Prahalad, C.K., Gary Hamel (1990). Harvard Business Review, May-June, 79-91.

A turbulent time:
1987 stock market crash 1989 Berlin Wall fell

1990 dissolution of the Soviet Union

1970s- 1980s: unchecked growth in corporations

Becoming large, inefficient conglomerates
Acquired what they needed: strategic business

units (SBUs)

Concept based on the ineffectiveness of these SBU C. K. Prahalad

management guru engage the "bottom of the pyramid" from cutting-edge to clich in six years

Gary Hamel:
continues to stress innovation still writes for HBR open innovation platform: Management

Innovation Exchange (MIX)

Image source: Wikipedia

Idea: The evolution of global management and the emergence/importance of Competencyminded management

Rethinking the Corporation The Roots of Competitive Advantage How Not to Think of Competence Identifying Core Competencies And Losing Them From Core Competencies to Core Products The Tyranny of the SBU Developing Strategic Architecture Redeploying to Exploit Competencies

Create markets, recognize emerging markets, shift consumers in established markets Requires major change from management as usual Changing basis for global leadership Portfolio of companies >>> portfolio of competencies

Strategic architecture: shift in thinking and resources to focus on competencies Focus on C&C as competency Predicted the blending of related fields Developed core product to compete in them Acquired competencies through alliances Now a world leader in consumer electronics
Image source: NEC

Companies using competencies experience rapid growth:

Canon, Honda outpaced rivals

Sony, Casio, Yamaha invented new devices

Competiveness result gaining to spawn unanticipated products Consolidating corporate-wide technologies and resources into competencies

Western companies stuck in old mentality Diversified corporation is a large tree Core competence is:
a bundle of skills integrated to make a company unique the engine for new business development, underlying

In contrast:

component of a companys competitive advantage created from the coordination, integration and harmonization of diverse skills and multiple streams of technologies communication, involvement, and working across organizational boundaries. grows, instead of diminishes, with use
subsidiaries as discrete SBUs

Image source: HBR

Companies consider themselves as bundles of product making businesses.

=> competitive strategy at the level of a business surpasses that at the level of an entire company.

Companies competitiveness is focused on price/performance attributes of current products.

Companies top management is not fully committed to building core competencies.

No detailed plan on what/where/how to build up.

Cultivating core competence does not mean

outspending rivals on R&D. Core competence does not mean shared costs. Building core competencies is different than integrating vertically.

How to identify: A Core Competency should be able to:

Accessibility: provide potential access to a variety

of markets Value-creation: make a significant contribution to perceived customer benefits of the end product => high economic value = benefits - costs Uniqueness: Be difficult for competitors to imitate => isolating mechanism

How to lose: A Core Competency is lost:

Through outsourcing/OEM-supply relationships

=> Example: Chrysler vs Honda Through giving up opportunities to establish competencies that are evolving in existing businesses => Example: television business

Lessons learned:
The costs of losing a core competence can be only

partly calculated in advance. It is very difficult to enter an emerging market if a company fails to invest in core competence building.

Core Competencies Build world leadership in the design and development of a particular class of product functionality

Core Products Embed competencies in core products. Maximize the world manufacturing share in core products -> shape the evolutions of end products

End Products First, build up advantages in component markets. Then, leverage off superior products to build brand share

Two Concepts of the Corporation: SBU or Core Competence Basic for competition Corporate structure Status of the business unit SBU Competitiveness of todays products Portfolio of businesses related in productmarket terms Autonomy is sacrosanct, the SBU owns all resources other than cash Discrete businesses are the unit of analysis, capital is allocated business by business Core Competence Interfirm competition to build competencies Portfolio of competencies, core products, and businesses SBU is potential reservoir of core competencies Businesses and competencies are the unit of analysis: top management allocates capital and talent

Resource allocation

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 Figure source: Prahalad, C.K., Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review, 86.

The ineffectiveness of SBU model:

Underinvestment in Developing Core

Competencies and Core Products Imprisoned Resources Bounded Innovation A shift in management is inevitable.

A strategic architecture:
Establish objectives for competence building A road map of the future that identifies which core

competencies to build and related technologies Create a managerial culture, team work, a capacity to change, and a willingness to share resources, to protect proprietary skills, and to think long term Consistency of resource allocation, administrative infrastructure

Benefits of Strategic Architecture

Reduce the investment needed to secure future

market leadership Provide a logic for product and market diversification

Management duties:
To identify and commit to technical and production linkages across SBUs that will provide a distinct competitive advantage. Top management: make resource allocation priority decision Lower level of management: understand and maintain consistency with top managements decision and disciplines.

SBUs should bid for core competencies in the same way they did for capital. How to exploit:
SBUs must defend why they need certain talents
SBUs must sacrifice short term in return for long

term benefits Rotation

The article is a radical breakthrough in management. Strengths of the article:

Timely, ground-breaking, forward-looking

Weakness of the article:

Difficult to read and understand fully

1. What is a core competence of a corporation? Why core competencies do no diminish in an organization? 2. What do the authors mean by the tyranny of the SBU? In what ways the two concepts of the corporation, SBU and core competence differ? Explain.
3. What would be your (individual) core competence? How would you relate that to your future development and personal goals in life?