Core Competence is the term coined by C K Prahalad and Gary Hamel, in their 1990 article entitled, “The Core Competence of the Corporation“, to explain how some Japanese corporations, such as Sony and Canon, became world market leaders after acquiring several technological capabilities, which allowed these firms to create and lead new markets, since innovative product functionalities and customer interfaces were offered.
A core competence is a bundle of skills and technologies that enable a company to provide superior value to customers. A core competence is effectively a company’s specialized capability to create unique customer value. This capability is largely embodied in the collective knowledge of its people and the organizational procedures that shape the way employees interact. Over time, investments made in facilities, people and knowledge that strengthen core competencies, create sustainable sources of competitive advantage.
“Core competencies are the collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies…core competence is communication, involvement and a deep commitment to working across organisational boundaries…core competence does not diminish with use. Unlike physical assets, which do deteriorate over time, competencies are enhanced as they are applied and shared.” – C K Prahalad and Gary Hamel.
A core competence should not be equated with a single skill or discrete technology. If a company identifies too many competencies, it is probably referring to discrete skills. At the same time, if it identifies only one or two competencies, the level of aggregation is too broad. Typically, a firm may have between five and 15 core competencies.
Skills which are a pre-requisite for becoming an industry player, should not be confused with core competencies. A core competence is also not a physical asset. For instance, a factory, a distribution channel, brand or patent cannot be referred to, as a core competence. The ability to manage these assets may, however, be a core competence.
A core competence should:
- Provide significant and appreciable value to customers, relative to competitor offerings;
- Be difficult for competitors to imitate or procure in the market;
- Enable a company to move into new markets or to develop new technologies.
Core competencies are not product specific. They can and should be leveragable to create new products/ services. Indeed, a core competence is truly core when it forms the basis for entry into new product lines/ businesses. Sony’s core competence in miniaturization has enabled it to develop a range of popular consumer products. Reliance Industries’ core competence in project management has enabled it to complete many complicated projects that span across industries ahead of schedule.
By understanding core competencies, a firm can identify which businesses to strengthen and which to divest. Identification of core competencies can also lead to greater clarity on potential entrants into the industry who may be using similar core competencies to make other products.
To sustain competitive advantage, competencies need to score well on four dimensions:
- Appropriability: The degree to which the profits earned by a competence can be appropriated by someone other than the firm in which the profits were earned. The lower the appropriability of the asset, the more sustainable the profits.
- Durability: How durable is the competence as a source of profit? Shortening product and technology life cycles make most competencies less durable than they were, a decade earlier.
- Transferability: The easier it is to transfer the core competencies and resources, the lower the sustainability of its competitive advantage.
- Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a competitor, to construct a nearly identical set of capabilities, the competitive advantage is not sustainable.
For sustainable competitive advantage, managers should invest time, effort, and resources in developing their critical competence. The first step towards developing critical competence is to understand that such a competence exists and realize that it makes a difference to the competitive advantage of the firm.
Some management scholars feel that core competence has several limitations. It is more useful in explaining why something has gone right or wrong and less useful in predicting what will be right or wrong. For instance, Clayton Christensen, the innovation guru, feels that core competence is too internally focused. Instead of asking what they are good at, companies must ask what customers value. Accordingly, they must develop new competencies when circumstances demand, instead of continuing to exploit existing ones. Prahalad, himself, has warned of core competencies becoming core rigidities. A dramatic structural change in an industry can substantially reduce the value of a core competence. That is why, it is important to assess the value of a core competence by the benefits it generates for customers rather than the technicalities underlying the core competence.
- The Core Competence of the Corporation (Harvard Business Review)