Core Competencies

 

Introduction and definition

Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.

This is how the management theory of “core competencies” was unveiled to the world by C. K. Prahalad and Gary Hamel, both influential business-thinkers, in an article in the Harvard Business Review in 1991, titled “The Core Competencies of the Corporation.”

“Core competencies” stand for what a corporation does best, its expertise in its field of business, and the uniqueness of its products in the eyes of its customers.

Core competencies reflect the fundamental knowledge and technical skills that make a corporation and its products “special.” The core competencies of a corporation help it distinguish itself from its rivals and seize a competitive advantage in the marketplace.
 

Importance of core competencies for business

In their highly analytical, but also eminently readable, article, Prahalad and Hamel compared a few well-known corporations to show how some of them were able to build new fortunes while some others lost their markets, because of their ability or inability to “identify, cultivate, and exploit” their core competencies.

They predicted that managers in the coming decades would succeed or fail depending on their ability to leverage the core competencies of their corporations. The critical task of managers was to develop organisations capable of infusing products with “irresistible functionality,” or, even better, create “products that customers need but have not yet even imagined.”

‘It’s about people’

Core competence is about dovetailing technology streams but also about the organisation of work and workforce and the delivery of value. Prahalad and Hamel pointed out that core competencies were about people:

Core competence is communication, involvement, and a deep commitment to working across organizational boundaries.

For example, world-class research in lasers or ceramics can take place in a corporate laboratory without, unfortunately, having an impact on any of the businesses of the company.

The skills that make up core competence must “coalesce around individuals whose efforts are not so narrowly focused that they cannot recognize the opportunities for blending their functional expertise with those of others in new and interesting ways.”

In other words, the scientist in the ceramic lab should be able to team up with talented people across departments and units if the company is to develop a core competence.
 

Myopic strategies

Many Western corporate managements of the time (1980s to early ’90s), Prahalad and Hamel rued in their article, hardly thought of competitiveness in terms of core competencies, and these managements risked huge losses down the road because of this lapse.

They were trapped in the mindset of SBU (strategic business unit) management and either outsourced core processes or sold them to OEMs (original equipment manufacturers) instead of preserving and developing these processes for their corporations’ own good.

Giving examples, the authors said that some US corporations wound up TV manufacturing, thinking that they would not be able to compete with low-price, high-quality products from Japan and Korea.

But by doing so, they lost their core competence in video technology, and were unable to take advantage of the digital TV market later.

According to Prahalad and Hamel, corporations should be organised into a portfolio of core competencies rather than a portfolios of end products. They should develop a “strategic architecture” to prepare a plan for building core competencies and finding the resources necessary, the authors suggested.
 

Core products, end products

Core Competencies
Core competencies lead to the development of what Prahalad and Hamel called “core products,” which are not directly sold to consumers but are used to make end-user products.

Prahalad and Hamel thought of the diversified corporation (say, Honda) as a tree, with its roots as its core competencies (know-how and ability to produce lightweight engines, in Honda’s case).

  • The trunk and major branches represent the core products (Honda’s lightweight engines).
  • The smaller branches are the business units (units that manage Honda’s portable-generator business).
  • The fruits and flowers (generators) are the end products sold to customers.

 

Identifying and building core competencies for business

Prahalad and Hamel mentioned three tests to identify core competencies in a company:

(1) Core competencies gives potential access to a wide variety of markets—for example, competence in optics made Canon a market leader in not only cameras but also laser printers.

(2) They contribute significantly to end-product benefits—for example, Honda’s engines initially powered portable generators and later motorcycles and cars.

(3) They are difficult to imitate—for example, Sony’s ability to miniaturise electronics.

In order to build core competencies, a corporation should

  • understand which of its abilities customers value the most
  • develop an intra-organisational think tank to isolate key abilities and make a plan to transform them into strengths across various departments
  • depute key personnel (“competence carriers”) and allocate funds to building core competencies for the organisation as a whole
  • integrate technologies and coordinate diverse production skills
  • opt for strategic alliances, acquisition, or licensing arrangements to strengthen core competencies
  • observe competitors active in the same market to ensure that the core competencies being built are unique
  • preserve the pursuit of developing core competencies even in the wake of organisational changes

In order to identify core competencies and build them, it is also necessary to understand what they are not. Core competencies are not necessarily about outspending competitors in research spending, opting for vertical integration, cutting costs by sharing resources among a corporation’s business units, or outsourcing non-core processes to focus on core functions.

These may help, but by themselves they are not adequate to build core competencies.
 

Why build core competencies?

Core competencies go into the making of corporate strategies. They are also used to

  • improve a corporation’s position in its own market and also develop new markets
  • integrate strategic thinking across all wings
  • decide allocation of resources
  • refine decisions on outsourcing, sale or disinvestment of divisions

Corporations that fail to exploit their core competencies are condemned to compete with their rivals on the basis of their product price.

When this strategy fails, they find themselves ousted from the market. They may then start thinking of core competencies, but that may be too late.

Building core competencies is an ambitious enterprise. Once built, they are strengthened by their constant use and deployment. “But competences still need to be nurtured and protected; knowledge fades if it is not used,” Prahalad and Hamel point out.
 

Major Topics in Business Strategy

Introduction to Strategic Management
SWOT Analysis
PEST Analysis
Horizontal and Vertical Integration Strategy
Porter’s Five Forces Analysis
GE McKinsey Matrix
MECE Framework
BCG Growth Share Matrix
Business Strategy Simulation Games
Management Consulting

Back to the top: MBA Syllabus

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