The Core Competence of the Corporation - Essay Example

Essay Corporations that have succeeded in market places around the globe have predominantly leveraged their core competencies and have exploited capabilities that eventually add up to their core product or core services. According to Hamel and Prahalad (1990) it is the core competence of organizations that eventually drives successful performance especially with regards to constantly changing and dynamic market environments. This paper critically discusses the significance of core competencies by providing some real business examples in the tourism, hospitality and services industries. Identifying opportunities in the external environment and adopting a pre-active response to changes in the consumer markets is a fundamental element in organizations developed around core competencies (Hamel and Prahalad, 1990; 1994). One example for this is the case of Preussag AG. Preussag had traditionally been a company focusing on logistics, information systems and ‘old economy’ business lines such as metal trading, mining and construction (Dittmann et al., 2008). In 1997 the company estimated that the ‘old economy’ business need to be minimized as possible and that new diversified (or unrelated) markets needed to be exploited. In that year Preussag acquired the German Hapag-Lloyd corporation which specialized in cruises, travel agencies and airline services. The latter company owned as much as 30% of the German tour operator TUI. Eventually in 2001 Pressaug was renamed to TUI and almost 70% of its operations were in the tourism sector. TUI today is one of the most successful operators with profitable business yields and increased market shares. The entrance of the former Preussag into the tourism industry was largely effected by the exploitation and leverage of the company’s core competencies. Theuvsen (2004) states that the core competence of Preussag was the ability to vertically integrate unrelated businesses – particularly the company had proceeded into acquisition of 17 different firms, all with successful results. In that sense, Preussag (renamed to TUI) focused on developing such networks and acquiring business firms that although may seemed non – relevant to its core business, they eventually added significantly to its core competencies (Barnes, 2008). A perfect example of a telecommunication services organization leveraging its core competencies in the attempt to diversify in other business markets is that of AT&T. The company established in 1984 has marked a successful performance in providing telecom services. Given the competitive environment and the increased rivals of major service providers, AT&T managed to invest on its core competencies and eventually expand its business to the credit card market as well. The company introduced a credit card in the early 1990s (Universal Credit Card) which ranked in the first position of market share in the US credit card sector (22million customers in 1995). AT&T’s core competencies are not the packages of telecommunications that are offered to customers (the final product/service), its core competencies are based on the knowledge and learning of ‘connecting people’ (Trebing and Estabrooks, 1998). In particular AT&T leveraged its outstanding capabilities in information systems and given its financial competencies it eventually proceeded to the credit card business sector (which has traditionally been dominated by financial service organizations). Hamel and Prahald (1994) stress that AT&T’s ability to differentiate to other business markets greatly depended on the company’s core competence in managing efficiently and effectively transaction and processing systems, which is a fundamental prerequisite (or input) to the credit card business. Failing to strategically identify, indicate and leverage core competencies is a very critical issue that Hamel and Prahalad (1990) discuss. When organizations focus on exploiting capabilities which do not constitute core competences they eventually lose the ability to be flexible towards dynamic and changing market environments. One example for core rigidity (as noted by Haberberg and Rieple, 2008) is that of Novotel – part of the larger corporate group Accor. Novotel was a successful international three start hotel chain firm that focused predominantly in establishing branches in large metropolitan cities and particularly near the airports in an attempt to differentiate its offerings and services. In 1987 as the company expanded and dominated market shares, the management provisioned for investing in the core competence of Novotel and eventually standardized its format, services and concept throughout the international markets. Under this scope Novotel introduced highly structured and rigid rules and regulations that should be adhered to by all employees. Segal-Horn (2000) stress that Novotel tried to leverage its competence in ‘control’ and in managing disciplined employees; however this proved a disaster since it changed its overall positioning in the market. At that point Novotel was less ‘hospitable’ than it intended to be and general sales dropped dramatically. Novotel’s failure pertains to the fact that its core competence was not the one leveraged, its core competence was its entire effective and strategic human resource management and not the implicit ‘control’ over practices. Moving on, Easy Jet is another example of a company that focuses on its core competencies and capabilities in an attempt to differentiate its position in the market and introduce new offerings. Easy Jet has actually managed to create a new market way before consumer demand was calling for new services. Easy Jet soon after establishing the grounds for successful performance in the low - cost airline market, identified opportunities in other not directly to airline service related businesses. The company entered the cruise market as well as the hospitality market in an equally successful manner. Easycruises and Easyhotels have been experiencing rapid growth and great acceptance on the part of customers. The company focused on delivering low cost services to other than airline tickets; in that extend it transferred its capabilities to other businesses areas as well. The core competencies of Easy Jet evolve around managing to design services that do not bear mark up costs (in-plane catering, travel agencies representation etc). As Kangis and O’Reilly (2003) state, the core competence of the organization is its direct communication and direct service to the customers. Leveraging this core competence was essential in differentiating its offerings and in entering new markets as well. Easycruises and Easyhotels as projects have been developed on the basis of EasyJet’s competency in transferring the associated additional costs to the customers’ themselves and allowing more cost-sensitive customers to select upon a number of offerings on the basis of prices. EasyJet’s core competence is efficiency and not the actual low price service; for this reason the company has managed to successfully penetrate and dominate new markets. Other major airline corporations such as Lufthansa and British airways were initially reluctant in engaging into direct sale of airline tickets (through internet or through elimination of travel agencies) due to their declination in undertaking a bulk of business from the travel agencies (Sull, 1999). Ryan Air is yet another case in which the company has successfully leveraged its core competencies and managed to differentiate its service offerings and gradually become key player in the low-cost airline market. The core competence of Ryan Air is outsourcing the non –core activities that are relevant to the service provided to customers. Kangis and O’Reilly (2003) suggest that Ryan Air outsources almost all processes and operations that are not the core input for its own offerings; maintenance, ground customer service, baggage handling. The authors indicate that the company’s competence in outsourcing strategically these operations has ultimately equipped the organization with the proper focus on its core product which is the provision of low cost and scale economies services. Although literature suggests that core competencies should not be subjects to outsourcing, Leavy (2004) claims that in the particular case outsourcing is the core competence of the corporation. Ryan Air has managed to remain a highly competitive airline firm, enjoying great portions of the market by strategically leveraging its ability to efficiently and effectively outsource non – core operations or activities (Kangis and O’Reilly, 2003). The company has increased its potentials for success by differentiating its services and offering low price tickets on the basis of outsourcing. Finally a very interesting example of a company managing to establish economies of scale and scope through spreading (or sharing) core competencies in non – related (diversified) business areas is that of Walt Disney. Hitt et al. (2009) discuss the company’s diversification to the theme parks business market. Walt Disney Co has traditionally been an organization focusing on the film and animated entertainment industry. However, the organizational management foresaw an opportunity for transferring its core competence in other entertainment sectors beyond film production. The development of theme parks (Disneyland, Euro – Disney etc) was a significant step in the company’s position and market strengthening. Thus apart from the entertainment industry, Disney managed to create a new market – the theme parks pertaining to the tourism and leisure industry. Walt Disney’s core competence was the development of images and heroes that were appealing to the audiences. Hitt et al. (2009) argue that its mere core competence was the development of a ‘fantasy climate’ which was communicated in its films; this competence was also shared by the company’s move towards the establishment of the theme parks. The core competencies of corporations, as illustrated in the examples discussed in this paper, may vary significantly from organization to organization as well as from industry to industry, but remain the fundamental source of successful performance built on strategic management of the corporations. References Barnes, D. (2008). 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