“The diversified corporation is a large tree. The trunk and major limbs are core products, the smaller branches are business units; the leaves, flowers, and fruit are end products. The root system that provides nourishment, sustenance, and stability is the core competence.”
–C.K. Prahalad & Gary Hamel
The main ideas about Core Competence were developed by management thinkers C.K. Prahalad and Gary Hamel through a series of articles in the Harvard Business Review starting with their 1990 article in it called “The Core Competence of the Corporation”. They defined Core Competencies as “the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”. Alternatively, core competencies can be thought of as things that a company can do uniquely well, and which no one else can copy quickly enough to affect competition. In short, core competencies help you avoid being a “me too” business that finds it hard to compete in the marketplace.
Prahalad and Hamel argued that core competencies are the source of competitive advantage and enable the firm to introduce an array of new end products and services. For example, the core competencies of Walt Disney World Parks and Resorts are (1) Animatronics and show design, (2) Storytelling, story creation, and themed parks, and (3) Efficient operation of theme parks.
The following three tests can be applied to know whether something is a true core competence or not in a company:
- Relevance: It should make a significant contribution to the perceived customer benefits of the end product. To know this aspect, ask questions like “why is the customer willing to pay more or less for one product or service than another?” “What is a customer actually paying for?” (That is, for what benefit he sees in it.) For example, Honda’s core competence in engines and power trains gave it a definite advantage in the businesses of cars, motorcycles, lawn mowers, and generators. Canon’s core competencies in optics, imaging, and microprocessor controls allowed it to enter and lead in markets as seemingly diverse as copiers, laser printers, cameras, and image scanners.
- Difficulty of imitation: It should be difficult for competitors to imitate. It will be difficult if it is a complex synthesis of individual technologies and production skills. A competitor could acquire some of the technologies that comprise the core competence, but will not find it easy to duplicate the collective learning and integrate and coordinate diverse technologies and production skills. For example, Dell’s strong position in the personal computer market is due to its core competencies of online customer “bespoking” of each computer built, minimization of working capital in the production process, and high manufacturing and distribution quality, leading to reliable products at competitive prices.
- Breadth of application: It should provide potential access to a wide variety of markets. For instance, Casio had competence in display systems, which enabled it to participate in such diverse businesses as calculators, miniature TV sets, monitors for laptop computers, and automotive dashboards.
Core competencies come in many forms: technology, managerial expertise, human resource management, corporate culture, marketing strategy, product quality, after-sales service, etc. Hence, heavy investment in R&D is not necessarily the route to developing core competencies. Technology can always be acquired through licensing or strategic alliances.
To identify the core competencies of your organization, (1) identify what factors your customers value, (2) identify your strengths and competencies based on what your customers value, (3) evaluate them with respect to the three tests given above, and (4) list out the strengths and competencies that have passed the test; those will be your core competencies.
Generally speaking, a business or organization will have no more than 5-6 fundamental core competencies. Core competencies do not diminish with use, and may be enhanced as they are applied and shared. Nevertheless, they need to be nurtured and protected for lasting competitive advantage. Core competencies need to be built through a process of continuous improvement and enhancement that may span several years.