MT5002 Management of Industrial R&D

LIM CHING WU LESLIE

g0603039@nus.edu.sg
HT0063039Y
Lecturer: Dr FRAN CARPAY
Centre of Management of Science & Technology
MT5002 Management of Industrial R&D

Introduction
Hamel and Prahalad (1990) introduced the concept of Core Competency in a Harvard

Business Review. They defined that a core competency is "an area of specialized expertise

that is the result of harmonizing complex streams of technology and work activity." They

gave the example of Sony, which had to ensure that technologist, engineers, and marketers

have a shared understanding of customer needs and of technological possibilities, in order to

bring miniaturization, their core competency, to their products. Similarly, in the service

industry, Citicorp’s competence in systems had provided them with the means to differentiate

itself from many financial service institutions.

Today, many firms are able to recognize and leverage on their core competencies to bring

compelling products to the market. This paper will give a short introduction on the concept of

core competency and then discuss the case studies on the core competencies of two firms,

Microsoft Corporation and Creative Technology Limited. Microsoft is a multinational

computer technology corporation with global annual revenue of US$44.28 billion and 76,000

employees in 102 countries. The latter is a Singapore-based, NASDAQ-listed, computer

multimedia products manufacturer with over 5000 employees worldwide. For each of the two

cases, this paper will apply Hamel and Prahalad’s concept to discuss why the competencies

described are considered to be “core”.

Core Competency
Hamel and Prahalad described the corporation as a large tree [1]. The trunk and major limbs

are core products, the smaller branches are business units; the leaves, the flowers, and the

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fruits are end products. The root system that provides nourishment, sustenance, and stability

is the core competence.

Apart from harmonizing streams of technology, organization of work and the delivery of

value, core competence is the communication, involvement, and deep commitment to

working across organizational boundaries. It does not diminish with use, but enhanced as

they are applied and shared. Core competencies need to be nurtured and protected.

In the core competencies underlying them, disparate businesses become coherent. According

to Hamel and Prahalad, there are at least three tests that can be applied to identify core

competencies in a company:

• Provides potential access to a wide variety of markets. Eg. Company with competence

in display systems enables them to participate in diverse business such as calculators,

TV, monitors, and automobile dashboards.

• Makes a significant contribution to the perceived customer benefits of the end product.

Eg. In the case of Honda’s engine manufacturing technologies.

• Difficult for competitors to imitate. Eg. A complex harmonization of individual

technologies and production skills.

The next two sections will determine the core competencies of Microsoft and Creative

respectively by first examining their products, then determining the core products and the

core competencies. The tests described above will then be used to check against the identified

core competencies.

Case Study #1: Microsoft Corporation

Product Lines
Microsoft software products are divided into eight main families. These include Windows,

Servers, Business Solutions, MSN, Office, Developer Tools, Games and Xbox, Windows

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Mobile. The other software products and services are divided into four main categories.

These include Home and Entertainment, Hardware, Finance, Books and Training.

Among these end products, two operating segments, Client and Business Solutions,

contributed to the majority of the company’s revenue. Client consists of premium edition

operating systems, including Windows XP Professional, Media Center Edition, Tablet PC

Edition, and other standard Windows operating systems, including Windows XP Home.

Business Solutions include Microsoft Office, Microsoft Project, Microsoft Visio, SharePoint

Portal Server CAL, Microsoft Live Meeting, One Note, Office Communication Server,

Microsoft Dynamics AX, Microsoft Dynamics CRM, Microsoft Dynamics GP, Microsoft

Dynamics NAV, Microsoft Dynamics SL, Microsoft Dynamics Retail Management System,

Microsoft Partner Program, and Microsoft Office Small Business Accounting.

Core Competencies
Microsoft clearly recognizes their core competencies that bring them high revenue. In fact,

Microsoft provides a guide to earning competency, for their business partners, on their

website [2]. These competencies are known as Microsoft Competencies. According to

Microsoft, the objectives of the Microsoft competencies are to help business partners

differentiate their skills and expertise to customers, extend their market reach, align their

business with relevant Microsoft marketing initiatives and form closer relationships with

other partners. This is inline with the concept of core competency. Although the Microsoft

Competencies may not be the core competencies of the company, they are closely linked as

this is a strategy in which Microsoft harmonize the activities of its business partners to itself.

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Hence, using the Microsoft Competencies and the list of end products, Exhibit 1 in

Appendix A shows the mapping of Microsoft’s capabilities to core competencies, to core

products, and to the end products.

The end products in Client and Business Solutions operating segments can be found in

different market segments, generating USD13,209M and USD14,488M in revenue

respectively for the 2006 fiscal year [3]. Thus, the core competences that drive these products

provided access to wide variety of market for the company. The perceived customer benefits

of Microsoft products are primarily connected (connecting people, processes and systems),

productive (in managing business), and flexible (in use of software). The key products that

contribute to those customer benefits are the operating systems and office tools which are

driven by the core competencies. These core competencies are complex and supported by the

15% of revenue Microsoft invested in R&D. Thus it will be very difficult for competitors to

imitate.

Case Study #2: Creative Technology Limited

Product lines
Creative products are used in an array of solutions for PC entertainment, education, music,

Internet applications and services and productivity tools markets [4]. Creative’s product line

includes an array of PC upgrades, such as Sound Blaster audio cards, multi-channel speakers,

lifestyle digital entertainment products (such as the NOMAD line of portable digital audio

players and PC-CAM/DC-CAM and WebCam digital cameras) and a mix of other products,

including three-dimensional (3-D) graphics cards, modems, software, musical instruments,

computer mice and keyboards. The company markets its products to consumers and system

integrators, with worldwide distribution through traditional marketing channels, original

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equipment manufacturers (OEMs) and the Internet under a variety of trademarks, including

the Blaster and MuVo family names.

Core Competencies
In the SWOT Analysis of Creative by DataMonitor, the “Strengths” of Creative are listed as

Sound Blaster, Strategic Alliances, Strengthening Distribution Network, and Proven R&D

Skills. Using these factors and the end products, Exhibit 2 shows the mapping of Creative’s

capabilities to core competencies, to core products, and to the end products.

In 1995, U.S. News ranked Creative as the number one firm in U.S. for sales growth, profit

growth, and average on return of shareholders’ equity from 1991 to 1994 [5]. The growth was

due to the sales of Sound Blaster audio cards which became the number selling add-on card

in the PC market [6]. Creative’s Personal Digital Entertainment operating segment, which

included MP3 players, experienced growth of revenues from USD54M in FY2000 to reach an

annualized run rate of USD270M in 2003. The Sound Blaster family sound cards and MP3

players are the leading products of Creative that helped it reached the worldwide market.

Using the core competence tests, Creative’s strength in Digital Audio Solutions clearly fits

this bill, resulting in continuous improvements to their leading products. Customers also

perceive Creative for the quality of their sound cards and MP3 players.

Conclusion
Microsoft is able to identify its core competencies to develop a well-structured business

partners’ competencies guide. Microsoft continues to rip benefits from its core competences

and invests a high percentage of their revenue in R&D each year to remain competitive.

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On the other hand, Creative’s early success built on the Sound Blaster sound cards helped it

to identify its core competence. It built on its core competences through key acquisitions such

as Cambridge Soundworks, Silicon Engineering Inc. and 3Dlabs, and also through strategic

investment in Sigmatel, which supplies sound chips to manufacturers of MP3 players.

Creative has successfully moved from Sound Blaster to MP3 players as their leading product

through their core competence. In their second quarter fiscal year 2007 earnings release

conference, Creative reported sales for personal digital entertainment (PDE), which includes

our MP3 players and web cameras, contributed 68% of total sales [7]. Besides building on

their core competence, Creative’s is able to work with the rest of the supply chain to reduce

production cost. It is able to take advantage of a lower market price for Flash memory,

reducing the cost of our Flash-based players and contributing to our higher gross margins.

Core competencies help the company to shift from one leading product to another, reacting to

the market changes. However, they have to be continuously improved with R&D. In order to

remain competitive, it is also important to harmonize the supply chain with the company’s

focus by aligning business partners to the company’s core competencies and establishing

strategic alliances to reduce cost. The two short case studies on Microsoft and Creative

demonstrated how these two companies made use of their core competencies to deliver range

of products which generate success for the companies.

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References

[1] C. K. Prahalad and G. Hamel, The Core Competence of the Corporation. Harvard
Business Review May-June, 1990.

[2] Microsoft Competencies Overview, Microsoft.com, 2007.

https://partner.microsoft.com/UK/40011230
Retrieved on 24 Mar 2007.

[3] Microsoft Corporation Annual Report 2006, Microsoft.com, 2007.

http://www.microsoft.com/msft/reports/ar06/staticversion/10k_fr_dis.html
Retrieved on 30 Mar 2007.

[4] Creative Technology Limited SWOT Analysis, DataMonitor Plc., 2003.

[5] Cohen, Warren, Simons, John, Fast Companies, U.S. News and World Report Vol.
119 Issue 1, 1995.

[6] T. M. Lee, Creative Labs: The Sound of Success, Smart Computing.com, 1993.
http://www.smartcomputing.com/editorial/article.asp?article=articles/1993/may93/93n0503.a
sp&articleid=5876&guid=
Retrieved on 30 Mar 2007.

[7] Creative Technology F2Q07 Earnings Call Transcript, Seeking Alpha.com, 2007.
http://seekingalpha.com/article/25592
Retrieved on 31 Mar 2007.

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Appendix A: Tables and Charts

Exhibit 1: Microsoft Corporation Core Competence Chart.

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Exhibit 2: Creative Technology Limited Core Competence Chart.

A-2