Theory of Core Competency By C K Prahalad and Gary Hamel Definition Core Competencies are the collective learning in the

organisation, especially how to Coordinate diverse production skills and integrate multiple streams of technologies.

Primary Characteristics of Core Competencies 1. Should provide access to a wide variety of markets. E.g. HONDA !t"s competence in engines and power trains have helped it to dominate motor#cycle, passenger car, lawn mower, and electricity generator $usinesses. &ust make significant contribution to the perceived consumer benefit o' the end product. E.g. 3 !t"s competencies in su$strates, coatings and adhesives have $rought a$out $usinesses li(e )post*it" notes, magnetic tapes, photographic 'ilms, pressure sensitive tapes and coated a$rasives. &ust $e difficu!t for competitors to imitate . E.g. CANON !t"s competencies in optics, imaging, and microprocessor controls gave it distinct advantage in copiers, laser printers, cameras and image scanners.

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Companies lose C.C. when they thin( o' only price , per'ormance o' end product. -ery soon suppliers can $ecome competitors. .Chrysler -s Honda/ 0ithout identi'ying C.C. it is di''icult to have intelligent alliances to $uild strategy.

The Tree Ana!ogy

"ome features of Core Competencies 1hey are a$out organisation o' wor( and the delivery o' value. 1hey re2uire communication, involvement, and deep commitment to wor( across organisational $oundaries. 1hey do not diminish with use. 1hey are the engines o' new product development. 1hey decide the patterns o' diversi'ication and mar(et entry. 1hey are not easily visi$le unli(e the $attle 'or glo$al $rand dominance. 1hey are $uilt via a we$ o' strategic alliances. !t does not mean outspending rivals in research and development.

"trategic #mportance of Core Competence$ Core Product and %nd Product 1he need to distinguish $etween $rand share achieved in end product mar(et .say re'rigerators/ and the manu'acturing share achieved in a core product .say compressors/ is important. E.g. Canon large world manu'acturing share in desktop printer engines, $ut $rand share in !aser printer $usiness is relatively small. E.g. atsushita &Panasonic' 345 world manu'acturing share in compressors. But very small $rand shares in air conditioners and re'rigerators. !t is there'ore important to have a larger share o' world core product"s mar(et to invest and develop core competencies. 1he e6cess revenue earned can $e used to $uild core competencies. 7s application o' core products is multiplied, it can reduce cost, time and risk in new product development .i.e.core products can lead to economies o' scale and scope/.

(hat is "trategic Architecture &"A') Strategic 7rchitecture is a road map o' the 'uture that identi'ies which core competencies to $uild and their constituent technologies. 1op management"s real responsi$ility is a strategic architecture that guides competence $uilding .$oth internally and 'rom partnerships/. By providing an impetus 'or learning 'rom alliances and a 'ocus 'or internal development e''orts, a company can dramatically reduce the investment needed to secure 'uture mar(et leadership. S.7. provides logic 'or product and mar(et diversi'ication. .&8& 'rom tractors and utility vehicles to truc(s, two#wheelers and passenger car/ S.7. should ma(e resource allocation priority transparent to the entire organi9ation .'rom mature and declining $usinesses to emerging ones/. S.7. lin(s changing customer needs, potential technologies and core competencies. .Samsung in consumer electronics mar(et/ S.7. is a tool 'or communication with customers and e6ternal constituents. !t reveals the $road direction without giving away every step.

*edep!oying *esources to %+p!oit Competencies Core Competencies are corporate resources and may $e reallocated $y corporate management. 7n individual $usiness does not own any$ody. .0hen Canon identi'ied an opportunity in digital laser printers, it gave SB: managers the right to raid other SB:s to pull together the re2uired pool o' talent/. Competence carriers should $e regularly $rought together 'rom across the corporation to trade notes and ideas. 1his will $uild a strong 'eeling o' community among these people. 1he loyalty o' competence carriers should $e to the integrity o' the core competency area they represent and not ;ust to a particular $usiness.

1arun Khanna and Krishna Palepu have a contrarian perspective in their article, <0hy =ocused Strategies may $e wrong 'or Emerging &ar(ets>

Competing on Capabi!ities ,y -eorge "ta!k$ Phi!ip %vans . /awrence "hu!man !t is $ased on the ?Core Competency? concept $ut e6tended $eyond the internal limits o' the company i.e. loo(ing at managing outsider relationships along with in#house process capa$ilities. !t loo(s $eyond production s(ills and technologies per se. E.g. !' Honda was good at engines so was G&. But Honda was very good at $oth <dea!er 0 management> capa$ility .e6ternal/ and <product 1 rea!i2ation> capa$ility .internal/. anagement

34 Dea!er

Honda developed the a$ility to train and support its dealer networ( with operating procedures and policies 'or merchandising, selling, 'loor planning and service management. =irst developed 'or its motorcycle $usiness, this set o' $usiness processes has since $een replicated in each new $usiness the company has entered.

54 Product *ea!i2ation .a$ility to launch new products success'ully/ 1raditional product development separates planning, proving and e6ecuting into three se2uential activities 7ssessing the mar(et"s needs and determining whether e6isting products are meeting those needs@

 Aeveloping 8 testing the proposed product@ and 1hen $uilding the prototype leading to commercial production. The end resu!t of this process is a new factory or organi2ation to introduce the new product4 Honda has arranged these activities di''erently. =irst, planning and proving go on continuously and in parallel. 1hese activities are clearly separated 'rom e6ecution. Be6t, when a new product is ready, it is released to e6isting 'actories and organi9ations, which dramatically shortens the amount o' time needed to launch it. E.g. 6Acura /egend7 was launched using the 'acilities o' 6Honda /egend7 with the help o' =&S. !t also re2uires appropriate culture 8 attitude. Cn the other hand set up a separate company .a su$sidiary/ to manu'acture and mar(et 6"aturn7 .Saturn Corporation now de$un(ed/. 7s time is reduced, so are cost and ris(. E6ample o' (a!1 art .7 service company with no manu'acturing operations/ !1CDs diversi'ied status originates 'rom its corporate strategy aimed at creating multiple drivers o' growth anchored on its time#tested core competencies unmatched distri$ution reach, superior $rand#$uilding

capa$ilities, e''ective supply chain management and ac(nowledged service s(ills in hoteliering. Competing on *esources David 8 Co!!is . Cynthia ontgomery

!t e6amines and attempts to e6plain how a company"s resources drive its per'ormance in a dynamic competitive environment. Competitive advantage, whatever its source, ultimately can $e attri$uted to the ownership of a valuable resource that ena$les the company to per'orm activities $etter or more ine6pensively than competitors.

1he company is essentially a $undle o' resources i' ii/ iii' Physica! various assets #ntangib!e $rand names, technological (now#how, etc. Organi2ationa! capabi!ity em$edded in a company"s routines, processes and culture. .&ar(eting capa$ility, E8A capa$ility, pro;ect management capa$ility, new product launch capa$ility, etc/

Can these resources !ead to competitive advantage) #s this advantage sustainab!e)

T%"T O9 ":"TA#NA,/% CO P%T#T#;% AD;ANTA-% O9 *%"O:*C%" !t is not enough to have competitive advantage vis#F#vis resources@ =or a resource to 2uali'y as the $asis 'or an e''ective strategy, it must pass a num$er o' e6ternal mar(et tests o' its value. 1here'ore it is essential to understand what these critical tests o' SC7 are. 34 Test of #nimitabi!ity !s the resource hard to copyG Physical uniqueness E.g. a wonder'ul real estate location, mineral rights, patents, etc. Path dependency 1he resource is uni2ue .especially the $rand loyalty it en;oys/ and there'ore scarce $ecause o' what happened along the path ta(en in their accumulation. E.g. Hohnson 8 Hohnson, 7mul, etc. Causal Ambiguity Here the di''iculty lies in determining either what the valua$le resource is or how to re#create it. 1his poses a $ig pro$lem 'or would#$e competitors. E.g. Eu$$ermaid, +&, Haldirams, etc. Economic Deterrence Because o' the pre#emptive investment $y a competitor $y ma(ing a si9ea$le investment in an asset. E.g. &aruti Su9u(i.

54 Test of Durabi!ity How 2uic(ly does the resource depreciateG 1he longer a resource lasts, more valua$le it is. Eesources, especially in technology driven industries, are eliminated via )creative destruction" or )canni$ali9ation" .Hoseph Schumpeter/. Brand is among the most dura$le resource .i' ta(en care o'/. 34 Test of Appropriabi!ity 0ho captures the value that the resource createsG &any times it is an individual who drives success and there'ore value in an organi9ation@ can the 'irm loose himG Aoes all value go to the 'irm, the resource owner@ or to others including customers, distri$utors, suppliers and employeesG Can the 'irm $e denied its share o' the value $y these important playersG <4 Test of "ubstitutabi!ity Can a uni2ue resource $e trumped $y a di''erent resourceG E.g. Steel industry is losing its mar(et in automo$ile engines to aluminum. !n car $umpers to molded plastics. Ietters to emails and sms.

 E.g. Bo competitor has $een a$le to $ring a su$stitute 'or 7mul"s low price strategy in mil( products in !ndia. E#commerce companies are su$stituting the distri$ution reach o' companies with courier .home delivery/. =4 Test of Competitive "uperiority 0hose resource is really $etterG !t is important to evaluate a company"s resources relative to competitors. 1o avoid vagueness o' generic statements o' resources li(e )consumer mar(eting s(ills" .C&S/, it is important to disaggregate the company"s resources. 1he category )C&S" 'or e.g. is too $road. !t can $e divided into a su$ category li(e $rand management, which can $e 'urther divided into )product# line e6tension" s(ill. 0hat is the va!ue of a brand measured by its sa!esG How has the brand sa!es grown y1o1y 'or the last 'ive years $oth in terms o' value and volumeG 0hat is the profit that this brand has been earning and can earnG How has the brand profits grown y1o1y 'or the last 'ive yearsG Has the unit profit increased or decreasedG 0hat are its implications to the $rand valueG

Have brand e+tensions been madeG 0hat is the success rate of these e+tensionsG 7t what cost has each brand e+tension $een madeG Since it is possi$le to measure these, it is possi$le to determine which company is competitively superior on these dimensions.

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