How Organizational Capability Leads To Competitive Advantage Through Core Competence

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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).

2 Figure 1 Stage 1

Stages in manufacturing’s strategic role Minimize manufacturing’s negative potential: “internally neutral”.

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.

Stage 2

Achieve parity with

“Industry practice” is followed

competitors: “externally

The planning horizon for manufacturing investment decisions is extended to incorporate a single business cycle.

neutral”.

Figure 3

Provide credible support to business strategy: “Internally Supportive”.

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.

Figure 4

Pursue a manufacturing base competitive advantage: “externally supportive”.

Efforts are made to anticipate the potential of new manufacturing practices and technologies. Manufacturing is involved upfront in major marketing and engineering decisions, (and vice versa). Long-range programs are pursued in order to acquire capabilities in advance of needs.

(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

3 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

4 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

5 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

6 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 HewlettPackard. 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

7 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.

8 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

9 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 underleveraged (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 1

End Products 2

Business Unit 1

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Business Unit 2

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Business Unit 3

Business Unit 4

Competence 3

Competence 4

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Core Product 2 Core Product 1 Competence 1

Competence 2

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 standalone (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

11 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,

12 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.

15 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 fullscale changes in the way business is conducted, so that simply

Andy Grove, Intel CEO

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 newnew 333Mhz 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

18 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

20 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 interbusiness 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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