Company Strategy
Prahalad and Hamel (part II)
Dr. Neil Harvey
We covered the backgrounds of Prahalad and Hamel in Part 1 of the series on these two strategic gurus. Here we review their first joint publication that attracted international attention.
The landmark article The Core Competence of the Corporation, co-authored by Hamel and Prahalad, first appeared in the
Harvard Business Review of May/June 1990 (Crainer 1998). It begins by comparing GTE and NEC. Between the early 1980s and 1988, NEC had emerged as the world leader in semi-conductors and as a first-tier in telecommunications products and computers. GTE had become, in effect, a telephone operating company with a position in defence and lighting products. The authors then posed the question as to why these two companies, starting with comparable business portfolios, performed so differently. The answer given is that NEC conceived of itself in terms of core competencies, while GTE did not.
The case was then made for rethinking the corporation in terms of core competencies, rather than divisions or strategic business units
(SBUs). While a company’s competitiveness is derived from the price/performance attributes of current products in the short run – 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 advantage are to be found in management’s ability to consolidate corporate wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities’
(Prahalad and Hamel 2000:360).
Core competencies are seen as the collective learning in an organisation – especially how to coordinate diverse production skills and integrate multiple streams of technologies. Examples given are Sony’s capacity to miniaturise and Philips’s optical/media expertise. The authors use the analogy of the corporation as a 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, sustenance and stability, they stress, is the core competence.
The article recommends that at least three tests be applied to identifying core competencies in a company:
- it should provide potential access to a wide variety of markets;
- it should make a significant contribution to perceived customer benefits of the end product;
- it should be difficult for competitors to imitate.
Prahalad and Hamel suggest that few companies are likely to build world leadership in more than five or six fundamental competencies. Core competencies, they postulate, are built through a process of continuous improvement and enhancement that may span a decade or longer.
They go on to discuss the tangible links between identified core competencies, core products and end products. Core products are the physical embodiments of one or more core competencies and are the components or sub-assemblies that contribute to the value of end products. It is essential, they state, to distinguish between core competencies, core products and end products, because global competition is played out by different rules and for different stakes at each level.
‘To build or defend leadership over the long term, a corporation will probably be a winner at each level. At the level of core competence, the goal is to build world leadership in the design and development of a particular class of product functionality – be it compact data storage and retrieval, as with Philip’s optical-media competence, or compactness and ease of use, as with Sony’s micromotors and microprocessor controls. To sustain leadership in their chosen core competence areas, these companies seek to maximise their world manufacturing share in core products.’ (Prahalad and Hamel
2000:365).
Prahalad and Hamel point out that a dominant position in core products allows a company to shape the evolution of applications and end markets. As a corporation multiplies the number of application areas for its core products, it can reduce the cost, time, and risk in new product development. They then examine the case for the view of a corporation as a portfolio of competencies rather than a SBU (Strategic Business Unit). Core competencies should be regarded as corporate resources that may be re-allocated by corporate management, in a similar manner to the allocation of capital expenditure.
The article recommends that senior management should spend a significant amount of time developing the corporate wide strategic architecture that establishes objectives for competence building. They define ‘strategic architecture’ as a road map of the future that identifies which core competencies to build, and their constituent technologies. Competence carriers should be regularly brought together from across the corporation to trade notes and ideas.
‘Core competencies are the wellspring of new business development. They should constitute the focus for strategy at the corporate level. Managers have to win manufacturing leadership in core products and capture global share through brand-building programmes aimed at exploiting economies of scope. Only if the company is conceived of as a hierarchy of core competencies, core products and market-focused business units will it be fit to fight.’
(Prahalad and Hamel 2000:372).
In the next issue, I will examine Hamel and Prahalad’s book, Competing for the
Future, which expands on, and deals in greater depth with, the concept of core competencies.
Source:
Crainer, S. (1998). The Ultimate Book of Business Gurus. New York: American Management Association.
Prahalad, C.K. and Hamel, Gary (1990). The Core Competence of the Corporation. In
Bartlett.
Christopher, C.A. and Ghoshal, Sumantra (2000). Transnational Management: Text, Cases and Readings in Cross-border Management (3rd
edn). New York: Irwin McGraw-Hill. |
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