• MAP Asia Pacific Ltd

Large Companies Are Worrying Less About Core Competencies, Should Nations Remain Stuck?

Business headlines around the world these days exhibit two trends. Firstly, there are a lot of announcements on business diversification. Firms are getting into new businesses, sometimes seemingly unrelated. Secondly, there is a big push for vertical integration. Firms are trying to control more and more of the value chains of their key product offerings.

This is actually similar to how early business magnates like Andrew Carnegie or Henry Ford built their businesses — they did everything concerning their businesses themselves. Till late 1960s, firms like Unilever and Universal Fruit Company became known for vertical integration across a range of business interests.

However, in the middle of the twentieth century, as firms became global or very big in their home markets, the talk about core competencies started getting entrenched. Analysing a business as a portfolio with constituents competing for limited resources gave rise to several theories which continued to focus on optimal structure of a firm.

Going back to 1937, the Nobel winning economist Ronald Coase wrote a seminal paper “The Nature Of The Firm”. He established that transaction costs, which go beyond the price of goods or services, should determine what the firms should produce internally. His work on understanding economic efficiencies of resource allocation in the presence of externalities formed the basis of how firms should be organised and which transactions should be outsourced.

In 1990, C K Prahlad and Gary Hamel wrote their famous Harvard Business Review article, “The Core Competence of the Corporation”. They explained that firms must identify, cultivate and exploit the core competencies that make business grow faster. Management consulting firms like BCG with the growth-share matrix and McKinsey with the product portfolio analysis further designed tools to address the question of what should a firm do.

On the balance, the second half of the last century established commonly accepted ground rules on how firms operated — they should not be doing everything, they should know what they are good at and they should know when to outsource parts of the business. The rising tide of globalisation further lifted the boats of these ruthless efficiency led management models.

But today, things seem to have come a full circle. A giant like Amazon is not just diversifying its business at a rapid pace, it is also vertically integrating each of these business lines. An innovator like Tesla is trying to control as much of the supply chain it possibly can. Elon Musk is also trying to buy Twitter, which would add social media to his repertoire of cars, batteries and spaceships. Apple, whose core competency decidedly was making beautiful consumer-facing hardware is making chips and revelling in deep content integration for its range of devices.

Closer home, Indian family-owned conglomerates were less influenced by the core competency theories, but even they had started to look at exiting some businesses based on portfolio analysis techniques. But in the last few years, the trend has stalled and even reversed.

This turn of fortune demonstrates how management theories that were once considered sacred can easily turn on their head. As the world saw more economic and social integration, transaction costs lowered which made it easier to think only in terms of allocative efficiency with no other consideration taking prominence. So perhaps, the management theories which looked unassailable were merely the aftereffects of globalisation rather than its foundational zeitgeist. As the world started decoupling post the global financial crisis, the ideas which ruled the roost for quarter of a century suddenly appeared to be planted on shaky grounds.