Download Value Correlation of Core Competence and Disclosure of the

Value Correlation of Core Competence and Disclosure of the
Information about It
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Zheng Jun
Management School, South-Central University for Nationalities
Wuhan, Hubei, P.R.China, 430074
Abstract
This paper discusses some fundamental issues related with the core competence of
corporation. Core competence is the fountainhead of enterprise value. It helps guarantee stable
net cash flow, reduce capital cost, insure persistent operation and realize the latent opportunity
value for profit obtaining. The author of this paper believes that the disclosure of core
competence is positive correlated with the growth of enterprise value. It helps coordinate the
benefit of value counterparts of an enterprise, and manifests the sustainable development ability
of enterprises.
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Key words
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Core competence, Enterprise value, Information disclosure
Introduction
Since Coase’s(1937) research on the nature of firm, Penrose’s(1959) research on the core
competence of corporation provided a theoretical explanation for exploring the nature of firm from a
new angle of production activity. Based on these researches, passed through several decades’
development and research, C. K. Prahalad and Cary Hamel (1990) published a paper titled “The Core
Competence of the Corporation” in Harvard Business Review, in which they defined core competence of
the corporation as the accumulative knowledge of an organization, particular the knowledge and skills
that coordinate many kinds of productive skills and integrate different technologies. It has been proofed
both by academic researches and empirical inductions that the core competence is the key increases
enterprise value. Based on the review of some fundamental issues and concepts about the core
competence of corporation, this paper focuses on the correlation of it to the enterprise value, and
makes some further deductions on the influence of the disclosure of core competence of the corporation
to the value of enterprises.
2 Some fundamental issues about the core competence of the corporation
According to the concepts of enterprise resource theory, corporation is an “aggregation of resources
that being coordinated and to whom the boundary is defined by the administrative frame”. Market
competition competence of a corporation manifests the skills that combines, gathers, and then integrates
resources an enterprise has, and forms the products and services of it. The parts of it that being solely
possessed by an enterprise, which brings competitive advantages comparing to competitors, was being
called the “core competence of the corporation” by C. K. Prahalad and Cary Hamel. In the long-term
competition, to maintain competitive advantages unceasingly, it is necessary for enterprise to construct
dynamic competence. Due to the simultaneously inspect of the effects that corporation resources and the
way they organizing it have to the performance of an enterprise, the competitive competence difference
makes a fully explanation to the difference of enterprise’s market performance. The Cultivation of
long-term dynamic competitive competence may guarantee enterprise to adjust the component elements
of core competence based on the changing of environmental factors. It helps the maintaining of
superiority in dynamic competition.
The competitive competence has long been accepted widely as an explanation for the difference
between enterprises. However, what enterprise competitive competence is and how to construct it, is still
quite disputed actually. Prahalad and Hamel thought that the core competence is the main origin which
forms the competitive advantages of enterprises. According to their opinion, the core competence is a
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combination of individual technologies and production skills being contained in the processes of
production and operation with obvious advantages. Stock et al. thought that the core competence of
corporation manifested as the collective skills and knowledge of the staff of an organization, as well as
the organization procedures by which the staff interact. According to Barton, core competence is a
knowledge system distinguishes and provides competition superiority. Sanchez, Sheen and Thomas
proposed to regard the managerial process of organizing property and allocating resources as the
competitive competence of a corporation. Synthesized all the viewpoints above, Durand summarized
and induced constitutive factors of enterprise competitive competence. He believed that the scope of the
competitive competence of a corporation may surmount that of the core competence, and includes all the
skills by which the corporation transforms resources into products and services.
This paper pays much attention to the effects of core competence on the value of enterprise. So it is
necessary to consider the disclosure of core competence in value report of corporation. It is not so easy
to judge what kind of core competence should be disclosed---- in other words, what are the factors
belong to the core competence. To make this judgment, following characteristics may be taken as basic
standards:
(1) Uniqueness and un-mimetism. The core competence must be unique and be owned by the
enterprise. This distinctive quality guarantees the core competence has the features of being difficult to
be imitated and replaced.
(2) Ductility. Core competence can develop out a series of new products and services to satisfy the
new customers. It supports the enterprise to extend to the more animate domains.
(3) Value superiority. Core competence is the fountainhead of enterprise value. On the one hand, it
can enhance the operation efficiency of enterprise, and helps the enterprise being better in value creating
and cost reducing than the competitors; on the other hand, it realizes and creates the value which
customers regard as important, brings long-term and substantive benefit and effectiveness to the
consumers.
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Judgment of the correlation of core competence to enterprise value
Along with the globalization and informationization of the economy worldwide, as well as the
widely application of high-tech, the surroundings of enterprise are experiencing unprecedented changes
today. The concepts of enterprise is no longer being limited to the inner tissues, but expanded to a much
more broad exterior scope. Therefore, the basic measurement that measures an enterprise is no longer
the profit or the maximization of investment return, but a more comprehensive index which shows the
competition competence, namely, the “enterprise value”.
3.1 The ultimate objective of the core competence of corporation is the maximization of
enterprise value.
The famous American management scientist Chandler pointed out, enterprise strategy means
research on the affecting and deciding of long-range objectives and goals of enterprise, and the choice of
the course and approach to achieve the objectives established. It is the science for carrying on the
optimized disposition of resources enterprise owned. The real objective of enterprises development is to
realize incessant value increment, so that to achieve the maximization of enterprise value. Therefore,
enterprise value maximization is the ultimate objective of enterprise strategy.
3.2 Core competence is an effective way to increase enterprise value
To state it on the angle of value evaluation, enterprise value is the summation of present
profit-making value and latent profit-making opportunity value. Among them, the present profit-making
value is being affected by net cash flow in the future, weighted average capital cost, and continuing
operation period.
3.2.1 Core competence guarantees obtaining of stable net cash flow
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This is decided by three basic characteristics of it. Firstly, because of the ductility of core
competence, a series of new products and services may be developed to meet the demand of customers.
Moreover, it supports the further development of new products and new varieties of product. Secondly,
speaking of the users, the value superiority of core competence decided that the new products and
services developed by core competence have the value can be perceived by users, which brings great
benefits to them. Thirdly, the uniqueness of the core competence guarantees the new products and
services can not be imitated by the competitors. To obtain the new products and services, purchasing is
the only way. This feature guarantees the enterprise being able to obtain stable net cash flow in the
future.
3.2.2
Core competence reduces the capital cost and thus increases enterprise value
According to the weighted average capital cost model, the capital cost of corporation is decided by
two factors: the capital structure and the unit financing cost. Unit financing cost consists of debt cost and
stockholder's right cost. For financing, core competence means high quality financing management
personnel. They may be competent to build good relationships with different interest groups, such as
customers, suppliers, financial institutions, government agencies, and so on. Therefore, they can obtain
funds that the enterprise needs with lower unit financing cost.
3.2.3
Core competence guarantees continuing operation of an enterprise
The issue of continuing operation is the starting point for discussing the contribution that the core
competence of corporation made to the cultivation of enterprise value, because it provides an
explanation of the secrecy that a long-term developing enterprise may has.
3.2.4 Core competence realizes the latent profit-making opportunity value of enterprise
Core competence of a corporation itself is the latent profit-making opportunity which the enterprise
owned, regardless of it is displayed by which form of final products, such as technology, product and
service. For an enterprise, the stronger the core competence of it is and the more opportunities it has, the
greater the value of the latent profit-making opportunity will be.
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Core competence of the corporation and information disclosure
Core competence of corporation is highly related with enterprise value. However, what the value is?
How to display value and the growth of it? Economists and scholars in the field of financing have been
addressing to these questions for a long time, but no certain solutions obtained yet. Therefore,
constructing of a set of financial index that displays enterprise value and simulate the process of value
growth as truly as possible become a realistic choice. This kind of financial index is so-called “core
financial index”. To transfer the core financial index to the interest related groups to enterprise value
forms the supply and demand of core financial information. The problem related with it is the disclosure
of core competence of corporation.
4.1 The disclosure of core competence is positive correlated with growth of enterprise value
The primary purpose of enterprise lies in value creation. Value is the comprehensive display of
enterprise efficiency. What the value is and how to display and measure value creation is a topic that has
being studied by people for a quite long time. According to the opinion of the theoreticians in the
Industry age, pursuing of profit maximization equals to the pursuing of value, therefore, the core
financial index then was mostly some reflect profit creation target. Along with the economy
development and the evolution of enterprise organization, there appears the listed company, for which
the shares are held by public, the understanding of enterprise value and the factors affect it being
deepened further. People found that the profit is not completely positive correlated with enterprise value,
so that it is necessary to find a better way of value measurement. It results in the discovery that the real
factor which truly positive correlated with the growth of value is the core competence target.
4.2 The disclosure of core competence is an important method to coordinate the interests of the
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value-related parties
According to the modern enterprise contract theory, enterprise is a combination of a group contacts
actually, and the shareholders, creditors, staff (include managers) are all the principal parts of the
contacts. Therefore, saying from the strict significance, there is no owner of enterprise, because there is
no other principal part alone to organize the shareholders, creditors and staff to sign and affect the
contracts. The shareholders, creditors and staff are then called the “stakeholders” in modern financing
theory. Actually, it is much more suitable to call it “the enterprise value counterparts”. Regardless of
stakeholder or value counterpart, the benefit objective function is incompletely consistent. So, to be
strictly, it is not realistic to disclose financial index that simultaneously reflect various value
counterparts’ benefit. However, according to the analysis fore-cited, no matter where the value
counterparts located and whether they have the same value orientation, core competence is certainly the
common objective of them.
4.3 The disclosure of core competence shows the sustainable development ability of enterprise
Continual existence of enterprise is the best guarantee to the benefit of investors, and also an
important foundation of society stabilization and prosperity. Therefore, to measure the integrative
efficiency, it is necessary to consider some of the long-term characteristics. The biggest flaw of pursuing
profit goal is that it can not be able to contain the goal component of persistent existence. Moreover,
sustainable development contains another meaning, the futurity. In fact, the investors do not only care
the accumulation result the existing investment produced. They pay much more attention on the return
in the future. A successful manager should know the importance of the future and plan it scientifically.
Only unceasing innovations cause successful long-term development of enterprise. Whether the
enterprise has innovation ability, whether it is able to develop in the future, and how the enterprise will
plan the prospect, all need to carry on a disclosure of the contents displayed in the core competence of
corporation.
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Conclusions
This paper explores the core competence of the corporation and the disclosure of the information
about it. It is not a new topic to be discussed, for it has been studied for long time by many famous
economist and financing scholars. It is the environmental changes which gives it the new meaning and
importance. Based on the research on some basic aspects of core competence, this paper results in some
important ideas about the disclosure of the information related with core competence of corporation.
However, there are many other issues need to be researched yet.
References
[1] Chandler, Alfred D.The Visible Hand: The Managerial Revolution in American Business. Beijing:
Business Press (Chinese version), 2000
[2] Prahalad,C.K. and Hamel.G. The Cord Competence of the Corporation. Harvard Business
Review,66(1990),May/June.
[3] Wang Qingfang. A Parse of the Character of Core Financial Index in the Value Management Age,
Contemporary Economy Science,5(2004).
[4] Xue Yunkuai, Wang Zhitai. Research on the Disclosure of Intangible Assets Information and its
Value Correlation. Accounting Research,11(2001).
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