The Core Competence of the Corporation PDF

The Core Competence of the Corporation C.K. Prahalad and Gary Hamel Harvard Business Review 90311  HBR MAY–JUNE 1990 The Core Competence of the Corporation...

The Core Competence of the Corporation C.K. Prahalad and Gary Hamel Harvard Business Review 90311  HBR MAY–JUNE 1990 The Core Competence of the Corporation C.K. Prahalad and Gary Hamel The most powerful way to prevail in global com- businesses, but it had no experience as an operating petition is still invisible to many companies. During telecommunications company. the 1980s, top executives were judged on their Yet look at the positions of GTE and NEC in ability to restructure, declutter, and delayer their 1988. GTE’s 1988 sales were $16.46 billion, and corporations. In the 1990s, they’ll be judged on NEC’s sales were considerably higher at $21.89 their ability to identify, cultivate, and exploit the billion. GTE has, in effect, become a telephone core competencies that make growth possible— operating company with a position in defense and indeed, they’ll have to rethink the concept of the lighting products. GTE’s other businesses are small corporation itself. in global terms. GTE has divested Sylvania TV and Consider the last ten years of GTE and NEC. In Telenet, put switching, transmission, and digital the early 1980s, GTE was well positioned to become PABX into joint ventures, and closed down semicon- a major player in the evolving information technol- ductors. As a result, the international position of ogy industry. It was active in telecommunications. GTE has eroded. Non-U.S. revenue as a percent of Its operations spanned a variety of businesses includ- total revenue dropped from 20% to 15% between ing telephones, switching and transmission systems, 1980 and 1988. digital PABX, semiconductors, packet switching, sat- NEC has emerged as the world leader in semicon- ellites, defense systems, and lighting products. And ductors and as a first-tier player in telecommunica- GTE’s Entertainment Products Group, which pro- tions products and computers. It has consolidated duced Sylvania color TVs, had a position in related its position in mainframe computers. It has moved display technologies. In 1980, GTE’s sales were $9.98 beyond public switching and transmission to include billion, and net cash flow was $1.73 billion. NEC, in such lifestyle products as mobile telephones, facsim- contrast, was much smaller, at $3.8 billion in sales. It ile machines, and laptop computers—bridging the had a comparable technological base and computer gap between telecommunications and office automa- tion. NEC is the only company in the world to be C.K. Prahalad is professor of corporate strategy and international in the top five in revenue in telecommunications, business at the University of Michigan. Gary Hamel is lecturer in semiconductors, and mainframes. Why did these two business policy and management at the London Business School. companies, starting with comparable business port- Their most recent HBR article, ‘‘Strategic Intent’’ (May–June 1989), won the 1989 McKinsey Award for excellence. This article folios, perform so differently? Largely because NEC is based on research funded by the Gatsby Charitable Founda- conceived of itself in terms of ‘‘core competencies,’’ tion. and GTE did not. Copyright q 1990 by the President and Fellows of Harvard College. All rights reserved. Rethinking the Corporation NEC carefully identified three interrelated streams of technological and market evolution. Top Once, the diversified corporation could simply management determined that computing would point its business units at particular end product evolve from large mainframes to distributed pro- markets and admonish them to become world lead- cessing, components from simple ICs to VLSI, and ers. But with market boundaries changing ever more communications from mechanical cross-bar ex- quickly, targets are elusive and capture is at best change to complex digital systems we now call temporary. A few companies have proven themselves ISDN. As things evolved further, NEC reasoned, the adept at inventing new markets, quickly entering computing, communications, and components busi- emerging markets, and dramatically shifting pat- nesses would so overlap that it would be very hard terns of customer choice in established markets. to distinguish among them, and that there would be These are the ones to emulate. The critical task for enormous opportunities for any company that had management is to create an organization capable of built the competencies needed to serve all three mar- infusing products with irresistible functionality or, kets. better yet, creating products that customers need but NEC top management determined that semicon- have not yet even imagined. ductors would be the company’s most important This is a deceptively difficult task. Ultimately, it ‘‘core product.’’ It entered into myriad strategic alli- requires radical change in the management of major ances—over 100 as of 1987—aimed at building com- companies. It means, first of all, that top manage- petencies rapidly and at low cost. In mainframe ments of Western companies must assume responsi- computers, its most noted relationship was with bility for competitive decline. Everyone knows about Honeywell and Bull. Almost all the collaborative high interest rates, Japanese protectionism, outdated arrangements in the semiconductor-component field antitrust laws, obstreperous unions, and impatient were oriented toward technology access. As they en- investors. What is harder to see, or harder to ac- tered collaborative arrangements, NEC’s operating knowledge, is how little added momentum compa- managers understood the rationale for these alliances nies actually get from political or macroeconomic and the goal of internalizing partner skills. NEC’s ‘‘relief.’’ Both the theory and practice of Western director of research summed up its competence ac- management have created a drag on our forward mo- quisition during the 1970s and 1980s this way: ‘‘From tion. It is the principles of management that are in an investment standpoint, it was much quicker and need of reform. cheaper to use foreign technology. There wasn’t a NEC versus GTE, again, is instructive and only need for us to develop new ideas.’’ one of many such comparative cases we analyzed to No such clarity of strategic intent and strategic understand the changing basis for global leadership. architecture appeared to exist at GTE. Although se- Early in the 1970s, NEC articulated a strategic intent nior executives discussed the implications of the to exploit the convergence of computing and com- evolving information technology industry, no com- munications, what it called ‘‘C&C.’’1 Success, top monly accepted view of which competencies would management reckoned, would hinge on acquiring be required to compete in that industry were commu- competencies, particularly in semiconductors. Man- nicated widely. While significant staff work was done agement adopted an appropriate ‘‘strategic architec- to identify key technologies, senior line managers ture,’’ summarized by C&C, and then communicated continued to act as if they were managing indepen- its intent to the whole organization and the outside dent business units. Decentralization made it dif- world during the mid-1970s. ficult to focus on core competencies. Instead, NEC constituted a ‘‘C&C Committee’’ of top individual businesses became increasingly depen- managers to oversee the development of core prod- dent on outsiders for critical skills, and collaboration ucts and core competencies. NEC put in place became a route to staged exits. Today, with a new coordination groups and committees that cut across management team in place, GTE has repositioned the interests of individual businesses. Consistent itself to apply its competencies to emerging markets with its strategic architecture, NEC shifted enor- in telecommunications services. mous resources to strengthen its position in compo- nents and central processors. By using collaborative arrangements to multiply internal resources, NEC was able to accumulate a broad array of core compe- The Roots of Competitive Advantage tencies. The distinction we observed in the way NEC and 1. For a fuller discussion, see our article, ‘‘Strategic Intent’’ HBR GTE conceived of themselves—a portfolio of compe- May–June 1989, p. 63. tencies versus a portfolio of businesses—was re- 80 HARVARD BUSINESS REVIEW May–June 1990 peated across many industries. From 1980 to 1988, The diversified corporation is a large tree. The Canon grew by 264%, Honda by 200%. Compare trunk and major limbs are core products, the smaller that with Xerox and Chrysler. And if Western manag- branches are business units; the leaves, flowers, and ers were once anxious about the low cost and high fruit are end products. The root system that provides quality of Japanese imports, they are now over- nourishment, sustenance, and stability is the core whelmed by the pace at which Japanese rivals are competence. You can miss the strength of competi- inventing new markets, creating new products, and tors by looking only at their end products, in the enhancing them. Canon has given us personal copi- same way you miss the strength of a tree if you look ers; Honda has moved from motorcycles to four- only at its leaves. (See the chart ‘‘Competencies: The wheel off-road buggies. Sony developed the 8mm Roots of Competitiveness.’’) camcorder, Yamaha, the digital piano. Komatsu de- Core competencies are the collective learning in veloped an underwater remote-controlled bulldozer, the organization, especially how to coordinate di- while Casio’s latest gambit is a small-screen color verse production skills and integrate multiple LCD television. Who would have anticipated the streams of technologies. Consider Sony’s capacity to evolution of these vanguard markets? miniaturize or Philips’s optical-media expertise. The In more established markets, the Japanese chal- theoretical knowledge to put a radio on a chip does lenge has been just as disquieting. Japanese compa- not in itself assure a company the skill to produce a nies are generating a blizzard of features and miniature radio no bigger than a business card. To functional enhancements that bring technological bring off this feat, Casio must harmonize know-how sophistication to everyday products. Japanese car in miniaturization, microprocessor design, material producers have been pioneering four-wheel steering, science, and ultrathin precision casing—the same four-valve-per-cylinder engines, in-car navigation skills it applies in its miniature card calculators, systems, and sophisticated electronic engine-man- pocket TVs, and digital watches. agement systems. On the strength of its product If core competence is about harmonizing streams features, Canon is now a player in facsimile trans- of technology, it is also about the organization of mission machines, desktop laser printers, even semi- work and the delivery of value. Among Sony’s com- conductor manufacturing equipment. petencies is miniaturization. To bring miniaturi- In the short run, a company’s competitiveness de- zation to its products, Sony must ensure that rives from the price/performance attributes of cur- technologists, engineers, and marketers have a rent products. But the survivors of the first wave of shared understanding of customer needs and of tech- global competition, Western and Japanese alike, are nological possibilities. The force of core competence all converging on similar and formidable standards is felt as decisively in services as in manufacturing. for product cost and quality—minimum hurdles for Citicorp was ahead of others investing in an op- continued competition, but less and less important erating system that allowed it to participate in world as sources of differential advantage. In the long run, markets 24 hours a day. Its competence in systems competitiveness derives from an ability to build, at has provided the company the means to differentiate lower cost and more speedily than competitors, the itself from many financial service institutions. core competencies that spawn unanticipated prod- Core competence is communication, involve- ucts. The real sources of advantage are to be found in ment, and a deep commitment to working across management’s ability to consolidate corporatewide organizational boundaries. It involves many levels technologies and production skills into competen- of people and all functions. World-class research in, cies that empower individual businesses to adapt for example, lasers or ceramics can take place in quickly to changing opportunities. corporate laboratories without having an impact on Senior executives who claim that they cannot any of the businesses of the company. The skills that build core competencies either because they feel the together constitute core competence must coalesce autonomy of business units is sacrosanct or because around individuals whose efforts are not so narrowly their feet are held to the quarterly budget fire should focused that they cannot recognize the opportunities think again. The problem in many Western compa- for blending their functional expertise with those of nies is not that their senior executives are any less others in new and interesting ways. capable than those in Japan nor that Japanese compa- Core competence does not diminish with use. Un- nies possess greater technical capabilities. Instead, like physical assets, which do deteriorate over time, it is their adherence to a concept of the corporation competencies are enhanced as they are applied and that unnecessarily limits the ability of individual shared. But competencies still need to be nurtured businesses to fully exploit the deep reservoir of tech- and protected; knowledge fades if it is not used. Com- nological capability that many American and Euro- petencies are the glue that binds existing businesses. pean companies possess. They are also the engine for new business develop- HARVARD BUSINESS REVIEW May–June 1990 81 Competencies: The Roots of Competitiveness End Products 1 2 3 4 5 6 7 8 9 10 11 12 Business Business Business Business 1 2 3 4 Core Product 2 Core Product 1 Competence Competence Competence Competence 1 2 3 4 The corporation, like a tree, grows from its roots. Core products are nourished by competencies and engender business units, whose fruit are end products. ment. Patterns of diversification and market entry sold several key businesses to competitors who were may be guided by them, not just by the attractiveness already competence leaders—Black & Decker in of markets. small electrical motors, and Thomson, which was Consider 3M’s competence with sticky tape. In eager to build its competence in microelectronics dreaming up businesses as diverse as ‘‘Post-it’’ notes, and had learned from the Japanese that a position in magnetic tape, photographic film, pressure-sensitive consumer electronics was vital to this challenge. tapes, and coated abrasives, the company has brought Management trapped in the strategic business unit to bear widely shared competencies in substrates, (SBU) mind-set almost inevitably finds its individual coatings, and adhesives and devised various ways to businesses dependent on external sources for critical combine them. Indeed, 3M has invested consistently components, such as motors or compressors. But in them. What seems to be an extremely diversified these are not just components. They are core prod- portfolio of businesses belies a few shared core com- ucts that contribute to the competitiveness of a wide petencies. range of end products. They are the physical embodi- In contrast, there are major companies that have ments of core competencies. had the potential to build core competencies but failed to do so because top management was unable to conceive of the company as anything other than a collection of discrete businesses. GE sold much of How Not to Think of Competence its consumer electronics business to Thomson of France, arguing that it was becoming increasingly Since companies are in a race to build the compe- difficult to maintain its competitiveness in this sec- tencies that determine global leadership, successful tor. That was undoubtedly so, but it is ironic that it companies have stopped imagining themselves as 82 HARVARD BUSINESS REVIEW May–June 1990 bundles of businesses making products. Canon, Nor does core competence mean shared costs, as Honda, Casio, or NEC may seem to preside over when two or more SBUs use a common facility—a portfolios of businesses unrelated in terms of cus- plant, service facility, or sales force—or share a com- tomers, distribution channels, and merchandising mon component. The gains of sharing may be sub- strategy. Indeed, they have portfolios that may seem stantial, but the search for shared costs is typically idiosyncratic at times: NEC is the only global com- a post hoc effort to rationalize production across ex- pany to be among leaders in computing, telecommu- isting businesses, not a premeditated effort to build nications, and semiconductors and to have a thriving the competencies out of which the businesses them- consumer electronics business. selves grow. But looks are deceiving. In NEC, digital technol- Building core competencies is more ambitious and ogy, especially VLSI and systems integration skills, different than integrating vertically, moreover. Man- is fundamental. In the core competencies underlying agers deciding whether to make or buy will start with them, disparate businesses become coherent. It is end products and look upstream to the efficiencies of Honda’s core competence in engines and power the supply chain and downstream toward distribu- trains that gives it a distinctive advantage in car, tion and customers. They do not take inventory of motorcycle, lawn mower, and generator businesses. skills and look forward to applying them in nontradi- Canon’s core competencies in optics, imaging, and tional ways. (Of course, decisions about competen- microprocessor controls have enabled it to enter, cies do provide a logic for vertical integration. Canon even dominate, markets as seemingly diverse as copi- is not particularly integrated in its copier business, ers, laser printers, cameras, and image scanners. Phil- except in those aspects of the vertical chain that ips worked for more than 15 years to perfect its support the competencies it regards as critical.) optical-media (laser disc) competence, as did JVC in building a leading position in video recording. Other examples of core competencies might include me- chantronics (the ability to marry mechanical and Identifying Core Competencies—And electronic engineering), video displays, bioengineer- Losing Them ing, and microelectronics. In the early stages of its competence building, Philips could not have imag- At least three tests can be applied to identify core ined all the products that would be spawned by its competencies in a company. First, a core competence optical-media competence, nor could JVC have antic- provides potential access to a wide variety of mar- ipated miniature camcorders when it first began ex- kets. Competence in display systems, for example, ploring videotape technologies. enables a company to participate in such diverse Unlike the battle for global brand dominance, businesses as calculators, miniature TV sets, moni- which is visible in the world’s broadcast and print tors for laptop computers, and automotive dash- media and is aimed at building global ‘‘share of boards—which is why Casio’s entry into the mind,’’ the battle to build world-class competencies handheld TV market was predictable. Second, a core is invisible to people who aren’t deliberately looking competence should make a significant contribution for it. Top management often tracks the cost and to the perceived customer benefits of the end prod- quality of competitors’ products, yet how many man- uct. Clearly, Honda’s engine expertise fills this bill. agers untangle the web of alliances their Japanese Finally, a core competence should be difficult for competitors have constructed to acquire competen- competitors to imitate. And it will be difficult if it is cies at low cost? In how many Western boardrooms a complex harmonization of individual technologies is there an explicit, shared understanding of the com- and production skills. A rival might acquire some of petencies the company must build for world leader- the technologies that comprise the core competence, ship? Indeed, how many senior executives discuss but it will find it more difficult to duplicate the more the crucial distinction between competitive strategy or less comprehensive pattern of internal coordina- at the level of a business and competitive strategy tion and learning. JVC’s decision in the early 1960s to at the level of an entire company? pursue the development of a videotape competence Let us be clear. Cultivating core competence passed the three tests outlined here. RCA’s decision does not mean outspending rivals on research and in the late 1970s to develop a stylus-based video development. In 1983, when Canon surpassed Xerox turntable system did not. in worldwide unit market share in the copier busi- Few companies are likely to build world leadership ness, its R&D budget in reprographics was but a in more than five or six fundamental competencies. small fraction of Xerox’s. Over the past 20 years, A company that compiles a list of 20 to 30 capabili- NEC has spent less on R&D as a percentage of ties has probably not produced a list of core compe- sales than almost all of its American and European tencies. Still, it is probably a good discipline to competitors. generate a list of this sort and to see aggregate capabil- HARVARD BUSINESS REVIEW May–June 1990 83 ities as building blocks. This tends to prompt the argued in these pages before, learning within an alli- search for licensing deals and alliances through ance takes a positive commitment of resources— which the company may acquire, at low cost, the travel, a pool of dedicated people, test-bed facilities, missing pieces. time to internalize and test what has been learned.2 Most Western companies hardly think about com- A company may not make this effort if it doesn’t petitiveness in these terms at all. It is time to take have clear goals for competence building. a tough-minded look at the risks they are running. Another way of losing is forgoing opportunities to Companies that judge competitiveness, their own establish competencies that are evolving in existing and their competitors’, primarily in terms of the businesses. In the 1970s and 1980s, many American price/performance of end products are courting the and European companies—like GE, Motorola, GTE, erosion of core competencies—or making too little Thorn, and GEC—chose to exit the color television effort to enhance them. The embedded skills that business, which they regarded as mature. If by ‘‘ma- give rise to the next generation of competitive prod- ture’’ they meant that they had run out of new prod- ucts cannot be ‘‘rented in’’ by outsourcing and OEM- uct ideas at precisely the moment global rivals had supply relationships. In our view, too many targeted the TV business for entry, then yes, the in- companies have unwittingly surrendered core com- dustry was mature. But it certainly wasn’t mature petencies when they cut internal investment in what in the sense that all opportunities to enhance and they mistakenly thought were just ‘‘cost centers’’ in apply video-based competencies had been exhausted. favor of outside suppliers. In ridding themselves of their television busi- Consider Chrysler. Unlike Honda, it has tended to nesses, these companies failed to distinguish be- view engines and power trains as simply one more tween divesting the business and destroying their component. Chrysler is becoming increasingly de- video media-based competencies. They not only got pendent on Mitsubishi and Hyundai: between 1985 out of the TV business but they also closed the door and 1987, the number of outsourced engines went on a whole stream of future opportunities reliant on from 252,000 to 382,000. It is difficult to imagine video-based competencies. The television industry, Honda yielding manufacturing responsibility, much considered by many U.S. companies in the 1970s to less design, of so critical a part of a car’s function to be unattractive, is today the focus of a fierce public an outside company—which is why Honda has made policy debate about the inability of U.S. corporations such an enormous commitment to Formula One to benefit from the $20-billion-a-year opportunity auto racing. Honda has been able to pool its engine- that HDTV will represent in the mid- to late 1990s. related technologies; it has parlayed these into a cor- Ironically, the U.S. government is being asked to fund poratewide competency from which it develops a massive research project—in effect, to compensate world-beating products, despite R&D budgets U.S. companies for their failure to preserve critical smaller than those of GM and Toyota. core competencies when they had the chance. Of course, it is perfectly possible for a company to In contrast, one can see a company like Sony reduc- have a competitive product line up but be a laggard in ing its emphasis on VCRs (where it has not been developing core competencies—at least for a while. If very successful and where Korean companies now a company wanted to enter the copier business today, threaten), without reducing its commitment to it would find a dozen Japanese companies more than video-related competencies. Sony’s Betamax led to a willing to supply copiers on the basis of an OEM debacle. But it emerged with its videotape recording private label. But when fundamental technologies competencies intact and is currently challenging changed or if its supplier decided to enter the market Matsushita in the 8mm camcorder market. directly and become a competitor, that company’s There are two clear lessons here. First, the costs product line, along with all of its investments in of losing a core competence can be only partly calcu- marketing and distribution, could be vulnerable. lated in advance. The baby may be thrown out with Outsourcing can provide a shortcut to a more com- the bath water in divestment decisions. Second, petitive product, but it typically contributes little to since core competencies are built through a process building the people-embodied skills that are needed of continuous improvement and enhancement that to sustain product leadership. may span a decade or longer, a company that has Nor is it possible for a company to have an intelli- failed to invest in core competence building will find gent alliance or sourcing strategy if it has not made it very difficult to enter an emerging market, unless, a choice about where it will build competence leader- of course, it will be content simply to serve as a ship. Clearly, Japanese companies have benefited distribution channel. from alliances. They’ve used them to learn from Western partners who were not fully committed to 2. ‘‘Collaborate with Your Competitors and Win,’’ HBR Janu- preserving core competencies of their own. As we’ve ary–February 1989, p. 133, with Yves L. Doz. 84 HARVARD BUSINESS REVIEW May–June 1990  American semiconductor companies like Motor- manufacture of core products for a wide variety of ola learned this painful lesson when they elected to external (and internal) customers yields the revenue forgo direct participation in the 256k generation of and market feedback that, at least partly, determines DRAM chips. Having skipped this round, Motorola, the pace at which core competencies can be en- like most of its American competitors, needed a large hanced and extended. This thinking was behind infusion of technical help from Japanese partners to JVC’s decision in the mid-1970s to establish VCR rejoin the battle in the 1-megabyte generation. When supply relationships with leading national consumer it comes to core competencies, it is difficult to get off electronics companies in Europe and the United the train, walk to the next station, and then reboard. States. In supplying Thomson, Thorn, and Telefun- ken (all independent companies at that time) as well as U.S. partners, JVC was able to gain the cash and the diversity of market experience that ultimately From Core Competencies enabled it to outpace Philips and Sony. (Philips devel- to Core Products oped videotape competencies in parallel with JVC, but it failed to build a worldwide network of OEM The tangible link between identified core compe- relationships that would have allowed it to acceler- tencies and end products is what we call the core ate the refinement of its videotape competence products—the physical embodiments of one or more through the sale of core products.) core competencies. Honda’s engines, for example, are JVC’s success has not been lost on Korean compa- core products, linchpins between design and develop- nies like Goldstar, Sam Sung, Kia, and Daewoo, who ment skills that ultimately lead to a proliferation of are building core product leadership in areas as di- end products. Core products are the components or verse as displays, semiconductors, and automotive subassemblies that actually contribute to the value engines through their OEM-supply contracts with of the end products. Thinking in terms of core prod- Western companies. Their avowed goal is to capture ucts forces a company to distinguish between the investment initiative away from potential competi- brand share it achieves in end product markets (for tors, often U.S. companies. In doing so, they accel- example, 40% of the U.S. refrigerator market) and erate their competence-building efforts while the manufacturing share it achieves in any particular ‘‘hollowing out’’ their competitors. By focusing on core product (for example, 5% of the world share of competence and embedding it in core products, compressor output). Asian competitors have built up advantages in com- Canon is reputed to have an 84% world manufac- ponent markets first and have then leveraged off their turing share in desktop laser printer ‘‘engines,’’ even superior products to move downstream to build though its brand share in the laser printer business brand share. And they are not likely to remain the is minuscule. Similarly, Matsushita has a world man- low-cost suppliers forever. As their reputation for ufacturing share of about 45% in key VCR compo- brand leadership is consolidated, they may well gain nents, far in excess of its brand share (Panasonic, price leadership. Honda has proven this with its JVC, and others) of 20%. And Matsushita has a com- Acura line, and other Japanese car makers are follow- manding core product share in compressors world- ing suit. wide, estimated at 40%, even though its brand share Control over core products is critical for other rea- in both the air-conditioning and refrigerator busi- sons. A dominant position in core products allows a nesses is quite small. company to shape the evolution of applications and It is essential to make this distinction between end markets. Such compact audio disc-related core core competencies, core products, and end products products as data drives and lasers have enabled Sony because global competition is played out by different and Philips to influence the evolution of the com- rules and for different stakes at each level. To build puter-peripheral business in optical-media storage. or defend leadership over the long term, a corporation As a company multiplies the number of application will probably be a winner at each level. At the level arenas for its core products, it can consistently re- of core competence, the goal is to build world leader- duce the cost, time, and risk in new product develop- ship in the design and development of a particular ment. In short, well-targeted core products can lead class of product functionality—be it compact data to economies of scale and scope. storage and retrieval, as with Philips’s optical-media competence, or compactness and ease of use, as with Sony’s micromotors and microprocessor controls. The Tyranny of the SBU To sustain leadership in their chosen core compe- tence areas, these companies seek to maximize their The new terms of competitive engagement cannot world manufacturing share in core products. The be understood using analytical tools devised to man- HARVARD BUSINESS REVIEW May–June 1990 85 age the diversified corporation of 20 years ago, when of product market share do not necessarily reflect competition was primarily domestic (GE versus Wes- various companies’ underlying competitiveness. In- tinghouse, General Motors versus Ford) and all the deed, companies that attempt to build market share key players were speaking the language of the same by relying on the competitiveness of others, rather business schools and consultancies. Old prescrip- than investing in core competencies and world core- tions have potentially toxic side effects. The need product leadership, may be treading on quicksand. for new principles is most obvious in companies or- In the race for global brand dominance, companies ganized exclusively according to the logic of SBUs. like 3M, Black & Decker, Canon, Honda, NEC, and The implications of the two alternate concepts of Citicorp have built global brand umbrellas by prolif- the corporation are summarized in ‘‘Two Concepts erating products out of their core competencies. This of the Corporation: SBU or Core Competence.’’ has allowed their individual businesses to build Obviously, diversified corporations have a portfo- image, customer loyalty, and access to distribution lio of products and a portfolio of businesses. But we channels. believe in a view of the company as a portfolio of When you think about this reconceptualization of competencies as well. U.S. companies do not lack the corporation, the primacy of the SBU—an organi- the technical resources to build competencies, zational dogma for a generation—is now clearly an but their top management often lacks the vision to anachronism. Where the SBU is an article of faith, build them and the administrative means for assem- resistance to the seductions of decentralization can bling resources spread across multiple businesses. A seem heretical. In many companies, the SBU prism shift in commitment will inevitably influence pat- means that only one plane of the global competitive terns of diversification, skill deployment, resource battle, the battle to put competitive products on the allocation priorities, and approaches to alliances and shelf today, is visible to top management. What are outsourcing. the costs of this distortion? We have described the three different planes on which battles for global leadership are waged: core Underinvestment in Developing Core Competen- competence, core products, and end products. A cor- cies and Core Products. When the organization is poration has to know whether it is winning or losing conceived of as a multiplicity of SBUs, no single on each plane. By sheer weight of investment, a business may feel responsible for maintaining a via- company might be able to beat its rivals to blue- ble position in core products nor be able to justify sky technologies yet still lose the race to build core the investment required to build world leadership in competence leadership. If a company is winning the some core competence. In the absence of a more race to build core competencies (as opposed to build- comprehensive view imposed by corporate manage- ing leadership in a few technologies), it will almost ment, SBU managers will tend to underinvest. Re- certainly outpace rivals in new business develop- cently, companies such as Kodak and Philips have ment. If a company is winning the race to capture recognized this as a potential problem and have world manufacturing share in core products, it will begun searching for new organizational forms that probably outpace rivals in improving product fea- will allow them to develop and manufacture core tures and the price/performance ratio. products for both internal and external customers. Determining whether one is winning or losing end SBU managers have traditionally conceived of product battles is more difficult because measures competitors in the same way they’ve seen them- Two Concepts of the Corporation: SBU or Core Competence SBU Core Competence Basis for competition Competitiveness of today’s products Interfirm competition to build competencies Corporate structure Portfolio of businesses related in product- Portfolio of competencies, core 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 trade-offs among businesses building competencies to secure the future 86 HARVARD BUSINESS REVIEW May–June 1990 selves. On the whole, they’ve failed to note the em- innovation opportunities that are close at hand— phasis Asian competitors were placing on building marginal product-line extensions or geographic leadership in core products or to understand the criti- expansions. Hybrid opportunities like fax machines, cal linkage between world manufacturing leadership laptop computers, hand-held televisions, or portable and the ability to sustain development pace in core music keyboards will emerge only when managers competence. They’ve failed to pursue OEM-supply take off their SBU blinkers. Remember, Canon ap- opportunities or to look across their various product peared to be in the camera business at the time it divisions in an attempt to identify opportunities for was preparing to become a world leader in copiers. coordinated initiatives. Conceiving of the corporation in terms of core com- petencies widens the domain of innovation. Imprisoned Resources. As an SBU evolves, it often develops unique competencies. Typically, the people who embody this competence are seen as the sole property of the business in which they grew up. The manager of another SBU who asks to borrow talented Developing Strategic Architecture people is likely to get a cold rebuff. SBU managers The fragmentation of core competencies becomes are not only unwilling to lend their competence car- inevitable when a diversified company’s information riers but they may actually hide talent to prevent its systems, patterns of communication, career paths, redeployment in the pursuit of new opportunities. managerial rewards, and processes of strategy devel- This may be compared to residents of an underdevel- opment do not transcend SBU lines. We believe that oped country hiding most of their cash under their senior management should spend a significant mattresses. The benefits of competencies, like the amount of its time developing a corporatewide stra- benefits of the money supply, depend on the velocity tegic architecture that establishes objectives for of their circulation as well as on the size of the stock competence building. A strategic architecture is a the company holds. road map of the future that identifies which core Western companies have traditionally had an ad- competencies to build and their constituent tech- vantage in the stock of skills they possess. But have nologies. they been able to reconfigure them quickly to re- By providing an impetus for learning from alliances spond to new opportunities? Canon, NEC, and and a focus for internal development efforts, a strate- Honda have had a lesser stock of the people and gic architecture like NEC’s C&C can dramatically technologies that compose core competencies but reduce the investment needed to secure future mar- could move them much quicker from one business ket leadership. How can a company make partner- unit to another. Corporate R&D spending at Canon ships intelligently without a clear understanding of is not fully indicative of the size of Canon’s core the core competencies it is trying to build and those it competence stock and tells the casual observer noth- is attempting to prevent from being unintentionally ing about the velocity with which Canon is able to transferred? move core competencies to exploit opportunities. Of course, all of this begs the question of what a When competencies become imprisoned, the peo- strategic architecture should look like. The answer ple who carry the competencies do not get assigned will be different for every company. But it is helpful to the most exciting opportunities, and their skills to think again of that tree, of the corporation orga- begin to atrophy. Only by fully leveraging core com- nized around core products and, ultimately, core petencies can small companies like Canon afford to competencies. To sink sufficiently strong roots, a compete with industry giants like Xerox. How company must answer some fundamental questions: strange that SBU managers, who are perfectly willing How long could we preserve our competitiveness in to compete for cash in the capital budgeting process, this business if we did not control this particular core are unwilling to compete for people—the company’s competence? How central is this core competence to most precious asset. We find it ironic that top man- perceived customer benefits? What future opportuni- agement devotes so much attention to the capital ties would be foreclosed if we were to lose this partic- budgeting process yet typically has no comparable ular competence? mechanism for allocating the human skills that em- The architecture provides a logic for product and body core competencies. Top managers are seldom market diversification, moreover. An SBU manager able to look four or five levels down into the organiza- would be asked: Does the new market opportunity tion, identify the people who embody critical com- add to the overall goal of becoming the best player petencies, and move them across organizational in the world? Does it exploit or add to the core com- boundaries. petence? At Vickers, for example, diversification op- Bounded Innovation. If core competencies are not tions have been judged in the context of becoming recognized, individual SBUs will pursue only those the best power and motion control company in the HARVARD BUSINESS REVIEW May–June 1990 87 world (see the insert ‘‘Vickers Learns the Value of zation. It provides a template for allocation decisions Strategic Architecture’’). by top management. It helps lower level managers The strategic architecture should make resource understand the logic of allocation priorities and disci- allocation priorities transparent to the entire organi- plines senior management to maintain consistency. Vickers Learns the Value of Strategic Architecture The idea that top management should develop a cor- porate strategy for acquiring and deploying core compe- Vickers Map of Competencies tencies is relatively new in most U.S. companies. There Electronic Fluid Power Electric are a few exceptions. An early convert was Trinova Controls Electrohydraulic Power (previously Libbey Owens Ford), a Toledo-based corpo- Valve amplifiers Pumps AC/DC ration, which enjoys a worldwide position in power and Logic Control valves Servo Cartridge valves motion controls and engineered plastics. One of its Motion Actuators Stepper major divisions is Vickers, a premier supplier of hydrau- Complete machine Package systems lics components like valves, pumps, actuators, and and vehicle Pneumatic products Fuel/Fluid transfer filtration devices to aerospace, marine, defense, auto- Filtration motive, earth-moving, and industrial markets. Vickers saw the potential for a transformation of its traditional business with the application of electronics Sensors System Engineering Electric disciplines in combination with its traditional tech- Products Valve/Pump Application focus nologies. The goal was ‘‘to ensure that change in tech- Actuators Actuator Power/Motion nology does not displace Vickers from its customers.’’ Fan packages Machine Control This, to be sure, was initially a defensive move: Vickers Generators Electronics recognized that unless it acquired new skills, it could Software not protect existing markets or capitalize on new growth opportunities. Managers at Vickers attempted to conceptualize the likely evolution of (a) technologies relevant to the power and motion control business, (b) Offering functionalities that would satisfy emerging customer Systems Packages Components Service needs, and (c) new competencies needed to creatively Training manage the marriage of technology and customer needs. Despite pressure for short-term earnings, top manage- ment looked to a 10- to 15-year time horizon in devel- oping a map of emerging customer needs, changing Focus Markets technologies, and the core competencies that would be Factory automation Off-highway Missiles/Space necessary to bridge the gap between the two. Its slogan Automotive systems Commercial aircraft Defense vehicles was ‘‘Into the 21st Century.’’ (A simplified version of the Plastic process Military aircraft Marine overall architecture developed is shown here.) Vickers is currently in fluid-power components. The architecture making ‘‘here and now’’ decisions about product priori- identifies two additional competencies, electric-power ties, acquisitions, alliances, and recruitment. components and electronic controls. A systems integra- Since 1986, Vickers has made more than ten clearly tion capability that would unite hardware, software, targeted acquisitions, each one focused on a specific and service was also targeted for development. component or technology gap identified in the overall The strategic architecture, as illustrated by the Vick- architecture. The architecture is also the basis for inter- ers example, is not a forecast of specific products or nal development of new competencies. Vickers has un- specific technologies but a broad map of the evolving dertaken, in parallel, a reorganization to enable the linkages between customer functionality requirements, integration of electronics and electrical capabilities potential technologies, and core competencies. It as- with mechanical-based competencies. We believe that sumes that products and systems cannot be defined with it will take another two to three years before Vickers certainty for the future but that preempting competitors reaps the total benefits from developing the strategic in the development of new markets requires an early architecture, communicating it widely to all its employ- start to building core competencies. The strategic archi- ees, customers, and investors, and building administra- tecture developed by Vickers, while describing the fu- tive systems consistent with the architecture. ture in competence terms, also provides the basis for 88 HARVARD BUSINESS REVIEW May–June 1990 In short, it yields a definition of the company and and are shown in ‘‘Core Competencies at Canon.’’ the markets it serves. 3M, Vickers, NEC, Canon, and When Canon identified an opportunity in digital Honda all qualify on this score. Honda knew it was laser printers, it gave SBU managers the right to raid exploiting what it had learned from motorcycles— other SBUs to pull together the required pool of tal- how to make high-revving, smooth-running, light- ent. When Canon’s reprographics products division weight engines—when it entered the car business. undertook to develop microprocessor-controlled The task of creating a strategic architecture forces copiers, it turned to the photo products group, which the organization to identify and commit to the tech- had developed the world’s first microprocessor-con- nical and production linkages across SBUs that will trolled camera. provide a distinct competitive advantage. Also, reward systems that focus only on product- It is consistency of resource allocation and the line results and career paths that seldom cross SBU development of an administrative infrastructure ap- boundaries engender patterns of behavior among unit propriate to it that breathes life into a strategic archi- managers that are destructively competitive. At tecture and creates a managerial culture, teamwork, NEC, divisional managers come together to identify a capacity to change, and a willingness to share re- next-generation competencies. Together they decide sources, to protect proprietary skills, and to think how much investment needs to be made to build long term. That is also the reason the specific archi- up each future competency and the contribution in tecture cannot be copied easily or overnight by capital and staff support that each division will need competitors. Strategic architecture is a tool for com- to make. There is also a sense of equitable exchange. municating with customers and other external con- One division may make a disproportionate contribu- stituents. It reveals the broad direction without tion or may benefit less from the progress made, but giving away every step. such short-term inequalities will balance out over the long term. Incidentally, the positive contribution of the SBU Redeploying to Exploit Competencies If the company’s core competencies are its critical Core Competencies at Canon resource and if top management must ensure that Precision Fine Micro- competence carriers are not held hostage by some Mechanics Optics electronics particular business, then it follows that SBUs should bid for core competencies in the same way they bid Basic camera m □ for capital. We’ve made this point glancingly. It is Compact fashion camera m □ important enough to consider more deeply. Electronic camera m □ Once top management (with the help of divisional EOS autofocus camera m □ m and SBU managers) has identified overarching com- Video still camera m □ m petencies, it must ask businesses to identify the proj- Laser beam printer m □ m ects and people closely connected with them. Color video printer m m Corporate officers should direct an audit of the loca- Bubble jet printer m m tion, number, and quality of the people who embody Basic fax m m competence. Laser fax m m This sends an important signal to middle manag- Calculator m ers: core competencies are corporate resources and Plain paper copier m □ m may be reallocated by corporate management. An Battery PPC m □ m individual business doesn’t own anybody. SBUs are Color copier m □ m entitled to the services of individual employees so Laser copier m □ m long as SBU management can demonstrate that the Color laser copier m □ m opportunity it is pursuing yields the highest possible NAVI m □ m pay-off on the investment in their skills. This mes- Still video system m □ m sage is further underlined if each year in the strategic Laser imager m □ m planning or budgeting process, unit managers must Cell analyzer m □ m justify their hold on the people who carry the com- Mask aligners m m pany’s core competencies. Stepper aligners m m Elements of Canon’s core competence in optics Excimer laser aligners m □ m are spread across businesses as diverse as cameras, Every Canon product is the result of at least one core competency. copiers, and semiconductor lithographic equipment HARVARD BUSINESS REVIEW May–June 1990 89 manager should be made visible across the company. all engineers under 30 were invited to apply for mem- An SBU manager is unlikely to surrender key people bership on a seven-person committee that was to if only the other business (or the general manager of spend two years plotting Canon’s future direction, that business who may be a competitor for promo- including its strategic architecture. tion) is going to benefit from the redeployment. Co- Competence carriers should be regularly brought operative SBU managers should be celebrated as together from across the corporation to trade notes team players. Where priorities are clear, transfers are and ideas. The goal is to build a strong feeling of less likely to be seen as idiosyncratic and politically community among these people. To a great extent, motivated. their loyalty should be to the integrity of the core Transfers for the sake of building core competence competence area they represent and not just to par- must be recorded and appreciated in the corporate ticular businesses. In traveling regularly, talking fre- memory. It is reasonable to expect a business that quently to customers, and meeting with peers, has surrendered core skills on behalf of corporate competence carriers may be encouraged to discover opportunities in other areas to lose, for a time, some new market opportunities. of its competitiveness. If these losses in performance Core competencies are the wellspring of new busi- bring immediate censure, SBUs will be unlikely to ness development. They should constitute the focus assent to skills transfers next time. for strategy at the corporate level. Managers have to Finally, there are ways to wean key employees off win manufacturing leadership in core products and the idea that they belong in perpetuity to any particu- capture global share through brand-building pro- lar business. Early in their careers, people may be grams aimed at exploiting economies of scope. Only exposed to a variety of businesses through a carefully if the company is conceived of as a hierarchy of core planned rotation program. At Canon, critical people competencies, core products, and market-focused move regularly between the camera business and the business units will it be fit to fight. copier business and between the copier business and Nor can top management be just another layer of the professional optical-products business. In mid- accounting consolidation, which it often is in a re- career, periodic assignments to cross-divisional proj- gime of radical decentralization. Top management ect teams may be necessary, both for diffusing core must add value by enunciating the strategic architec- competencies and for loosening the bonds that might ture that guides the competence acquisition process. tie an individual to one business even when brighter We believe an obsession with competence building opportunities beckon elsewhere. Those who embody will characterize the global winners of the 1990s. critical core competencies should know that their With the decade underway, the time for rethinking careers are tracked and guided by corporate human the concept of the corporation is already overdue. resource professionals. In the early 1980s at Canon, 90 HARVARD BUSINESS REVIEW May–June 1990