Welcome to Week 4!
This week, we are going to focus on TCO C, the concept of a core competency, and TCO D, developing a plan to increase innovation.
Whatis.com defines core competency as fundamental knowledge, ability, or expertise in a specific subject area or skill set. The core part of the term indicates that a competent individual has a strong basis upon which to gain additional competence to do a specific job or that a company has a strong basis upon which to develop additional products.
An important point upon which we will focus is the interrelationship between organizational strategy and core competencies. We will explore how core competencies influence the organization’s strategy and how the organization influences core competencies.
This week, we will also look at the importance of conducting both internal and external (Porter’s Five Forces and Stakeholder) analyses in order to lay the foundation for selecting a firm’s strategic direction.
We will then move on to describe the importance of a firm’s strategic intent and its ability to innovate. A firm’s strategic intent focuses the company on future markets and customer requirements and diminishes the risk that core competencies may become core rigidities.
Finally, we will look at some of the most commonly used qualitative, quantitative, and combination methods employed to evaluate new product development projects.
Given an organizational and industry context, identify the core technological competencies of the organization.
Explain the differences between strengths, core competencies, and sustainable competitive advantages in order to better understand a firm’s competitive position and establish its priorities for investment.
Analyze a company’s positioning and strategies and how best to apply core competencies.
Evaluate a firm’s technical capabilities to aid in the formation of technology strategies.
Given an organizational context, develop a plan to increase the innovative capabilities of the organization both through collaboration strategies and internal innovation.
Explain the importance of a balanced R&D project portfolio (i.e. advanced R&D, breakthrough, platform, and derivative).
Determine the appropriate strategic intent of an organization (e.g. an overall direction with ambitious, forward looking goals).
Evaluate a wide variety of methods available (both quantitative and qualitative) to evaluate innovation projects.
Defining the Organization’s Strategic Direction
Introduction | Identifying Core Competencies | Strategic Intent | New Product Development
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This week, we look closely at the importance of conducting both internal and external (Porter’s Five Forces and Stakeholder) analyses in order to lay the foundation for selecting a firm’s strategic direction. We see that an internal analysis begins with an assessment of the firm’s strengths and weaknesses. Each strength is then evaluated to determine whether it is a core competency (i.e., differentiates the firm from the competition) and whether it is the basis of a sustainable competitive advantage.
Core competencies strategically differentiate a firm from its competition and make if much more difficult to emulate. Gallon et al. suggests that firms take an inventory of capabilities by type, strength, importance, and criticality to firm operations and then compare that inventory to the inventory of their competitors’ competencies.
We will move on to describe the importance of a firm’s strategic intent (e.g., ambition, long-term goals) to its ability to innovate (i.e., achieve more than incremental improvements). A firm’s strategic intent focuses the company on future markets and customer requirements and diminishes the risk that core competencies will become core rigidities.
This week, the readings will provide an overview of some of the most commonly used qualitative, quantitative, and combination methods used to evaluate new product development projects. The readings emphasize that each method has its strengths and weaknesses and that most firms will (or should) use a combination of methods in order to triangulate their information about a project’s prospects.
Identifying Core Competencies
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TCO C is one of our most important TCOs. It focuses on core competencies.
While the short-term competitiveness of a company comes from the price and the performance of the products, long-term competitiveness can only come from a continual ability to produce more efficiently, in terms of cost and time, than competitors. To be competitive in the long run, companies must continue to use their resources and strengths to create unexpected but desirable products. The ability to develop such unanticipated products in response to changing opportunities in the marketplace is the primary source of a company’s competitive advantage. This ability is often referred to as core competence.
Core competencies differentiate a company strategically from its competitors and are usually a combination of different kinds of abilities (e.g., advertising, distribution, information systems, logistics management, applied science, process design). It is the harmonious combination of abilities that make core competencies difficult to imitate.
Sony’s core competency in miniaturization is the result of the firm’s ability to harmonize the use of multiple technologies, including liquid crystal displays, semiconductors, and so on. Sony is then able to utilize this competency in multiple markets, including televisions, radios, personal digital assistants, and so on. Consider 3M’s core competence with substrates, coatings, and adhesives. As a result of the core competence in those areas, 3M succeeded in creating Post-it notes, magnetic tape, and photographic film. Finally, small engines are Honda’s core competency. From this core, they make lawn mowers and cars.
A few simple core competencies underlie an extremely diverse group of businesses. If a company creates a list of 20 to 30 abilities, you can be sure that it does not have a list of core competencies.
Prahalad and Hamel view firms’ core competencies as the roots of a tree that sustain many branches and argue that the organization’s structure and incentives must encourage cooperation and exchange of resources across strategic business units.
They offer the following tests to identify a firm’s core competencies:
Can a competitive distinction be recognized by a specific competency?
Will this competency allow the firm to differentiate itself for its competition?
Will the customer perceive significant value from the new product? For example, Sony’s skills in miniaturization have an immediate impact on the utility customers reap from its portable products.
Does the competency affect many different aspects of several businesses and create future opportunities? For example, Honda’s core competence in engines enables the company to be successful in businesses as diverse as automobiles, motorcycles, lawn mowers, and generators.
Is the competency hard for competitors to imitate? In general, competencies that arise from the complex harmonization of multiple technologies will be difficult to imitate because these competencies take years to build and are path dependent.
Gallon, Stillman, and Coates suggest a six-step approach for identifying and cultivating a firm’s core competencies:
Starting the program begins with the formation of a steering committee, the appointment of a program manager, and the communication of the overall goals to all team members. The program manager should organize teams that will be responsible for circulating throughout the firm to compile an exhaustive inventory of capabilities.
Constructing an inventory of capabilities is done by categorizing the capabilities identified in step 1 by type, strength, importance, and criticality to firm operations.
Assessing capabilities proceeds by evaluating the criticality of each competency followed by an evaluation of the organization’s current level of expertise in each competency.
Identifying candidate competencies culls the list of capabilities to those the firm should focus on and grow.
Testing the candidate core competencies using Prahalad and Hamel’s original criteria is the next step (see above).
Evaluating the core competency position of the firm to determine whether competitors have similar competencies and to identify areas in which the organization needs to improve.
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Formulating a company’s technological innovation strategy requires the firm to assess its current position (e.g. strengths, weaknesses, core competencies, sources of sustainable competitive advantage) and define its strategic direction (e.g. how should the value proposition evolve over time, resource needs).
A company’s strategic intent should be ambitious. Strategic intent development begins with an evaluation of the firm’s capabilities and, ideally, ends in a plan that cohesively leverages all of the firm’s resources to create a sustainable competitive advantage.
A firm’s strategic intent is an ambitious, long-term term goal (i.e., planning 10 to 20 years into the future) that requires all levels of the organization to build on and stretch the firm’s existing core competencies. A firm’s strategic intent takes the focus away from current markets and meeting current customer requirements so that the organization can focus on future markets and customer requirements. Articulating the company’s strategic intent thus enables the company to focus its development efforts and to choose the investments necessary to develop strategic technologies and incorporate them into the company’s new products.
Canon’s obsession with overtaking Xerox in copiers, Apple’s mission of ensuring that every individual has a personal computer, and Yahoo’s goal of becoming the world’s largest Internet shopping mall are all examples of strategic intent.
New Product Development
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An important part of this week’s focus is to examine some of the most commonly used qualitative, quantitative, and combination methods used to evaluate new product development projects. This week, we emphasize that each method has its strengths and weaknesses and that most firms will (or should) use a combination of methods to triangulate their information about a project’s prospects.
One of the important things we need to remember is the important role played by managerial assumptions in the accuracy and utility of any measure used. Ultimately, the product that will be developed comes down to the decision of a few key managers. New product development is inherently risky and expensive, putting pressure on managers to make careful choices among projects.
As a result, most firms use a mix of formal, informal, quantitative, and qualitative methods when selecting and managing innovation projects, and each of these methods has its own strengths and weaknesses. Often, the choices are driven by strategic implications rather than strictly financial analysis.
III. Discussion Grading and Follow-up Topics
Remind students about the discussion grading policy for this class as an announcement or in an early discussion posting.
A. Core Competency
What is the difference between a strength, a competitive advantage, and a sustainable competitive advantage?>
Why is it necessary to perform external and internal analyses before the firm can identify its true core competencies?
Pick a company with which you are familiar. Can you identify some of its core competencies?
B. Quantitative Methods For Choosing Projects
Can a particular strategic intent be too ambitious?
For what kind of development projects might a real options approach be appropriate? For what kind of projects would it be inappropriate?
What are some of the reasons that a firm might use both qualitative and quantitative assessments of a project?