The Two Cs of Success: Core Competency

As top management at American Telephone & Telegraph, Eastman Kodak and Rockwell International will tell you, C. K. Prahalad has become the hottest consultant in America by telling companies to pay less attention to the marketplace and more time defining what they are.

Existentialism for managerial narcissists? The Me Decade, Fortune 500 style? Not quite--this India-born University of Michigan professor is hardly the Tom Wolfe of corporate introspection. However, he makes a provocative and persuasive case that traditional management models don't capture how organizations create value. Managers who religiously preach the sacred texts of Peter Drucker's "Management by Objectives" and Ted Levitt's "Marketing Myopia" might find Prahalad's prose subversively illuminating.

The real value of a company isn't found in its market portfolio of products, services and technologies, Prahalad asserts, but in its organizational portfolio of strategic competencies.

Managers struggling to define "what business are we really in?" are asking the wrong question. The right question, argues Prahalad, is, "What are we really good at and how can we build upon it?"

For example, Sony Corp. has used its superb skills in miniaturization to build extraordinarily successful franchises in audio, video and multimedia-based consumer electronics products. But "Sony doesn't have a vice president of miniaturization," Prahalad notes, because "miniaturization is a value that's widely dispersed throughout the organization." The company's predisposition and ability to transform bulky electronics into sleek, palm-sized packages is inextricably part of what it means to be Sony. Miniaturization may not be on Sony's organizational charts, but it is undeniably a strategic competence.

Similarly, when AT&T; moved (successfully) into the credit card business, many people wondered what a telecommunications giant knew about financial services. In fact, transaction processing is at the core of the credit card business. With its own web of networks and billing infrastructures, AT&T; already possessed a significant core competence in transaction processing. What looked like a diversification was, in reality, the application of a core competence to provide a new service.

In Prahalad's model, diversification can be the extension of a skill set rather than the acquisition of an unrelated business that promises elusive synergies. "We still think in terms of serving markets rather than in creating opportunity horizons," says Prahalad. The real focus of a corporate acquisition strategy shouldn't be buying access to markets but acquiring complementary competencies that extend the existing ones. That is the rationale behind Sony's acquisition of CBS Records and Columbia Pictures. It is also AT&T;'s hope in its recent purchase of NCR.

Consequently, the priorities shift from management by objectives toward the management of competencies. The emphasis is less on external markets than on the internal skills and values of the organization. The allocation of talent thus becomes even more critical than the allocation of capital, Prahalad observes. Companies are forced to define themselves differently.

For Kodak, the photo film giant that spent more than $5 billion acquiring a pharmaceutical company as part of a diversification effort, that has meant redefining its desired core competency as "imaging"--whether those images be flowers blooming on silver halide film or computerized silicon. Imaging is the theme now disciplining Kodak's diversification efforts, its research and development investments and the company's sense of itself.

"Prahalad has probably had a bigger impact on us than any consultant we've had here over the past 10 years," acknowledges 18-year Kodak veteran Robert LaPerle, director of business planning for the photo products group. The company is now more willing to practice creative introspection than to slavishly follow the dictates of market research.

Of course, the competency perspective makes it easy to don the rose-colored glasses of self-delusion. Too many organizations (and the people in them) believe that they possess a core competence when, in harsh reality, they do not. This was clearly the case with AT&T; in the computer industry. Sears may be losing its core competence in retailing; Detroit is trying to rediscover its core competencies in automobile manufacturing. Asserting competence is far easier than rigorously improving it.

"Competence doesn't come from money," Prahalad says. "We spent $23 billion over eight years to put a man on the moon. . . . Detroit has spent over $70 billion over a decade, and it still can't build a car that's better than a Honda."

Quite clearly, one of the reasons that a Toyota and a Honda are so successful is that they intimately understand how to nurture, develop and enhance their core competencies in manufacturing. When Ford decided to draw upon its core competence in design, it enjoyed tremendous success with its Sable and Taurus lines.

"The global competitive battles of the 1980s were won by companies that could achieve cost and quality advantages in existing, well-defined markets," Prahalad says. "In the 1990s, these battles will be won by companies that can build and dominate fundamentally new markets."

Where will these new markets come from? Not from examining the entrails of old markets but by creative blending, mixing, fusing and extending core competencies. I have no doubt that the core competency perspective will be extended to questions surrounding the core competencies of nations.

The competency perspective is powerful not only because it's simple but because it asks us to do two things we know we need to do better: build on our strengths and learn from our weaknesses. Organizations that do those things well can't help but succeed in the market.

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