Urge you to visit biography of CK Prahlad if you don't know him. In summary, Prahlad is a renowned Management consultant, author and orator, well respected both by Indian and Western businesses.
In his HBR article on "The Core Competency of Corporation" (written in 1990) he stresses on concepts around how companies should invest in their core strengths. He compares NEC and GTE (now acquired by Verizon) and depicts with data on how NEC succeeded and GTE failed. At one point of time GTE was a much larger company than NEC. He stresses on the fact that every company should strive to find its core competency and stick to it. He says The critical task for management is to create an organization capable of infusing products with irresistible functionality or, better yet, creating products that customers need but have not yet even imagined. (I cannot help but quote Nintendo here, who is a market leader in Video gaming business just because of exploiting this "irresistible functionality".)
If C.K. Prahlad is right, the formula for success is clearly to be market focused and to create well differentiated products and services in the company's domain, there by gaining as much market share as possible. I have to agree, while this is simple to say and conceptualize, it is not something which we see in the real life. Companies have no business in diversification but today we see every big corporation has business units, which are clearly in Red. Diversification is a choice of investor and not the company. Today business units function like companies themselves and do whatever they can to survive and create "false hope" which slows down the conglomerate as a whole. I really like the GE philosophy of being 1st or 2nd in the market. If business units cannot create or help create appealing products and there by gaining market share, they have no business justification to be a part of the company.
Here, I want to take the example of a typical Indian IT company and debate what goes around. We have so many support units such as HR and Finance which cut across number of business units in an IT company. In almost all the IT companies I know of, these support units hold more power and influence on the business than, the business decison makers. While I am not underplaying the support unit's role, the call on the business should almost always be done by a business leader and not a support unit. Why this is not a visible problem? My answer: The rate at which many of our IT companies are growing, because of the demand, has not exposed the problem. I am betting that this problem will be exposed in this downturn and companies evolve and change for good. We can never outsource Finance or HR decisions which are very closely aligned to the growth of the IT business but we can definitely outsource some support functions such as back end processing, procurement, operations etc.,
"Revenue maximization" and "cost optimization" is always a tussle between business units and finance. This is an interesting topic and I will cover this in subsequent blogs but my point is that no company can grow with "Cost Optimization" as its core strategy. There is no doubt that companies should be lean and mean to be competitive and cost efficient but "Cost optimization" cannot be the core strategy of any company. I believe this economy will actually help companies to shake out that extra fat and be lean and mean.
CK Prahlad's ideas around core competency hold good even today. Businesses cannot afford to create business units, which are not aligned to their core competency. If businesses really want to succeed and gain market share, businesses should focus on creating compelling products and creating core competencies in their domain and allow non-profitable and inefficient businesses to fail. In this economy, this concept is mandatory and not optional for every company.
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