Prahalad, C., K. and Hamel, G. 1990. The Core Competence of the Corporation.
GTE and NEC are both in the information and technology industry
They both started with comparable business portfolios
GTE’s businesses are small in global terms, while NEC is in the top five in revenue in
telecommunications, semiconductors and mainframes
Why did these two companies perform so differently?
o NEC management determined a “core product” and formed strategic alliances to build
competences rapidly and at low cost
o GTE management treated business units independently and didn’t focus on core
competences
Competitiveness
o In the short run, derives from the price/performance attributes of current products
o In the long run, derives from an ability to build, at lower costs and more rapidly than
competitors, the core competences that spawn unanticipated products
The real source of advantage is the ability to consolidate technology and production skills
that empower individual businesses to adapt quickly to changing opportunities
Diversified corporation as a tree
o Trunk and major limbs are core products
o Smaller branches are business units
o Leaves, flowers and fruits are the end products
o The root system that provides nourishment, sustenance, and stability is the core
competence
Core competence
o Collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technologies
o Communication, involvement and a deep commitment to working across
organizational boundaries
o It involves many levels of people and all functions
o Doesn’t diminish with use
Competences are enhanced as they are applied and shared; but they need to be nurtured and
protected, otherwise they fade if not used
Management trapped in the strategic business unit’s (SBU) mindset inevitably finds its
individual businesses dependent on external sources for critical components
Three tests to find core competences
1. A core competence provides potential access to a variety of markets
2. A core competence should make a significant contribution to the perceived customer
benefits of the end product
3. A core competence should be difficult for competitors to imitate
Core competences can be lost by
o Cutting internal investments
o Foregoing opportunities
The costs of losing a core competence are unpredictable
GTE and NEC are both in the information and technology industry
They both started with comparable business portfolios
GTE’s businesses are small in global terms, while NEC is in the top five in revenue in
telecommunications, semiconductors and mainframes
Why did these two companies perform so differently?
o NEC management determined a “core product” and formed strategic alliances to build
competences rapidly and at low cost
o GTE management treated business units independently and didn’t focus on core
competences
Competitiveness
o In the short run, derives from the price/performance attributes of current products
o In the long run, derives from an ability to build, at lower costs and more rapidly than
competitors, the core competences that spawn unanticipated products
The real source of advantage is the ability to consolidate technology and production skills
that empower individual businesses to adapt quickly to changing opportunities
Diversified corporation as a tree
o Trunk and major limbs are core products
o Smaller branches are business units
o Leaves, flowers and fruits are the end products
o The root system that provides nourishment, sustenance, and stability is the core
competence
Core competence
o Collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technologies
o Communication, involvement and a deep commitment to working across
organizational boundaries
o It involves many levels of people and all functions
o Doesn’t diminish with use
Competences are enhanced as they are applied and shared; but they need to be nurtured and
protected, otherwise they fade if not used
Management trapped in the strategic business unit’s (SBU) mindset inevitably finds its
individual businesses dependent on external sources for critical components
Three tests to find core competences
1. A core competence provides potential access to a variety of markets
2. A core competence should make a significant contribution to the perceived customer
benefits of the end product
3. A core competence should be difficult for competitors to imitate
Core competences can be lost by
o Cutting internal investments
o Foregoing opportunities
The costs of losing a core competence are unpredictable
