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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 to undertake them. 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 were developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a best-selling book - Competing for the Future.Their central idea was 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 it self.' C K Prahalad and G Hamel 1990|
These areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products.
For example, for a manufacturer of electronic equipment, key areas of expertise could be in the design of the electronic components and circuits. For a ceramics manufacturer, they could be the routines and processes at the heart of the production process. For a software company the key skills may be in the overall simplicity and utility of the program for users or alternatively in the high quality of software code writing they have achieved.
Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.
Identifying Core Competencies
Prahalad and Hamel suggest three factors to help identify core competencies in any business:
(1) 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
(2) 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)
(3) 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
A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence, as it will not differentiate the business from any other similar businesses. For example, a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However it is possible to develop such a process into a core competence with suitable investment in equipment and training.
It follows from the concept of Core Competencies that resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.
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