Core Competence da Corporação - Artigo Harvard Business Review

wwwhbrorg A R T I C L E The Core Competence of the Corporation by CK Prahalad and Gary Hamel Included with this fulltext Harvard Business Review article The Idea in Briefthe core idea The Idea in Practiceputting the idea to work 1 Article Summary 2 The Core Competence of the Corporation A list of related materials with annotations to guide further exploration of the articles ideas and applications 15 Further Reading Product 6528 The Idea in Brief The Idea in Practice The Core Competence of the Corporation page 1 of 15 COPYRIGHT 2003 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION ALL RIGHTS RESERVED Diversified giant NEC competed in seem ingly disparate businessessemiconduc tors telecommunications computing and consumer electronics and dominated them all How It considered itself not a collection of strategic business units but a portfolio of core competencies the companys collec tive knowledge about how to coordinate di verse production skills and technologies NEC used its core competencies to achieve what most companies only attempt Invent new markets exploit emerging ones de light customers with products they hadnt even imaginedbut definitely needed Think of a diversified company as a tree the trunk and major limbs as core products smaller branches as business units leaves and fruit as end products Nourishing and stabilizing everything is the root system core competencies Focusing on core competencies creates unique integrated systems that reinforce fit among your firms diverse production and technology skillsa systemic advan tage your competitors cant copy CLARIFY CORE COMPETENCIES When you clarify competencies your entire or ganization knows how to support your compet itive advantageand readily allocates re sources to build crossunit technological and production links Use these steps Articulate a strategic intent that defines your company and its markets eg NECs exploit the convergence of computing and communi cations Identify core competencies that support that intent Ask How long could we dominate our business if we didnt control this competency What future opportunities would we lose without it Does it provide access to multiple markets Casios core competence with display sys tems let it succeed in calculators laptop monitors and car dashboards Do customer benefits revolve around it Hondas competence with highrevving lightweight engines offers multiple con sumer benefits BUILD CORE COMPETENCIES Once youve identified core competencies en hance them Invest in needed technologies Citicorp trumped rivals by adopting an operating sys tem that leveraged its competenciesand let it participate in world markets 24 hours a day Infuse resources throughout business units to outpace rivals in new business development 3M and Honda won races for global brand dom inance by creating wide varieties of products from their core competencies Results They built image customer loyalty and access to dis tribution channels for all their businesses Forge strategic alliances NECs collaboration with partners like Honeywell gave it access to the mainframe and semiconductor technolo gies it needed to build core competencies CULTIVATE A CORE COMPETENCY MINDSET Competencysavvy managers work well across organizational boundaries willingly share re sources and think long term To encourage this mindset Stop thinking of business units as sacrosanct That imprisons resources in units and moti vates managers to hide talent as the company pursues hot opportunities Identify projects and people who embody the firms core competencies This sends a mes sage Core competencies are corporatenot unitresources and those who embody them can be reallocated When Canon spotted op portunities in digital laser printers it let man agers raid other units to assemble talent Gather managers to identify nextgeneration competencies Decide how much investment each needs and how much capital and staff each division should contribute The Core Competence of the Corporation by CK Prahalad and Gary Hamel harvard business review mayjune 1990 page 2 of 15 COPYRIGHT 1990 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION ALL RIGHTS RESERVED The most powerful way to prevail in global competition is still invisible to many compa nies During the 1980s top executives were judged on their ability to restructure declut ter and delayer their corporations In the 1990s theyll be judged on their ability to identify cultivate and exploit the core com petencies that make growth possibleindeed theyll have to rethink the concept of the cor poration itself Consider the last ten years of GTE and NEC In the early 1980s GTE was well positioned to become a major player in the evolving informa tion technology industry It was active in tele communications Its operations spanned a vari ety of businesses including telephones switching and transmission systems digital PABX semiconductors packet switching satel lites defense systems and lighting products And GTEs Entertainment Products Group which produced Sylvania color TVs had a posi tion in related display technologies In 1980 GTEs sales were 998 billion and net cash flow was 173 billion NEC in contrast was much smaller at 38 billion in sales It had a comparable technological base and computer businesses but it had no experience as an oper ating telecommunications company Yet look at the positions of GTE and NEC in 1988 GTEs 1988 sales were 1646 billion and NECs sales were considerably higher at 2189 billion GTE has in effect become a telephone operating company with a position in defense and lighting products GTEs other businesses are small in global terms GTE has divested Syl vania TV and Telenet put switching transmis sion and digital PABX into joint ventures and closed down semiconductors As a result the international position of GTE has eroded Non US revenue as a percent of total revenue dropped from 20 to 15 between 1980 and 1988 NEC has emerged as the world leader in semiconductors and as a firsttier player in tele communications products and computers It has consolidated its position in mainframe computers It has moved beyond public switch ing and transmission to include such lifestyle The Core Competence of the Corporation harvard business review mayjune 1990 page 3 of 15 CK Prahalad is professor of corporate strategy and international business at the University of Michigan Gary Hamel is lecturer in business policy and management at the London Busi ness School Their most recent HBR arti cle Strategic Intent MayJune 1989 won the 1989 McKinsey Award for ex cellence This article is based on re search funded by the Gatsby Charitable Foundation products as mobile telephones facsimile ma chines and laptop computersbridging the gap between telecommunications and office automation NEC is the only company in the world to be in the top five in revenue in tele communications semiconductors and main frames Why did these two companies starting with comparable business portfolios perform so differently Largely because NEC conceived of itself in terms of core competencies and GTE did not Rethinking the Corporation Once the diversified corporation could simply point its business units at particular end prod uct markets and admonish them to become world leaders But with market boundaries changing ever more quickly targets are elu sive and capture is at best temporary A few companies have proven themselves adept at inventing new markets quickly entering emerging markets and dramatically shifting patterns of customer choice in established markets These are the ones to emulate The critical task for management is to create an or ganization capable of infusing products with irresistible functionality or better yet creat ing products that customers need but have not yet even imagined This is a deceptively difficult task Ulti mately it requires radical change in the man agement of major companies It means first of all that top managements of Western compa nies must assume responsibility for competi tive decline Everyone knows about high inter est rates Japanese protectionism outdated antitrust laws obstreperous unions and impa tient investors What is harder to see or harder to acknowledge is how little added momen tum companies actually get from political or macroeconomic relief Both the theory and practice of Western management have created a drag on our forward motion It is the princi ples of management that are in need of reform NEC versus GTE again is instructive and only one of many such comparative cases we analyzed to understand the changing basis for global leadership Early in the 1970s NEC artic ulated a strategic intent to exploit the conver gence of computing and communications what it called CC 1 Success top manage ment reckoned would hinge on acquiring com petencies particularly in semiconductors Man agement adopted an appropriate strategic architecture summarized by CC and then communicated its intent to the whole organiza tion and the outside world during the mid 1970s NEC constituted a CC Committee of top managers to oversee the development of core products and core competencies NEC put in place coordination groups and committees that cut across the interests of individual businesses Consistent with its strategic architecture NEC shifted enormous resources to strengthen its position in components and central processors By using collaborative arrangements to multi ply internal resources NEC was able to accu mulate a broad array of core competencies NEC carefully identified three interrelated streams of technological and market evolution Top management determined that computing would evolve from large mainframes to distrib uted processing components from simple ICs to VLSI and communications from mechanical crossbar exchange to complex digital systems we now call ISDN As things evolved further NEC reasoned the computing communica tions and components businesses would so overlap that it would be very hard to distin guish among them and that there would be enormous opportunities for any company that had built the competencies needed to serve all three markets NEC top management determined that semiconductors would be the companys most important core product It entered into myr iad strategic alliancesover 100 as of 1987 aimed at building competencies rapidly and at low cost In mainframe computers its most noted relationship was with Honeywell and Bull Almost all the collaborative arrangements in the semiconductorcomponent field were oriented toward technology access As they en tered collaborative arrangements NECs oper ating managers understood the rationale for these alliances and the goal of internalizing partner skills NECs director of research summed up its competence acquisition during the 1970s and 1980s this way From an invest ment standpoint it was much quicker and cheaper to use foreign technology There wasnt a need for us to develop new ideas No such clarity of strategic intent and strate gic architecture appeared to exist at GTE Al though senior executives discussed the implica tions of the evolving information technology industry no commonly accepted view of which The Core Competence of the Corporation harvard business review mayjune 1990 page 4 of 15 competencies would be required to compete in that industry were communicated widely While significant staff work was done to iden tify key technologies senior line managers con tinued to act as if they were managing indepen dent business units Decentralization made it difficult to focus on core competencies In stead individual businesses became increas ingly dependent on outsiders for critical skills and collaboration became a route to staged ex its Today with a new management team in place GTE has repositioned itself to apply its competencies to emerging markets in telecom munications services The Roots of Competitive Advantage The distinction we observed in the way NEC and GTE conceived of themselvesa portfo lio of competencies versus a portfolio of busi nesseswas 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 fourwheel off road buggies Sony developed the 8mm cam corder Yamaha the digital piano Komatsu developed an underwater remotecontrolled bulldozer while Casios latest gambit is a smallscreen 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 fourwheel steering fourvalvepercylinder en gines incar navigation systems and sophisti cated electronic enginemanagement systems On the strength of its product features Canon is now a player in facsimile transmission ma chines desktop laser printers even semicon ductor manufacturing equipment In the short run a companys competitive ness derives from the priceperformance 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 qualityminimum 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 managements 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 Sonys capacity to miniaturize or Philipss opti calmedia 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 knowhow in miniaturization microprocessor design ma terial science and ultrathin precision casing the same skills it applies in its miniature card The Core Competence of the Corporation harvard business review mayjune 1990 page 5 of 15 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 Sonys 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 Worldclass 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 Competencies The Roots of Competitiveness Competence 1 Competence 4 Competence 3 Competence 2 Core Product 2 Core Product 1 1 2 3 4 5 6 7 8 9 10 11 12 Business 1 Business 4 Business 3 Business 2 End Products The corporation like a tree grows from its roots Core products are nourished by competencies and engender business units whose fruit are end products The Core Competence of the Corporation harvard business review mayjune 1990 page 6 of 15 entry may be guided by them not just by the attractiveness of markets Consider 3Ms competence with sticky tape In dreaming up businesses as diverse as Post it notes magnetic tape photographic film pressuresensitive 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 leadersBlack 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 mindset 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 How Not to Think of Competence Since companies are in a race to build the competencies that determine global leader ship successful companies have stopped imagining themselves as bundles of businesses making products Canon Honda Casio or NEC may seem to preside over portfolios of businesses unrelated in terms of customers distribution channels and merchandising strategy Indeed they have portfolios that may seem idiosyncratic at times NEC is the only global company to be among leaders in computing telecommunications and semi conductors and to have a thriving consumer electronics business But looks are deceiving In NEC digital tech nology especially VLSI and systems integra tion skills is fundamental In the core compe tencies underlying them disparate businesses become coherent It is Hondas core compe tence in engines and power trains that gives it a distinctive advantage in car motorcycle lawn mower and generator businesses Canons core competencies in optics imaging and micropro cessor controls have enabled it to enter even dominate markets as seemingly diverse as copiers laser printers cameras and image scanners Philips worked for more than 15 years to perfect its opticalmedia laser disc compe tence as did JVC in building a leading position in video recording Other examples of core competencies might include mechantronics the ability to marry mechanical and electronic engineering video displays bioengineering and microelectronics In the early stages of its competence building Philips could not have imagined all the products that would be spawned by its opticalmedia competence nor could JVC have anticipated miniature cam corders when it first began exploring videotape technologies Unlike the battle for global brand domi nance which is visible in the worlds broadcast and print media and is aimed at building global share of mind the battle to build worldclass competencies is invisible to people who arent deliberately looking for it Top management often tracks the cost and quality of competi tors products yet how many managers untan gle the web of alliances their Japanese compet itors have constructed to acquire competencies at low cost In how many Western boardrooms is there an explicit shared understanding of the competencies the company must build for world leadership Indeed how many senior ex ecutives discuss the crucial distinction between competitive strategy at the level of a business and competitive strategy at the level of an en tire company Let us be clear Cultivating core competence does not mean outspending rivals on research and development In 1983 when Canon sur passed Xerox in worldwide unit market share in the copier business its RD budget in repro graphics was but a small fraction of Xeroxs Over the past 20 years NEC has spent less on RD as a percentage of sales than almost all of its American and European competitors The Core Competence of the Corporation harvard business review mayjune 1990 page 7 of 15 Nor does core competence mean shared costs as when two or more SBUs use a com mon facilitya plant service facility or sales forceor share a common component The gains of sharing may be substantial but the search for shared costs is typically a post hoc ef fort to rationalize production across existing businesses not a premeditated effort to build the competencies out of which the businesses themselves grow Building core competencies is more ambi tious and different than integrating vertically moreover Managers deciding whether to make or buy will start with end products and look upstream to the efficiencies of the supply chain and downstream toward distribution and customers They do not take inventory of skills and look forward to applying them in nontradi tional ways Of course decisions about compe tencies do provide a logic for vertical integra tion Canon is not particularly integrated in its copier business except in those aspects of the vertical chain that support the competencies it regards as critical Identifying Core Competencies And Losing Them 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 boardswhich is why Casios 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 Hondas 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 JVCs decision in the early 1960s to pursue the development of a video tape competence passed the three tests out lined here RCAs decision in the late 1970s to develop a stylusbased 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 toughminded look at the risks they are running Companies that judge competi tiveness their own and their competitors pri marily in terms of the priceperformance of end products are courting the erosion of core competenciesor 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 OEMsupply 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 252000 to 382000 It is difficult to imagine Honda yield ing manufacturing responsibility much less de sign of so critical a part of a cars function to an outside companywhich is why Honda has made such an enormous commitment to For mula One auto racing Honda has been able to pool its enginerelated technologies it has par layed these into a corporatewide competency from which it develops worldbeating products despite RD 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 ciesat 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 The Core Competence of the Corporation harvard business review mayjune 1990 page 8 of 15 changed or if its supplier decided to enter the market directly and become a competitor that companys 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 Theyve used them to learn from Western partners who were not fully committed to preserving core competencies of their own As weve argued in these pages before learning within an alliance takes a positive commitment of resourcesthe travel a pool of dedicated people testbed facil ities time to internalize and test what has been learned 2 A company may not make this effort if it doesnt 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 wasnt mature in the sense that all opportuni ties to enhance and apply videobased 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 mediabased 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 videobased competencies The television industry consid ered by many US companies in the 1970s to be unattractive is today the focus of a fierce pub lic policy debate about the inability of US cor porations to benefit from the 20billionayear opportunity that HDTV will represent in the mid to late 1990s Ironically the US govern ment is being asked to fund a massive research projectin effect to compensate US 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 videorelated competencies Sonys 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 1megabyte generation When it comes to core competencies it is difficult to get off the train walk to the next station and then reboard From Core Competencies to Core Products The tangible link between identified core competencies and end products is what we call the core productsthe physical embodi ments of one or more core competencies Hondas engines for example are core prod ucts linchpins between design and develop ment skills that ultimately lead to a prolifera tion of end products Core products are the components or subassemblies that actually contribute to the value of the end products Thinking in terms of core products forces a company to distinguish between the brand share it achieves in end product markets for example 40 of the US refrigerator market and the manufacturing share it achieves in any particular core product for example 5 of the world share of compressor output The Core Competence of the Corporation harvard business review mayjune 1990 page 9 of 15 Canon is reputed to have an 84 world man ufacturing share in desktop laser printer en gines even though its brand share in the laser printer business is minuscule Similarly Mat sushita has a world manufacturing share of about 45 in key VCR components far in ex cess of its brand share Panasonic JVC and oth ers of 20 And Matsushita has a commanding core product share in compressors worldwide estimated at 40 even though its brand share in both the airconditioning and refrigerator businesses is quite small It is essential to make this distinction be tween 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 leader ship 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 functionalitybe it compact data storage and retrieval as with Philipss opticalmedia competence or com pactness and ease of use as with Sonys micro motors and microprocessor controls To sustain leadership in their chosen core competence areas these companies seek to maximize their world manufacturing share in core products The manufacture of core prod ucts for a wide variety of external and inter nal customers yields the revenue and market feedback that at least partly determines the pace at which core competencies can be en hanced and extended This thinking was be hind JVCs decision in the mid1970s to estab lish VCR supply relationships with leading national consumer electronics companies in Europe and the United States In supplying Th omson Thorn and Telefunken all indepen dent companies at that time as well as US partners JVC was able to gain the cash and the diversity of market experience that ultimately enabled it to outpace Philips and Sony Philips developed videotape competencies in parallel with JVC but it failed to build a worldwide net work of OEM relationships that would have al lowed it to accelerate the refinement of its vid eotape competence through the sale of core products JVCs success has not been lost on Korean companies like Goldstar Sam Sung Kia and Daewoo who are building core product leader ship in areas as diverse as displays semiconduc tors and automotive engines through their OEMsupply contracts with Western compa nies Their avowed goal is to capture invest ment initiative away from potential competi tors often US companies In doing so they accelerate their competencebuilding efforts while hollowing out their competitors By fo cusing on competence and embedding it in core products Asian competitors have built up advantages in component markets first and have then leveraged off their superior products to move downstream to build brand share And they are not likely to remain the lowcost sup pliers forever As their reputation for brand leadership is consolidated they may well gain price leadership Honda has proven this with its Acura line and other Japanese car makers are following suit Control over core products is critical for other reasons A dominant position in core products allows a company to shape the evolu tion of applications and end markets Such compact audio discrelated core products as data drives and lasers have enabled Sony and Philips to influence the evolution of the com puterperipheral business in opticalmedia stor age As a company multiplies the number of ap plication arenas for its core products it can consistently reduce the cost time and risk in new product development In short welltar geted core products can lead to economies of scale and scope The Tyranny of the SBU 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 US companies do not lack the technical resources The Core Competence of the Corporation harvard business review mayjune 1990 page 10 of 15 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 bluesky 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 priceperformance 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 coreprod 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 SBUan organizational dogma for a genera tionis 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 theyve seen themselves On the whole theyve 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 Theyve failed to pursue OEMsupply op portunities or to look across their various prod Two Concepts of the Corporation SBU or Core Competence SBU Core Competence Basis for competition Competitiveness of todays products Interfirm competition to build competencies Corporate structure Portfolio of businesses related in product Portfolio of competenciescore products and market terms businesses Status of the business unit Autonomy is sacrosanct the SBU owns all SBU is a potential reservoir of core resources other than cash competencies Resource allocation Discrete businesses are the unit of analysis Businesses and competencies are the unit of capital is allocated business by business analysis top management allocates capital and talent Value added of top management Optimizing corporate returns through capital Enunciating strategic architecture and allocation tradeoffs among businesses building competencies to secure the future The Core Competence of the Corporation harvard business review mayjune 1990 page 11 of 15 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 RD spending at Canon is not fully indicative of the size of Canons 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 peoplethe com panys 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 handmarginal productline ex tensions or geographic expansions Hybrid op portunities like fax machines laptop comput ers handheld 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 Developing Strategic Architecture The fragmentation of core competencies be comes inevitable when a diversified com panys information systems patterns of com munication career paths managerial rewards and processes of strategy develop ment do not transcend SBU lines We believe that senior management should spend a sig nificant amount of its time developing a cor poratewide strategic architecture that estab lishes objectives for competence building A strategic architecture is a road map of the fu ture that identifies which core competencies to build and their constituent technologies By providing an impetus for learning from alliances and a focus for internal development efforts a strategic architecture like NECs CC can dramatically reduce the investment needed to secure future market leadership How can a company make partnerships intelli gently without a clear understanding of the core competencies it is trying to build and those it is attempting to prevent from being un intentionally transferred Of course all of this begs the question of what a strategic architecture should look like The answer will be different for every com pany But it is helpful to think again of that tree of the corporation organized around core products and ultimately core competencies To sink sufficiently strong roots a company must answer some fundamental questions How long could we preserve our competitive ness in this business if we did not control this particular core competence How central is this core competence to perceived customer benefits What future opportunities would be foreclosed if we were to lose this particular competence The architecture provides a logic for product The Core Competence of the Corporation harvard business review mayjune 1990 page 12 of 15 and market diversification moreover An SBU manager would be asked Does the new market opportunity add to the overall goal of becom ing the best player in the world Does it exploit or add to the core competence At Vickers for example diversification options have been judged in the context of becoming the best power and motion control company in the world see the insert Vickers Learns the Value of Strategic Architecture The strategic architecture should make re source allocation priorities transparent to the entire organization It provides a template for allocation decisions by top management It helps lower level managers understand the logic of allocation priorities and disciplines se nior management to maintain consistency In short it yields a definition of the company and Vickers Learns the Value of Strategic Architecture The idea that top management should de velop a corporate strategy for acquiring and deploying core competencies is relatively new in most US companies There are a few exceptions An early convert was Trinova previously Libbey Owens Ford a Toledo based corporation which enjoys a world wide position in power and motion controls and engineered plastics One of its major di visions is Vickers a premier supplier of hy draulics components like valves pumps ac tuators and filtration devices to aerospace marine defense automotive earthmoving and industrial markets Vickers saw the potential for a transfor mation of its traditional business with the application of electronics disciplines in com bination with its traditional technologies The goal was to ensure that change in tech nology does not displace Vickers from its customers This to be sure was initially a defensive move Vickers recognized that un less it acquired new skills it could not pro tect existing markets or capitalize on new growth opportunities Managers at Vickers attempted to conceptualize the likely evolu tion of a technologies relevant to the power and motion control business b functionalities that would satisfy emerging customer needs and c new competencies needed to creatively manage the marriage of technology and customer needs Despite pressure for shortterm earnings top management looked to a 10 to 15year time horizon in developing a map of emerg ing customer needs changing technologies and the core competencies that would be necessary to bridge the gap between the two Its slogan was Into the 21st Century A simplified version of the overall architec ture developed is shown here Vickers is currently in fluidpower components The architecture identifies two additional com petencies electricpower components and electronic controls A systems integration ca pability that would unite hardware soft ware and service was also targeted for devel opment The strategic architecture as illustrated by the Vickers example is not a forecast of specific products or specific technologies but a broad map of the evolving linkages between customer functionality requirements potential technologies and core competencies It as sumes that products and systems cannot be defined with certainty for the future but that preempting com petitors in the development of new markets requires an early start to building core competencies The strategic architecture developed by Vickers while describing the future in competence terms also provides the basis for making here and now decisions about prod uct priorities acquisitions alliances and recruitment Since 1986 Vickers has made more than ten clearly targeted acquisitions each one focused on a specific component or technology gap identified in the overall architecture The architec ture is also the basis for in ternal development of new competencies Vickers has undertaken in parallel a reorganization to enable the integration of electronics and electrical capabilities with mechanical based competencies We believe that it will take another two to three years before Vick ers reaps the total benefits from developing the strategic architecture communicating it widely to all its employees customers and investors and building administrative sys tems consistent with the architecture Vickers Map of Competencies Electronic Controls Valve amplifiers Logic Motion Complete machine and vehicle Systems Packages Components Service Offering Training Focus Markets Factory automation Automotive systems Plastic process Offhighway Commercial aircraft Military aircraft MissilesSpace Defense vehicles Marine Electric Power ACDC Servo Stepper Electric Products Actuators Fan packages Generators Electrohydraulic Pumps Control valves Cartridge valves Actuators Package systems Pneumatic products FuelFluid transfer Filtration Sensors ValvePump Actuator Machine System Engineering Application focus PowerMotion Control Electronics Software Fluid Power The Core Competence of the Corporation harvard business review mayjune 1990 page 13 of 15 the markets it serves 3M Vickers NEC Canon and Honda all qualify on this score Honda knew it was exploiting what it had learned from motorcycleshow to make highrevving smoothrunning lightweight engineswhen it entered the car business The task of creating a strategic architecture forces the organization to identify and commit to the technical and production linkages across SBUs that will pro vide a distinct competitive advantage It is consistency of resource allocation and the development of an administrative infra structure appropriate to it that breathes life into a strategic architecture and creates a man agerial culture teamwork a capacity to change and a willingness to share resources to protect proprietary skills and to think long term That is also the reason the specific archi tecture cannot be copied easily or overnight by competitors Strategic architecture is a tool for communicating with customers and other ex ternal constituents It reveals the broad direc tion without giving away every step Redeploying to Exploit Competencies If the companys core competencies are its critical resource and if top management must ensure that competence carriers are not held hostage by some particular business then it follows that SBUs should bid for core compe tencies in the same way they bid for capital Weve made this point glancingly It is impor tant enough to consider more deeply Once top management with the help of di visional and SBU managers has identified overarching competencies it must ask busi nesses to identify the projects and people closely connected with them Corporate offic ers should direct an audit of the location num ber and quality of the people who embody competence This sends an important signal to middle managers core competencies are corporate re sources and may be reallocated by corporate management An individual business doesnt own anybody SBUs are entitled to the services of individual employees so long as SBU man agement can demonstrate that the opportunity it is pursuing yields the highest possible payoff on the investment in their skills This message is further underlined if each year in the strate gic planning or budgeting process unit manag ers must justify their hold on the people who carry the companys core competencies Elements of Canons core competence in op tics are spread across businesses as diverse as cameras copiers and semiconductor litho graphic equipment and are shown in Core Competencies at Canon When Canon identi fied an opportunity in digital laser printers it gave SBU managers the right to raid other SBUs to pull together the required pool of tal ent When Canons reprographics products di vision undertook to develop microprocessor controlled copiers it turned to the photo prod ucts group which had developed the worlds first microprocessorcontrolled camera Also reward systems that focus only on productline results and career paths that sel dom cross SBU boundaries engender patterns of behavior among unit managers that are de structively competitive At NEC divisional managers come together to identify nextgen eration competencies Together they decide how much investment needs to be made to build up each future competency and the con tribution in capital and staff support that each Core Competencies at Canon Precision Fine Micro Mechanics Optics electronics Basic camera Compact fashion camera Electronic camera EOS autofocus camera Video still camera Laser beam printer Color video printer Bubble jet printer Basic fax Laser fax Calculator Plain paper copier Battery PPC Color copier Laser copier Color laser copier NAVI Still video system Laser imager Cellanalyzer Mask aligners Stepper aligners Excimer laser aligners Every Canon product is the result of at least one core competency The Core Competence of the Corporation harvard business review mayjune 1990 page 14 of 15 division will need to make There is also a sense of equitable exchange One division may make a disproportionate contribution or may benefit less from the progress made but such short term inequalities will balance out over the long term Incidentally the positive contribution of the SBU manager should be made visible across the company An SBU manager is unlikely to sur render key people if only the other business or the general manager of that business who may be a competitor for promotion is going to ben efit from the redeployment Cooperative SBU managers should be celebrated as team players Where priorities are clear transfers are less likely to be seen as idiosyncratic and politically motivated Transfers for the sake of building core com petence must be recorded and appreciated in the corporate memory It is reasonable to ex pect a business that has surrendered core skills on behalf of corporate opportunities in other areas to lose for a time some of its competi tiveness If these losses in performance bring immediate censure SBUs will be unlikely to as sent to skills transfers next time Finally there are ways to wean key employ ees off the idea that they belong in perpetuity to any particular business Early in their ca reers people may be exposed to a variety of businesses through a carefully planned rota tion program At Canon critical people move regularly between the camera business and the copier business and between the copier busi ness and the professional opticalproducts busi ness In midcareer periodic assignments to crossdivisional project teams may be neces sary both for diffusing core competencies and for loosening the bonds that might tie an indi vidual to one business even when brighter op portunities beckon elsewhere Those who em body critical core competencies should know that their careers are tracked and guided by corporate human resource professionals In the early 1980s at Canon all engineers under 30 were invited to apply for membership on a sevenperson committee that was to spend two years plotting Canons future direction includ ing its strategic architecture Competence carriers should be regularly brought together from across the corporation to trade notes and ideas The goal is to build a strong feeling of community among these peo ple To a great extent their loyalty should be to the integrity of the core competence area they represent and not just to particular businesses In traveling regularly talking frequently to cus tomers and meeting with peers competence carriers may be encouraged to discover new market opportunities Core competencies are the wellspring of new business development They should con stitute the focus for strategy at the corporate level Managers have to win manufacturing leadership in core products and capture global share through brandbuilding programs aimed at exploiting economies of scope Only if the company is conceived of as a hierarchy of core competencies core products and mar ketfocused business units will it be fit to fight Nor can top management be just another layer of accounting consolidation which it often is in a regime of radical decentralization Top management must add value by enunciat ing the strategic architecture that guides the competence acquisition process We believe an obsession with competence building will char acterize the global winners of the 1990s With the decade underway the time for rethinking the concept of the corporation is already over due 1 For a fuller discussion see our article Strategic Intent HBR MayJune 1989 p 63 2 Collaborate with Your Competitors and Win HBR Jan uaryFebruary 1989 p 133 with Yves L Doz Reprint 90311 Harvard Business Review OnPoint 6528 To order see the next page or call 8009880886 or 6177837500 or go to wwwhbrorg The Core Competence of the Corporation Further Reading To Order For reprints Harvard Business Review OnPoint orders and subscriptions to Harvard Business Review Call 8009880886 or 6177837500 Go to wwwhbrorg For customized and quantity orders of reprints and Harvard Business Review OnPoint products Call Frank Tamoshunas at 6177837626 or email him at ftamoshunashbspharvardedu page 15 of 15 A R T I C L E S What Is Strategy by Michael E Porter Harvard Business Review NovemberDecember 1996 Product no 4134 This seminal article by Michael Porter focuses on the question of strategic positioning with spe cific emphasis on creating fit among your com panys activitiesreinforcing that theme of The Core Competence of the Corporation Porter urges firms to clarify what distinguishes them and which markets they best serve The secret to sustainable strategic positioning he maintains is performing different activities from rivals or performing similar ones in different ways The author explains the three key principles underly ing strategic positioning 1 unique positioning within markets 2 the willingness to choose where you wont compete and 3 alignment of all your companys activities so that they reinforce one another and your strategy Strategy and the Internet by Michael E Porter Harvard Business Review March 2001 Product no 6358 Porter shows how aligning Internet technology with your corporate strategy can prove especially effective Too many companies he argues be lieve that the Internet renders established rules about strategy obsolete To the contrary it makes them more vital than ever Porter advo cates regarding the Internet as a tool that can support or damage your firms strategic position ing The key to using it Integrate Internet initia tives into your strategy and operations so that they complement your competitive approaches and create systemic advantages that rivals cant copy Introducing TShaped Managers Knowledge Managements Next Generation by Morten T Hansen and Bolko von Oetinger Harvard Business Review March 2001 Product no 6463 This article builds on Prahalad and Hamels ad vice about cultivating a corecompetency mind set in unit managers The authors describe a new kind of executiveone who freely shares ideas and expertise across company boundaries in order to support highlevel corporate strategy while fiercely enhancing business unit perfor mance These Tshaped managers create hori zontal value in five ways 1 boost efficiency through best practice transfer 2 improve deci sion quality through peer advice 3 grow reve nue through shared expertise 4 generate new business opportunities through idea crosspolli nation 5 make bold strategic moves through wellcoordinated implementation The authors then explain how to cultivate Tshaped manag ers Getting It Done New Roles for Senior Executives by Thomas M Hout and John C Carter Harvard Business Review NovemberDecember 1995 Product no 3715 Hout and Carter share Prahalad and Hamels views on senior executive turf wars Acting like feudal barons no longer works they argue In stead executives must collaborate on behalf of the company as a whole These leaders are per fectly positioned to leverage their firms core competencies Theyre the ones who create com petitive breakthroughs by linking improved pro cesses to the companys overall strategy The au thors offer concrete advice to CEOs who want to strengthen interaction among senior managers