Introduction
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 where 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 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 it self.' C K Prahalad
and G Hamel 1990
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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:
What does the Core Competence
Achieve?
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Comments / Examples
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Provides potential access to a
wide variety of markets
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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
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Makes a significant contribution
to the perceived customer benefits of the end product
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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)
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Difficult for competitors to
imitate
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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
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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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