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 w ork activity." They gave the example of Sony, which had to ensure that technolog ist, engineers, and marketers have a shared understanding of customer needs and of technological possibilities, in order to bring miniaturization, their core co mpetency, to their products. Similarly, in the service industry, Citicorps compet ence in systems had provided them with the means to differentiate itself from ma ny 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 introdu ction on the concept of core competency and then discuss the case studies on the core competencies of two firms, Microsoft Corporation and Creative Technology L imited. Microsoft is a multinational computer technology corporation with global annual revenue of US$44.28 billion and 76,000 employees in 102 countries. The l atter is a Singapore-based, NASDAQ-listed, computer multimedia products manufact urer with over 5000 employees worldwide. For each of the two cases, this paper w ill apply Hamel and Prahalads concept to discuss why the competencies described a re 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 leav es, the flowers, and the 1

Centre of Management of Science & Technology MT5002 Management of Industrial R&D fruits are end products. The root system that provides nourishment, sustenance, and stability is the core competence. Apart from harmonizing streams of technolo gy, organization of work and the delivery of value, core competence is the commu nication, involvement, and deep commitment to working across organizational boun daries. It does not diminish with use, but enhanced as they are applied and shar ed. 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 appl ied to identify core competencies in a company: Provides potential access to a w ide variety of markets. Eg. Company with competence in display systems enables t hem to participate in diverse business such as calculators, TV, monitors, and au tomobile dashboards. Makes a significant contribution to the perceived customer benefits of the end product. Eg. In the case of Hondas engine manufacturing techn ologies. Difficult for competitors to imitate. Eg. A complex harmonization of in dividual technologies and production skills. The next two sections will determin e the core competencies of Microsoft and Creative respectively by first examinin g 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 Xb ox, Windows 2

Centre of Management of Science & Technology MT5002 Management of Industrial R&D Mobile. The other software products and services are divided into four main cate gories. These include Home and Entertainment, Hardware, Finance, Books and Train ing. Among these end products, two operating segments, Client and Business Solutions, contributed to the majority of the companys revenue. Client consists of premium edition operating systems, including Windows XP Professional, Media Center Editi on, Tablet PC Edition, and other standard Windows operating systems, including W indows 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, Mic rosoft Dynamics GP, Microsoft Dynamics NAV, Microsoft Dynamics SL, Microsoft Dyn amics Retail Management System, Microsoft Partner Program, and Microsoft Office Small Business Accounting. Core Competencies Microsoft clearly recognizes their core competencies that bring them high revenu e. In fact, Microsoft provides a guide to earning competency, for their business partners, on their website [2]. These competencies are known as Microsoft Compe tencies. According to Microsoft, the objectives of the Microsoft competencies ar e to help business partners differentiate their skills and expertise to customer s, extend their market reach, align their business with relevant Microsoft marke ting initiatives and form closer relationships with other partners. This is inli ne 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. 3

Centre of Management of Science & Technology MT5002 Management of Industrial R&D Hence, using the Microsoft Competencies and the list of end products, Exhibit 1 in Appendix A shows the mapping of Microsofts capabilities to core competencies, to core products, and to the end products. The end products in Client and Business Solutions operating segments can be foun d 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 p erceived customer benefits of Microsoft products are primarily connected (connec ting people, processes and systems), productive (in managing business), and flex ible (in use of software). The key products that contribute to those customer be nefits are the operating systems and office tools which are driven by the core c ompetencies. These core competencies are complex and supported by the 15% of rev enue Microsoft invested in R&D. Thus it will be very difficult for competitors t o imitate. Case Study #2: Creative Technology Limited Product lines Creative products are used in an array of solutions for PC entertainment, educat ion, music, Internet applications and services and productivity tools markets [4 ]. Creatives 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 W ebCam digital cameras) and a mix of other products, including three-dimensional (3-D) graphics cards, modems, software, musical instruments, computer mice and k eyboards. The company markets its products to consumers and system integrators, with worldwide distribution through traditional marketing channels, original 4

Centre of Management of Science & Technology MT5002 Management of Industrial R&D equipment manufacturers (OEMs) and the Internet under a variety of trademarks, i ncluding the Blaster and MuVo family names. Core Competencies In the SWOT Analysis of Creative by DataMonitor, the Strengths of Creative are lis ted as Sound Blaster, Strategic Alliances, Strengthening Distribution Network, a nd Proven R&D Skills. Using these factors and the end products, Exhibit 2 shows the mapping of Creatives 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 grow th, 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]. Creatives Personal Digital E ntertainment operating segment, which included MP3 players, experienced growth o f revenues from USD54M in FY2000 to reach an annualized run rate of USD270M in 2 003. The Sound Blaster family sound cards and MP3 players are the leading produc ts of Creative that helped it reached the worldwide market. Using the core compe tence tests, Creatives 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 i ts core competences and invests a high percentage of their revenue in R&D each y ear to remain competitive. 5

Centre of Management of Science & Technology MT5002 Management of Industrial R&D On the other hand, Creatives early success built on the Sound Blaster sound cards helped it to identify its core competence. It built on its core competences thr ough 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 Sou nd 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 o n their core competence, Creatives is able to work with the rest of the supply ch ain to reduce production cost. It is able to take advantage of a lower market pr ice for Flash memory, reducing the cost of our Flash-based players and contribut ing 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 companys focus by aligning business partners to the companys core competencies and establishing strategic alliances to reduce cost. The two short case studies on Microsoft and Creative demonstrated how these two companie s made use of their core competencies to deliver range of products which generat e success for the companies. 6

Centre of Management of Science & Technology MT5002 Management of Industrial R&D 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 Retriev ed 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. R-1

Centre of Management of Science & Technology MT5002 Management of Industrial R&D Appendix A: Tables and Charts Exhibit 1: Microsoft Corporation Core Competence Chart. A-1

Centre of Management of Science & Technology MT5002 Management of Industrial R&D Exhibit 2: Creative Technology Limited Core Competence Chart. A-2