1. Steven Forbes Marriott School November 2005
Core Competencies
Steven Forbes
Marriott School
November 2005

2. Agenda Competencies defined Brainstorming competencies
The competitive diversified corporation
Exercise: identifying competencies
Strategic architecture

3. What are core competencies?
Core competencies are the skills, characteristics, and assets that set your company apart from competitors. They are the fuel for innovation and the roots of competitive advantage.
The way in which core competencies fuel innovation will be discussed later in the training.
Competitive advantage will also be discussed later.

4. SBU’s Vs. Core Competencies
The old concept of the diversified corporation is a portfolio of strategic business units (SBU’s) within a similar product or customer category. Each SBU’s goal is to put competitive products on the shelf today.
Today’s corporation must maintain competitiveness by developing core competencies. These competencies determine the strategic architecture of the firm. Competencies must translate into core products, which significantly contribute to the firm’s end products.
Many corporations are still hold to the old concept of diversification. They have a variety of products in similar customer or product categories.
When the focus of the corporation is on the products it produces, it suffers from complexity issues, organizational boundaries, and reduced competitiveness.
Each SBU acts as a separate business and little value, other than brand recognition, is added to it by the other SBU’s. They must stay profitable by pushing products through existing markets.
These problems can be overcome by structuring the organization around core competencies. Each of these principles will be discussed in greater detail throughout the training.

5. Competencies Do Not Mean:
Outspending competitors on research and development
Cost sharing among SBU’s
Vertical integration
Outspending competitors on R & D is not necessary. With the core competency focus, R & D can be limited to further developing just the core products or competencies. Technologies are available from many sources. These technologies can be integrated into core competencies and new products and markets developed.
Cost sharing is common among SBU’s of the old corporate model. It is not necessarily to be avoided, but it is not the part of developing core competencies. Each SBU can benefit from the competencies of the firm. If a SBU produces a core product that isn’t being widely used, it can be integrated into other SBU’s.
Vertical integration fits the old model of the corporation more than the new. Every aspect of the end product does not need to be owned or produced by the firm. “One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. The company controlled not only the mills where the steel was manufactured, but the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc.” (Wickipedia)
The gaps that are not covered by core competencies can be filled by strategic alliances and licensing agreements. The new diversified corporation is not defined by it’s end product, but by it’s competencies.

6. Brainstorming Exercise
What costs are involved in developing new products if your market requires constant innovation?
The only company that might get away with a lack of innovation is one that manufactures electric chairs for government contracts.
Let the trainees name some of the costs involved with developing a new product and bringing it to the market. How often is this successful? For how long is this successful?
Electric Chairs are one of the few technologies that have not changed in almost 50 years. With a big government contract, this could be a stable business. However, innovation can play into profitability factors just as easily as another industry. What if a company had a competency in death science? They could produce other capital punishment tools. Maybe the company could even have a competency in political movements.
Let the trainees name some things that would be beneficial to miniaturize. Anyone of these ideas could make a whole new industry. Later, we will discuss how Casio’s competency in miniaturization has created new markets.
What if you could miniaturize anything? What then would it cost to develop new products? What products would you make?

7. The Diversified Corporation
This is a simple model of how the diversified corporation should be structured. The core competencies are the nourishment for the corporation. They should influence everything. They should result in core products, which will be used for end products.

8. Why Competencies?
Even good marketing wont make a “me too” firm competitive in the long run.
Competencies are enhanced with time.
Make or buy decisions are simplified.
Non-competencies can be supplemented with strategic alliances and licensing agreements.
A “me too” firm is a company that takes existing products from existing markets and sells them with their name on it. For example, somebody could start a t-shirt company and put their French name on the T-shirts. There is a possibility that these could become popular for a time, but where is the long term competitive advantage?
Competencies develop with use. They do not deteriorate if they are the focus of the firm. If R & D is focused on using these competencies and core products in different ways, they will become more proficient and more easily integrated with other products and technologies.
Rather than spending countless hours on make buy decisions, find out if it is a core competency. If it is, spend the money to make it better. If it is not, just outsource it. If it would be beneficial to have it as a competency, then acquire a company with that competency.
Fill in the gaps. If you know what skills and products you will need a lot of, make strategic alliances get licensing agreements. These keep costs down and energy focused. It’s amazing how small the costs are for developing core competencies, especially in comparison with the costs of the old corporate model.

9. Competencies to Core Products
Core products are the tangible evidence of our core competencies. They are key contributors to the customer benefits received from the end product.
Honda: Small gas engines
Canon: Desktop laser printer engines
3M: Adhesives and substrates
Core products are the physical outputs that result from core competencies. They should be the best part of any end product sold by the firm. They should be what makes the product so great or functional.
Describe why each of these examples makes such a vital difference to the above mentioned companies’ end products.

10. From these core products come the new strategic business units
From these core products come the new strategic business units. These SBU’s can be in completely separate markets.
These businesses each have end products that contain the core products.
In each SBU, outsourcing may be considered for everything except the core products and competencies.
This is far different from vertical integration. Now the SBU’s can have nothing more in common than core products.
Every product will contain the core products within it.
As discussed earlier, outsourcing is useful for the skills or products that are not core competencies.

11. Real World Example:
Every end product offered by Canon has at least one core product that makes a significant contribution to the perceived customer benefits.
Some of these products are in totally unrelated markets. They have different customers and different uses. However, the same core competencies make up the best part of every end product.

12. Manufacturing Share
With core products, the focus shifts from market share to manufacturing share.
Matsushita owns Panasonic, JVC, and others. Their brand share for VCR’s is about 20%.
Their world manufacturing share of VCR components is 45%.
Back when people bought VCR’s Panasonic and JVC were huge names. Of course they still are for DVD players now. 20% seems like a big market share. When VCR’s lost popularity, Matsushita was able to sell DVD players. Even if new brands took over the VCR market, they would still be buying parts from Matsushita. They have a competency in VCR components. This manufacturing share is the means for long-term global competition.

13. Exercise: Identifying Your Core Competencies
Compile a list of capabilities.
What do you excel at at?
Think of your most skilled employees.
What products have been your past winners?
A list of capabilities may be 30 to 40 long. These cannot all be core competencies. They must be narrowed down. What products or skills have really contributed to the competitiveness of your company?

14. Be Realistic
“Few companies are likely to build world leadership in more than five or six fundamental competencies”
- (HBR 1990)
A smaller firm may be very competitive with only one core competency.

15. Now the Test
Does this competence provide potential access to a wide variety of markets?
Does this competence make a significant contribution to the perceived customer benefits of the end product?
Is this competence difficult for competitors to imitate?
As discussed earlier, a core competence should not be limited to one market. It should make a significant difference what is valued about the product by they customer. By integrating multiple competencies, few competitors should be able to do what you do best.

16. Variety of Markets
What do miniature card calculators, pocket TVs, and digital watches have in common?
They are all the result of Casio’s know-how in miniaturization, microprocessor design, material science, and ultrathin precision casing.
These markets for these products are very different from one another.

17. Customer Benefit
Fit this in your pocket.
Do these competencies add to the perceived customer benefits of the end product?
Isn’t what makes a miniature TV so great the fact that it’s small? Casio has created an entire new market by integrating their core competencies. This is an example of innovation and shaping the future market place.

18. Easy to Imitate?
Philips is a market leader in TVs. Have you ever seen a Philips mini TV? Miniaturization is not one of Philips competencies. They could put one on the market by outsourcing the design and production.
Would this give them any manufacturing share? Or just temporary market share?
Even Philips hasn’t imitated Casio’s mini TVs. They are known for quality TVs. They could outsource the design and production. With their high quality brand name, they could push plenty of these. This would be a lot of work for a short term product push. It could even hurt their brand name if people see their focus changing. They should stick to their core competencies. Casio has made it difficult for anybody to compete with them in their products that integrate all of their core competencies.

19. So What?
If you don’t know what your core competencies are, you may spin off a business unit that contains your most competitive skills, employees, or core products.
Long term strategy involves constant innovation. Core competencies provide a market position that allows a company to influence what products will be available in the future.
The old corporations were often guilty of spinning of unprofitable businesses. This is great, unless that business contains some of your most skilled work force, core products, or competencies. Example from Prahalad and Hamel’s core competence article. GE, Motorola, GTE, Thorn, GEC all chose to exit the color TV market because they felt there was no more new color TV product ideas. In the process, they spun off video-media based competencies. They all missed the $20 billion dollar a year HDTV market. Now it has become difficult to jump back on the bandwagon and compete.
If core competencies are carefully developed, they can be integrated with new technologies and other competencies. This results in innovation, leading to all new markets. It also opens the doors for product improvement where others cant afford or don’t know where to make improvements.

20. Strategic Architecture
A company’s future is determined by it’s core competencies. These competencies define the architecture and characteristics of the global competitive firm.
Like the tree diagram showed, the architecture of the company should be a result of core competencies. Then can a firm compete globally. Otherwise, Western firms will lose global market share as Asian companies have embraced these principles for quite some time.

21. Boundaryless Organization
In the old diversified corporation, ideas and technologies are reluctantly shared from one SBU to the next, if at all.
Boundaries seem transparent when SBU’s share core competencies and core products. These resources come from the firm.
The Boundaryless organization is an organizational behavior term. This is the panicle of how an organization should be structured and function. When competencies are the focus of everyone in the organization, many of the structurally imposed organizational barriers can be overcome. The boundaryless organization lacks a lot of the communication barriers that prevent so many firms from growth and increased functionality.

22. Resource Allocation
When core competencies are the roots of the firm, specialized employees and core products can be allocated to various SBU’s.
At Canon, specialized employees move between camera and printer products regularly.
With core competency structure, reallocation decisions are much more easily understood. Resistance to reallocation of resources declines if everybody is focused on competency building.

23. Innovation
Using core competencies, new technologies can be developed without heavy R&D costs.
Casio: Small-screen LCD TV
Canon: Personal copier
Komatsu: Underwater remote-controlled bulldozer
Honda: Off-road buggy
Sony: 8mm camcorder
These are a few examples of how core competencies have lead to entire new markets. Innovation must be consistent for long-term success. Remind trainees of the miniaturization exercise at the beginning of the training. With core competencies, developing new markets does not require anywhere near the R & D costs of traditionally structured firms.

24. Competence Building
The focus of today’s global firm should be in competence building.
Constantly improving competencies provides for new integrated technologies.
Competencies provide focus for long-term goals.
If the focus is competence building, the firm will have long-term goals that truly contribute to success. The strategic architecture of the corporation should be framed by the core competencies. This is the successful organization. The main focus of executives must be competence building.

25. Competitive Advantage
Short-term market share can be won by anyone with a good idea.
Race to get products on the shelf.
Long-term success involves competency structured organizations, innovation, and market consistency.
Same core products, integrated into new end products, creating new markets.
As we discussed earlier, anybody can put something on the shelf. New ideas are especially helpful for this, but they don’t create lasting competitiveness.
Using the principles we discussed in this training, we should understand why core competencies are the roots of competitive advantage. Strategic architecture integrates all these principles. This is the successful firm in the long run.

26. Summary Learn your competencies Develop your competencies
Structure your organization around your competencies
Involve core products in all end products
Outsource non-competencies with strategic alliances and licensing.
Briefly tie these principles together one last time.

27. Readings
Gary Hamel and C. K. Prahalad, (1990) "The Core Competence of the Corporation", Harvard Business Review, vol. 68, no. 3, May-June 1990, pp
Galunic, D.C. and Rodan, S. (1998). "Resource recombinations in the firm: knowledge structures and the potential for Schumpeterian innovation". Strategic Management Journal vol 19. p
Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading Multinational Companies", California Management Review, vol 40, no. 4, pp
"Core Competencies." QuickMBA. Internet Center for Management and Business      Administration, Inc. 18 Nov <      core-competencies/>.  
Gamonal, Paula. "Core Competencies Working Smarter, Not Harder." Ravenwerks.      Ravenwerks. 21 Nov <      core_competencies.htm>.  
"strategy - core competencies." Tutor2u. Tutor2u. 16 Nov      <
These are some excellent sources to gain a better understanding of Core Competencies.