tend to underinvest. Re- cently, companies such as Kodak and Philips have recognized this as a  potential  problem and have begun searching for new organiza- tional forms that will allow them to develop and manufacture core products for both inter- nal and external customers.

SBU managers have traditionally conceived of competitors in the same way they’ve seen themselves. On the whole, they’ve failed to note the emphasis Asian competitors were placing on building leadership in core products or to understand the critical linkage between world manufacturing leadership and the ability to sustain development pace in core compe- tence. They’ve failed to pursue OEM-supply op- portunities or to look across their various prod-uct divisions in an attempt to identify opportunities for coordinated initiatives.

Imprisoned Resources. As an SBU evolves, it often develops unique competencies. Typi- cally, the people who embody this compe- tence are seen as the sole property of the busi- ness in which they grew up. The manager of another SBU who asks to borrow talented peo- ple is likely to get a cold rebuff. SBU managers are not only unwilling to lend their compe- tence carriers but they may actually hide tal- ent to prevent its redeployment in the pursuit of new opportunities. This may be compared to residents of an underdeveloped country hiding most of their cash under their mat- tresses. The benefits of competencies, like the benefits of the money supply, depend on the velocity of their circulation as well as on the size of the stock the company holds.

Western companies have traditionally had an advantage in the stock of skills they possess. But have they been able to reconfigure them quickly to respond to new opportunities? Canon, NEC, and Honda have had a lesser stock of the people and technologies that com- pose core competencies but could move them much quicker from one business unit to an- other. Corporate R&D spending at Canon is not fully indicative of the size of Canon’s core competence stock and tells the casual observer nothing about the velocity with which Canon is able to move core competencies to exploit op- portunities.

When competencies become imprisoned, the people who carry the competencies do not get assigned to the most exciting opportunities, and their skills begin to atrophy. Only by fully leveraging core competencies can small com- panies like Canon afford to compete with in- dustry giants like Xerox. How strange that SBU managers, who are perfectly willing to com- pete for cash in the capital budgeting process, are unwilling to compete for people—the com- pany’s most precious asset. We find it ironic that top management devotes so much atten- tion to the capital budgeting process yet typi- cally has no comparable mechanism for allocat- ing the human skills that embody core competencies. Top managers are seldom able to look four or five levels down into the organi- zation, identify the people who embody critical competencies, and move them across organiza- tional boundaries.

Bounded Innovation.  If  core  competencies are not recognized, individual SBUs will pur- sue only those innovation opportunities that are close at hand—marginal product-line ex- tensions or geographic expansions. Hybrid op- portunities like fax machines, laptop comput- ers, hand-held televisions, or portable music keyboards will emerge only when managers take off their SBU blinkers. Remember, Canon appeared to be in the camera business at the time it was preparing to become a world leader in copiers. Conceiving of the corpora- tion in terms of core competencies widens the domain of innovation.

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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