The Core Competence of the Corporation - Coursework Example

Critique: The Core Competence of the Corporation TABLE OF CONTENTS S No. Page No. Executive Summary 3 Introduction 4 2 Key Definitions 4 3 Key Insights & Takeaways 5 4 Insights from other scholars: Critical evaluation 5 Application to the Case 1 Brief: the two companies 9 2 The Customer 9 3 Applying learnings to the Case 10 4 Core Competence & BBCL 10 5 Core Competence & El Nino 11 6 Assessing the de-constructed components of Core Competence 11 7 Analyzing the Potential BBCL-El Dorado JV 12 8 Conclusion 13 Reference List 14 Executive Summary One of the seminal articles in the strategic management literature, ‘The Core Competence of the Corporation’ paved the way for several researchers and practitioners to question and challenge established industry practices. The article created a churn in management thinking and execution. In this article the authors identify key tenets which together make up what can be termed as ‘core competence’. Effectively, the authors stress on the collective learning of the organization, juxtaposed with technical competencies and production technologies as drivers of core competence. They suggest simple tests that can help assess the construct: i) does the competence help the firm in addressing diverse markets, ii) is it easily imitable? and iii) does the customer perceive a benefit from the end product? In the second part of the report, we apply the learnings to a civil engineering situation where there are two organizational actors: BBCL and El Dorado. We find that the potential Joint Venture could lead to development of core competencies. In the current scheme of things, both companies do not have any clear core competencies. We also analyze the firms in terms of the capabilities that they have developed over the years. The Core Competence of the Corporation 1. Introduction The paper deals with critical business insights developed by the authors C K Prahalad and Gary Hamel during the course of their interactions and research involving different multinational firms. The paper has a practitioner orientation with crisp, easy to understand examples and frameworks that have been derived from industry insights. The crux of the paper lies in its ability to differentiate certain key strengths of the firms that have helped them differentiate their firm’s advantages from others; additionally, these key strengths, which Prahalad & Hamel (1993) term as core competencies have enabled the companies to make their mark in several products. These strengths have led the firms to sustained and profitable growth. 2. Key definitions The authors begin with an introduction to two different companies operating in the telecommunications space: GTE and NEC. The time frame studied is 1980 to 1988. While NEC started small, it ended up bigger in revenues and market share during the end of the period. This provided an impetus for the authors to try and identify what lay behind the scenes at these two telecommunication giants. One of the definitions put forth by the authors is the term ‘core competence’ itself. A core competence could be something similar to a capability developed by a company that could help establish a sustainable, defensible and profitable market position. In a competitive environment, a core competence could be a strategic asset. The next question this leads us to is this: if a capability needs to be defined as a core competence, then what criteria can be used to test it? The authors recommend three tests: 1) Does the capability help the firm compete in several product markets? 2) Can the competence or capability be easily imitated by rivals and 3) Is the customer capable of perceiving a difference because of the company’s competence in a particular domain? If the answers to all three questions are in the affirmative, then the particular competence could be termed a core competence. 3. Key Insights & Takeaways To explain with the help of an analogy, the authors use a tree with its roots, branches and fruits. The roots are akin to the core competence. They provide the foundation for the tree. The core products could be the branches or stems that garner support from the roots. The fruits are the end products which are consumed by the market. Once the roots are strong, they can support the tree during tough times also. Extending the analogy to a corporation, the authors take the example of Honda. Honda developed competencies in engine design and manufacturing. This was their core competence. They extended this to different products such as passenger cars, lawn mowers and generators. With a single core competence, Honda was able to exploit different markets and carved out a substantial market share for itself in each. Similarly, Canon with its core competence in microelectronics and imaging techniques was able to extend it to several end products such as cameras, copiers and fax machines. The authors point to a typical western corporation and say that top level managers are concerned more about their budget allocations. Accordingly, their focus is narrow and confined to their own Strategic Business Unit (SBU). This restricted scope of vision hampers the focus on developing core competencies. While business unit managers should be vying for core talent, they are only competing for tightly controlled capital allocation. This could be one reason why most American companies were unable to counter the Japanese onslaught in automobiles and electronic products. 4. Insights from other scholars: Critical Evaluation There have been a flood of articles and papers supporting the key tenets of the paper under review. Besides, these papers have sought to build upon and extend the findings of these authors. We review some of these articles. During the 1990s, there were few articles that also sought to critique some of the findings of the authors, Prahalad and Hamel. We briefly go through such papers also. While Prahalad & Hamel (1990) defined the core competence in broader terms, Walsh & Linton (2001) sought to de-construct the article and proposed a hierarchy through which a core competence could be portrayed. They used the analogy of a pyramid with the base or the foundation consisting of the technical competences and the upper part of the pyramid composed of the managerial capabilities. This strengthens the original authors’ work by acknowledging the need for a strong foundation. Plus, the article extends it by looking at the construct from a functional perspective. Within any organization, technical and managerial competencies exist. How they are leveraged determines the manner in which the firm will compete in the marketplace. Walsh & Linton (2001) also sought to differentiate different competencies for manufacturing and service industries. They broadly hint that in service industries the competencies may be more tacit and knowledge based. Other prominent scholars such as Porter (1996) have used the idea of core competence but have reviewed it from a different perspective. Porter (1996) has revisited the definition of strategy by stating what strategy is not about, instead of giving direct explanations. For instance, he says that operational effectiveness cannot be called a strategy; it can be a small part of the overall strategy. He also supports Prahalad & Hamel (1990) by stating that the essence of strategy is a choice of task execution that differs from those adopted by rivals. Further credit is given to the ‘core competence’ article by Porter (1996), when he states that a strategy could be based on the differing needs of the customers. Where Porter diverges from the article under review is the concept of trade-offs and fit. Here Porter (1996) discusses that a firm needs to make a trade-off between competing alternatives. These could be to do with the specific technology for a product or a service orientation, where the firm could adopt a niche strategy or a mass-market strategy. While defining ‘fit’, Porter (1996) brings in the concept of alignment between the firm’s capabilities with the firm’s industry. In this case, Porter also disagrees with the views of Prahalad & Hamel (1990). Porter avers that managers are focused on core competencies and critical resources, while they neglect ‘fit’. He defines ‘fit’ as the alignment between the firm’s competencies in conjunction with its operational parameters. For example, a firm exploiting a mass market product should also combine it with advanced mass production techniques which will give it a competitive edge. Core competence as a conceptual construct has been used by Band & Scanlan (1995) in strategic control. The authors define strategic control as a form of monitoring the strategy implementation. The focus would be on monitoring whether the strategy meets the long term objectives, optimally using the available resources. In this context, the authors try to conceptually extend the ‘core competence’ construct stating that strategic controls should be focused on protecting and safeguarding the core competencies of the organization. Their prime assumption is that ‘core competence’ is a valuable asset and possibly the foundation of the strategy implementation process; hence the need for strategic controls to protect it and promote sustained exploitation of the core competencies for the organizations growth and performance. There have been a few authors who have stoutly opposed the concept of core competence. However, they have defined their defense under a specific organizational context. In the case of the Internet enabled services, each product that is available online is vulnerable to imitation and substitution. For such products, Christensen (2006) discusses the concept of open innovation, whereby an individual or a firm designs a product for the web and then throws the gauntlet open to the general public to upgrade the product. Software developers, programmers and the like are free to add to the original product and enhance it. A simple example would be the case of Mozilla’s Firefox internet browser. Its open architecture allows others to add upgrades. For firms which deal with such services, the concept of core competence as defined by Prahalad & Hamel (1990) holds very less significance. There is no way of protecting the product from imitation; therefore it fails in its test for core competence. Yet several such companies have become market leaders. Google is also another example which encourages all users to contribute to its services. Yet its leadership has gone unchallenged for almost a decade. One of the strongest opposition to the ‘core competence’ construct was put forth by Collis & Montgomery (1995) who swung the argument around stating that core competencies are typically considered internal to the firm; what is really needed is the match of the firm’s inimitable resources with the demands of the marketplace. In other words, the authors state that tacit assets which are embodied in the firm in different ways need to be de-constructed. For example, they say that a company needs to be more specific while defining, say,’ strong consumer marketing skills’. They need to dig deeper and find out whether the skills are in the advertising or promotional stream or whether it is due to maximum market penetration. While summarizing the different authors’ critique and extensions to the core competence construct, we conclude that the view is still robust. We can counter the argument thus: in the case of Open innovation, such firms have invaluable tacit assets (search engine design & optimization) which are combined with tremendous functional skills such as advertising for revenue generation: applicable to Google. Core competences still hold true. Imitation is a strong possibility, but the combined, inimitable, hard-to-copy, skills remain the foundation of Google’s continued market dominance. While Collis & Montgomery (1995) strongly counter Core competence saying that it merely discusses internal strengths, we need to just check one of the tests for core competence proposed: does the consumer perceive a differentiated product because of the said competence? Very clearly, the assumption behind this is market orientation. In other words, the core competence assumes that the product meets a certain market requirement and it has factored in the market assessment. Sample this: Prahalad & Hamel also state that a core competence provides access to several markets. Clearly, they have looked at the aspect of the environment. While Porter (1996) discusses the role of ‘fit’ stating that the core competence construct has not considered this vital assumption, Prahalad & Hamel, while defining core competence state that it is the collective learning of the organization, combining diverse production skills (read manufacturing, distribution, service advantage) with multiple technology streams. Here they have implicitly factored in ‘fit’ though they have not discussed it in detail. On most fronts, the paper stands up to the scrutiny of scholars. Hence we rest our case stating that the construct has been well established and validated by several other scholars. Application to the Case 1. Brief: the two companies The case deals with an assessment of two different companies in the context of an infrastructure development project. The two companies in question are Boom Bust Construction Limited (BBCL) and El Nino. BBCL has been in the industry for over four decades and El Nino has recently acquired infrastructural competency through an acquisition: Eldorado was acquired through the purchase of a mining organization ‘Deepdown’. BBCL is a family owned concern set up in 1968 by Jed Boom. His two sons and a daughter work for the company, managing different functional domains. 2. The Customer The Government is the key customer here. With due support from both political parties, the current coalition Government has decided to increase the emphasis on sound infrastructure development. In view of this decision, they have focused on the National Development Plan (NDP) to pursue some of the key infrastructural projects outlined under the 2007-2013 plan, under which the M360 motorway is to be given priority. The National Roads Authority (NRA) has received tenders for the M360 construction. They are exploring two options: 1) divide the entire motorway into smaller stretches and invite tenders for each stretch, and 2) invite tenders for the entire stretch of motorway – ensure a single strong construction company is identified who can deliver the project on time and within the allotted budget. 3. Applying learnings to the Case In the article, Prahalad & Hamel (1990) listed out some of the arguments for the development of core competencies. In our application to the case, we try and identify some of the relevant facets of the article. This can help us relate theory with a practical scenario. First we apply some of the conceptual learnings to BBCL and then to El Dorado. Secondly, we look at the holistic picture and identify the linkages between theory and practice. Wherever applicable, we also attempt to highlight issues that have not been addressed by the research paper. 4. Core Competence & BBCL In the case of BBCL, we can list out some of their capabilities first: a) they have been strong in the construction industry (buildings) for about four years and their organization has built up a sound reputation. b) Jed Boom has built up key capabilities in establishing and managing key relationships with Government agencies and is well aware of the regulatory and legal framework. c) BBCL has developed capabilities in using advanced Information Technology applications for operational issues. In this domain, their product has been able to streamline operations and optimize costs: capital costs and construction time has reduced by 10%, there is a reduction in defects and accidents by 20%. d) the leadership team which is composed of Jed’s family has developed complementary capabilities: Wilma has financial expertise, Jetro has commercial management expertise and is also well versed with RIAI standard form of contract. Paul has expertise in IT systems though he was a chartered accountant by profession in his earlier employment. If we were to apply the tests of core competence, we find that while BBCL has strong capabilities, none of them translate to core competence. Another key point to note is that they have set up the civil division only in 2007 and it is being headed by Jetro who has some prior experience in commercial activities. Their competence so far has been restricted to buildings – possibly for both commercial and housing purposes. 5. Core Competence & El Nino We find that with the acquisition of El Dorado, the conglomerate El Nino has strengthened its position in the civil engineering sector. El Dorado has several years of experience handling construction for airports, motorways and rail track construction. They are also strong in commercial management techniques as evinced by their 50-member strong commercial team who manage contract related work throughout their European offices. Using the given information, we can say that their capabilities are i) civil engineering services on a large scale, ii) commercial management expertise gained through their exposure to several projects spread across the European Union. Applying the tests for core competence, we can infer that though they have capabilities in different areas, they do not have core competence in any specific area. Being newcomers to the Irish market, they seek a partner who has local knowledge and can complement their strengths. 6. Assessing the de-constructed components of Core Competence If we take El Dorado, the roots of their competence lie in construction engineering services. The branches or the core products can be compared to the rail tracks, airports and motorways. The end product which is experienced by the customers could possibly refer to the actual roads, airport buildings, tarmac, railway tracks, over-bridges, flyovers etc. A point worth reiterating here is that they still do not have core competences. Their strengths can be termed as capabilities or competences only. A similar application could be extended to study BBCL’s capabilities. The only difference in the case of BBCL is that their end products were buildings, both of a commercial nature and those for housing purposes. Only recently they have forayed into civil engineering services. 7. Analyzing the Potential BBCL- El Dorado JV The JV brings complementary strengths to the table. BBCL brings in a high level of IT expertise while El Dorado brings with it a vast experience in civil engineering services. While BBCL brings in a tremendous knowledge of the local Government and regulatory practices, El Dorado brings in a sharper commercial acumen. Taken together, their capabilities could give rise to ‘core competence’. This can be analyzed only through ex-post activities. Additionally, we need to consider the statement from Prahalad & Hamel (1990) where they mention that the core competence is the collective learning of the organization calling for a blend of production capabilities combined with technical competencies. Applying this definition to the potential Joint Venture, we can say that once the two organizations start working together, only then we can observe if complementary capabilities are also supported through managerial skills of teamwork, interpersonal development and collaborative efforts. In essence, the development of a core competence can come about only with the combined application of efforts in different spheres, technical competence combined with managerial coordination, lending credence to Porter (1996) who proposed a combination of skills and managerial application. 8. Conclusion We have done a critical review of Prahalad & Hamel (1990) drawing upon the scholarly insight of several other researchers. Secondly, we have tried to apply some of the learnings of the article to the case under discussion. The case insights reveal that the two companies do not possess any core competence as of the current situation. However, what is clear is that if the Joint Venture proceeds smoothly, certain core competencies could evolve. Having said that, we conclude by saying that few companies have managed to develop core competencies, yet as the authors pointed out, there are simple methods which can be employed to build these core competencies. In the larger interests of businesses, they could help firms drive towards profitable growth. Reference List Band DC & Scanlan, G 1995, ‘Strategic Control through Core Competencies’, Long Range Planning, vol. 28, no. 2, pp. 102-114. Christensen, JF 2006, ‘Withering Core Competency for the Large Corporation in an Open Innovation World?’, in Chesbrough, H., Vanhaverbeke, W. and West, J. (eds.), Open Innovation: Researching a New Paradigm. Oxford University Press, Oxford, pp. 35-61 Collis, DJ & Montgomery, CA 1995, ‘Competing on Resources’, Harvard Business Review, no. 4, pp. 118-128. Porter, ME 1996, ‘What is Strategy?’, Harvard Business Review, no. 6, pp. 61-78. Prahalad, CK & Hamel, Gary 1993, ‘The Core Competence of the Corporation’, Harvard Business Review, no. 3, pp. 2-15. Walsh, ST & Linton, JD 2001, ‘The Competence Pyramid: A Framework for Identifying and Analyzing Firm and Industry Competence’, Technology Analysis & Strategic Management, vol. 13, no. 2, pp. 165-177. Read More