The term “core competence” has taken hold in the business world. Not many academic terms break through to common usage so this might be viewed as a tremendous success. Unfortunately, it isn’t clear that it is particularly useful with the modified practitioner definition. As it is commonly used, it seems to mean “stuff the firm is pretty good at.” Unlike Prahalad and Hamel’s original article, common usage does not suggest that these capabilities: necessarily confer value in the eyes of customers over what rivals can produce, are hard to imitate, or that they are especially relevant in a corporate (multi-business) context.
Stripped of these defining characteristics, is the term useful?
As it is commonly used, the term can help firms distinguish what they are relatively good at from things that they are not. This is akin to a simple business unit-level internal analysis that identifies strengths and weaknesses. While it is important for firms to be aware of their strengths and weaknesses, by not comparing the strengths to rivals, we cannot infer whether the firm has a competitive advantage or how long such an advantage might last. It could even reflect a competitive disadvantage if rivals are superior in those areas. As a mode of internal analysis, the common usage doesn’t really go beyond SWOT analysis, which itself is woefully inadequate as a form of analysis.
When practitioners use the term core competence, it is often preceded by the words “stick to your…” That is, the firm should understand what they are good at and avoid straying from strengths. Of course, acquiring a new competence should be an important strategic decision – not to be taken lightly. However, the traditional advice seems to miss the mark if it implies that firms should avoid such decisions altogether.
In short, as an internal analysis tool, the common usage of the term core competence does not add much value – certainly not relative to other internal analysis tools like value chain and VRIO analysis.
The Financial Times reports that in 2010, a Heuer Autavia Reference 2446, a popular driver’s chronograph of the 1960s, was sold for £5,400. But late in 2016, Christie’s achieved $125,000 for an identical watch. Valuable and rare resources are heavily sought after. This also creates a strong incentive to imitate. Enter “Frankenwatches.” Enterprising individuals have been able to cobble together watches from vintage spare parts that can be convincing. This has bread mistrust in the market and increased the value of market mechanisms (e.g., prim auction houses) that can certify authenticity. Then, there is also a market for known fakes (if they are done well). Ultimately, this demonstrates valuable and rare resources as well as imperfect imitation. Perfect for watch affectionados and students of the resource based view. The Financial Times article is a good (and timely) reading to prime a classroom discussion of strategic resources and attempts to imitate.
The augmented reality (AR) game, Pokémon Go, has taken the world by storm as players roam the real world catching Pokémon and battling in Pokémon gyms. The game has set 5 records since its launch in July 2016 — including the most revenue by a mobile game in its first month ($206.5 million). Nintendo’s stock doubled 15 days into the release, adding $7.5B in value, but then settled back into a mere 50% increase when it became clear that Nintendo was a partner with limited ownership in the company that developed the game (Niantic, a Google spinoff). Although the game is free, users can make purchases in the app store to support their Pokémon ‘hunting’. The bewildering success must clearly be keeping Niantic’s CEO, John Hanke, and his crew awake at night. Besides the operational issues related to scaling up, intellectual property (IP) had become a big issue. A slew of imitators were emerging as well as a number of companies trying to steal the game’s data content and algorithm. In addition, the formidable international expansion faces roadblocks in the most populous Asian countries while potential users were impatient. There were many additional potential revenue sources to be tapped and explored such as the recent win-win partnership with McDonalds Japan. Moreover, while getting gamers out and about was good, there were a number of unintended consequences. On the plus side, many entrepreneurs were finding ways to make money from the game — for example restaurants could lure in customers if there was a Pokestop nearby. At the same time, users and non-users worried about possible injuries, trespassing, and invasion of privacy among other things. Naturally, this makes an outstanding ripped-from-the-headlines case for strategy courses. It is a great vehicle to cover key topics such as entrepreneurship, strategic alliances, internal analysis/capabilities, and external analysis. The following are some materials that are useful for the case:
Successful strategy is often a combination of luck firm specific skills and favorable conditions. AmorePacfic makes a great ripped-from-the-headlines case since it rose to be the #1 South Korean firm buoyed by a growing and large domestic demand from a growing population. Hallyu – the Korean equivalent of Hollywood was also a driving factor as South Koreans want to look like their favorite stars and use the same cosmetic products and that includes men. In fact, it is estimated that a whopping 20% of South Korean men use cosmetic products on a regular basis. AmorPacific capitalized on this growing trend by building up its brand and investing in R&D and ultimately riding the popularity of K-pop and K-movies to expand internationally. At a time that demand is softening, K-cosmetics are still growing with exports increasingly exceeding imports and Korean cosmetics brands now more popular than European brands in China and increasing their penetration in many countries including China, Hong Kong, Japan, the US, Vietnam, and in a surprising list of other countries such as Poland where their addition to Sephora’s product line and other large retailers will ensure broad distribution. How has a $150 1.7 oz managed to gain global popularity? Some materials for the case might include:
Economics-games.com is a free educational games site for teaching microeconomics, industrial organization and game theory. This site includes some simple (short) simulations designed to demonstrate specific principles. This should not be confused with longer simulations that extend across many class sessions. Instructors set up user IDs & passwords for their class and students are paired with others in the class (or even across universities if desired). These are really nice interactive online exercises that can be done between classes. In this sense, they are an excellent online complement beyond the usual readings and talking head videos. Here are some of the games:
Cournot and Stackelberg games
Public good financing game
Common-pool resources game
Asymmetric matching penny game
An air transport economics simulation covering price discrimination, vertical differentiation and peak-load pricing.
Differentiation can be a challenge if existing products have identified the most central value propositions for customers. Increasingly, firms must differentiate using paths that may not follow others and there may be good reasons that rivals have left the path uncharted. Here is an example of differentiation whose time may not have come…
Presenting material clearly and concisely may not be the best way to help students learn. In fact, presenting ambiguous information that leverages common sources of confusion may be a much better route to learning. This post is intended to serve as a BLEG to solicit examples of confusions that students experience. Accordingly, this is a starting point for developing new material that draws on confusion to teach strategy. We begin by understanding what confuses students. Here are some examples that come to mind (please add your own examples in the comments):
What does 5 Forces tell us about the firm’s advantage? Students often put a focal firm in the center and consider rivals to be substitutes. They don’t understand that the framework addresses the industry and not the firm.
What industry to choose for 5 forces? Students often choose an umbrella industry instead of the specific segment they are considering entering (e.g., beer instead of micro brews in South Africa). The result, then, is almost useless for making decisions and the analysis is not used to make recommendations.
Some resources are valuable while others are Inimitable (VRIO): Students think they are looking for some resources that fit in each bucket (V,R,I, & O) instead of a few resources that meet all of the criteria. They don’t understand that VRIO is a filter to evaluate all strengths in the value chain.
What is that “O” for anyway (in VRIO)? It seems to make sense but students often don’t really understand how a firm can have all of the pieces and still not execute. I use Xerox PARC as an example.
How do we make decisions using VRIO? Students often think they understand but don’t really know how to use it to make a decision. For example, how are capabilities relevant to decisions like entering new markets or fending off rivals?
Motivation for diversification: guilty until proven innocent. Students often suggest that a firm should acquire a successful target. They fail to see that future success is built into the acquisition price and don’t ask why the buyer could create unique value over other bidders.
Technology advantages erode rapidly. People see technology as key but miss that it can be easy to reverse engineer (leading to a temporary advantage). While the iPhone confers an advantage to Apple, Samsung has more market share.
Core competence is not what a firm does well if rivals can do it better. Core competence must refer to VRIO resources in order to create value.
Again, please add your own examples in the comments below. The following TED talk by Derek Muller describes the technique in teaching science.
Nonsubstitutability is a critical resource attribute for sustaining a competitive advantage. Otherwise, a rival may find a different resource that can nullify an advantage without actually imitating the focal firm’s resource or capability. An example might be Apple’s iPhone patent for the “screen bounce” when the user scrolls to the bottom of a page or list. Early Android phones had the same feature but, more recent phones, work around this patent by displaying a blue tinge at the edge of the screen (see picture) when one has scrolled to the end. In this way, many patents do not confer an advantage as rivals find ways to work around them and customers don’t perceive a significant difference in the product. In class, one might give this example coupled with the video below which depicts a battle between Fezzik and Westley in the Princess Bride — agility and size can be discussed as substitutes in determining competitive advantage (of course, Westley wins though he at first seems to be at a disadvantage).
Lego profits have more than doubled in the last five years. The company has sold non-core businesses and doubled down on the core building block products. They are the undisputed king of building toys. A recent New York Times article describes the lay of the land brick by brick. Lego has focused on more wholesome building themes (Star Wars, etc.) while rivals have sought space where they don’t have to directly compete. For example, Mattel’s MEGA unit has a series of much more realistic building sets (Sponge Bob, Terminator, and Star Trek). Similarly, McFarlane toys has a very successful series of “Walk Dead” building sets that deviate from the image Lego prefers to maintain. In addition to competitors seeking to differentiate, many complementors have emerged such as Pley which offers Lego set rentals (the “Netlix” of the Lego world) or numerous used Lego trading businesses (here is one in Madison). Interestingly, research suggests that these Lego sets may actually reduce creativity — especially compared to the older version that involved a simple bucket of bricks rather than a kit to build a specific thing. Of course, their move into Lego films brings in an interesting discussion of diversification.
The $104B merger between AB InBev and SABMiller makes a great holiday addition to your classroom. While it is largely a corporate strategy question, I used this discussion to kick off my course and I plan to come back to it as we hit various topics. Here is a packet of news articles that I used as the basis of the case. I also had students complete a brief online poll in advance of the class. This allowed me to start by summarizing their positions and to call on people who I knew had relatively unusual opinions. I used the case to show them how to draw a decision tree (click the image to enlarge) reflecting the uncertainty associated with the acquisition. Of course, it also frames topics throughout the course. Here are a few examples:
Internal capabilities. AB InBev’s capability to conduct acquisitions and to cut costs.
External analysis. Market structure for beer in different countries (namely Africa and China which drive this deal). Also, we compared the market structure for micro- and macro-brews. Of course, these mega-brews act to control distribution channels so barriers to entry are a key part of the game.
Competitive dynamics. Of course this is a game among the rivals but it also includes adjacent industries (like spirits).
Corporate. What are the logics for value creation? For example, to what extent does scale lower manufacturing costs as opposed to purchasing power or other mechanisms. At what point is a larger scale no longer an advantage?
Strategic factor markets: The M&A context makes it clear that most of the synergies go to the target (especially at the 50% bid premium).
Global. As indicated above, this is mostly about entry into new markets (China and Africa, among others).
Chrome has been sucking power from your laptop batteries. Google has been playing catch up to Apple’s Safari in terms of power consumption on Mac computers for some time. Apple’s product is optimized to be more efficient to their own proprietary operating system while Google is optimizing development efforts across platforms. Indeed, Microsoft’s Internet Explorer also enjoys a power consumption advantage on Windows machines. Of course, this could just be a flaw in Chrome but it does seem like it might be linked to specialization on a single platform as opposed to cross-platform compatibility. Strategy classes might explore more deeply how valuable the advantage of vertical integration might be in this case. Also, what type of organization must be in place to realize this potential value. Of course, the ad revenue gleaned from these products may justify vertical integration but it is less clear how this would create value for users. Power consumption, on the other hand, would be important to users.
Rather than fully embed superior design capabilities in organizational routines, Apple has instead identified and promoted Jony Ive into the design guru role once occupied by Steve Jobs. Ive “worked closely with the late co-founder Steve Jobs, who called Mr Ive his spiritual partner on products stretching back to the iMac.” As before, the reliance on a single person in this role raises key questions: An article published in the New Yorker earlier this year described how “Mr Ive had been describing himself as both ‘deeply, deeply tired‘ and ‘always anxious’ and said he was uncomfortable knowing that ‘a hundred thousand Apple employees rely on his decision-making – his taste – and that a sudden announcement of his retirement would ambush Apple shareholders.‘” Can this be described as an organizational capability? An organizational routine? A dynamic capability? Does it matter that the capability is largely embedded in a single person who is not an owner? All good questions to kick off a nice class discussion…
Contributed by Russ Coff
Along the lines of yesterday’s differentiation example, here we have an upgraded Uber service. A common theme in strategy courses is that differentiation strategies require that customer willingness to pay exceeds the cost of a premium service. The example may seem silly but it is a response to customers’ desire to have a car immediately. Again,the Onion nails it with this clip:
Firms work hard to differentiate their services. A common theme in strategy courses is that customers must have a willingness to pay that exceeds the cost of the premium service. If so, we can explore whether a given firm has an advantage in offering the premium service. Sometimes the bar for “premium” isn’t very high… As always, the Onion hits it right on the head with this clip:
American Eagle Outfitters has shown strength among teens at a time when hipster Abercrombie & Fitch is struggling (see this WSJ article for details). The company credited their “Don’t Ask Why” collection in part for its 3% increase in revenue. They referred to the collection a cost-effective “testing lab” to spot trends. By experimenting with new fabrics, washes and styles, they believe they can gauge which styles are gaining favor and add them to the regular collection. American Eagle said the process was key to turning around the company’s tops business, which is now one of the best-performing segments. For example, one of the trends is to abandon the logo covered clothing that was popular in the 1990s. For class, this might make a discussion of dynamic capabilities much more tangible than the academic literature has so far achieved. How do they do it? Does this confer an advantage? If so, to what extent is it sustainable? Of course, this is also an opportunity to bring research into the classroom. For example, one might have students discuss whether this example looks more like Eisenhardt & Martin’s view or dynamic capabilities or those of Teece, Helfat, Peteraf, Winter or others (even Coff had something to say about this ;-).
Will Samsung Pay win a standards war over Apple and Google? Apple Pay and Google Pay may have gotten lots of buzz but adoption of contactless payment has been slow. The near field communications (NFC) technologies that they rely on require that merchants invest in new technology at the point of sale. Samsung has acquired LoopPay and its technology to allow phones to communicate with any magnetic strip reader. The new service is expected to launch in the 2nd half of 2015. Even if NFC is ultimately a superior technology, the ease of adoption may allow Samsung to dominate as users seek a solution that they can use with most merchants. Meanwhile, Google plans to include it’s Pay app on all Android devices which could increase its penetration. Though it is important to note that this might create a conflict with its key Android partner Samsung. This should engender a nice discussion of strategy in “winner take all” standards wars. In class, one might assign groups to debate why Google, Apple, Samsung, or other will win this market.
Dave Kryscynski has provided an excellent series of online videos to supplement your course or to help move portions of it online. These are very well produced and may allow you to spend class time on more experiential activities found elsewhere on this site. Below is the video on Porter’s generic strategies but I have provided links to all of the available videos below and listed others that you can gain access to through Wiley.