The companies that define the next decade will not be the ones with the best product this year. They will be the ones that started building the right skills ten years ago. In a world obsessed with quarterly earnings and brand share, that is an uncomfortable truth. But the logic of strategy has shifted. Corporate strategy can no longer be an amalgamation of business unit P&Ls. It must be centered on core competencies — the bundles of skills and technologies that act as gateways to entire families of future products and markets. Those who master this compete to shape the future. Those who don’t end up buying components, paying royalties, and depending on the firms that did the hard work of competence-building years earlier.
A core competence is not a factory, a brand, or a patent. It is an aptitude. Honda’s is engines and power-to-weight engineering. Sony’s is miniaturization. FedEx’s is logistics. Wal-Mart’s is inventory and distribution. Motorola’s is wireless. These competencies matter because they deliver benefits in a way that ordinary capabilities cannot. First, they create disproportionate customer value. Customers don’t choose Honda because of its dealers, they choose it for fuel economy, acceleration, and engine refinement. Few customers can explain the technical nuance, but they feel the benefit. Second, they are competitively unique. Every delivery company has drivers, but only FedEx turned bar-coding, wireless communications and network management into a routing competence that competitors could not easily match. Third, they are extendable. This is what makes them gateways. 3M’s skills in adhesives and substrates did not produce one product, they produced tens of thousands. HP’s strengths in measurement, computing and communications gave it options across industries. This is why investing in competence leadership is like buying an option on the future. Sharp and Toshiba committed hundreds of millions to flat-screen displays in the late 1980s when the only real market was calculators. There was no spreadsheet to justify pocket TVs or laptops yet. But they understood that whoever controlled portable, low-power, high-resolution displays would have access to dozens of applications later. By 1992 Sharp had 38% of a $2.1 billion market that was expected to more than triple. U.S. firms, focused only on the laptop as an end-product, were content to buy screens from Japan. By the time they realized screens were a gateway technology with military and commercial uses, they were already dependent and had to turn to government funding to try to catch up.
If competencies are the roots and products are the fruit, then the job of top management changes. It can no longer be to simply manage each business unit for its current returns. Leaders must have a point of view today about which competencies to build for 5 to 10 years out, even when the end-products are not yet clear. They must also know which current competencies are slowly eroding and which competitors are actually “competence competitors” rather than just product competitors. Ford and Honda competed for decades not just on Taurus versus Accord, but on powertrains, electronics and styling. Canon’s real rivals for leadership were not only camera makers, but Kodak, Nikon, Toshiba and HP in imaging and optics. Most companies only fight at the level of brand and end-product share. But the battle for the future is won much earlier. It starts with competing for talent, patents and alliance partners to acquire the constituent skills. Then comes the harder work of synthesizing those skills into a true competence, which requires integration across disciplines more than invention in one. Japanese firms often won here not because they invented first, but because they were better at combining and absorbing. The third level is competing for core-product share. Canon sells printer engines to HP and Apple. Its share of the intermediate “engine” market is far higher than its share of branded printers, and that volume funds the next round of competence-building. Asian firms mastered this by using OEM relationships to build manufacturing share that exceeded their brand share. By the time firms reach the final level of fighting for customers in the store, much of the advantage has already been determined upstream.
This approach is difficult because competence-building violates almost every pressure in a modern corporation. It takes years, not quarters. JVC spent almost 20 years perfecting videotape. Philips did the same for optical media. You cannot accelerate cumulative learning the way you can accelerate a product launch. It is also invisible in the short term. Profits can hide weakness. Intel’s $2.3 billion profit in 1993 looked like competence, but a large portion came from two endowments: legal protection of the X86 architecture and the installed base that IBM had created. Strip those away and you see the underlying skill. Porsche learned this painfully. Its brand allowed it to charge a premium for years while Japanese competitors quietly overtook its engineering. By the early 1990s buyers realized the performance no longer matched the price, and U.S. sales fell from over 30,000 to under 4,000 in less than a decade.
The move toward virtual integration makes this even more treacherous. You do not need to make everything. Canon buys 75% of the parts in its copiers. Nike outsources manufacturing but controls design, logistics and brand. The danger is in outsourcing what is truly core. When you do that, you surrender control of your future. Rover became dependent on Honda for engines and platforms. U.S. computer makers became dependent on Japanese and Taiwanese firms for screens and components. If competitors line up to buy your core product, that is proof you lead a competence. If you have to line up to buy theirs, that is proof you do not. Leaders must therefore be clear on what skills actually define the firm to customers and provide access to new markets, and protect those at all costs.
Finally, competencies are not permanent. What was once a differentiator becomes baseline. Quality and speed gave Japanese automakers an edge in the 1980s. By the 1990s they were prerequisites for everyone. Defense contractors built elaborate skills around government contracting, only to find them of little value when procurement collapsed. This means leadership is a continuous process of asking what benefits customers will value next, and what skills will be required to deliver them uniquely.In the end, the choice is stark. Companies that center strategy on core competence invest before the business case is obvious. They integrate disparate technologies into new capabilities. They measure progress not just by market share but by competence share. They compete to shape the future. Companies that do not will remain large and profitable for a time, but they will increasingly find themselves writing checks to the firms that did the hard work earlier — paying for components, paying royalties, and depending on others for access to the markets that matter most.
