1

HOW ORGANIZATIONAL CAPABILITY LEADS TO

COMPETITIVE ADVANTAGE THROUGH CORE
COMPETENCE

Chapter One: The Changing Nature of Competitive Advantage

High Level Competition is Forcing Companies to Change Their Attitudes Towards

Manufacturing Functions

The past several years have witnessed a growing awareness among American

managers of the central importance to competitive success in first rate competence in the

work of production. At the top of many corporate agendas now rests the determination to

boost productivity, product quality, and new product innovation. This is all to the good.

What managers still lack, however, is a powerful descriptive framework for understanding

how their manufacturing organizations are contributing to the overall strategic goals, as

well as other kinds of contribution those organizations could be asked to make.

In most of these companies, the bulk of the labor force and assets are tied to the

manufacturing function. The attitudes, expectations, and traditions that have developed

over time in and around that function will be difficult to change. Companies cannot atone

for years of neglect simply by throwing large chunks of investment dollars at the problem.

It normally takes several years of disciplined effort to transform the manufacturing

weakness into strengths.

In practice, of course, the challenge for managers in far more complex than is

suggested by the simple dichotomy between “weakness” and “strength”. There is no single

end that every manufacturing function must serve and serve well. There are, instead,

several generic kinds of roles the function can play in a company. These roles can be

viewed as stages of development along a continuum. See figure 1 on next page

(Wheelwright & Hayes, 1985).


Figure 1 Stages in manufacturing’s strategic role
Stage 1 Minimize manufacturing’s
negative potential: “internally
neutral”.
Stage 2 Achieve parity with
competitors: “externally
neutral”.
Figure 3 Provide credible support to
business strategy: “Internally
Supportive”.
Figure 4 Pursue a manufacturing base
competitive advantage:
“externally supportive”.
(Wheelwright & Hayes, 1985)
Time as a Source of Competitive Advantage
Like competition itself, competitive advantage is a constantly moving target. For
any company in any industry, the key is not to get stuck with a single simple notion of its
2
Outside experts are called in to
make decisions about strategic
manufacturing issues.
Internal, detailed management
control systems are the primary
means for monitoring
manufacturing performance.
Manufacturing is kept flexible and
reactive.
“Industry practice” is followed
The planning horizon for
manufacturing investment
decisions is extended to
incorporate a single business
cycle.
Capital investment is the primary
means for catching up with
competition or achieving a
competitive edge.
Manufacturing investments are
screened for consistency with the
business strategy.
A manufacturing strategy is
formulated and pursued.
Longer-term manufacturing
developments and trends are
addressed systematically.
Efforts are made to anticipate the
potential of new manufacturing
practices and technologies.
Manufacturing is involved up-
front in major marketing and
engineering decisions, (and vice
versa).
Long-range programs are pursued
in order to acquire capabilities in
advance of needs.
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source of advantage. The best competitors, the most successful ones, know how to keep

moving and always stay on the cutting edge.

Today, time is on the cutting edge. The ways leading companies manage time—in

production, in new product development and introduction, in sales and distribution—

represent the most powerful sources of competitive advantage. Though certain Western

companies are pursuing these advantages, Japanese experience and practice provide the

most instructive examples—not because they are necessarily unique but because they best

illustrate the evolutionary stages through with leading companies have advanced.

In the period following World War II, Japanese companies used their low labor

costs to gain entry into various industries. As wage rates rose and technology became

more significant, the Japanese shifted first to scale-based strategies and then focused

factories to achieve advantage. The advent of just-in-time production brought with it a

move to flexible factories, as leading Japanese companies sought both low cost and great

variety in the market. Cutting-edge Japanese companies today are capitalizing on time as a

critical source of competitive advantage: shortening the planing loop in the product

development cycle and trimming process time in the factory—managing time the way most

companies manage costs, quality, or inventory.

In fact, as a strategic weapon, time is the equivalent of money, productivity, quality,

even innovation. Managing time has enabled to Japanese companies not only to reduce

their costs but also to offer broad product lines, cover more market segments, and upgrade

the technological sophistication of their products. These companies are time-based

competitors (Stalk, 1988).

Organizational Learning as a Competitive Advantage

Surprisingly, a clear definition of learning has proved to be elusive over the years.

Organizational theorists have studied learning for a long time; the accompanying
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quotations suggest that there is still considerable disagreement (see figure 2 “Definitions of

Organizational Learning”). Most scholars view organizational learning as a process that

unfolds over time and link it with knowledge acquisition and improved performance. But

they differ on other important matters (Garvin, 1993).

Figure 2: Definitions of Organizational Learning

Scholars have proposed a variety of definitions of organizational learning. Here is

a small sample:

Organizational learning means the process of improving actions through knowledge and
understanding. C.Marlene Fiol and Marjorie A. Lyles, “Organizational Learning”
Academy of Management Review, October 1985.

An entity learns if, through its processing of information, the range of its potential
behaviors is changed. George P. Huber, “Organizational Learning: The Contributing
Processes and the Literatures,” Organization Science, February 1991.

Organizations are seen as learning by encoding inferences from history into routines
that guide behavior. Barbara Levitt and James G. March, “Organizational Learning,”
American Review of Sociology, Vol. 14, 1988.

Organizational Learning is a process of detecting and correcting error. Chris Argyris,

“Double Loop Learning in Organizations, “Harvard Business Review, Sept.-Oct. 1977.
(Garvin, 1993)

How can we discern among this cacophony of voices yet build on earlier insights?

As a first step, consider the following definition:

A learning organization is an organization skilled at creating, acquiring, and

transferring knowledge, and at modifying its behavior to reflect new knowledge and

insights (Garvin, 1993).

Organizational learning may be defined as the capacity (or process) within an

organization to maintain or improve performance based on experience. This activity

involves knowledge acquisition (the development or creation of skills, insights,

relationships), knowledge sharing (the dissemination to others of what has been acquired
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by some), and knowledge utilization (integration of the learning so that it is assimilated,

broadly available, and can be generalized to new situations) (DiBella, Nevis, Gould, 1996).

Those companies which seek to undertake organizational learning will surely gain

competitive advantage over those who don’t. Improved capabilities and core competencies

are built. Some simple steps, such as proper documenting, will prevent mistakes from

being made twice. A company will not grow to its full potential unless organizational

learning is taking place. Without organizational learning, companies will not be able to

compete and thus will disappear.

Technological Expansion and Organizational Capability

Technology management literature argues firm capability affects technological

expansion. In order to enter into a new product or technological field, firms need

technological capabilities to design or use the new technology, they also need

manufacturing and customer knowledge to produce and market the technology. Lacking

these capabilities makes it difficult to adopt new technologies. On the other hand, if firms

are able to apply existing capabilities to new technological fields, they are more likely to

take this advantage and expand into new fields (Chen, 1996).

On the other hand, if firms are unable to use existing capabilities in new

technological fields, they will have to pay high switching costs to adopt the technologies.

For these firms, organizational inertia can create difficulties in adopting new technologies.

Thus, possessing organizational capabilities similar to that in new technological fields

positively affects technological expansion (Chen, 1996).

Group Technology

Group technology is a Philosophy holding that managers should exploit similarities

and achieve efficiencies by grouping like problems. In most cases, a prerequisite for the

identification of similarities is a system by which objects of interest can be classified and

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coded (that is, assigned symbols representing relevant information). As an analogy, books

in a library catalog are classified and coded in such a way that one can find all the books

written by a particular author, covering a certain topic, or sharing the same title.

Similarities between parts, captures in the group technology code, can in like

manner be used by manufacturing engineering, manufacturing, purchasing, and sales. For

example a manufacturer can drastically reduce the time and effort spent deciding how a

part should be produced if this information is available for a similar part.

Group technology is drawing increasing interest from manufacturers because of its

many applications for boosting productivity. Group technology is an approach to

manufacturing that seeks to maximize production efficiencies by grouping similar and

recurring problems or tasks. By improving productivity is this way, group technology adds

to the competitive advantage of a company (Hyer and Wemmerlov, 1984).

Chapter Two: Organizational Capability Through Core Competence

Competence Leads to Competitive Advantage

Competition for competence is not product versus product, or even business versus

business. It is corporation versus corporation. In competing to build leadership in

competencies like electronic imaging and printing and fine optics, Cannon competes with a

broad array of “competence competitors,” including Toshiba, Kodak, Nikon, and Hewlett-

Packard. Wal-Mart competes with Kmart and Sears in developing world-class logistics.

Glaxo competes with Merck to develop new drug-discovery competencies. There are

several reasons it makes sense to conceive of competition for competence as intercorporate

competition.

First, core competencies are not product-specific. They contribute to the

competitiveness of a range of products or services. In this sense, core competencies

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transcend any particular product or service, and indeed may transcend and single business

unit within the corporation. Core competencies are also longer lasting than any individual

product or service. While the constituent skills that go into Sony’s miniaturization

competence have changed markedly since the company first licensed the transistor from

Bell Labs, and while the range of products where Sony exploits that competence has grown

and changed, miniaturization has been at the heart or Sony’s competitiveness for decades.

Likewise, Motorola’s core competence in wireless communications has outlived many of

the specific technologies that have contributed to the competence, and many of the

products that have embodied it.

Second, because a core competence contributes to the competitiveness of a range

products or services, winning or losing the battle for competence leadership can have a

profound impact on a company’s potential for growth and competitive differentiation, a

much greater impact than the success or failure of a single product. If Motorola lost its

leadership position in wireless competencies, a broad spectrum of businesses would suffer

—including pagers, two-way mobile radios, and cellular telephones.

Third, because the investment, risk-taking, and time frame required to achieve core

competence leadership often exceeds the resources and patients of a single business unit,

some competencies will not be built in the absence of direct corporate support. Senior

management cannot leave it up to individual business units, each of which is interested in

primarily protecting it position within a preexisting product or market, to identify and

sustain investment in core competencies that will secure the firm’s position in the markets

of the future (Prahalad and Hamel, 1994).

Core Competencies: The Collective Learning in the Organization

Core competencies are the collective learning in the organization, especially how to

coordinate diverse production skills and integrate multiple streams of technologies.

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Consider Sony’s capacity to miniaturize or Philip’s optical-media expertise. The

theoretical knowledge to put a radio on a chip does not in itself assure a company the skill

to produce a miniature radio no bigger than a business card. The bring off this feat, Casio

must harmonize know-how in miniaturization, microprocessor design, material science,

and ultrathin precision casting—the same skills it applies in its miniature card calculators,

pocket TV’s, and digital watches.

If core competence is about harmonizing streams of technology, it’s also about the

organization of work and the delivery of value. Among Sony’s competencies is

miniaturization. To bring miniaturization to its products, Sony must ensure that

technologists, engineers, and marketers have a shared understanding of customer needs and

of technological possibilities. The force of core competence is felt as decisively in services

as in manufacturing. Citicorp was ahead of others in investing in an operating system that

allowed it to participate in world markets 24 hours a day. Its competence in systems has

provided the company the means to differentiate itself from many service financial service

institutions (Prahalad and Hamel, 1990).

The key to understanding competence is that although it incorporates a technology

component, it also involves the governance process inside the organization (the quality of

relationships across functions, across business units), and collective learning across levels

and functions) inside the company. We may conceptualize competence as follows:

Competence = (Technology x Governance Process x Collective Learning).

Consider a company that is not blessed with much technology. It qualifies for not

more than, say, 200 units, using the formula from above. However this firm has fostered

the capacity to work across organizational boundaries and is fully focused on

organizational learning. Let us give it 100 units for governance and 500 for collective

learning, leading to a competence of 10 million. The message is clear: Investments in

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technology, if they are not, in tandem, accompanied by investments in governance and the

creation of a learning environment at all levels in the organization will remain under-

leveraged (Prahalad, 1993).

Competence, Core Products, Business Units, and End Products

The diversified corporation is like a large tree. The trunk and major limbs are the

core products, the smaller branches are the business units; the leaves, flowers, and fruit are

the end products. The root system that provides nourishment, sustenance, and the stability

is the core competence. You can miss the strength of a competitor by looking only at their

end products, in the same way you can miss the strength of a tree by only looking at it’s

leaves (see figure 3 below).

Figure 3 End Products

1 2 3 4 5 6 7 8 9 10 11 12

Business Unit Business Unit Business Unit Business Unit

1 2 3 4

Core Product 2

Core Product 1

Competence 1 Competence 2 Competence 3 Competence 4

Identifying Core Competencies

At least three tests can be applied to identify core competencies in a company.

First, a core competence provides potential access to a wide variety of markets.

Competence in display systems, for example, enables a company to participate in such

diverse businesses as calculators, miniature TV sets, monitors for laptop computers, and

automotive dashboards—Which is why Casio’s entry into the hand-held TV market was
 10
predictable. Second, a core competence should make a significant contribution to the

perceived customer benefits of the end product.

Finally, a core competence should be difficult for competitors to imitate. And it

will be difficult to imitate if it is a complex harmonization of individual technologies and

production skills. A rival might acquire some of the technologies that compromise the core

competence, but it will find to duplicate the more or less comprehensive pattern of internal

coordination and learning. JVC’s decision in the early 1960’s to pursue the development

of videotape competence passed the three tests outlined here. RCA’s decision in the late

1970’s to develop a stylus-based video turntable system did not (Prahalad and Hamel,

1990).

Three more tests that can be applied to identify core competencies: 1. It is a

significant source of competitive differentiation? Does it provide a unique signature to the

organization, like miniaturization for Sony, or user friendliness at Apple? 2. Does it

transcend a single business? Does it cover a range of businesses, both current and new? 3.

It is hard for competitors to imitate? It is hard for someone to visit Matsushita or Sony and

come back with an outline why they are good at manufacturing or miniaturization,

respectively. Competence permeates the whole organization, and it represents tacit

learning in an organization.

The difference between technology and competence is that technology can stand-

alone (e.g., design of very large scale integration). Competence, on the other hand, is

getting consistently high yields in VLSI. This transcends design capabilities. The process

of converting good designs into high yields requires that multiple levels (e.g., shop floor

to product develop engineers) and multiple functions (e.g., application engineers and

manufacturing groups) work very closely. A lot of understanding and learning is tacit.

And the recognition that competence represents tacit as well as explicit learning and the
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cumulative knowledge base involving a large number of people is critical to understanding

core competence. Technical capabilities, as stand alone skills, are not the key to

understanding core competencies. Competence is embedded in the whole organization

(Prahalad, 1993).

The Roots of Competitive Advantage

In the short run, a company’s competitiveness derives from the

price/performance attributes of current products. But the survivors of the first wave of

global competition, Western and Japanese alike, are all converging on similar and

formidable standards for product cost and quality—minimum hurdles for continued

competition, but less and less important as sources of differential advantage. In the long

run, competitiveness derives from the ability to build, at a lower cost and more speedily

than competitors, the core competencies that spawn unanticipated products. The real

sources of advantage are to be found in management’s ability to consolidate corporatewide

technologies and production skills into competencies that empower individual businesses

to adapt quickly to changing opportunities.

Senior executives who claim that they cannot build core competencies either

because they feel the autonomy of business units is sacrosanct or because their feet are

held to the quarterly budget fire should think again. The problem in most Western

companies is not that their senior executives are any less capable than those in Japan or

that Japanese companies possess greater technical capabilities. Instead, it is their

adherence to a concept of the corporation that unnecessarily limits the ability of the

individual businesses to fully exploit the deep reservoir of technical capability that many

American and European companies possess (Prahalad and Hamel, 1990).

Consider the color television business, for example. In order to succeed, firms

must have access to core products such as picture tubes, signal-processing I.C.’s, tuners,
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and line output transformers. If we disaggregate businesses at the core product level—be it

TV’s, VCR’s, camcorders, or laptop computers—we find very few Western firms that

dominate worldwide. This perspective allows us to evaluate competitive outcomes

differently. For example, we can explain why Matsushita and JVC won the battle for

VCR’s. Their combined market share through licensing was 80%, and core products for

decks was 85%. Eighty-five percent of the world’s requirements for decks were made by

one company (Prahalad, 1993)!

Keeping and Maintaining Competencies

Sustainable collective intelligence is the organizations ability to the experience of

interconnectedness into organizational learning. It is integration between the process of

creating collective intelligence and accomplishing the tasks on the group’s agenda.

Although the experience or spirit of community is essential to core competence, it

is not sufficient unto itself. If the group cannot convert collective intelligence into

organizational action it can easily become a bonded support group rather than a high

performing learning community. Sustainable collective intelligence represents the

organizations ability to sustain itself as a learning community while simultaneously acting

an making decisions with the group intelligence, surpassing the sum of the IQ of the

individual members.

The learning architecture of competency consists primarily of the systems and

structures that sustain memory and learning in the organization over time. Examples

include the compensation system, the career development process, style of leadership,

methods of distribution of power and governance, and even physical structure of the site.

Both visible and invisible structures, systems, and forces affect a group’s ability to

experience itself as an authentic community

(Http://www.vision.nest.com/cbw/creating.html.).
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Chapter Three: Intel Corporation—The World’s Most Powerful Chip

Company

Management Competency

In 1968, business owners had been very strong on hierarchies and on reporting. They

believed on clear lines of command. They thought that employees should be like officers

in the army, communicating only with their immediate superiors and immediate inferiors.

And like soldiers, they considered it the height of disloyalty for an employee to raise an

issue with someone higher up if he was dissatisfied with the response of his immediate

superior gave him.

Visionaries before their time, Intel’s management saw that in a fast moving industry

where speed of response to change was all-important, and where information had to flow

as swiftly as possible if the company was to make the right decisions, this approach did not

make sense. Instead, they wanted to encourage anyone who had a good idea to speak up,

anyone who had a question to ask it. Staff meetings were to be open to anyone who

though they could contribute something by attending; no manager, no matter how senior,

should refuse a request for help or information from another employee (Jackson, 1997).

Second Sourcing

Early in its history, Intel was consolidating, price pressures were increasing, and

experts were beginning to say that it was now too late to start a broad based semiconductor

manufacturing company. So the financial climate was too risky to consider developing

radical new products at the outset.

Their solution was to become a second source. There were two ways to become a

second source. The formal way was to sign a licensing agreement with the company that

invented the product, paying an up-front fee and royalty. In return you got a set of masks
 14
containing the master layouts of the circuits. Sometimes, if you were lucky, some

engineering visits to help you get the line working properly so that the process would

deliver reasonable yields.

The informal way was to buy a few sample parts from a distributor as soon as the

part came out, rush them back to the lab, pop the top, and take blow-ups of the circuits

inside. You then assigned a team of people to take traces on a part, carrying out a kind of

electrical audit to try to deduce from the signals going in and out what is happening inside.

This was slower and more difficult than the official second sourcing, but cheaper. And

although it was frowned on, the law of the trademarks and patents, secrets, and copyrights

was murky enough to make it possible without actually breaking the law (Jackson, 1997).

Competencies Sustain Competitiveness

With profits of $2.3 billion in 1993, Intel was the most profitable semiconductor

company. But Intel’s profits are not an entirely accurate barometer of the company’s

competencies. Buried in Intel’s profits are two significant endowments. First are its

intellectual property rights. The is no doubt that Intel is an innovative firm and produces

elegant and parsimonious microprocessor designs. On the other hand, if there were as few

legal barriers to copying a semiconductor design as there are to copying a retail concept,

much of Intel’s profits would be shared with competitor capable of reverse engineering and

then manufacturing Intel-design chips. Intel’s intellectual property rights, created by

patent legislation and enforced though the courts are, in essence, a tax levied on every Intel

customer. A second endowment is Intel’s installed base. The fact that Intel’s X86 chip

became the standard in the PC world owes much to the enormous distribution power of

IBM. IBM made the X86 architecture the de facto standard. The installed base of the X86

microprocessors has given Intel a substantial advantage in migrating customers from 286

to 386 to 486 to Pentium-based PC’s.

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What every Intel manager must wonder is how profitable Intel would be if these

two endowments disappeared. How, for example, would the competition between Intel’s

Pentium chip and the Power-PC chip of IBM, Motorolla, and Apple turn out if no

competitor had an advantage of a preexisting installed base? Intel’s profitability would be

substantially reduced. In fact, intellectual property rights are being treatend around the

world and at some point, as microprocessor technology changes, it will be impossible for

Intel to continue to extrapolate on past chip designs or to count on its installed base for

forward momentum. A new phase of competition will eventually open up where the only

advantage that Intel will be able to count on will be its own design, manufacturing, and

distribution competencies. Ultimately, what sustains competitiveness is not a firm’s

endowments, but its competencies. Managers must be able to distinguish between the two

(Prahalad and Hamel, 1994).

Assembling a Great Team

The selection process Noyce and Moore, Intel founders, used in assembling their

team was simple. The pair asked everyone they respected particularly in the electronic

engineering departments of universities, for names of the brightest research scientists they

knew. Noyce or Moore would make contact with a phone call, and the candidate would be

invited over for a chat—either at Noyce’s house or at some modest local restaurant like the

International House of Pancakes. They would chat over lunch or breakfast, the candidate

siting on one plastic banquette, The Intel founders sitting opposite on the other, and then

Noyce and Moore would make their decision. In addition to being a brilliant engineer, you

had to pass two tests to get a job at Intel. You had to be willing to come to work for Bob

and Gordon for no more than your current salary with your existing employer—and some

times, if they though you were over paid, for 10 percent less. In return, you’d be promised

stock options, which you would have to trust would be adequate compensation for the pay
 16
raise forgone. Also you had to be willing to take a demotion. If Intel was going to grow as

fast as its founders hoped, its first round of hires would soon be responsible for running

much larger teams of people. In the meantime, they would have to spend a few months

doing work that was more junior than the job they had come from (Jackson, 1997).

Building competencies starts with assembling the best possible teams that a

company can acquire. The knowledge that these employees bring is critical to building

technological and skill base. Keeping these employees is crucial.

Change—Strategic Inflection Points

“A strategic inflection point is a time in the life of a company when its

fundamentals are about to change. That change can mean an

opportunity to rise to new heights. But it may just as likely signal the

beginning of the end.

Strategic inflection points can be caused by technological

change but they are more than technological change. They can be

caused by competitors but are more than competition. They are full-
Andy Grove, Intel
CEO
scale changes in the way business is conducted, so that simply

adopting new technology or fighting the as you used to may be insufficient. They build up

force so insidiously that you may have a hard time even putting a finger on what has

changed, yet you know that something has. Let’s not mince words: A strategic inflection

can be deadly when unattended to. Companies that begin a decline as a result of its

changes rarely recover their previous greatness.

But strategic inflection points do not always lead to disaster. When the way

business is being conducted changes, it creates opportunities for players who are adept at

operating in the new way. This can apply to newcomers or incumbents, for whom a

strategic inflection point may mean an opportunity for a new period of growth.

Intel'sIntel’s
newnew333Mhz
333Mhz Pentium II
Pentium II
 17
You can be the subject of a strategic inflection point but you can also be the cause

of one. Intel has been both. In the mid-eighties, the Japanese memory producers brought

upon us an inflection point so overwhelming that it forced us out of memory chips and into

the relatively new field of microprocessors. The microprocessor business that we have

dedicated ourselves to has since gone on to cause the mother of all inflection points for

other companies, bringing very difficult times to the classical mainframe computer

companies. Having both being affected by inflection points and having caused them, I can

safely say that the former is tougher. I’ve grown up in a technological industry. Most of

my experiences are rooted there. I think in technological concepts and metaphors, and a

lot of my examples in this book come what I know. But strategic inflection points, by

often brought about by the workings of technology, are not restricted to technological

industries.”

(Andy Grove from his book “Only the Paranoid Survive”, 1996).

Chapter Four: Acquiring Core Competence

Strategic Alliances

The NEC Corp. constituted a “C&C” Committee of top managers to oversee the

development of core products and core competencies. NEC put in place coordination

groups and committees that cut across the interest of individual businesses. Consistent

with its strategic architecture, NEC shifted enormous resources to strengthen its position in

components and central processors. By using collaborative arrangements to multiple

internal resources, NEC was able to accumulate a broad array of core competencies.

NEC carefully identified three interrelated streams of technological and market

evolution. Top management determined that computing would evolve from large

mainframes to distributed processing, components from simple IC’s to VLSI, and

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communications from simple cross-bar exchange to complex digital systems we now call

ISDN. As things evolved further, NEC reasoned, the computing, component, and

communication businesses would so overlap that it would be hard to distinguish among

them, and that there would be enormous opportunities for any company that had built the

competencies needed to serve all three markets.

NEC top management determined that semiconductors would be the company’s

most important “core product.” It entered into a myriad strategic alliances—over 100 as of

1987—aimed at building competencies rapidly and at low cost. In mainframe computers

its most noted relationship was with Honeywell and Bull. Almost all the collaborative

arrangements in the semiconductor-component field were orientated toward technology

access. As they entered collaborative arrangements, NEC’s operating managers understood

the rationale for these alliances and the goal for internalizing partner skills. NEC’s director

of research summed up its competence acquisition during the 1970’s and 1980’s this way:

“From an investment standpoint, it was much quicker and cheaper to use foreign

technology. There wasn’t need for us to develop new ideas.” (Prahalad and Hamel, 1990).

Resource Leverage

A high aspiration level (compared to the resources available) leads to the need for

resource leverage. The issues for managers is: How do you create the capacity in a large

organization to leverage corporate resources? The process of resource leverage is

accomplished through the development of a strategic architecture (a way to capture the

pattern of likely industry evolution), identifying core competencies and core products.

Reusability of indivisible assets, as well as core products, in new and imaginative

configurations to create new market opportunities is at least the heart of the process of

leverage (Prahalad, 1993).

Management Must See the Company as Anything Other Than a Collection of Discrete
Businesses
 19

There are major companies that have had the potential to build core competencies

but have failed to do so because top management was unable to conceive of the company

as anything other than a collection of discrete businesses. GE sold much of its consumer

electronics to Thomson of France, arguing it was becoming to increasingly difficult to

maintain its competitiveness in this sector. That was undoubtedly so, but it is ironic that it

sold several key businesses to competitors who were already competence leaders—Black

& Decker in small electrical motors, and Thomson, which was eager to build its

competence in microelectronics and had learned from the Japanese that a position in

consumer electronics was vital to this challenge.

Management trapped in the strategic business unit mind-set almost inevitably finds

its individual business dependant on external sources for critical components, such as

motors or compressors. But these are not just components. They are core products that

contribute to the competitiveness of a wide range of end products. They are physical

embodiments of core competencies (Prahalad and Hamel, 1990).

Energizing the Organization

The role of top management is essientially one of energizing the whole

organization—all people, at all levels, in all functions, and in all geographies. It involves

developing a shared mindset and shared goals, and developing strategies for acquiring

competency. Senior managers must focus on such questions as: How do we stretch the

imagination of the total employee pool? How do we focus on team motivation?

How can top managers establish an aspiration level (strategic intent) for the

organization? Motivation for change results from an aspiration that all employees can

identify with and feel committed to. Aspirations must by definition exceed the current

resources of the company. Therefore, by design, strategic intent must cause a “misfit”

between aspirations and current resources and current approaches to using resources. The
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aspiration must focus the energies of the organization toward innovation (changing the

rules of the game) in the way the firm competes (Prahalad, 1993).

Chapter Five: Changes Needed to Build Core Competencies and

Maintain Them

Changes Needed to Build Core Competencies Throughout the Organization

Managers have traditionally focused on current customers, products—markets, and

corresponding business units. Research has shown that there is something beyond

understanding business units and customers. We to start with a strategic intent, create a

strategic architecture, understand core competencies and products, such there is a logic for

business, both current and new, and that leverage is based on continuous reconfiguration of

these competencies.

To realize both the stretch and the leverage that this set of ideas promotes, we need

to develop a set of values and beliefs that are consistent with this orientation to profitable

growth. What is the unit of analysis for resource allocation? How do we manage inter-

business unit linkages? How do we create organizational capabilities, such as global-local

capability or cycle time? And then, how do we think about administrative processes such

as budgeting or planning?

The next challenge for senior management is: How do you connect individual

employees’ motivation and contribution with customers through a transparent process

inside the company, where everybody understands what the shared aspirations are and how

the various businesses interlink with each other, and logic for nesting individual products

and new initiatives? That is the next round of challenge (Prahalad, 1993).

A core competence of community in the workplace must be nurtured through three

significant stages of growth. By definition, growth necessitates a certain amount of pain.

When we grow as individuals, we have to give up the innocents of childhood in order to

 21
meet challenges of adulthood, and later face the loss of physical agility and health to

embrace our dying process. We cannot avoid these transitions as we mature—and neither

can a community. If the organizational community avoids the pain of growth, it stops the

learning process. But if it consciously embraces the three learning challenges, it finds

opportunities to grow spiritually, psychologically, and competitively (Gozdz, 1995).

Three Developmental Challenges to Sustaining Competence

1. Embracing Wholeness. Businesses cannot sustain themselves as communities

or as learning organizations unless they become capable of embracing a

paradigm of wholeness, a paradigm compatible with a living systems

perspective. The skills of the learning organization and of community building

can be temporarily grafted onto and old worldview, which rejects a spiritual

sense of life, seeks answers in linear causality, and fragment system problems

into systems for easier comprehension. But such a transplant will not “take”

permanently. Community living is a system, and the organization will see that

it dies if it is treated like a machine or factor of production—behavior the

current mechanistic worldview reinforces.

2. Discipline and Mastery. A learning organization that embraces community as a

core competence requires day-in and day-out practice of discipline and mastery,

so that the community and individuals within it cannot help but move toward

optimum professional competency, joy, and aligned organizational purpose.

No learning organization is fully mature, fully in community at its birth.

Life in our organizations is significantly more ordinary than a constant state of

generative learning or communal bliss will allow. No organization can

constantly create a positive learning environment or always feel like a “family.”

The evolution of a living community will include turbulent times as we

 22
encounter one another’s and the organization’s shadow sides. The learning

organization will constantly cycle through the stages of pseudo-community,

chaos, emptiness, and glimpses of community as it grows toward wholeness.

3. Social Responsibility. Once a learning organization has embraced a paradigm

of wholeness and established itself as a sustainable learning community, it will

find itself called to the responsibilities of the larger society. This final

developmental stage is really just a starting place for another level of growth.

Community, which is comprised of multiple levels of systems, always

acts interdependently. Each level, while a whole system in itself, is also a part

of a more comprehensive whole. For example, the individual self is a whole

and simultaneous part of the learning organization. The self and the

organization are part of a larger whole: society.

The developmental challenge for individuals, organizations, and

societies is to understand the interdependence of these levels and act to develop

each appropriately while keeping the whole in mind. With experiences of

interconnectedness to inform its view, a community will undoubtedly discover

that its survival is linked to that of the larger society. If the organization has

achieved a level of maturity and has integrated the prior two stages, it can take

systems-oriented actions. Otherwise, it will again be treating symptoms rather

than root causes of problems (Gozdz, 1995).

Summary

Time as a Source of Competitive Advantage

Cutting-edge Japanese companies today are capitalizing on time as a critical source of

competitive advantage: shortening the planing loop in the product development cycle and
 23
trimming process time in the factory—managing time the way most companies manage

costs, quality, or inventory.

Organizational Learning as a Competitive Advantage

Organizational learning means the process of improving actions through knowledge and
understanding. George P. Huber, “Organizational Learning: The Contributing Processes
and the Literatures,” Organization Science, February 1991.

Organizational Learning is a process of detecting and correcting error. Chris Argyris,

“Double Loop Learning in Organizations, “Harvard Business Review, Sept.-Oct. 1977.

Those companies which seek to undertake organizational learning will surely gain
competitive advantage over those who don’t. Improved capabilities and core competencies
are built. A company will not grow to its full potential unless organizational learning is
taking place. Without organizational learning, companies will not be able to compete and
thus will disappear.

Technological Expansion and Organizational Capability

Technology management literature argues firm capability affects technological

expansion. In order to enter into a new product or technological field, firms need

technological capabilities to design or use the new technology.

Group Technology

Group technology is drawing increasing interest from manufacturers because of its

many applications for boosting productivity. Group technology is an approach to

manufacturing that seeks to maximize production efficiencies by grouping similar and

recurring problems or tasks.

Competence Leads to Competitive Advantage

Competition for competence is not product versus product, or even business versus

business. First, core competencies are not product-specific. Core competencies are also

longer lasting than any individual product or service.

Core Competencies: The Collective Learning in the Organization

Core competencies are the collective learning in the organization, especially how to

coordinate diverse production skills and integrate multiple streams of technologies.

 24
If core competence is about harmonizing streams of technology, it’s also about the

organization of work and the delivery of value. Among Sony’s competencies is

miniaturization. The key to understanding competence is that although it incorporates a

technology component, it also involves the governance process inside the organization (the

quality of relationships across functions, across business units), and collective learning

across levels and functions) inside the company. We may conceptualize competence as

follows: Competence = (Technology x Governance Process x Collective Learning).

Competence, Core Products, Business Units, and End Products

The diversified corporation is like a large tree. The trunk and the major limbs are the core

products, the smaller branches are the business units; the leaves, flowers, and fruit are the

end products.

Identifying Core Competencies

At least three tests can be applied to identify core competencies in a company. First, a core

competence provides potential access to a wide variety of markets. Second, A core

competence should make a significant contribution to the perceived benefits of the end

product. Finally, a core competence should be difficult for competitors to imitate.

Keeping and Maintaining Competencies

Sustainable collective intelligence is the organizations ability to the experience of

interconnectedness into organizational learning. The learning architecture of competency

consists primarily of the systems and structures that sustain memory and learning in the

organization over time.

Management Competency

Early in the creation of the Intel Corporation, Intel’s upper management saw that in

a fast moving industry speed of response to change was all-important, and adopted liberal

management procedures much earlier before they were popular in other industries
 25
Change—Strategic Inflection Points

A strategic inflection point is a time in the life of a company when its fundamentals

are about to change. That change can mean an opportunity to rise to new heights, or may

be just as likely to be the beginning of the end. Intel over came this problem in the 80’s

while being outsold by a Japanese market of memory chips, they began manufacturing

microprocessors which catapulted them to the top.

Strategic Alliances

The NEC Corp. constituted a “C&C” Committee of top managers to oversee the

development of core products and core competencies. NEC top management determined

that semiconductors would be the company’s most important “core product.” By using

collaborative arrangement to multiple internal resources, NEC was able to accumulate a

broad array of core competencies.

Resource Leverage

The process of resource leverage is accomplished through the development of

strategic architecture (a way to capture the pattern of likely industry evolution), core

competencies and core products.

Energizing the Organization

The role of top management is essentially one of energizing the whole organization

—all the people, at all levels, in all functions, and in all geographies. It involves a

developed mindset and shared goals.

Changes Needed to Build Core Competencies Throughout the Organization

Managers have traditionally focused on current customers, products—markets, and

corresponding business units. If the organizational community avoids the pain of growth,

it stops the learning process.

 26
Three Developmental Challenges to Sustaining Competence

No learning organization is fully mature, fully in community at its birth. The

learning organization will constantly cycle through the stages of pseudo-community, chaos,

emptiness, and glimpses of community as it grows toward wholeness.

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