The Core Competence of the Corporation

The Core Competence of the Corporation

In the early 1980s, GTE was positioned to become a major player in the information technology industry. NEC was much smaller and had no experience as an operating telecommunications company. Today NEC is among the top five companies in telecommunications, semiconductors, and mainframes. GTE has become essentially a telephone company with a position in defense and lighting products. What happened? NEC built and nurtured a group of core competencies. GTE, on the other hand, couldn’t agree on which competencies to base its strategy. It organized itself around strategic business units, which by nature under-invest in core competencies, imprison resources, and bind innovation. A company’s competitiveness derives from its core competencies and core products (the tangible results of core competencies). Core competence is the collective learning in the organization, especially the capacity to coordinate diverse production skills and integrate streams of technologies. It is also a commitment to working across organizational boundaries. Organizing around core competencies requires a radical change in corporate organization. The first step requires identifying core competencies, which meet these three requirements: they provide potential access to a wide variety of markets, make a contribution to the customer benefits of the product, and are difficult for competitors to imitate. The next step is to redesign the architecture of the company and provide an impetus for learning from alliances and a focus for internal development. Management should ask: How long could we preserve our competitiveness if we did not control this core competence? How central is this core competence to customer benefits? What opportunities would be foreclosed if we lost this competence?

Diversified giant NEC competed in seemingly disparate businesses—semiconductors, 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 collective knowledge about how to coordinate diverse production skills and technologies.

NEC used its core competencies to achieve what most companies only attempt: Invent new markets, exploit emerging ones, delight 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 advantage your competitors can’t copy.

The Idea in Practice

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 communications”).

Identify core competencies that support that intent. Ask:

Once you’ve identified core competencies, enhance them:

Invest in needed technologies. Citicorp trumped rivals by adopting an operating system 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 development. 3M and Honda won races for global brand dominance by creating wide varieties of products from their core competencies. Results? 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 technologies it needed to build core competencies.

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

Stop thinking of business units as sacrosanct. 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 spotted opportunities in digital laser printers, it let managers raid other units to assemble talent.)

Gather managers to identify next-generation competencies. Decide how much investment each needs, and how much capital and staff each division should contribute.

The most powerful way to prevail in global competition is still invisible to many companies. During the 1980s, top executives were judged on their ability to restructure, declutter, and delayer their corporations. In the 1990s, they’ll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible—indeed, they’ll have to rethink the concept of the corporation itself.

C.K. Prahalad was the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan’s Ross School of Business. He wrote this article, his 16th for HBR, before he passed away, on April 16, 2010.

Gary Hamel is a visiting professor at London Business School and the founder of the Management Lab. He is a co-author of Humanocracy: Creating Organizations as Amazing as the People Inside Them (Harvard Business Review Press, forthcoming).

The Core Competence of the Corporation

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