We are going to explain the concept of core competency in this article and how to generate a competitive advantage for a company. This article will also tell you what contemporary views on core competencies do exist. We will provide a summary of a few cases and studies to describe the complexities of the concept.
The term core competency was coined by Dr.C.K Prahalad and Prof. Gray Hamel in 1989. They took examples of various Japanese firms and compared them with their American counterpart. Competence based strategy is the part of an overall strategy that is concerned with integrating technology, know-how (including patents), value and culture in order to create a set of competencies that unfolds superior value for customers and thereby support the product-market strategy of the firm
We should think of the organization as a small sapling which after nourishment develops into a strong tree with core competences as its trunk. This core competency trunk helps in growing branches of different businesses and then these businesses grow products as fruit. The following graphic pictures this very well.
Sadly, a lot of companies around the world are not too well versed with the concept of core competencies or fail to recognize actual competencies which may help them with long term.
Importance of core competences
Core competencies are the collective learning of the organization, especially how to co-ordinate the diverse production skill and integrate multiple stream of technologies. A company, if it has identified its core competencies, will be capable of creating more value. Core competences must coalesce around individuals working in the organization. These people should recognize their effort in building and strengthening these core competencies.
Unlike physical assets, which do deteriorate over time, competences are enhanced as applied and share across the organization. The competences act as the glue which bind businesses together as well as pave the way for new business development. In other words core competences of a business are also guiding parameters for new markets and diversification.
The process of developing core competencies starts with the strategic intent of being a leader in the market by leveraging the resources. This thought of being a leader in the market is called strategic intent. This concept points out to identifying various opportunity gaps. It is an obsession with writing a competitive agenda, for a long period of time, which is shared with the whole organization.
Strategic intent provides a basis for stretching the goals of the organization with barrier breaking initiatives.
Framework for leverage (strategic architecture)
The next stage towards developing the core competencies is to leverage the current resources of the organization. This stage is known a developing the strategic architecture. Strategic architecture is a roadmap which predicts what core competencies to build and which related technologies are needed. This step requires the distillation of past and present data to answer the following questions:
- Change in customer interference
- New technological possibilities
- Competitor’s positioning
- Current and future set up of the industry
This exercise allows managers to maintain consistency in their efforts and provides logic for managing linkages across business units. It is helpful in more than one way. Apart from being a useful tool for managing innovation, it also helps in identifying alliances and acquisitions of strategic importance. Internally, this helps the lower management to allocate resources and upper management to keep focus. Leveraging resources and thereafter the development of core competencies requires investment in three different things:
b) Governance process
c) Collective learning
Companies should invest in all three of them. If not, then you will hamper the development of core competencies. Thus, a company should invest in good governance and learning environment and not just technology.
Identifying core competencies
Core competencies play an important role in the process of leverage. We can identify them using three simple tests:
- Does the trait provide a major competitive differentiation? Does it provide a unique value proposition to the organization?
- Does the trait cover a lot of business or is useful only for a single business unit? Is it useful only for current business or for new ones too?
- Is it hard for competitors to imitate?
Core competencies extend to the whole organization, and are part of tactical learning at the same time. We should not confuse a core competence with a core technology. A technology / technical capabilities is complete in itself while a core competence is embedded inside the organization. Without one another it can’t exist. We should also differentiate between core competencies and core capabilities before moving forward. Core capabilities are crucial for survival but, unlike a core competency, does not confer any specific differential advantage over other competitors in the industry.
Importance of core competencies
The most important advantage of having core competencies is having a long term competitive advantage. These competencies help in bridging the gap between performance and opportunity, thus helping a company in being a potential leader in the industry. By linking traditional business to products and service of the future, the company acquires greater opportunity for success. This also helps in activation of the company by acting as a guideline for diversification.
Core competencies are also an indicator that resources are being used in the right places in the right amount. An organization should focus on outsourcing all non-core activities which will streamline the operations to encourage learning environment congruent to their competencies.
Core competencies also help in the development of core products. They should have access to all the primary component of a complex product which can help in long term foothold in that particular industry. This complex product can then be used to create a pipeline of products.
Core competencies are meaningful if they are related to an attribute valued by the market. Customers need to perceive a consistent difference in important attributes between the producer’s products or services and those of its competitors. Intel particularly uses this. Their core competence lies in developing an array of microprocessors in very short time. With the proved attribute of speed and quality against other competitors, this core competency provides a distinctive competitive advantage.
Last but not least, core competencies make a company focus on extensive R&D.
Losing core competencies
Companies, especially big ones, have to be really careful when outsourcing a product or service to a different organization while looking to cut cost. In the past, Chrysler has viewed engines in cars as just another component which was outsourced to various Japanese companies. Outsourcing is thus a two bladed sword if not handled properly. While outsourcing can give a short term competitive advantage, it typically contributes very little to developing people skills which help in building core competency.
Sometimes lack of forecasting the state of the market and lack of a clear framework can make companies forsake attractive opportunities. It often arises from a lack of clear insight in the core product and the core competencies of a business. It is super important to recognize the importance of core competencies in entering an emerging market.
Multiple examples from around the world can be cited in support of the concept of core competencies:
- NEC asserts that they use 18% of their earnings for R&D. NEC of Japan investigates its core competencies every 5 years. With a spending of 18% in R&D they have a boastful array of 36 core techniques in total.
- Apple as an organization developed products which are rich in design and user experience. This gave them a distinguished brand image in the market, which stands even now in the face of multiple competitors. Apple products are sold with high margins.
- 3M as a company is a perfect example of commitment to developing core competencies. It has a range of diversified products which include post-it notes, magnetic tapes, photographic film, pressure sensitive tapes and coated abrasives. These all have quite different production technologies, end-consumers, and channel of distribution. All this is connected with a few competencies in substrates, coatings, and adhesives and a culture which was developed internally during it’s years of operations.
- Canon cornered the copier market in 1990s by investing a lot in core competencies. Before PC copiers became available in 1982, copying was done on a departmental basis within companies and through commercial copy centers. Copy centers served a range of copying needs, from small copying jobs to large, high speed/high volume projects involving document preparation. Satisfaction of copying needs depend on a copier’s price, quality, performance, features, maintenance, and after-sales support. Those factors became the basis for defining various market segments. The most profitable segment was of course the large volume one in which Xerox was the market leader. Thus a gap existed between the companies’ performance and the opportunity in terms of small volume copier market. In other words companies around the world were placing a high value on getting a small, relatively inexpensive personal copier and thus an easy-to-use, durable, low priced, and maintenance-free small copier awaited innovation. Canon approached the problem by assembling a task force of 200 people and developed a series of core products; disposable cartridges, instant toner fusers, and other components to decrease the size as well as the cost. Thus, an entirely new product was born which was reliable and required less servicing. This product was developed and launched in less than 3 years, which really put Canon towards becoming a competent player in printer technology.
- A hospital in Singapore, Mount Elizabeth Hospital, is well known for organ transplantations. That is the core competency of this hospital. This hospital may as well have doctors and nurses from various countries to create a multi-ethnic workforce for better communication with a better patient management. That would be their core competency
Arguments and examples against core competency?
Prahalad’s paper in 1990 was in many ways ground breaking. This concept changed the paradigm of strategic consulting. The whole western management shifted from the rigid strategic guideline of Michael Porter to a more fluid strategic intent. However two decades after the introduction of this concept we are shifting again. The market now is much more dynamic in the presence of rapidly changing markets and user needs. China’s low cost manufacturing and research capabilities can wreak on any manufacturing organizations worldwide.
Changing consumer needs are making companies take help of smaller and design companies even for their core products. For example, Apple bought SIRI and Nike taking help of Apple in creating a digital experience for its customers. Netflix, though their core competency is said to be content delivery, but they are now venturing into original content creation too.
In my opinion, these examples can’t be taken as argument against core competencies keeping in mind the short term time horizon they are being applied to.
Core competency is a fairly hard concept to grasp. The resources and patience required for the development of even a single competency is huge. A strategic mindset and focus on achieving a long term global leadership is important to develop a strategic intent.
We think our readers should kind in mind one thing. Core competencies are needed to develop a global leadership and long term competitive advantages. A company may be highly profitable even without developing a core competency, but only for a short period of time.