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The Core Competence of the Corporation

by C.K. Prahalad and Gary Hamel

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Harvard Business Review

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The Idea in Brief—the core ideaThe Idea in Practice—putting the idea to work

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The Idea in Brief The Idea in Practice

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Diversified giant NEC competed in seem-ingly disparate businesses—semiconduc-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 company’s col-lective knowledge about how to coordi-nate diverse production skills and technolo-gies.

NEC used its core competencies to achieve what most companies only attempt: Invent new markets, exploit emerging ones, de-light customers with products they hadn’t even imagined—but 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 firm’s diverse production and technology skills—a systemic advan-tage your competitors can’t copy.

CLARIFY CORE COMPETENCIES

When you clarify competencies, your entire organization knows how to support your competitive advantage—and readily allocates resources to build cross-unit technological and production links. Use these steps:

Articulate a strategic intent

that defines your company and its markets (e.g., NEC’s “exploit the convergence of computing and commu-nications”).

Identify core competencies

that support that intent. Ask:

•

How long could we dominate our business if we didn’t control this competency?

•

What future opportunities would we lose without it?

•

Does it provide access to multiple markets? (Casio’s core competence with display sys-tems let it succeed in calculators, laptop monitors,

and

car dashboards.)

•

Do customer benefits revolve around it? (Honda’s competence with high-revving, lightweight engines offers multiple con-sumer benefits.)

BUILD CORE COMPETENCIES

Once you’ve identified core competencies, enhance them:

Invest in needed technologies.

Citicorp trumped rivals by adopting an operating sys-tem that leveraged its competencies—and let it participate in world markets 24 hours a day.

Infuse resources throughout business units

to outpace rivals in new business develop-ment. 3M and Honda won races for global brand dominance by creating wide varieties of products from their core competencies. Re-sults? They built image, customer loyalty, and access to distribution channels for all their businesses.

Forge strategic alliances.

NEC’s 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 MIND-SET

Competency-savvy managers work well across organizational boundaries, willingly share resources, and think long term. To en-courage this mind-set:

Stop thinking of business units as sacro-sanct.

That imprisons resources in units and motivates managers to hide talent as the company pursues hot opportunities.

Identify projects and people who embody the firm’s core competencies.

This sends a message: Core competencies are corporate—not unit—resources, and those who embody them can be reallocated. (When Canon spot-ted opportunities in digital laser printers, it let managers raid other units to assemble talent.)

Gather managers to identify next-genera-tion competencies.

Decide how much invest-ment each needs, and how much capital and staff each division should contribute.


by C.K. Prahalad and Gary Hamel

harvard business review • may–june 1990 page 2

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The most powerful way to prevail in globalcompetition is still invisible to many compa-nies. During the 1980s, top executives werejudged on their ability to restructure, declut-ter, and delayer their corporations. In the1990s, they’ll be judged on their ability toidentify, cultivate, and exploit the core compe-tencies that make growth possible—indeed,they’ll 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 tobecome a major player in the evolving infor-mation technology industry. It was active intelecommunications. Its operations spanned avariety of businesses including telephones,switching and transmission systems, digitalPABX, semiconductors, packet switching, satel-lites, defense systems, and lighting products.And GTE’s Entertainment Products Group,which produced Sylvania color TVs, had a posi-tion in related display technologies. In 1980,GTE’s sales were $9.98 billion, and net cashflow was $1.73 billion. NEC, in contrast, was

much smaller, at $3.8 billion in sales. It had acomparable technological base and computerbusinesses, but it had no experience as an oper-ating telecommunications company.

Yet look at the positions of GTE and NEC in1988. GTE’s 1988 sales were $16.46 billion, andNEC’s sales were considerably higher at $21.89billion. GTE has, in effect, become a telephoneoperating company with a position in defenseand lighting products. GTE’s other businessesare small in global terms. GTE has divested Syl-vania TV and Telenet, put switching, transmis-sion, and digital PABX into joint ventures, andclosed down semiconductors. As a result, theinternational position of GTE has eroded.Non-U.S. revenue as a percent of total revenuedropped from 20% to 15% between 1980 and1988.

NEC has emerged as the world leader insemiconductors and as a first-tier player in tele-communications products and computers. Ithas consolidated its position in mainframecomputers. It has moved beyond public switch-ing and transmission to include such lifestyle



C.K. 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 ar-ticle, ‘‘Strategic Intent’’ (May–June 1989), won the 1989 McKinsey Award for excellence. This article is based on research funded by the Gatsby Charita-ble Foundation.

products as mobile telephones, facsimile ma-chines, and laptop computers—bridging thegap between telecommunications and officeautomation. NEC is the only company in theworld to be in the top five in revenue in tele-communications, semiconductors, and main-frames. Why did these two companies, startingwith comparable business portfolios, performso differently? Largely because NEC conceivedof itself in terms of ‘‘core competencies,’’ andGTE did not.

Rethinking the Corporation

Once, the diversified corporation could simplypoint its business units at particular end prod-uct markets and admonish them to becomeworld leaders. But with market boundarieschanging ever more quickly, targets are elusiveand capture is at best temporary. A few com-panies have proven themselves adept at in-venting new markets, quickly entering emerg-ing markets, and dramatically shiftingpatterns of customer choice in establishedmarkets. These are the ones to emulate. Thecritical task for management is to create an or-ganization capable of infusing products withirresistible functionality or, better yet, creat-ing products that customers need but have notyet even imagined.

This is a deceptively difficult task. Ulti-mately, it requires radical change in the man-agement of major companies. It means, first ofall, that top managements of Western compa-nies must assume responsibility for competi-tive decline. Everyone knows about high inter-est rates, Japanese protectionism, outdatedantitrust laws, obstreperous unions, and impa-tient investors. What is harder to see, or harderto acknowledge, is how little added momen-tum companies actually get from political ormacroeconomic ‘‘relief.’’ Both the theory andpractice of Western management have createda drag on our forward motion. It is the princi-ples of management that are in need of re-form.

NEC versus GTE, again, is instructive andonly one of many such comparative cases weanalyzed to understand the changing basis forglobal leadership. Early in the 1970s, NEC artic-ulated a strategic intent to exploit the conver-gence of computing and communications,what it called ‘‘C&C.’’

1

Success, top manage-ment reckoned, would hinge on acquiring

com-petencies

, particularly in semiconductors. Man-

agement adopted an appropriate ‘‘strategicarchitecture,’’ summarized by C&C, and thencommunicated its intent to the whole organi-zation and the outside world during the mid-1970s.

NEC constituted a ‘‘C&C Committee’’ of topmanagers to oversee the development of coreproducts and core competencies. NEC put inplace coordination groups and committeesthat cut across the interests of individual busi-nesses. Consistent with its strategic architec-ture, NEC shifted enormous resources tostrengthen its position in components and cen-tral processors. By using collaborative arrange-ments to multiply internal resources, NEC wasable to accumulate a broad array of core com-petencies.

NEC carefully identified three interrelatedstreams of technological and market evolution.Top management determined that computingwould evolve from large mainframes to distrib-uted processing, components from simple ICsto VLSI, and communications from mechani-cal cross-bar exchange to complex digital sys-tems we now call ISDN. As things evolved fur-ther, NEC reasoned, the computing,communications, and components businesseswould so overlap that it would be very hard todistinguish among them, and that there wouldbe enormous opportunities for any companythat had built the competencies needed toserve all three markets.

NEC top management determined thatsemiconductors would be the company’s mostimportant ‘‘core product.’’ It entered into myr-iad strategic alliances—over 100 as of 1987—aimed at building competencies rapidly and atlow cost. In mainframe computers, its mostnoted relationship was with Honeywell andBull. Almost all the collaborative arrange-ments in the semiconductor-component fieldwere oriented toward technology access. Asthey entered collaborative arrangements,NEC’s operating managers understood the ra-tionale for these alliances and the goal of inter-nalizing partner skills. NEC’s director of re-search summed up its competence acquisitionduring the 1970s and 1980s this way: ‘‘From aninvestment standpoint, it was much quickerand cheaper to use foreign technology. Therewasn’t 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 technologyindustry, no commonly accepted view of whichcompetencies would be required to compete inthat industry were communicated widely.While significant staff work was done to iden-tify key technologies, senior line managerscontinued to act as if they were managing in-dependent business units. Decentralizationmade it difficult to focus on core competen-cies. Instead, individual businesses became in-creasingly dependent on outsiders for criticalskills, and collaboration became a route tostaged exits. Today, with a new managementteam in place, GTE has repositioned itself toapply its competencies to emerging markets intelecommunications services.

The Roots of Competitive Advantage

The distinction we observed in the way NECand GTE conceived of themselves—a portfolioof competencies versus a portfolio of busi-nesses—was repeated across many industries.From 1980 to 1988, Canon grew by 264%,Honda by 200%. Compare that with Xerox andChrysler. And if Western managers were onceanxious about the low cost and high quality ofJapanese imports, they are now overwhelmedby the pace at which Japanese rivals are in-venting new markets, creating new products,and enhancing them. Canon has given us per-sonal copiers; Honda has moved from motor-cycles to four-wheel off-road buggies. Sony de-veloped the 8mm camcorder, Yamaha, thedigital piano. Komatsu developed an underwa-ter remote-controlled bulldozer, while Casio’slatest gambit is a small-screen color LCD tele-vision. Who would have anticipated the evolu-tion of these vanguard markets?

In more established markets, the Japanesechallenge has been just as disquieting. Japa-nese companies are generating a blizzard offeatures and functional enhancements thatbring technological sophistication to everydayproducts. Japanese car producers have beenpioneering four-wheel steering, four-valve-per-cylinder engines, in-car navigation sys-tems, and sophisticated electronic engine-management systems. On the strength of itsproduct features, Canon is now a player infacsimile transmission machines, desktoplaser printers, even semi-conductor manufac-turing equipment.

In the short run, a company’s competitive-

ness derives from the price/performance at-tributes of current products. But the survivorsof the first wave of global competition, West-ern and Japanese alike, are all converging onsimilar and formidable standards for productcost and quality—minimum hurdles for contin-ued competition, but less and less important assources of differential advantage. In the longrun, competitiveness derives from an ability tobuild, at lower cost and more speedily thancompetitors, the core competencies that spawnunanticipated products. The real sources of ad-vantage are to be found in management’s abil-ity to consolidate corporatewide technologiesand production skills into competencies thatempower individual businesses to adaptquickly to changing opportunities.

Senior executives who claim that they can-not build core competencies either becausethey feel the autonomy of business units is sac-rosanct or because their feet are held to thequarterly budget fire should think again. Theproblem in many Western companies is notthat their senior executives are any less capa-ble than those in Japan nor that Japanese com-panies possess greater technical capabilities.Instead, it is their adherence to a concept ofthe corporation that unnecessarily limits theability of individual businesses to fully exploitthe deep reservoir of technological capabilitythat many American and European compa-nies possess.

The diversified corporation is a large tree.The trunk and major limbs are core products,the smaller branches are business units; theleaves, flowers, and fruit are end products. Theroot system that provides nourishment, suste-nance, and stability is the core competence.You can miss the strength of competitors bylooking only at their end products, in the sameway you miss the strength of a tree if you lookonly 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 co-ordinate diverse production skills and inte-grate multiple streams of technologies.Consider Sony’s capacity to miniaturize orPhilips’s optical-media expertise. The theoret-ical knowledge to put a radio on a chip doesnot in itself assure a company the skill to pro-duce a miniature radio no bigger than a busi-ness card. To bring off this feat, Casio mustharmonize know-how in miniaturization, mi-



croprocessor design, material science, and ul-trathin precision casing—the same skills it ap-plies in its miniature card calculators, pocketTVs, and digital watches.

If core competence is about harmonizingstreams of technology, it is also about the orga-nization of work and the delivery of value.Among Sony’s 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 competenceis felt as decisively in services as in manufactur-ing. Citicorp was ahead of others investing inan operating system that allowed it to partici-pate in world markets 24 hours a day. Its com-petence in systems has provided the companythe 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.World-class research in, for example, lasers orceramics can take place in corporate laborato-ries without having an impact on any of thebusinesses of the company. The skills that to-gether constitute core competence must coa-lesce around individuals whose efforts are notso narrowly focused that they cannot recog-nize the opportunities for blending their func-tional expertise with those of others in newand interesting ways.

Core competence does not diminish withuse. Unlike physical assets, which do deterio-rate over time, competencies are enhanced asthey are applied and shared. But competenciesstill need to be nurtured and protected; knowl-edge fades if it is not used. Competencies are

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 areend products.



the glue that binds existing businesses. Theyare also the engine for new business develop-ment. Patterns of diversification and marketentry may be guided by them, not just by theattractiveness of markets.

Consider 3M’s competence with sticky tape.In dreaming up businesses as diverse as ‘‘Post-it’’ notes, magnetic tape, photographic film,pressure-sensitive tapes, and coated abrasives,the company has brought to bear widelyshared competencies in substrates, coatings,and adhesives and devised various ways tocombine them. Indeed, 3M has invested consis-tently in them. What seems to be an extremelydiversified portfolio of businesses belies a fewshared core competencies.

In contrast, there are major companies thathave had the potential to build core competen-cies but failed to do so because top manage-ment was unable to conceive of the companyas anything other than a collection of discretebusinesses. GE sold much of its consumer elec-tronics business to Thomson of France, arguingthat it was becoming increasingly difficult tomaintain its competitiveness in this sector.That was undoubtedly so, but it is ironic that itsold several key businesses to competitors whowere already competence leaders—Black &Decker in small electrical motors, and Thom-son, which was eager to build its competencein microelectronics and had learned from theJapanese that a position in consumer electron-ics was vital to this challenge.

Management trapped in the strategic busi-ness unit (SBU) mind-set almost inevitablyfinds its individual businesses dependent on ex-ternal sources for critical components, such asmotors or compressors. But these are not justcomponents. They are core products that con-tribute to the competitiveness of a wide rangeof 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 com-petencies that determine global leadership,successful companies have stopped imaginingthemselves as bundles of businesses makingproducts. Canon, Honda, Casio, or NEC mayseem to preside over portfolios of businessesunrelated in terms of customers, distributionchannels, and merchandising strategy. Indeed,they have portfolios that may seem idiosyn-cratic at times: NEC is the only global com-

pany to be among leaders in computing, tele-communications, and semiconductors

and

tohave 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 businessesbecome coherent. It is Honda’s core compe-tence in engines and power trains that gives ita distinctive advantage in car, motorcycle,lawn mower, and generator businesses.Canon’s core competencies in optics, imaging,and microprocessor controls have enabled it toenter, even dominate, markets as seemingly di-verse as copiers, laser printers, cameras, andimage scanners. Philips worked for more than15 years to perfect its optical-media (laser disc)competence, as did JVC in building a leadingposition in video recording. Other examples ofcore competencies might include mechantron-ics (the ability to marry mechanical and elec-tronic engineering), video displays, bioengi-neering, and microelectronics. In the earlystages of its competence building, Philips couldnot have imagined all the products that wouldbe spawned by its optical-media competence,nor could JVC have anticipated miniature cam-corders when it first began exploring videotapetechnologies.

Unlike the battle for global brand domi-nance, which is visible in the world’s broadcastand print media and is aimed at building glo-bal ‘‘share of mind,’’ the battle to build world-class competencies is invisible to people whoaren’t deliberately looking for it. Top manage-ment often tracks the cost and quality of com-petitors’ products, yet how many managers un-tangle the web of alliances their Japanesecompetitors have constructed to acquire com-petencies at low cost? In how many Westernboardrooms is there an explicit, shared under-standing of the competencies the companymust build for world leadership? Indeed, howmany senior executives discuss the crucial dis-tinction between competitive strategy at thelevel of a business and competitive strategy atthe level of an entire company?

Let us be clear. Cultivating core competencedoes

not

mean outspending rivals on researchand development. In 1983, when Canon sur-passed Xerox in worldwide unit market sharein the copier business, its R&D budget in re-prographics was but a small fraction of Xerox’s.Over the past 20 years, NEC has spent less on



R&D as a percentage of sales than almost all ofits American and European competitors.

Nor does core competence mean sharedcosts, as when two or more SBUs use a com-mon facility—a plant, service facility, or salesforce—or share a common component. Thegains of sharing may be substantial, but thesearch for shared costs is typically a post hoc ef-fort to rationalize production across existingbusinesses, not a premeditated effort to buildthe competencies out of which the businessesthemselves grow.

Building core competencies is more ambi-tious and different than integrating vertically,moreover. Managers deciding whether tomake or buy will start with end products andlook upstream to the efficiencies of the supplychain and downstream toward distributionand customers. They do not take inventory ofskills and look forward to applying them innontraditional ways. (Of course, decisionsabout competencies

do

provide a logic for ver-tical integration. Canon is not particularly inte-grated in its copier business, except in those as-pects of the vertical chain that support thecompetencies it regards as critical.)

Identifying Core Competencies—And Losing Them

At least three tests can be applied to identifycore competencies in a company. First, a corecompetence provides potential access to awide variety of markets. Competence in dis-play systems, for example, enables a companyto participate in such diverse businesses as cal-culators, miniature TV sets, monitors for lap-top computers, and automotive dashboards—which is why Casio’s entry into the handheldTV market was predictable. Second, a corecompetence should make a significant contri-bution to the perceived customer benefits ofthe end product. Clearly, Honda’s engine ex-pertise fills this bill.

Finally, a core competence should be diffi-cult for competitors to imitate. And it

will

bedifficult if it is a complex harmonization of in-dividual technologies and production skills. Arival might acquire some of the technologiesthat comprise the core competence, but it willfind it more difficult to duplicate the more orless comprehensive pattern of internal coordi-nation and learning. JVC’s decision in the early1960s to pursue the development of a video-tape competence passed the three tests out-

lined here. RCA’s decision in the late 1970s todevelop a stylus-based video turntable systemdid not.

Few companies are likely to build worldleadership in more than five or six fundamen-tal competencies. A company that compiles alist of 20 to 30 capabilities has probably notproduced a list of core competencies. Still, it isprobably a good discipline to generate a list ofthis sort and to see aggregate capabilities asbuilding blocks. This tends to prompt thesearch for licensing deals and alliances throughwhich the company may acquire, at low cost,missing pieces.

Most Western companies hardly think aboutcompetitiveness in these terms at all. It is timeto take a tough-minded look at the risks theyare running. Companies that judge competi-tiveness, their own and their competitors’, pri-marily in terms of the price/performance ofend products are courting the erosion of corecompetencies—or making too little effort toenhance them. The embedded skills that giverise to the next generation of competitive prod-ucts cannot be ‘‘rented in’’ by outsourcing andOEM-supply relationships. In our view, toomany companies have unwittingly surren-dered core competencies when they cut inter-nal investment in what they mistakenlythought were just ‘‘cost centers’’ in favor of out-side suppliers.

Consider Chrysler. Unlike Honda, it hastended to view engines and power trains assimply one more component. Chrysler is be-coming increasingly dependent on Mitsubishiand Hyundai: between 1985 and 1987, thenumber of outsourced engines went from252,000 to 382,000. It is difficult to imagineHonda yielding manufacturing responsibility,much less design, of so critical a part of a car’sfunction to an outside company—which iswhy Honda has made such an enormous com-mitment to Formula One auto racing. Hondahas been able to pool its engine-related tech-nologies; it has parlayed these into a corporate-wide competency from which it developsworld-beating products, despite R&D budgetssmaller than those of GM and Toyota.

Of course, it is perfectly possible for a com-pany to have a competitive product line up butbe a laggard in developing core competen-cies—at least for a while. If a company wantedto enter the copier business today, it wouldfind a dozen Japanese companies more than



willing to supply copiers on the basis of anOEM private label. But when fundamentaltechnologies changed or if its supplier decidedto enter the market directly and become acompetitor, that company’s product line, alongwith all of its investments in marketing anddistribution, could be vulnerable. Outsourcingcan provide a shortcut to a more competitiveproduct, but it typically contributes little tobuilding the people-embodied skills that areneeded to sustain product leadership.

Nor is it possible for a company to have anintelligent alliance or sourcing strategy if it hasnot made a choice about where it will buildcompetence leadership. Clearly, Japanese com-panies have benefited from alliances. They’veused them to learn from Western partners whowere not fully committed to preserving corecompetencies of their own. As we’ve argued inthese pages before, learning within an alliancetakes a positive commitment of resources—thetravel, a pool of dedicated people, test-bed fa-cilities, time to internalize and test what hasbeen learned.

2

A company may not make thiseffort if it doesn’t have clear goals for compe-tence building.

Another way of losing is forgoing opportuni-ties to establish competencies that are evolvingin 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 rivalshad targeted the TV business for entry, thenyes, the industry was mature. But it certainlywasn’t mature in the sense that all opportuni-ties to enhance and apply video-based compe-tencies had been exhausted.

In ridding themselves of their televisionbusinesses, these companies failed to distin-guish between divesting the business and de-stroying their video media-based competen-cies. They not only got out of the TV businessbut they also closed the door on a wholestream of future opportunities reliant onvideo-based competencies. The television in-dustry, considered by many U.S. companies inthe 1970s to be unattractive, is today the focusof a fierce public policy debate about the in-ability of U.S. corporations to benefit from the$20-billion-a-year opportunity that HDTV willrepresent in the mid- to late 1990s. Ironically,

the U.S. government is being asked to fund amassive research project—in effect, to com-pensate U.S. companies for their failure to pre-serve critical core competencies when they hadthe chance.

In contrast, one can see a company like Sonyreducing its emphasis on VCRs (where it hasnot been very successful and where Koreancompanies now threaten), without reducing itscommitment to video-related competencies.Sony’s Betamax led to a debacle. But itemerged 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, thecosts of losing a core competence can be onlypartly calculated in advance. The baby may bethrown out with the bath water in divestmentdecisions. Second, since core competencies arebuilt 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 itvery difficult to enter an emerging market, un-less, of course, it will be content simply toserve as a distribution channel.

American semiconductor companies likeMotorola learned this painful lesson whenthey elected to forgo direct participation in the256k generation of DRAM chips. Havingskipped this round, Motorola, like most of itsAmerican competitors, needed a large infusionof technical help from Japanese partners to re-join the battle in the 1-megabyte generation.When it comes to core competencies, it is diffi-cult to get off the train, walk to the next sta-tion, and then reboard.

From Core Competencies to Core Products

The tangible link between identified core com-petencies and end products is what we call thecore products—the physical embodiments ofone or more core competencies. Honda’s en-gines, for example, are core products, linch-pins between design and development skillsthat ultimately lead to a proliferation of endproducts. Core products are the componentsor subassemblies that actually contribute tothe value of the end products. Thinking interms of core products forces a company todistinguish between the brand share itachieves in end product markets (for example,40% of the U.S. refrigerator market) and the



manufacturing share it achieves in any partic-ular core product (for example, 5% of theworld share of compressor output).

Canon is reputed to have an 84% world man-ufacturing share in desktop laser printer ‘‘en-gines,’’ even though its brand share in the laserprinter business is minuscule. Similarly, Mat-sushita has a world manufacturing share ofabout 45% in key VCR components, far in ex-cess of its brand share (Panasonic, JVC, andothers) of 20%. And Matsushita has a com-manding core product share in compressorsworldwide, estimated at 40%, even though itsbrand share in both the air-conditioning andrefrigerator businesses is quite small.

It is essential to make this distinction be-tween core competencies, core products, andend products because global competition isplayed out by different rules and for differentstakes at each level. To build or defend leader-ship over the long term, a corporation willprobably be a winner at each level. At the levelof core competence, the goal is to build worldleadership in the design and development of aparticular class of product functionality—be itcompact data storage and retrieval, as withPhilips’s optical-media competence, or com-pactness and ease of use, as with Sony’s micro-motors and microprocessor controls.

To sustain leadership in their chosen corecompetence areas, these companies

seek tomaximize their world manufacturing share incore products

. The manufacture of core prod-ucts for a wide variety of external (and inter-nal) customers yields the revenue and marketfeedback that, at least partly, determines thepace at which core competencies can be en-hanced and extended. This thinking was be-hind JVC’s decision in the mid-1970s to estab-lish VCR supply relationships with leadingnational consumer electronics companies inEurope and the United States. In supplyingThomson, Thorn, and Telefunken (all indepen-dent companies at that time) as well as U.S.partners, JVC was able to gain the cash and thediversity of market experience that ultimatelyenabled it to outpace Philips and Sony. (Philipsdeveloped videotape competencies in parallelwith 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 coreproducts.)

JVC’s success has not been lost on Korean

companies like Goldstar, Sam Sung, Kia, andDaewoo, who are building core product leader-ship in areas as diverse as displays, semicon-ductors, and automotive engines through theirOEM-supply contracts with Western compa-nies. Their avowed goal is to capture invest-ment initiative away from potential competi-tors, often U.S. companies. In doing so, theyaccelerate their competence-building effortswhile ‘‘hollowing out’’ their competitors. By fo-cusing on competence and embedding it incore products, Asian competitors have built upadvantages in component markets first andhave then leveraged off their superior productsto move downstream to build brand share. Andthey are not likely to remain the low-cost sup-pliers forever. As their reputation for brandleadership is consolidated, they may well gainprice leadership. Honda has proven this withits Acura line, and other Japanese car makersare following suit.

Control over core products is critical forother reasons. A dominant position in coreproducts allows a company to shape the evo-lution of applications and end markets. Suchcompact audio disc-related core products asdata drives and lasers have enabled Sonyand Philips to influence the evolution of thecomputer-peripheral business in optical-media storage. As a company multiplies thenumber of application arenas for its coreproducts, it can consistently reduce the cost,time, and risk in new product development.In short, well-targeted core products can leadto economies of scale

and

scope.

The Tyranny of the SBU

The new terms of competitive engagementcannot be understood using analytical toolsdevised to manage the diversified corporationof 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 samebusiness schools and consultancies. Old pre-scriptions have potentially toxic side effects.The need for new principles is most obvious incompanies organized exclusively according tothe logic of SBUs. The implications of the twoalternate concepts of the corporation are sum-marized in ‘‘Two Concepts of the Corporation:SBU or Core Competence.’’

Obviously, diversified corporations have aportfolio of products and a portfolio of busi-



nesses. But we believe in a view of the com-pany as a portfolio of competencies as well.U.S. companies do not lack the technical re-sources to build competencies, but their topmanagement often lacks the vision to buildthem and the administrative means for assem-bling resources spread across multiple busi-nesses. A shift in commitment will inevitablyinfluence patterns of diversification, skill de-ployment, resource allocation priorities, andapproaches to alliances and outsourcing.

We have described the three different planeson which battles for global leadership arewaged: core competence, core products, andend products. A corporation has to knowwhether it is winning or losing on each plane.By sheer weight of investment, a companymight be able to beat its rivals to blue-sky tech-nologies yet still lose the race to build corecompetence leadership. If a company is win-ning the race to build core competencies (asopposed to building leadership in a few tech-nologies), it will almost certainly outpace rivalsin new business development. If a company iswinning the race to capture world manufactur-ing share in core products, it will probably out-pace rivals in improving product features andthe price/performance ratio.

Determining whether one is winning or los-ing end product battles is more difficult be-cause measures of product market share donot necessarily reflect various companies’ un-derlying competitiveness. Indeed, companiesthat attempt to build market share by relyingon the competitiveness of others, rather thaninvesting in core competencies and world core-product leadership, may be treading on quick-sand. In the race for global brand dominance,companies like 3M, Black & Decker, Canon,

Honda, NEC, and Citicorp have built globalbrand umbrellas by proliferating products outof their core competencies. This has allowedtheir individual businesses to build image, cus-tomer loyalty, and access to distribution chan-nels.

When you think about this reconceptualiza-tion of the corporation, the primacy of theSBU—an organizational dogma for a genera-tion—is now clearly an anachronism. Wherethe SBU is an article of faith, resistance to theseductions of decentralization can seem hereti-cal. In many companies, the SBU prism meansthat only one plane of the global competitivebattle, the battle to put competitive productson 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 formaintaining a viable position in core productsnor be able to justify the investment requiredto 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 Philipshave recognized this as a potential problemand have begun searching for new organiza-tional forms that will allow them to developand manufacture core products for both inter-nal and external customers.

SBU managers have traditionally conceivedof competitors in the same way they’ve seenthemselves. On the whole, they’ve failed tonote the emphasis Asian competitors wereplacing on building leadership in core productsor to understand the critical linkage between

Two Concepts of the Corporation: SBU or Core Competence

SBU Core Competence

Basis for competition Competitiveness of today's products Interfirm competition to build competenciesCorporate structure Portfolio of businesses related in product- Portfolio of competencies,core products, and

market terms businessesStatus of the business unit Autonomy is sacrosanct; the SBU “owns” all SBU is a potential reservoir of core

resources other than cash competenciesResource 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 capitaland talent

Value added of top management Optimizing corporate returns through capital Enunciating strategic architecture andallocation trade-offs among businesses building competencies to secure the future



world manufacturing leadership and the abil-ity to sustain development pace in core compe-tence. They’ve failed to pursue OEM-supplyopportunities or to look across their variousproduct divisions in an attempt to identify op-portunities for coordinated initiatives.

Imprisoned Resources.

As an SBU evolves, itoften 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 ofanother SBU who asks to borrow talented peo-ple is likely to get a cold rebuff. SBU managersare not only unwilling to lend their compe-tence carriers but they may actually hide tal-ent to prevent its redeployment in the pursuitof new opportunities. This may be comparedto residents of an underdeveloped countryhiding most of their cash under their mat-tresses. The benefits of competencies, like thebenefits of the money supply, depend on thevelocity of their circulation as well as on thesize of the stock the company holds.

Western companies have traditionally hadan advantage in the stock of skills they possess.But have they been able to reconfigure themquickly to respond to new opportunities?Canon, NEC, and Honda have had a lesserstock of the people and technologies that com-pose core competencies but could move themmuch quicker from one business unit to an-other. Corporate R&D spending at Canon isnot fully indicative of the size of Canon’s corecompetence stock and tells the casual observernothing about the velocity with which Canonis able to move core competencies to exploitopportunities.

When competencies become imprisoned,the people who carry the competencies do notget assigned to the most exciting opportuni-ties, and their skills begin to atrophy. Only byfully leveraging core competencies can smallcompanies like Canon afford to compete withindustry giants like Xerox. How strange thatSBU managers, who are perfectly willing tocompete for cash in the capital budgeting pro-cess, are unwilling to compete for people—thecompany’s most precious asset. We find itironic that top management devotes so muchattention to the capital budgeting process yettypically has no comparable mechanism for al-locating the human skills that embody corecompetencies. Top managers are seldom ableto look four or five levels down into the organi-

zation, identify the people who embody criti-cal competencies, and move them across orga-nizational boundaries.

Bounded Innovation.

If core competenciesare not recognized, individual SBUs will pur-sue only those innovation opportunities thatare close at hand—marginal product-line ex-tensions or geographic expansions. Hybrid op-portunities like fax machines, laptop comput-ers, hand-held televisions, or portable musickeyboards will emerge only when managerstake off their SBU blinkers. Remember, Canonappeared to be in the camera business at thetime it was preparing to become a worldleader in copiers. Conceiving of the corpora-tion in terms of core competencies widens thedomain of innovation.

Developing Strategic Architecture

The fragmentation of core competencies be-comes inevitable when a diversified com-pany’s information systems, patterns of com-munication, career paths, managerial rewards,and processes of strategy development do nottranscend SBU lines. We believe that seniormanagement should spend a significantamount of its time developing a corporate-wide strategic architecture that establishes ob-jectives for competence building. A strategicarchitecture is a road map of the future thatidentifies which core competencies to buildand their constituent technologies.

By providing an impetus for learning fromalliances and a focus for internal developmentefforts, a strategic architecture like NEC’s C&Ccan dramatically reduce the investmentneeded to secure future market leadership.How can a company make partnerships intelli-gently without a clear understanding of thecore competencies it is trying to build andthose it is attempting to prevent from beingunintentionally transferred?

Of course, all of this begs the question ofwhat a strategic architecture should look like.The answer will be different for every com-pany. But it is helpful to think again of thattree, of the corporation organized around coreproducts and, ultimately, core competencies.To sink sufficiently strong roots, a companymust answer some fundamental questions:How long could we preserve our competitive-ness in this business if we did not control thisparticular core competence? How central isthis core competence to perceived customer



benefits? What future opportunities would beforeclosed if we were to lose this particularcompetence?

The architecture provides a logic for productand market diversification, moreover. An SBUmanager would be asked: Does the new mar-ket opportunity add to the overall goal of be-coming the best player in the world? Does itexploit or add to the core competence? At

Vickers, for example, diversification optionshave been judged in the context of becomingthe best power and motion control companyin the world (see the insert ‘‘Vickers Learns theValue of Strategic Architecture’’).

The strategic architecture should make re-source allocation priorities transparent to theentire organization. It provides a template forallocation decisions by top management. It

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 rela-tively new in most U.S. companies. There are a few exceptions. An early convert was Trinova (previously Libbey Owens Ford), a Toledo-based corporation, which enjoys a worldwide position in power and motion controls and engineered plastics. One of its major divisions is Vickers, a premier sup-plier of hydraulics components like valves, pumps, actuators, and filtration devices to aerospace, marine, defense, automotive, earth-moving, 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 short-term earnings, top management looked to a 10- to 15-year 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 fluid-power components. The architecture identifies two additional competencies, electric-power components and electronic controls. A systems integra-tion capability that would unite hardware, software, and service was also targeted for development.

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 func-tionality 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 over-all architecture. The archi-tecture is also the basis for internal 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 CompetenciesElectronicControls

Valve amplifiersLogic

MotionComplete machine

and vehicle

Systems Packages Components ServiceOffering

Training

Focus MarketsFactory automationAutomotive systems

Plastic process

Off-highwayCommercial aircraft

Military aircraft

Missiles/SpaceDefense vehicles

Marine

ElectricPowerAC/DCServo

Stepper

ElectricProductsActuators

Fan packagesGenerators

ElectrohydraulicPumps

Control valvesCartridge valves

ActuatorsPackage systems

Pneumatic productsFuel/Fluid transfer

Filtration

SensorsValve/Pump

ActuatorMachine

System EngineeringApplication focusPower/Motion

ControlElectronicsSoftware

Fluid Power



helps lower level managers understand thelogic of allocation priorities and disciplines se-nior management to maintain consistency. Inshort, it yields a definition of the company andthe markets it serves. 3M, Vickers, NEC,Canon, and Honda all qualify on this score.Honda

knew

it was exploiting what it hadlearned from motorcycles—how to makehigh-revving, smooth-running, lightweightengines—when it entered the car business.The task of creating a strategic architectureforces the organization to identify and com-mit to the technical and production linkagesacross SBUs that will provide a distinct com-petitive advantage.

It is consistency of resource allocation andthe development of an administrative infra-structure appropriate to it that breathes lifeinto a strategic architecture and creates a man-agerial culture, teamwork, a capacity tochange, and a willingness to share resources, toprotect proprietary skills, and to think longterm. That is also the reason the specific archi-tecture cannot be copied easily or overnight by

competitors. Strategic architecture is a tool forcommunicating with customers and other ex-ternal constituents. It reveals the broad direc-tion without giving away every step.

Redeploying to Exploit Competencies

If the company’s core competencies are itscritical resource and if top management mustensure that competence carriers are not heldhostage by some particular business, then itfollows that SBUs should bid for core compe-tencies in the same way they bid for capital.We’ve 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 identifiedoverarching competencies, it must ask busi-nesses to identify the projects and peopleclosely connected with them. Corporate offic-ers should direct an audit of the location, num-ber, and quality of the people who embodycompetence.

This sends an important signal to middlemanagers: core competencies are

corporate

re-sources and may be reallocated by corporatemanagement. An individual business doesn’town anybody. SBUs are entitled to the ser-vices of individual employees so long as SBUmanagement can demonstrate that the op-portunity it is pursuing yields the highest pos-sible pay-off on the investment in their skills.This message is further underlined if eachyear in the strategic planning or budgetingprocess, unit managers must justify their holdon the people who carry the company’s corecompetencies.

Elements of Canon’s core competence in op-tics are spread across businesses as diverse ascameras, copiers, and semiconductor litho-graphic equipment and are shown in ‘‘CoreCompetencies at Canon.’’ When Canon identi-fied an opportunity in digital laser printers, itgave SBU managers the right to raid otherSBUs to pull together the required pool of tal-ent. When Canon’s reprographics products di-vision undertook to develop microprocessor-controlled copiers, it turned to the photo prod-ucts group, which had developed the world’sfirst microprocessor-controlled camera.

Also reward systems that focus only onproduct-line results and career paths that sel-dom cross SBU boundaries engender pat-terns of behavior among unit managers that

Core Competencies at Canon

Precision Fine Micro-Mechanics Optics electronics

Basic cameraCompact fashion cameraElectronic cameraEOS autofocus cameraVideo still cameraLaser beam printerColor video printerBubble jet printerBasic faxLaser faxCalculatorPlain paper copierBattery PPCColor copierLaser copierColor laser copierNAVIStill video systemLaser imagerCell analyzerMask alignersStepper alignersExcimer laser aligners

Every Canon product is the result of at least one core competency



are destructively competitive. At NEC, divi-sional managers come together to identifynext-generation competencies. Together theydecide how much investment needs to bemade to build up each future competency andthe contribution in capital and staff supportthat each division will need to make. There isalso a sense of equitable exchange. One divi-sion may make a disproportionate contribu-tion or may benefit less from the progressmade, but such short-term inequalities will bal-ance out over the long term.

Incidentally, the positive contribution of theSBU manager should be made visible acrossthe company. An SBU manager is unlikely tosurrender key people if only the other business(or the general manager of that business whomay be a competitor for promotion) is going tobenefit from the redeployment. CooperativeSBU managers should be celebrated as teamplayers. Where priorities are clear, transfers areless likely to be seen as idiosyncratic and politi-cally motivated.

Transfers for the sake of building core com-petence must be recorded and appreciated inthe corporate memory. It is reasonable to ex-pect a business that has surrendered core skillson behalf of corporate opportunities in otherareas to lose, for a time, some of its competi-tiveness. If these losses in performance bringimmediate 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 perpetuityto any particular business. Early in their ca-reers, people may be exposed to a variety ofbusinesses through a carefully planned rota-tion program. At Canon, critical people moveregularly between the camera business and thecopier business and between the copier busi-ness and the professional optical-products busi-ness. In mid-career, periodic assignments tocross-divisional project teams may be neces-sary, both for diffusing core competencies andfor 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 knowthat their careers are tracked and guided by

corporate human resource professionals. In theearly 1980s at Canon, all engineers under 30were invited to apply for membership on aseven-person committee that was to spend twoyears plotting Canon’s future direction, includ-ing its strategic architecture.

Competence carriers should be regularlybrought together from across the corporationto trade notes and ideas. The goal is to build astrong feeling of community among these peo-ple. To a great extent, their loyalty should be tothe integrity of the core competence area theyrepresent and not just to particular businesses.In traveling regularly, talking frequently to cus-tomers, and meeting with peers, competencecarriers may be encouraged to discover newmarket opportunities.

Core competencies are the wellspring ofnew business development. They should con-stitute the focus for strategy at the corporatelevel. Managers have to win manufacturingleadership in core products and capture glo-bal share through brand-building programsaimed at exploiting economies of scope.Only if the company is conceived of as a hier-archy of core competencies, core products,and market-focused business units will it befit to fight.

Nor can top management be just anotherlayer of accounting consolidation, which itoften is in a regime of radical decentraliza-tion. Top management must add value byenunciating the strategic architecture thatguides the competence acquisition process.We believe an obsession with competencebuilding will characterize the global winnersof the 1990s. With the decade underway, thetime for rethinking the concept of the corpo-ration is already overdue.

1. For a fuller discussion, see our article, ‘‘Strategic Intent’’HBR May–June 1989, p. 63. 2. ‘‘Collaborate with Your Competitors and Win,’’ HBR Janu-ary–February 1989, p. 133, with Yves L. Doz.

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page 15

Further Reading

A R T I C L E S

What Is Strategy?

by Michael E. Porter


November–December 1996Product no. 96608

This seminal article by Michael Porter focuses on the question of strategic positioning, with spe-cific emphasis on creating “fit” among your com-pany’s activities—reinforcing 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 main-tains, is performing

different

activities from ri-vals, or performing

similar

ones in different ways. The author explains the three key princi-ples underlying strategic positioning: 1) unique positioning within markets, 2) the willingness to choose where you

won’t

compete, and 3) alignment of all your company’s activities so that they reinforce one another

and

your strat-egy.

Strategy and the Internet

by Michael E. Porter


March 2001Product no. R0103D

Porter shows how aligning Internet technol-ogy with your corporate strategy can prove espe-cially effective. Too many companies, he ar-gues, believe that the Internet renders established rules about strategy obsolete. To the contrary, it makes them more vital than ever. Porter advocates regarding the Internet as a tool that can support or damage your firm’s strategic positioning. The key to using it?

Inte-grate

Internet initiatives into your strategy and operations so that they complement your competitive approaches and create systemic advantages that rivals can’t copy.

Introducing T-Shaped Managers: Knowledge Management’s Next Generation

by Morten T. Hansen and Bolko von Oetinger


March–April 2001Product no. R0103G

This article builds on Prahalad and Hamel’s ad-vice about cultivating a core-competency mind-set in unit managers. The authors describe a new kind of executive—one who freely shares ideas and expertise across company boundaries in order to support high-level cor-porate strategy, while fiercely enhancing busi-ness unit performance. These

T-shaped man-agers

create horizontal value in five ways: 1) boost efficiency through best practice transfer, 2) improve decision quality through peer ad-vice, 3) grow revenue through shared exper-tise, 4) generate new business opportunities through idea cross-pollination, 5) make bold strategic moves through well-coordinated im-plementation. The authors then explain how to cultivate T-shaped managers.

Getting It Done: New Roles for Senior Executives

by Thomas M. Hout and John C. Carter


November–December 1995Product no. 95604

Hout and Carter share Prahalad and Hamel’s 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 perfectly positioned to leverage their firm’s core competencies: They’re the ones who create competitive breakthroughs by linking improved processes to the company’s overall strategy. The authors offer concrete advice to CEOs who want to strengthen interaction among senior managers.


http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0103D

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0103G

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0103G



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