View Point
June 23, 2006
Corporate Competencies

In times past, industrial competition used to be largely associated with brawn, whereas today it is really down to brain. Intelligence and intangible assets are replacing some components of raw material and capital as the true source of competitive advantage resulting in the economic value of knowledge becoming even greater. Yesterday’s successful entities were a combination of a lot of bulk and a little knowledge; by contrast many of today’s winning companies offer consumers a lot of knowledge and little bulk.{{more}} For the typical car produced by General Motors in the early 21st century, material cost accounts for only 16 percent of total cost. Similarly the software cost of producing a PC accounts for 80 percent of total costs and hardware 20 percent, while as recently as 1984 it was the reverse, hardware 80 percent and software 20 percent. The implications are that goods produced across the globe are becoming increasingly weightless, with the underlying wealth generated being a function of wisdom. Bill Gates, the richest man in the world exemplifies this growing trend; and he may also be setting a new trend where at 48 he is making the transition to withdraw from management of his company, Microsoft to devote more time to his charitable foundations.

The typical firm in an earlier generation had 20 to 30 years within which to globally exploit its competitive advantages. Such companies could use an incremental approach, adding country after country to their market penetration. But globalization has changed all of that. The recent wave of de-regulation and global integration already affects most organizations. It has even affected English soccer where Chelsea has been known on a few occasions to have played English Premier League opposition without a single British player in its team. This is not yet extended to cricket where the authorities have so far been able to restrict the number of overseas players registered by each county. Contributing to this process of globalization is the fact that the average level of tariff in the industrial countries is now less than 10% of what it was before the First World War. The cost of shipping, too, has also fallen. Shipping costs of goods from the U.S to Japan have come down by almost 50 percent in the same period. Meanwhile, the stock of foreign direct investment has increased by 1600 percent in the last 16 years and international trade has increased some 1500 percent during the last 40 years.

Knowledge is spread less unevenly across the globe today, but core competencies tend to be in such short supply that you seldom find them all in one location. You sometimes have to move a function elsewhere to take advantage of a core competency. Indeed, the CEO of CISCO Systems has said he would put his jobs anywhere in the world where the right infrastructure is, with the right educated workforce and the right supportive government. Increasing numbers of organizations utilizing knowledge from many different fields of expertise are beginning to realise that sophisticated demand and supplies are not always located in the same place. A majority of the most advanced trendsetters in the world do not, for example, live in the vicinity of Helsinki Finland, the home of the Nokia mobile phone company. The firm has had to send its people to King’s Road Chelsea, in London or to Venice Beach in Los Angeles California to pick up the latest signals.

The Economist Adam Smith pointed out many years ago that, as the size of a market increases, so should the degree of specialization. Over the last few decades, many multinationals have become both narrower and hollower. As a consequence, in order to dominate their industries they have seen the need to rely more and more on partners. The network, rather than the single firm is becoming the relevant unit of analysis and action. Could we in St. Vincent and the Grenadines become part of that network one day as we begin to place a higher priority on education and training and importantly, on IT skills? The process would, however, need to be fast tracked to take advantage of the dynamism that is such an integral part of globalism.

Companies that fail to adapt to the fast-changing environment of the 21st century will just find that they begin to wither and may eventually die. While successful companies have core capabilities that determine what they can do; more important than anything else are their core compassions, that is what people in their organizations actually care about doing. Because without passion there is no energy and without energy there is no performance.