Contents
Many companies see themselves as a collection of business units. Each unit has its product, its market, its figures. In 1990, the strategy researchers C. K. Prahalad and Gary Hamel turned this view on its head. They did not ask what products a company sells but what capabilities stand behind those products. One of their examples is Honda – a model case of Core Competence.
An article that changes the view
Situation
In May 1990, the Harvard Business Review publishes the article “The Core Competence of the Corporation.” In it, Prahalad and Hamel describe companies as trees. The visible fruits are the end products. The roots are the core competencies: combined knowledge and skill built up across the whole company over many years. Between them stand what they call core products: components or subassemblies in which the competence takes tangible form.
Link to the principle
If you look only at the fruit, you allocate money according to the figures of individual divisions. If you look at the roots, you ask which capability carries the company and how it can grow. That is the heart of the principle: the lead lies not in the individual product but in the capability behind it.
From auxiliary engine to global company
Situation
After World War II, Soichiro Honda starts out with small auxiliary engines for bicycles. In 1948, he founds the Honda Motor Company. Motorcycles follow, and in the 1960s they are a great success in the United States as well. In 1963, the first Honda cars come onto the market. Alongside them come engines for equipment used in gardening, agriculture and construction.
Link to the principle
The products change; the capability stays. From the start, Honda builds one thing above all: engines. Every new business uses the knowledge gained in the previous one. In this way, the competence grows with every market instead of having to be reinvented in each one.
One engine, many markets
Situation
Prahalad and Hamel see Honda’s core competence in engines and powertrains. The engine is found in cars, motorcycles, lawn mowers and portable generators. For customers, these are completely different things. A lawn mower and a sports car have little in common. For Honda, they are linked by the same technology: small, economical, robust combustion engines.
Link to the principle
Prahalad and Hamel name three tests. Does the capability open up access to many markets? Does it make a noticeable contribution to the benefit customers experience in the end product? Is it hard to imitate? In Honda’s case, the answer is yes three times over. The engine opens up many markets. What counts for customers in the end is that the engine runs reliably. And the skill has grown over decades; it did not appear overnight in a laboratory.
Core product instead of brand share
Situation
The two authors propose measuring success not only by the market share of individual brands. More important, they say, is the share of core products. A company that supplies engines, screens or chips for many end products, including to other manufacturers, builds up its competence faster than one that serves only its own brand.
Link to the principle
This gives rise to a management task. The competence does not belong to one division but to the whole company. Management has to direct money and people to where the shared capability grows, even if an individual division would rather keep what it can do to itself. Prahalad and Hamel explicitly warn that divisional thinking fragments competencies.
When the root becomes a shackle
Situation
Researchers pointed out a downside early on. In 1992, the management scholar Dorothy Leonard-Barton described how core capabilities can turn into core rigidities. What made a company great can blind it when technology changes. For a company whose strength lies in the combustion engine, this question arises with particular clarity in the shift to electric drives.
Link to the principle
Core competence does not mean nurturing a particular component forever. It means recognizing the deeper capability and developing it further. In Honda’s case, it could be defined more narrowly (combustion engines) or more broadly (compact, reliable drive technology). How broadly or narrowly you define your competence determines whether it carries you or holds you back.
Key takeaways
Key lessons
- Don’t ask first what you sell; ask what capability stands behind it.
- A real core competence opens up several markets, not just one.
- Check whether customers feel the benefit of your capability in the result.
- Don’t let competencies break apart into departments that keep them to themselves.
- Define your competence so that it survives the next change in technology.
Summary
Honda shows what C. K. Prahalad and Gary Hamel mean by core competence. Behind cars, motorcycles, lawn mowers and generators stands the same capability: building small, reliable engines. It opens up many markets, creates a noticeable benefit for customers and is hard to copy. At the same time, the example shows the limit: a competence defined too narrowly can become a burden at the next change in technology.
Sources
- C. K. Prahalad, Gary Hamel: The Core Competence of the Corporation. In: Harvard Business Review 68 (1990), no. 3, pp. 79–91.
- Gary Hamel, C. K. Prahalad: Competing for the Future. Boston: Harvard Business School Press 1994.
- Dorothy Leonard-Barton: Core Capabilities and Core Rigidities. In: Strategic Management Journal 13 (1992), Summer Special Issue, pp. 111–125.
- Wikipedia: Honda
