Quick Thoughts: Corporate DNA or Changing a Leopard’s Spots

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Gary Hamel and C.K. Prahalad, “The Core Competence of the Corporation” Harvard Business Review, May-June, 1990

Historically, the study of organizational behavior has gotten very little respect.  First year MBA students use the class for surreptitiously reading casework from other classes or, simply getting in a little “Angry Birds”.  Business faculties sneer that OB research is lacking in the hard numbers that make management science a real “science”.  Noting that the mathematical foundations of modern Finance and Economics may not be as firm as academics like to purport, I suggest that TMT investors ignore corporate culture at their own peril even if it is a bit squishy.

The C.K. Prahalad and G. Hamel article linked above has proven to be extraordinarily influential, despite its lack of multivariate regression analysis.  This article was the genesis of the concept of core competencies, now a common consultant-speak catch phrase, but then a startling observation.  Company success is built on developing superior capabilities in areas that are important to success in a base business.  Successful diversification is often built by extending into new areas where the superior capabilities honed in the base business will also be competitive advantages.  Conversely, diversifying into a new area simply because your existing customers also buy the new product, or because it uses some of the same base materials, or simply because it seems like a big opportunity, may not prove to be a good idea.  Moreover, if a company competes in an industry that undergoes a major paradigm shift that rewards a very different set of competencies, that company will struggle.

We have written about the tech industry sea change that laid waste to a long roster of computer makers over the course of the ‘80’s. The mini-computer market required regular and highly customized architectural redesigns to deliver increasing performance and a high-touch direct sales force for distribution.  Many competitors focused on task specific niches – e.g. office document processing for Wang Labs, fault tolerant production systems for Tandem and Stratus, etc..  With the emergence of the x86 PC, product engineering was greatly simplified, distribution broadened dramatically, and niche markets were absorbed into the main.  The winners – Dell, Compaq and others – excelled in manufacturing, logistics and broad distribution, the old guard, with the exception of IBM, simply died.  How did IBM succeed?  To simplify, it was able to leverage its towering competence in large account sales into a dominant position in growing markets for services and software.

This concept is particularly germane today as the TMT industry barrels headlong into another massive paradigm shift.  We see proud Hewlett Packard, with its exceptional competence for elegant hardware design combining precision with reliability built over its 70 year history, struggling to transition to a business plan more focused on software and services.  We see Intel and its paranoia-driven focus on pushing the envelope of circuit complexity and semiconductor manufacturing processes, tripping up as the market demands lower power, lower cost and rapid product development rather than sheer processing performance.  We see Dell and its long vaunted manufacturing and direct distribution prowess faced with new product markets asking for design innovation and heterogenous distribution.  Nokia and RIM gasp for relevance in a mobile device market that is no longer just about the device itself, but the software operating environment and associated network delivered services that come with it.

The ramifications of industry transformation are not just limited to the PC value chain and cell phone makers that are struggling with the rise of tablets and smartphones.  As residential broadband gets more capable and more competitive, we believe the distribution of video entertainment will tip toward the Internet.  While cable operators have long standing competence in expanding their coaxial networks, negotiating programming fees and influencing regulators, years of monopoly have left them bereft of the customer service, consumer marketing, or user interface DNA that will be currency of the realm in the brave new world.  You could argue the same on behalf of the nation’s telephone carriers, as they contemplate ventures like on-line content distribution and mobile payments.

Similarly, media companies used to a role as gate keeping middlemen who could pick and choose the entertainment that would see the light of day, will find their networks of relationships less valuable once the Internet shortcut to the consumer for content creators is more firmly established, and will have to rely on their financing, marketing and branding savvy to carry the day.

On the enterprise side, traditional data center technology vendors – e.g. HP, Cisco, EMC, VMWare, Oracle, et al. – all of whom have defined differentiated value-added solutions for enterprise customers that value a strong hand to hold will face commoditization as data center demand shifts sharply to sophisticated cloud hosts looking to buy simple and cheap.  It is safe to say that this group of companies, used to thick margins and primed to integrate functionality rather than strip it out, would struggle to struggle to hit lowest cost benchmarks.  Moreover, the new opportunities created by the shift to the cloud, as consultants to enterprise customers, as providers of SaaS, or as cloud hosts in their own right will take very different skills.

Acquisitions are no panacea for a genetic problem.  No amount of new blood from hot silicon valley start ups was able to transform the phone company DNA of Lucent before it stumbled into its marriage of convenience with similarly impaired Alcatel.  A steady stream of new acquisitions and new CEOs has made little impact on HP.  While it won’t stop the likes of Oracle, SAP or Intel from further deals to shore up their cloud or mobile credentials, the potential success of these competency graft-ons should be considered with a bit of a jaundiced eye.

History says that leopards have a very difficult time in changing their spots.  This degree of difficulty vaults Lou Gerstner’s accomplishments at IBM into double-sized niche in the Pantheon of management achievement.   While I can’t say that none of the leopards in today’s TMT landscape will manage to come up with a convincing set of stripes, I will say that I wouldn’t bet on it.

For our full research notes, please visit our published research site.

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