Answer Happy

Write an essay (900 to 1100 words)
-“The critical task for management is to create an
organization capable of infusing products with irresistible
functionality or, better yet, creating products that customers need
but have not yet even imagined"
The Core Competence of the Corporation 13 45% in key VCR components, far in excess of its brand share (Panasonic, JVC, and others) of 20%. And Matsushita has a commanding core product share in compressors worldwide, estimated at 40%, even though its brand share in both the air-conditioning and refrigerator businesses is quite small. It is essential to make this distinction between core competencies, core products, and end products because global competition is played out by different rules and for different stakes at each level. To build or defend leadership over the long term, a corporation will probably be a winner at each level. At the level of core competence, the goal is to build world leadership in the design and develop- ment of a particular class of product functionality-be it compact data storage and retrieval, as with Philips's optical-media competence, or compactness and ease of use, as with Sony's micromotors and microprocessor controls. To sustain leadership in their chosen core competence areas, these compa- nies seek to maximize their world manufacturing share in core products. The manufacture of core products for a wide variety of external (and internal) cus- tomers yields the revenue and market feedback that, at least partly, determines the pace at which core competencies can be enhanced and extended. This think- ing was behind JVC's decision in the mid-1970s to establish VCR supply rela- tionships with leading national consumer electronics companies in Europe and the United States. In supplying Thomson, Thorn, and Telefunken (all indepen- dent companies at that time) as well as U.S. partners, JVC was able to gain the cash and the diversity of market experience that ultimately enabled it to outpace Philips and Sony. (Philips developed videotape competencies in parallel with JVC, but it failed to build a worldwide network of OEM relationships that would have allowed it to accelerate the refinement of its videotape competence through the sale of core products.) JVC's success has not been lost on Korean companies like Goldstar, Sam Sung, Kia, and Daewoo, who are building core product leadership in areas as diverse as displays, semiconductors, and automotive engines through their OEM- supply contracts with Western companies. Their avowed goal is to capture investment initiative away from potential competitors, often U.S. companies. In doing so, they accelerate their competence-building efforts while “hollowing out” their competitors. By focusing on competence and embedding it in core products, Asian competitors have built up advantages in component markets first and have then leveraged off their superior products to move downstream to build brand share. And they are not likely to remain the low-cost suppliers for- ever. As their reputation for brand leadership is consolidated, they may well gain price leadership. Honda has proven this with its Acura line, and other Japanese car makers are following suit. Control over core products is critical for other reasons. A dominant posi- tion in core products allows a company to shape the evolution of applications and end markets. Such compact audio disc-related core products as data drives and lasers have enabled Sony and Philips to influence the evolution of the com- puter-peripheral business in optical-media storage. As a company multiplies the number of application arenas for its core products, it can consistently reduce the
14 STRATEGIC LEARNING IN A KNOWLEDGE ECONOMY TWO Concepts of the Corporation: SBU or Core Competence SBU Core Competence Basis for competition Competitiveness of today's products Interfirm competition to build competencies Corporate structure Portfolio of businesses related in product market terms Portfolio of competen- cies, core products, and businesses Status of the business unit Autonomy is sacro- sanct; the SBU "owns" all resources other than cash SBU is a potential reservoir of core competencies Resource allocation Discrete businesses are the unit of analysis; capital is allocated business by business Businesses and com- petencies are the unit of analysis: top management allocates capital and talent Value added of top management Optimizing corporate Enunciating strategic returns through capital architecture and build- allocation trade-offs ing competencies to among businesses secure the future BOX 1.1 Two Concepts of the Corporation: SBU or Core Competence cost, time, and risk in new product development. In short, well-targeted core products can lead to economies of scale and scope. THE TYRANNY OF THE SBU The new terms of competitive engagement cannot be understood using ana- lytical tools devised to manage the diversified corporation of 20 years ago, when competition was primarily domestic (GE versus Westinghouse, General Motors versus Ford) and all the key players were speaking the language of the same business schools and consultancies. Old prescriptions have potentially toxic side effects. The need for new principles is most obvious in companies organized exclusively according to the logic of SBUs. The implications of the two alternate concepts of the corporation are summarized in “Two Concepts of the Corpora- tion: SBU or Core Competence.”
The Core Competence of the Corporation 15 Obviously diversified corporations have a portfolio of products and a port- folio of businesses. But we believe in a view of the company as a portfolio of competencies as well. U.S. companies do not lack the technical resources to build competencies, but their top management often lacks the vision to build them and the administrative means for assembling resources spread across multiple busi- nesses. A shift in commitment will inevitably influence patterns of diversification, skill deployment, resource allocation priorities, and approaches to alliances and outsourcing. We have described the three different planes on which battles for global leadership are waged: core competence, core products, and end products. A cor- poration has to know whether it is winning or losing on each plane. By sheer weight of investment, a company might be able to beat its rivals to blue-sky tech- nologies yet still lose the race to build core competence leadership. If a company is winning the race to build core competencies (as opposed to building leadership in a few technologies), it will almost certainly outpace rivals in new business development. If a company is winning the race to capture world manufacturing share in core products, it will probably outpace rivals in improving product fea- tures and the price/performance ratio. Determining whether one is winning or losing end product battles is more difficult because measures of product market share do not necessarily reflect var- ious companies' underlying competitiveness. Indeed, companies that attempt to build market share by relying on the competitiveness of others, rather than investing in core competencies and world core-product leadership, may be tread- ing on quicksand. In the race for global brand dominance, companies like 3M, Black & Decker, Canon, Honda, NEC, and Citicorp have built global brand umbrellas by proliferating products out of their core competencies. This has allowed their individual businesses to build image, customer loyalty and access to distribution channels. When you think about this reconceptualization of the corporation, the pri- macy of the SBU—an organizational dogma for a generation is now clearly an anachronism. Where the SBU is an article of faith, resistance to the seductions of decentralization can seem heretical. In many companies, the SBU prism means that only one plane of the global competitive battle, the battle to put competitive products on the shelf today, is visible to top management. What are the costs of this distortion? Underinvestment in Developing Core Competencies and Core Products When the organization is conceived of as a multiplicity of SBUs, no single business may feel responsible for maintaining a viable position in core products nor be able to justify the investment required to build world leadership in some core competence. In the absence of a more comprehensive view imposed by cor- porate management, SBU managers will tend to underinvest. Recently companies
16 STRATEGIC LEARNING IN A KNOWLEDGE ECONOMY such as Kodak and Philips have recognized this as a potential problem and have begun searching for new organizational forms that will allow them to develop and manufacture core products for both internal and external customers. SBU managers have traditionally conceived of competitors in the same way they've seen themselves. On the whole, they've failed to note the emphasis Asian competitors were placing on building leadership in core products or to under- stand the critical linkage between world manufacturing leadership and the ability to sustain development pace in core competence. They've failed to pursue OEM- supply opportunities or to look across their various product divisions in an attempt to identify opportunities for coordinated initiatives. Imprisoned Resources As an SBU evolves, it often develops unique competencies. Typically the people who embody this competence are seen as the sole property of the business in which they grew up. The manager of another SBU who asks to borrow tal- ented people is likely to get a cold rebuff. SBU managers are not only unwilling to lend their competence carriers but they may actually hide talent to prevent its redeployment in the pursuit of new opportunities. This may be compared to resi- dents of an underdeveloped country hiding most of their cash under their mat- tresses. The benefits of competencies, like the benefits of the money supply depend on the velocity of their circulation as well as on the size of the stock the company holds. Western companies have traditionally had an advantage in the stock of skills they possess. But have they been able to reconfigure them quickly to respond to new opportunities? Canon, NEC, and Honda have had a lesser stock of the people and technologies that compose core competencies but could move them much quicker from one business unit to another. Corporate R&D spending at Canon is not fully indicative of the size of Canon's core competence stock and tells the casual observer nothing about the velocity with which Canon is able to move core competencies to exploit opportunities. When competencies become imprisoned, the people who carry the compe- tencies do not get assigned to the most exciting opportunities, and their skills begin to atrophy. Only by fully leveraging core competencies can small compa- nies like Canon afford to compete with industry giants like Xerox. How strange that SBU managers, who are perfectly willing to compete for cash in the capital budgeting process, are unwilling to compete for people--the company's most precious asset. We find it ironic that top management devotes so much attention to the capital budgeting process yet typically has no comparable mechanism for allocating the human skills that embody core competencies. Top managers are seldom able to look four or five levels down into the organization, identify the people who embody critical competencies, and move them across organizational boundaries.
The Core Competence of the Corporation 17 Fluid Power Mohon Actuators Actuators Mochine Vickers Leams the value of Strategic Architecture The idea that top management should develop a cor- Vickers is currently in fluid-power components. The porate strategy for acquiring and deploying core com- architecture identifies two additional competencies, petencies is relatively new in most U.S. companies. electric power components and electronic controls. There are a few exceptions. An carly convert was A systems integration capability that would unite Trinova (previously Libbey Owens Ford), a Toledo- hardware, software, and service was also targeted based corporation, which enjoys a worldwide position for development. in power and motion The strategic archi- controls and engi- tecture, as illustrated Vickers Map of Competencies neered plastics. One by the Vickers exam- of its major divisions ple, is not a forecast of is Vickers, a premier specific products or supplier of hydraul Electronic Electric specific technologies Controls Power ics components like Electrohydroute but a broad map of valves, pumps, actua- Valve amplifiers Pumps AC/DC Control valves the evolving linkages tors, and filtration de Loge Servo Cartridge valves between customer vices to acrospace, Stepper functionality require marine, defense, auto- Complete machine Package systems and vehicle Pneumatic products ments, potential tech- motive, earth-mov. no Fuel/Fuld transfer nologies, and core ing, and industrial Fthaion competencies. It as. markets. sumes that products Vickers saw the po and systems cannot tential for a trans Sensors System Engineering Electric be defined with cer- formation of its tra Volve/Pump Application focus Products tainty for the future ditional business Actuator Power/Motion but that preempting with the application Control Fon packages competitors in the of electronics disci Electronics Generators development of new plines in combination Software markets requires an with its traditional early start to building technologies. The core competencies. goal was to ensure The strategic archi- that change in tech. Offering tecture developed by nology does not dis. Systems Packages Components Vickers, while de place Vickers from Training scribing the future in its customers." This, competence terms, to be sure, was initial- also provides the basis ly a defensive move: for making "here and Focus Markets Vickers recognized now" decisions about that unless it acquired Fodbory automation On highway Misches/Spode product priorities, ac new skills, it could Automotive syns Commercial loro Deterse whicles quisitions, alliances, Plodie process not protect existing Mary aroon Monne and recruitment. markets or capitalize Since 1986, Vickers on new growth oppor- has made more than tunities. Managers at Vickers attempted to conceptual. ten clearly targeted acquisitions, each one focused on ize the likely evolution of (a) technologies relevant to a specific component or technology gap identified in the power and motion control business, (b) functionali- the overall architecture. The architecture is also the ties that would satisfy emerging customer needs, and basis for internal development of new competencies. (c) new competencies needed to creatively manage Vickers has undertaken, in parallel, a reorganization the marriage of technology and customer needs. to enable the integration of electronics and electrical Despite pressure for short-term earnings, top man. capabilities with mechanical-based competencies. We agement looked to a 10-to 15-year time horizon in de believe that it will take another two to three years veloping a map of emerging customer needs, changing before Vickers reaps the total benefits from devel. technologies, and the core competencies that would be oping the strategic architecture, communicating it necessary to bridge the gap between the two. Its slogan widely to all its employees, customers, and investors, was "Into the 21st Century" (A simplified version of and building administrative systems consistent with the overall architecture developed is shown here. the architecture Service BOX 1.2 Vickers Learns the Value of Strategic Architecture
18 STRATEGIC LEARNING IN A KNOWLEDGE ECONOMY Bounded Innovation If core competencies are not recognized, individual SBUs will pursue only those innovation opportunities that are close at hand-marginal product-line extensions or geographic expansions. Hybrid opportunities like fax machines, laptop computers, hand-held televisions, or portable music keyboards will emerge only when managers take off their SBU blinkers. Remember, Canon appeared to be in the camera business at the time it was preparing to become a world leader in copiers. Conceiving of the corporation in terms of core compe- tencies widens the domain of innovation. DEVELOPING STRATEGIC ARCHITECTURE The fragmentation of core competencies becomes inevitable when a diversi- fied company's information systems, patterns of communication, career paths, managerial rewards, and processes of strategy development do not transcend SBU lines. We believe that senior management should spend a significant amount of its time developing a corporatewide strategic architecture that establishes objectives for competence building. A strategic architecture is a road map of the future that identifies which core competencies to build and their constituent technologies. By providing an impetus for learning from alliances and a focus for internal development efforts, a strategic architecture like NEC's C&C can dramatically reduce the investment needed to secure future market leadership. How can a company make partnerships intelligently without a clear understanding of the core competencies it is trying to build and those it is attempting to prevent from being unintentionally transferred? Of course, all of this begs the question of what a strategic architecture should look like. The answer will be different for every company. But it is helpful to think again of that tree, of the corporation organized around core products and, ultimately core competencies. To sink sufficiently strong roots, a company must answer some fundamental questions: How long could we preserve our com- petitiveness in this business if we did not control this particular core competence? How central is this core competence to perceived customer benefits? What future opportunities would be foreclosed if we were to lose this particular competence? The architecture provides a logic for product and market diversification, moreover. An SBU manager would be asked: Does the new market opportunity add to the overall goal of becoming the best player in the world? Does it exploit or add to the core competence? At Vickers, for example, diversification options have been judged in the context of becoming the best power and motion control company in the world (see the insert “Vickers Learns the Value of Strategic Architecture"). The strategic architecture should make resource allocation priorities trans- parent to the entire organization. It provides a template for allocation decisions
The Core Competence of the Corporation 19 by top management. It helps lower level managers understand the logic of alloca- tion priorities and disciplines senior management to maintain consistency. In short, it yields a definition of the company and the markets it serves. 3M, Vick- ers, NEC, Canon, and Honda all qualify on this score. Honda knew it was exploiting what it had learned from motorcycles-how to make high-revving, smooth-running, lightweight engines--when it entered the car business. The task of creating a strategic architecture forces the organization to identify and commit to the technical and production linkages across SBUs that will provide a distinct competitive advantage. It is consistency of resource allocation and the development of an adminis- trative infrastructure appropriate to it that breathes life into a strategic architec- ture and creates a managerial culture, teamwork, a capacity to change, and a willingness to share resources, to protect proprietary skills, and to think long term. That is also the reason the specific architecture cannot be copied easily or overnight by competitors. Strategic architecture is a tool for communicating with customers and other external constituents. It reveals the broad direction without giving away every step. REDEPLOYING TO EXPLOIT COMPETENCIES If the company's core competencies are its critical resource and if top man- agement must ensure that competence carriers are not held hostage by some par- ticular business, then it follows that SBUs should bid for core competencies in the same way they bid for capital. We've made this point glancingly. It is important enough to consider more deeply. Once top management (with the help of divisional and SBU managers) has identified overarching competencies, it must ask businesses to identify the projects and people closely connected with them. Corporate officers should direct an audit of the location, number, and quality of the people who embody competence. This sends an important signal to middle managers: core competencies are corporate resources and may be reallocated by corporate management. An indi- vidual business doesn't own anybody. SBUs are entitled to the services of individ- ual employees so long as SBU management can demonstrate that the opportunity it is pursuing yields the highest possible pay-off on the investment in their skills. This message is further underlined if each year in the strategic planning or bud- geting process unit managers must justify their hold on the people who carry the company's core competencies. Elements of Canon's core competence in optics are spread across businesses as diverse as cameras, copiers, and semiconductor lithographic equipment and are shown in “Core Competencies at Canon.” When Canon identified an oppor- tunity in digital laser printers, it gave SBU managers the right to raid other SBUs to pull together the required pool of talent. When Canon's reprographics prod- ucts division undertook to develop microprocessor-controlled copiers, it turned
20 STRATEGIC LEARNING IN A KNOWLEDGE ECONOMY to the photo products group, which had developed the world's first microproces- sor-controlled camera. Also, reward systems that focus only on product-line results and career paths that seldom cross SBU boundaries engender patterns of behavior among unit managers that are destructively competitive. At NEC, divisional managers come together to identify next-generation competencies. Together they decide how much investment needs to be made to build up each future competency and the contribution in capital and staff support that each division will need to make. There is also a sense of equitable exchange. One division may make a dispropor- tionate contribution or may benefit less from the progress made, but such short- term inequalities will balance out over the long term. Incidentally the positive contribution of the SBU manager should be made visible across the company. An SBU manager is unlikely to surrender key people if only the other business (or the general manager of that business who may be a competitor for promotion) is going to benefit from the redeployment. Coopera- tive SBU managers should be celebrated as team players. Where priorities are clear, transfers are less likely to be seen as idiosyncratic and politically motivated. Transfers for the sake of building core competence must be recorded and appreciated in the corporate memory. It is reasonable to expect a business that has surrendered core skills on behalf of corporate opportunities in other areas to lose, for a time, some of its competitiveness. If these losses in performance bring immediate censure, SBUs will be unlikely to assent to skills transfers next time. Finally there are ways to wean key employees off the idea that they belong in perpetuity to any particular business. Early in their careers, people may be exposed to a variety of businesses through a carefully planned rotation program. At Canon, critical people move regularly between the camera business and the copier business and between the copier business and the professional optical- products business. In mid-career, periodic assignments to cross-divisional project teams may be necessary both for diffusing core competencies and for loosening the bonds that might tie an individual to one business even when brighter oppor- tunities beckon elsewhere. Those who embody critical core competencies should know that their careers are tracked and guided by corporate human resource professionals. In the early 1980s at Canon, all engineers under 30 were invited to apply for membership on a seven-person committee that was to spend two years plotting Canon's future direction, including its strategic architecture. Competence carriers should be regularly brought together from across the corporation to trade notes and ideas. The goal is to build a strong feeling of com- munity among these people. To a great extent, their loyalty should be to the integrity of the core competence area they represent and not just to particular businesses. In traveling regularly, talking frequently to customers, and meeting with peers, competence carriers may be encouraged to discover new market opportunities.
The Core Competence of the Corporation 21 Core Competencies at Canon Precision Mechanics Fine Optics Micro- electronics ロロロロロロロロロロ ロロロロロロ Basic camera Compact fashion camera Electronic camera EOS autofocus camera Video still camera Laser beam printer Color video printer Bubble jet printer Basic fax Laser fax Calculator Plain paper copier Battery PPC Color copier Laser copier Color laser copier NAVI Still video system Laser imager Cell analyzer Mask aligners Stepper aligners Excimer laser aligners OOOOOOOOOOOO 留园田园留圈圈圈圈圈圈曾國回國圖國國自 Every Canon product is the result of at least one core competency. BOX 1.3 Core Competencies at Canon Core competencies are the wellspring of new business development. They should constitute the focus for strategy at the corporate level. Managers have to win manufacturing leadership in core products and capture global share through brand-building programs aimed at exploiting economics of scope. Only if the company is conceived of as a hierarchy of core competencies, core products, and market-focused business units will it be fit to fight.
22 STRATEGIC LEARNING IN A KNOWLEDGE ECONOMY Nor can top management be just another layer of accounting consolida- tion, which it often is in a regime of radical decentralization. Top management must add value by enunciating the strategic architecture that guides the compe- tence acquisition process. We believe an obsession with competence building will characterize the global winners of the 1990s. With the decade underway, the time for rethinking the concept of the corporation is already overdue.