A core competency is something that a firm can do well and that meets the following three conditions specified by Gary Hamel and C.K. Prahalad (1990):
- Core competency provides consumer benefits
- Core competency is not easy for competitors to imitate
- Core competency can be leveraged widely across many products and markets.
A core competency can take various forms which includes technical or subject matter know how which is a reliable process. This also includes close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture such as the dedication of employees. Many theories of modern business suggest that most activities that are not part of a company's core competency should be outsourced.
A sustainable competitive advantage can be said to exist when core competency may produce a long term advantage.
Development of the Core Competency Concept
This concept was introduced by Hamel & Prahalad in a 1990 Harvard Business Review article. They wrote that it is an area of specialized expertise that is the result of harmonising complex streams of technology and work activity. As an example they gave Honda's expertise in engines where it enabled them to develop a variety of quality products from lawn mowers and snow blowers to trucks and automobiles. To take an example from the motor industry, it has been claimed that Volvo's core competency is safety. But is this the end result in terms of customer benefit? Their core or main competency might be more about their ability in the design of high protection components, or their research into market demands concerning safety.
Ever since Prahalad and Hamel introduced the term in the 1990's many researchers have tried to highlight and further illuminate the meaning of core competency. According to D. Leonard-Barton (1992), Capabilities are considered core if they differentiate a company strategically. On the other hand, to quote Galunic and Rodan (1998), ... a core competency differentiates not only between firms but also inside a firm, it differentiates amongst several competencies. In other words, a core competency guides a firm recombining its competencies in response to demands from the environment.
To take an example: Black and Decker's core product is their electric motor. Most subsequent end products are modifications of this basic technology. (Obviously not their work benches, battery charging systems, coffee percolators etc.)
They produce products for the home workshop, home cleaning and the kitchen appliance markets:
- small electric motors which are used to produce drills, sanders, circular saws, routers, rotary tools, drivers and polishers
- small electric motors for vacuum cleaning, etc.
- small electric motors which are used to produce can openers, food processors, blenders, bread makers, and fans.
Characteristics of Core Competencies
There are three tests for Core Competencies:
- Potential access to a wide variety of markets - the core competency must be capable of developing new products and services
- A core competency must make a significant contribution to the perceived benefits of the end product.
- Core Competencies should be difficult for competitors to imitate. In many industries, such competencies are likely to be unique.
Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required for them to be carried out. So the goal is for management to focus attention on competencies that really affect competitive advantage.
The Work of Hamel and Prahalad
The main ideas about Core Competencies where developed by C.K. Prahalad and Gary Hamel through a series of articles in the Harvard Business Review followed by a best-selling book - Competing for the Future. Their central idea is that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth. In the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible - indeed, they'll have to rethink the concept of the corporation itself. C K Prahalad and G Hamel 1990
|What does the Core Competence Achieve?
|Comments / Examples
|Provides potential access to a wide variety of markets
|The key core competencies here are those that enable the creation of new products and services.
|Example: Why has Saga established such a strong leadership in supplying financial services (e.g. insurance) and holidays to the older generation?
|Core Competencies that enable Saga to enter apparently different markets:
|Clear distinctive brand proposition that focuses solely on a closely-defined customer group
|Leading direct marketing skills - database management; direct-mailing campaigns; call centre sales conversion
|Skills in customer relationship management
|Makes a significant contribution to the perceived customer benefits of the end product
|Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for?
|Example: Why have Tesco been so successful in capturing leadership of the market for online grocery shopping?
|Core competencies that mean customers value the Tesco.com experience so highly:
|Designing and implementing supply systems that effectively link existing shops with the Tesco.com web site
|Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient
|Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling)
|Difficult for competitors to imitate
|A core competence should be "competitively unique": In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as "core", a competence should be something that other competitors wish they had within their own business.
|Example: Why does Dell have such a strong position in the personal computer market?
|Core competencies that are difficult for the competition to imitate:
|Online customer "bespoking" of each computer built
|Minimisation of working capital in the production process
|High manufacturing and distribution quality - reliable products at competitive prices