Class Lectures Core Competencies Session-8
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Transcript of Class Lectures Core Competencies Session-8
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Core Competencies
Session 8
Based on The Core Competencies of theCorporation by CK Prahalad & Garry
Hamel
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Then and Now
A diversified corporation used to be able to simplypoint business units at particular end productmarkets.
With market boundaries changing ever morequickly, targets are elusive and capture is at besttemporary.
Two alternative concepts: A portfolio of businessesvs a portfolio of competencies.
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NEC vs GTE -- an excellent contrast
NEC
strategic intent to exploit theconvergence of computing andcommunications.
Success would hinge on acquiringcompetencies, esp. in semiconductors.
Shifted enormous resources tostrengthen its position in componentsand central processors.
Accumulated a broad array of corecompetencies
Three interrelated streams oftechnological and market evolution convergence of communication,computing & component business.
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NEC vs GTE
Decided semiconductors to be thecompany's most important "coreproduct."
Strategic alliances--over 100 as of 1987--aimed at building competenciesrapidly and at low cost.
All their collaborations were orientedtoward technology access
"From an investment standpoint, itwas much quicker and cheaper to useforeign technology. There wasn't aneed for us to develop new ideas."
GTE
No such clarity of strategic intent andstrategic architecture appeared to exist
No commonly accepted view of whichcompetencies would be required tocompete in the IT industry
Line managers continued to act as ifthey were managing independent
business units.
Decentralization made it difficult toconcentrate on core competencies.
Instead, individual business unitsbecame increasingly dependent onoutsiders for critical skills,
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Result In 1980
GTE Sales $ 9.98 Billion
NEC Sales - $ 3.8 Billion
In 1988 GTE sales - $ 16.46 Billion
NEC sales - $ 21.89 Billion
NEC a world leader in semiconductors, telecom products and
computers. GTE a telephone operating co. Other biz are small globally.
Other biz divested
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What are core competencies?
Core competencies are the skills, characteristics, andassets that set your company apart fromcompetitors.
They are the intangible tangibles that you own andyour competitors do not
They are the fuel for innovation and the roots ofcompetitive advantage.
True Differentiation
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Core competence -- The roots ofcompetitive advantage
Real sources of advantage is the ability toconsolidate corporate-wide technologies andproduction skills into competencies to enable SBUs
to adapt quickly to changing opportunities
However, senior executives feel the autonomy ofbusiness units is sacrosanct (a challenge to overcome in
many companies)
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SBUs Vs. Core Competencies
Old
Diversified corporation is aportfolio of strategicbusiness units (SBUs)
within a similar product orcustomer category.
Each SBUs goal is to putcompetitive products on theshelf today.
Speed hence lack ofinnovation
Todays
Competitiveness bydeveloping corecompetencies.
These competenciesdetermine the strategicarchitecture of the firm(7S?).
Competencies musttranslate into core products,which significantlycontribute to the firms endproducts.
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The Competitive DiversifiedCorporation
You can miss the strengthof a competitor by lookingonly at their end products
The diversified organizationis like a large tree. The trunkand major limbs are coreproducts, smaller branchesare business units, the leaves,the flowers and fruit are end
products. The root systemprovides nourishment,sustenance and stability isthe core competence.
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From these core productscome the new strategicbusiness units. These SBUscan be in completelyseparate markets.
These businesses each haveend products that containthe core products.
In each SBU, outsourcingmay be considered foreverything except the coreproducts andcompetencies.
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In the short run,
competitiveness = the price/performance attributesof current products.
In the long run,
competitiveness = ability to build the corecompetencies that spawn unanticipated products, at
lower cost and more speedily than competitors
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The roots of competitive advantage
Core competencies are the collective learning in theorganization, diverse production skills and integratemultiple streams of technologies (other resources).
Core competence is communication, involvement, and adeep commitment to working across organizationalboundaries.
Core competence does not diminish with use.
Unlike physical assets, competencies are enhanced as theyare applied and shared.
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The roots of competitive advantage
Core competencies need to be nurtured and protected, asknowledge fades if it is not used.
Competencies are the glue that binds existing businesses andalso the engine for new business development
Many companies had the potential to build core competenciesbut failed because of collection of discreet businesses thatcould not work coherently.
Management trapped in the SBU mind-set almost inevitablyfinds its individual businesses dependent on external sourcesfor critical component (Old cos like JK, ..)
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Why Competencies?
Even good marketing wont make a me too firmcompetitive in the long run.
Competencies are enhanced with time.
Make or buy decisions are simplified.
Non-competencies can be supplemented withstrategic alliances and licensing agreements (Eg BPOs in India largely handle non core operations of large
organizations like GM)
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Competencies are not
Battle for global brand dominance, they are the battle tobuild world-class competencies which remains invisibleto many management.
Cost and quality of competitor products that the topmanagement often tracks; it is the web of alliances theircompetitors may have constructed to acquirecompetencies at low cost. (Honda, Toyota)
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Competencies Do Not Mean:
Competitive strategy at the SBU level ( it iscompetitive strategy at the level of an entire company)
Outspending rivals on R&D or sharing costs
between SBUs.
Integrating vertically. (Though it may help take that
decision)
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Identifying core competencies, andlosing them
Three tests can be applied to identify core competencies:
A core competence provides potential access to a wide varietyof markets. (e.g. Competence in display systems opens up toTVs, calculators, monitors, auto dashboards- Casio)
A core competence should make a significant contribution tothe perceived customer benefits of the end products. (e.g.Honda's engines fit this bill.)
A core competence should be difficult for competitors to
imitate. And it will be difficult if it is a complexharmonization of individual technologies and productionskills (Reliance Inds project management skills consideredglobally the finest)
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You cannot have more than 5 6 competencies
A company that compiles a list of 20-30 capabilities hasprobably not produced a list of core competencies.
However, it is probably good discipline to generate a list ofthis sort and to see the aggregate capabilities as buildingblocks.
Companies that judge competitiveness, their own and theircompetitors, in terms of the price/performance of endproducts are eroding the core competencies
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Embedded skills that give rise to next generation competitiveproducts cannot be "rented in" by outsourcing and OEMsupply relationships
In CK Prahalad's view--too many companies have unwittinglysurrendered core competencies when they cut investment in whatthey mistakenly thought were just "cost centres" in favour ofoutside suppliers.
Example Philips, GE, Indian retailers.
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Two clear lessons
First, the costs of losing a core competence can be only partlycalculated in advance. The baby may be thrown out with thebath water in divestment decisions.
Second, since core competencies are built through a process ofcontinuous improvement and enhancement that can span adecade or longer, a company that has failed to invest in corecompetence building will find it very difficult to enter anemerging market, unless of course, it will be content simply toserve as a distribution channel
Ex. P&G, Coke, Pepsi, IBM, Kraft ; what core competency of theirsallowed them the leverage in the Indian market?
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From Core Competencies to CoreProducts
Core products are the tangible evidence of our corecompetencies. They contribute to the customer
benefits received from the end product. Honda: Small gas engines
Canon: Desktop laser printer engines
3M: Adhesives and substrates
3 different planes : core competence, core products,and end products.
To sustain leadership in chosen core competence areas,strongest companies seek to maximize their world-manufacturing share in core products.
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Control over core products is criticalfor several reasons:
Can build up advantages in component markets first and thenleverage off their superior products to move downstream to buildbrand share.
As their reputation for brand leadership is consolidated, they maywell gain price leadership.
A dominant position in core products allows a company to shapethe evolution of applications and end markets.
As a company multiplies the number of application arenas for itscore products, it can reduce the cost, time, and risk in new productdevelopment. (economies of scale)
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Why SBU is not a great Idea
Important to know whether winning or losing on corecompetence, core products, or end products.
The SBU means that only one plane of the globalcompetitive battle, the battle to put competitive productson the shelf today, is visible to top management.
Under investment in developing core competencies andcore products (Ex.MAA Group)
Imprisoned resources
Bounded innovation
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The bottom line
Core competencies are the source of new businessdevelopment
Only if a company is conceived of as a hierarchy of
core competencies, core products, and market-focused business units, will it be fit to fight.
In the final analysis--Top management adds valueby enunciating the strategic architecture that guides
the competence acquisition process (BusinessDesign)
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Every end product offered byCanon has at least one coreproduct that makes a significant
contribution to the perceivedcustomer benefits.
How could Canon beat Xerox?
Canon people move between
SBUs carrying ideas andcompetencies
Example:
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Manufacturing Share
With core products, the focus shifts from marketshare to manufacturing share.
Matsushita owns Panasonic, JVC, and others. Their brandshare for VCRs is about 20%.
Their world manufacturing share of VCR components is 45%.
Canon owns a large share of world manufacturing off copiers,whereas Xerox failed to see the rationale
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Exercise: Identifying Your CoreCompetencies
Compile a list of capabilities.
What do you excel at at?
Think of your most skilled employees.
What products have been your past winners?
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The Test
Does this competence provide potential access to awide variety of markets?
Does this competence make a significantcontribution to the perceived customer benefits ofthe end product?
Is this competence difficult for competitors toimitate?
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Variety of Markets
What do miniature cardcalculators, pocket TVs, anddigital watches have incommon?
They are all the result ofCasios know-how inminiaturization,microprocessor design,
material science, andultrathin precision casing.
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Customer Benefit
Do these competenciesadd to the perceivedcustomer benefits of theend product?
Fit this in your pocket
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Easy to Imitate?
Philips is a market leader in TVs. Have you ever seen aPhilips mini TV? Miniaturization is not one of Philipscompetencies. They could put one on the market byoutsourcing the design and production.
Would this give them any manufacturing share? Or justtemporary market share?
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This could lead to
If you dont know what your core competencies are, youmay spin off a business unit that contains your mostcompetitive skills, employees, or core products.
Long term strategy involves constant innovation. Corecompetencies provide a market position that allows acompany to influence what products will be available inthe future.
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Developing strategic architecture
Prahalad believes that senior management should spenda significant amount of time developing a corporate-wide strategic architecture that establishes objectives forcompetence building.
A strategic architecture = a road map of the future thatidentifies which core competencies to build and theirconstituent technologies
Two things critical for strategic architecture to come to
life: Consistency of resource allocation.
Development of an administrative infrastructure that enablesconsistency of resource allocation
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Strategic Architecture
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A companys future is determined by its corecompetencies. These competencies define thearchitecture and characteristics of the globalcompetitive firm.
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Boundaryless Organization
In the old diversified corporation, ideas andtechnologies are reluctantly shared from one SBU tothe next, if at all.
Boundaries seem transparent when SBUs share corecompetencies and core products. These resourcescome from the firm.
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Resource Allocation
When core competencies are the roots of the firm,specialized employees and core products can beallocated to various SBUs.
At Canon, specialized employees move betweencamera and printer products regularly.
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Innovation
Using core competencies, new technologies can bedeveloped without heavy R&D costs.
Casio: Small-screen LCD TV Canon: Personal copier
Honda: Off-road buggy
Sony: 8mm camcorder
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Competence Building
The focus of todays global firm should be incompetence building.
Constantly improving competencies provides fornew integrated technologies.
Competencies provide focus for long-term goals.
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Competitive Advantage
Short-term market sharecan be won by anyonewith a good idea.
Race to get products onthe shelf.
Long-term successinvolves competencystructured organizations,innovation, and market
consistency.
Same core products,integrated into new endproducts, creating new
markets.
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Ask
How long could we dominate our biz if we did notcontrol this competency?
What future opportunities do we lose without it?
Does it provide access to multiple markets? (Casio)
Do customer benefits revolve around it? (Hondascompetence with high revving, lightweight enginesoffer multiple consumer benefits cars, gensets..)
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Summary
Learn your competencies
Develop your competencies
Structure your organization around yourcompetencies
Involve core products in all end products
Outsource non-competencies with strategic alliancesand licensing.
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Readings
Gary Hamel and C. K. Prahalad, (1990) "The Core Competence of the Corporation", Harvard Business Review, vol.68, no. 3, May-June 1990, pp 79-93.
Galunic, D.C. and Rodan, S. (1998). "Resource recombinations in the firm: knowledge structures and the potentialfor Schumpeterian innovation". Strategic Management Journal vol 19. p. 1193-1201.
Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading MultinationalCompanies", California Management Review, vol 40, no. 4, pp. 117-132.
"Core Competencies." QuickMBA. Internet Center for Management and BusinessAdministration, Inc. 18 Nov. 2005 .
Gamonal, Paula. "Core Competencies Working Smarter, Not Harder." Ravenwerks.Ravenwerks. 21 Nov. 2005 .
"strategy - core competencies." Tutor2u. Tutor2u. 16 Nov. 2005.