Core competency

A core competency is something that a firm can do well and that meets the following three conditions specified by Hamel and Prahalad (1990):

1. It provides customer benefits
2. It is hard for competitors to imitate
3. It can be leveraged widely to many products and markets.

A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture such as employee dedication. Modern business theories suggest that most activities that are not part of a company's core competency should be outsourced.

If a core competency yields a long term advantage to the company, it is said to be a sustainable competitive advantage.

Development of the Concept

The concept of core competencies was developed in the management field. C.K. Prahalad and Gary Hamel introduced the concept in a 1990 Harvard Business Review article. They wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." As an example they gave Honda's expertise in engines. Honda was able to exploit this core competency to develop a variety of quality products from lawn mowers and snow blowers to trucks and automobiles. To take an example from the automotive industry, it has been claimed that Volvo’s core competency is safety. This however is perhaps the end result of their competency in terms of customer benefit. Their core competency might be more about their ability to source and design high protection components, or to research and respond to 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, "Capabilities are considered core if they differentiate a company strategically." On the other hand Galunic and Rodan (1998) argue that "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."

Individual versus Core Competencies

It is important to distinguish between individual competencies or capabilities and core competencies. Individual capabilities stand alone and are generally considered in isolation. Gallon, Stillman, and Coates (1995) made it explicit that core competencies are more than the traits of individuals. They defined core competencies as "aggregates of capabilities, where synergy is created that has sustainable value and broad applicability." That synergy needs to be sustained in the face of potential competition and, as in the case of engines, must not be specific to one product or market. So according to this definition, core competencies are harmonized, intentional constructions.

Coyne, Hall, and Clifford (1997) proposed that "a core competence is a combination of complementary skills and knowledge bases embedded in a group or team that results in the ability to execute one or more critical processes to a world class standard." Two ideas are especially important here. The skills or knowledge must be complementary, and taken together they should make it possible to provide a superior product."

For example, Black and Decker's core technological competencies pertain to 200 to 600 W electric motors, and this motor is their core product. All of their end products are modifications of this basic technology (with the exception of their work benches, flash lights, battery charging systems, toaster ovens, and coffee percolators).

They produce products for three markets:

1. the home workshop market: In the home workshop market, small electric motors are used to produce drills, circular saws, sanders, routers, rotary tools, polishers, and drivers
2. the home cleaning and maintenance market: In the home cleaning and maintenance market, small electric motors are used to produce dust busters, etc.
3. the kitchen appliance market: In the kitchen appliance market, small electric motors are used to produce can openers, food processors, blenders, bread makers, and fans.

Characteristics of Core Competencies

There are three tests for Core Competencies

1. Potential access to a wide variety of markets - the core competency must be capable of developing new products and services
2. A core competency must make a significant contribution to the perceived benefits of the end product.
3. Core Competencies should be difficult for competitors to imitate. In many industries, such competencies are likely to be unique

References

• Coyne, Kevin P.; Hall, Stephen J. D.; Clifford, Patricia Gorman (1997) "Is your core competence A MIRAGE?", McKinsey Quarterly, 1997 Issue 1, p40-54, 15p, 1c; (AN 9707212358)
• Gary Hamel and C. K. Prahalad, (1990) "The Core Competence of the Corporation", Harvard Business Review, vol. 68, no. 3, May-June 1990, pp 79-93.
• Galunic, D.C. and Rodan, S. (1998). "Resource recombinations in the firm: knowledge structures and the potential for Schumpeterian innovation". Strategic Management Journal vol 19. p. 1193-1201.
• Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading Multinational Companies", California Management Review, vol 40, no. 4, pp. 117-132.

source: http://en.wikipedia.org/