Corporate finance - Financial Management Collection

Financial Management (Financial Management Association), Fall, 1993 by Melissa Lunt, Ted Veit

CLOUGH: Bennett, let me add something to what you're saying. The same arguments apply to the electronic industry. The electronic industry isn't merely in the process of change, it is going through a revolution. We have killed our kings and queens, and now we're assassinating our presidents. The very large, historically successful companies in this industry have created enormous problems for themselves-many of which stem from sheer size--and they are now under tremendous pressure to shrink and change.

The embryonic companies of today that are going to be successful in the next ten years are companies that don't want to do it the way IBM did. For example, if you have a uniquely valuable idea for creating and marketing teleconferencing electronic equipment, you want to focus just on design and marketing. You don't want to invest in large manufacturing entities. You don't want to go out and buy the land and build on it, because you don't bring anything to the manufacturing ballgame. Your manufacturing skills are not as good as those of people who have been honing their manufacturing skills for 20 years. And, in many cases, you may not want to market it either. Your brilliance resides in the fact that you can create this unique and better electronic equipment.

People today don't want to make investments in areas beyond their expertise. This is the new American model of enterprise--smaller companies with limited funding and resources relying on out-sourcing and other forms of networking or partnerships. It's adherence to the principle of comparative advantage, focusing only on what you do best and getting other people to do the other stuff they do better. And that's really a departure from the way electronic companies operated from the late 1950s until just the last few years.

STEWART: C.K., in one of your articles, you criticized Motorola for skipping the round of 256K Dynamic Random Access Memories, or DRAMS. You argued that doing so made it very difficult for Motorola to participate in the 1-Meg stage. But, with hindsight, this seems to have been the right decision for Motorola. As Charlie said earlier, memories today are commodities. And, as a consequence, it seems clear to us now that the Japanese invested billions of dollars in building memory capacity with virtually no returns to show for it.

So, to return to my earlier question, Isn't there a possible danger in overemphasizing the need to leverage core competencies into an all-consuming quest for global leadership? Can that pursuit excuse investing billions of dollars in quest of a core competence that could become available to anybody at commodity prices?

PRAHALAD: Actually, I think you asked seven different questions. And I think it's important to unscramble them because in any discussion of this kind, unless you are very clear about what issue we are talking about, we can go from one to another almost seamlessly.

The first question you raised was this: Is NEC creating wealth compared to, say, GTE? It's an interesting question. If you look at profitability alone, GTE is probably more profitable than NEC. And I suspect that GTE's shareholders have done better than NEC's at least in the last five or six years.