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Enough? When is a Corporation at Risk of Outstripping its Core Competencies?

INTRODUCTION

One of the key concepts of the field of strategy is core competencies. Core competencies lead to organizational capabilities which in turn form an organization's competitive advantage. Core competencies date back to the work of Andrews (1971) but were formalized by Prahalad and Hamel (1990) and took on the competencies-based approach with Teece and Pisano (1994) and expanded by Eisenhardt and Martin (2000). Recent work (Peteraf et al., 2013) demonstrates that even though there has been extensive writing on core competencies and dynamic capabilities, there is little in the way of a common understanding of dynamic capabilities.

Capabilities and strategy are broad realms, lending themselves to a range of perspectives (Pisano, 2017). In this paper we look at companies who rely on technical innovation for their core competencies and explore both what is required for an organization to maintain their core competency and translate said competencies into dynamic capabilities that continue to drive competitive advantage.

Where once business models were built with the assumption that information costs were high (Tushman & Nadler, 1978), today information costs are rapidly approaching zero and organizations have the ability to engage with their stakeholders in unprecedented ways. Big data is a reality. It seems that almost every year the world is storing more data than all of history produced prior to it. Storage cost is becoming nominal. In 1961 a 28 Megabite IBM diskdrive cost almost $1 Million in 2018 inflation adjusted dollars. Today in 2018, Hewlet Packard will give you 500,000 Megabites of cloud storage for free. Whereas once the ability to handle large amounts of data were a core competency that could lead to dynamic capabilities, today data scientists who extract insight and designers who can quickly bring new products and services to market are critical.

BUSINESS MODELS AND STRATEGY

As more free and extremely low cost assets become available (and customers also expect more free services) it becomes more difficult to identify which core competencies must be owned to differentiate oneself from the competition. When data and knowledge were expensive to obtain and process, organizations could use this capability to create dynamic capabilities. Teece (2007) posits that knowing how to use free and open assets is becoming the most important asset of an organization.

Dahlander and Gann (2010) demonstrate that taking advantage of knowledge assets requires the adoption of new strategies and the development of new dynamic capabilities. Such an entrepreneurial model can develop new innovative capabilities while a company continues to exploit their existing capabilities (Bresnahan, Greenstein, & Henderson, 2011) but a company must have the needed resources for such an endeavor. In an environment where consumers often have no intention of paying for new dynamic capabilities (e.g., Facebook accounts, YouTube videos, Twitter messages), companies face a dilemma of using their core competencies to develop new dynamic capabilities while being able to monetize the products and services that they launch. Capability identification, selection and creation are important strategic decisions (Teece & Pisano, 1994; Teece, Pisano, & Shuen, 1997) as they are in competition to create technological, operational and organizational capabilities to produce competitive advantages in their product markets. Companies must make capability enhancing investments where they will choose between deepening their existing capabilities and broadening their offering (Pisano, 2016). All of this must be done in the light of very real resource constraints.

TECHNOLOGY SHIFTS

Technology Shifts are among the most lethal threats to any successful business (Tongur & Engwall, 2014). There are generally two strategies that one can follow: either invest in research and development to transform a firm's core competence (Rosenbloom & Cusumano, 1987) or change the firm's value proposition by embedding the product in functional sales and product services (Rosenbloom & Cusumano, 1987). Both strategies face uncertainties. The reality is this is a business model problem, not a technology problem (Christensen, 2006).

Such shifts are a challenge. Some mature firms have managed this transformation (Bergek et al., 2013) but research also demonstrates many incumbent firms encountering difficulties when encountering radical technological change (Tushman & O'Reilly, 1996). Many shifts in technology are necessitating new revenue models (Wirtz et al., 2010).

Developing new competencies requires experimentation, a great deal of freedom, and risk (Simon, Houghton, & Gurney, 1999). It is often a delicate balancing act on the part of corporate management between giving the venture the independence it requires and monitoring it to minimalize the costs and risks associated with the process (Garrett & Covin, 2015).

Successful companies must make a choice to remain relevant. Coping with technological shifts and leveraging core competencies to create new dynamic capabilities to maintain or create new competitive advantages is resource intensive and risky. The next section gives examples of companies facing this crossroad and illustrates how they have responded to the challenge. We also observe that some companies must make a choice, to remain independent or merge with another firm. Often there is an optimal time to merge to maximize shareholder return.

IN INDUSTRY

Let's look at two recent social media companies. Both YouTube and Twitter are exceptionally popular services. YouTube revolutionized watching videos over the web and in 2018, 72 hours of new content are uploaded to the site every minute. Twitter is among the most popular direct communication services. It is credited with helping to orchestrate the Arab Spring and is the favorite communication tool of the President of the United States. However, with all of their success and ubiquitous presence in our culture, neither has created a profitable business. The two companies took different paths. YouTube was acquired by Google for $1.65 Billion in 2005 and still has not returned a profit for Google. Twitter, founded in 1999, rebuffed many takeover overtures including rumors of takeover offers by Google in 2009 and 2011. In its history, Twitter has only had 1 profitable quarter. Buyout rumors linked to Verizon, Disney, and Facebook continue to swirl.

Is a company like Twitter, presumably to develop new dynamic capabilities, logical for another successful company? Was YouTube a smart acquisition for Google? These examples are not unique. Facebook acquired WhatsApp for $22 Billion in 2014 when it was generating a mere $10.2 Million in revenue and reportedly lost $138 Million for Facebook the following year. Oculus, the virtual reality company was acquired for $2 Billion in 2016 to develop a capability in virtual reality (Heath 2017). Again, little revenue has been generated and CEO Mark Zuckerberg is requesting patience. One might ask if companies like Google and Facebook would have been more prudent to forgo such ventures and stick to their extremely profitable core businesses. Have they outstripped their core competencies?

Among more traditional companies, business models are changing. People are buying a lot less stuff (Cowen, 2018). The sharing economy has taken root. Companies must derive new income streams, ways to monetize their products and services. As an analogy, one can purchase their home. However, as any homeowner will tell you, owning a home obligates the owner to any number of continuing bills. Utilities, property taxes, and maintenance are all critical. Imagine what would happen to the value of one's home if all of a sudden the electricity, water, or sewage were terminated. Speculate what would happen to a home's value if all of a sudden the municipality no longer maintained the roads, provided quality schools, or police services. All of those bills that homeowners pay are integral to the value of their homes. Many businesses must now look for ways to get the owners of their products to pay a continuing stream of payments because they are seeing their profits erode on the sale of one core product. The internet of things will likely accelerate this. For example, your smartphone, computer, television have all largely become commodities. The profits to providers come from selling you apps, subscriptions, and other ancillary products and services. There is speculation that this will require development of new core competencies to develop the necessary dynamic capabilities to compete in this environment.

The automotive industry is undergoing a major transformation. Fiat-Chrysler has sought a merger with Ford, GM, and even Chinese automaker Geely realizing that they lack the resources to reinvent the company as automotive technology shifts (Schultz, 2018). Ford itself is in disarray. Profits are down as is their stock price as they struggle to define themselves in this changing environment (Rogers, 2018). Looking at an industry stalwart, Honda, a company that prides itself on doing everything is being forced to outsource under immense financial pressure (McLain, 2018). The auto industry is rapidly changing. Electrification and self-driving capabilities are on the horizon. While among the best builders of traditional automobiles, Honda has no capabilities in either electric motors or self-driving software (McLain, 2018). They are financially stressed to extend their core competencies and develop these dynamic capabilities. Toyota, a leader in electric motors and self-driving software spends approximately 3.5% of revenue on R&D. Honda, without these dynamic capabilities already spends 5% of revenue on R&D. Currently, Honda is outsourcing these capabilities to Bosch for self-driving software and Hitachi for electric motors. It is forecast that by 2030, 66% of automobiles will be either fully electric or a hybrid (McLain, 2017) Will Honda be sacrificing too much control ceding these dynamic capabilities to suppliers? This is a challenge regarding R&D (Rubin de Celis, 2007). Should Honda focus on acquiring suppliers with these capabilities as Google and Facebook have with their social media empires? Should Honda seek to sell itself or merge with another automaker while their core competencies are still world class in the "traditional" automotive sector?

Looking at one of the world's most mature businesses, Agribusiness is also facing many challenges. For close to a century dominant firms like Cargill and Archer Daniels Midland have dictated the rules of the marketplace (Bunge, 2018). However, in order to achieve economies of scale, many individual farms have become massive businesses and are pushing back against the multi-billion-dollar industry giants. With information technology and improved weather forecasting, the farmers are able to predict both their own crop yield, that of other competing farms, and everyone's project time to market. With economies of scale, many are building their own storage facilities and buying their own trucks to hold inventory and ship product to different market locations at more advantageous times to receive a better price. This is eating into the profit margins of the industry giants who were used to providing a central purchasing location and gathering inventory at harvest time at a low price. Technology and scale have required the agribusiness giants to adopt new models. For example, the giants have started to share profits with farmers. Cargill has started selling data and forecasting to help farmers maximize their profits. In areas where the agribusiness giants are struggling most, they have sold their grain elevators and storage facilities to the farmers and exited the markets. Farmers, once price takers, are often able to compete directly with the industry giants. It is no longer as profitable to play middleman. The industry giants must provide more personal attention and more technology to remain relevant to their clients.

CONCLUSION

The business environment is becoming ever more complex and challenging. The near future will bring Super-intelligent machines, engineered bodies, algorithms that can manipulate your emotions with uncanny precision and more (Harari, 2018). Speed matters (Potter et al., 2010). Coping with technology shifts and an economic environment that requires companies to leverage their core competencies to develop new dynamic capabilities, companies must be cautious. It may be tempting to use near term monopoly profits to branch off into a wide array of quasi-related businesses thinking that such a wide spectrum will offer some assurances in an increasingly complex an unpredictable environment. However, for many firms, selling or merging, in other words cashing in when they are doing well may be the best answer like YouTube and WhatsApp. For others, the question becomes how broad a company should go to develop new dynamic capabilities. Should a social media be pursuing space travel and self-driving cars? The authors suggest that this is an area of focus for future research.

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John Lipinski, Indiana University of Pennsylvania

P. Michael Kosicek, Indiana University of Pennsylvania
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Author:Lipinski, John; Kosicek, P. Michael
Publication:Competition Forum
Date:Jul 1, 2018
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