In order to explore the link between core competency and competitive advantage, it is crucial to understand the implications of both terms. Competitive advantage could imply exploitation of resources resulting in an organisation’s distinctive position compared to competition. While most firms view the attainment of competitive advantage as earning greater investment returns, it can comprise of various aspects, for instance, enhancing environmental impact or capturing a greater market share can be viewed as a source of competitive advantage for a particular firm. Porter (1985) defined competitive advantage as the value delivered by a firm’s products that exceeds costs of creating that value. In this context, competitive advantage was achieved by a firm through adoption of either a differentiation or cost leadership strategy.
However, competitive advantage does not solely rely upon implementation of value creating activities as the notion undermines and sometimes ignores to account for the potential of competitors. Therefore the concept of distinctive/core competency was explored by Prahalad and Hamel (1990) who described it as the distinctive knowledge, capabilities and skills, of a firm that differentiate it from competitors. These unique capabilities could incorporate anything from a firm’s value creating strategy to its organisational culture. Core competency notion is perceived to create significant value for a firm that competitors cannot imitate or exploit in the long run. The core competency theory has therefore, added meaning to competitive advantage concept.
Core Competency and Competitive Advantage — The Link
A firm’s competitive advantage reflects its internal competitive context while the core competency inclines towards the broader strategic intent. The development of core competencies by organisations increases their resources returns which deteriorate in value if they are not utilized effectively. Failure to develop such distinctive capabilities can erode a firm’s competitive advantage. Therefore, firms are not only encouraged to develop and exploit unique capabilities but also defend them, in order to distinguish themselves from competitors. Prahalad and Hamel (1990) mention that a ‘competency’ is classified as ‘core’ if it satisfies the following conditions:
- It delivers superior value and extended benefits to customer.
- It assists in unique differentiation of products/services which is inimitable by competitors.
- It explores and provides access to a wide range of markets.
It is obvious that if firms strive to offer superior value to their customers, they will cultivate strong, long term relationships with them that will form the basis of competitive advantage. Similarly if a firm differentiates itself based on its product design or customer service, it will outperform competition provided that these capabilities are distinctive enough to become inimitable by competitors.
Successful firms thrive upon their core competencies and consider them as a source of competitive advantage. Market structure is not rigid and can be modified through long term innovation. This innovation points towards a firm’s ability to shape the market by developing distinct capabilities through innovation in technology that lead towards sustainable products resulting in competitive advantage. The distinctive capabilities of a firm also comprises of the network of relationships with customers, suppliers and similar firm related activities. Therefore core competencies that do result in competitive advantage are the ones embedded in a firm’s structure and culture. Therefore, in a broader perspective, core competencies can emerge from human resources, operation and marketing functions within a firm, with an impact on financial performance that ultimately translates into competitive advantage.
Those firms that shared their unique capabilities internally and defended them from being imitated by competitors, have appeared to achieve and sustain their competitive advantage over a much longer time period. However, a firm might not be successful in maintaining a competitive edge if it fails to develop competencies that are effective enough to compete within a turbulent external and competitive environment. For instance, the current economic crisis has made it more difficult for firm’s to compete within their industry as consumers have become conscious and selective of their purchases. In such a crisis, only those firms attain a competitive edge that continually develop their core competencies taking in account the changing consumer perceptions. Similarly it is argued that if a core competency is not shared throughout the different organisational levels, the capabilities might become unproductive as the end products/service would not be distinctive and competitive position will deteriorate. There exists a dual causal relationship between the two concepts; therefore, it is crucial to discuss how firms apply these theoretical concepts on a practical level. To establish the link between theory and practice, the core competencies of Dell are discussed and how it has lead the company to attain a competitive position within the computer industry.
Mini Case Study: The Case of Dell
Dell is considered as the world’s largest and most renowned manufacturer of PCs. The company specialises in manufacturing, developing, designing and marketing hardware products; mainly computers, mp3 players, printers and the like. Dell operates via a ‘direct sales business model’ which has significantly differentiated the company from its competitors.
The business model of Dell operates through the following system:
- The company accepts orders (mainly comprising of PCs) directly through internet and telephone.
- They then purchase standardized/commoditised parts and components and assemble in accordance with these orders to produce customized hardware.
- PCs constitute 60% of sales while 85% of custom is acquired from corporate customers.
- After sales, service is again provided through internet and telephone.
This model is a depiction of Dell’s strategy that primarily focuses on provision of high quality and value-for-money PCs to its customers. The direct sales channel has always adapted itself to advancements in technology which has enabled it to provide rapid and efficient service to customers. Consequently, the business model has enabled Dell to achieve significant cost advantages because there are no intermediaries involved. Competencies and capabilities are complementary concepts; where the former emphasizes on technological or production expertise at various stages of the value chain, while the latter encompasses the entire value chain. In this context, Dell has not only developed its core competencies but has also transformed them into core capabilities that have added value to all the primary and secondary activities of its value chain. Therefore, Dell’s business model can be viewed as a core capability of the company that has enabled it to develop specific core competencies that are strategically aligned with both internal and external factors. It is due to these competencies that Dell has not only achieved competitive advantage but has sustained it throughout the years.
Another major core competency of Dell is its Just-in-time inventory system that operates in such an efficient manner that inventory lasts only two hours unlike its competitors who have inventories lasting four weeks. The parts ordered by customers come directly to the factory, hence, Dell has no outstanding inventory. Moreover, Dell trains and assigns profit margins and quality and production targets to its staff in order to deliver superior customer value, quickly and efficiently. Therefore it demonstrates the ability to integrate its internal competencies in order to effectively market and deliver products at prices that rivals cannot compete with. As an outcome, Dell’s customers value its products and prefer them to competitors which have established the company’s competitive edge. These competencies are embedded within Dell’s culture and structure and are difficult to imitate by competitors. Competitive advantage can only be sustained when value adding strategy is not simultaneously implemented by competitors and benefits arising from strategic implementation cannot be duplicated. In this context, the inventory system has also enabled Dell to develop and maintain superior supplier relations is another prominent core competency that is perfectly inimitable and has helped the company achieve competitive advantage.
According to Kay’s model of Distinctive Capability (1993) there are two fundamental relationships that can be identified for Dell (i) direct dealing with customers which is linked with its procurement policy and then (ii) with suppliers. The way they have integrated these can be considered a distinctive arrangement of their architecture which enables them to achieve innovations in supply and distribution channels and good brand reputation- for efficiency/speed/value and therefore reduce the propensity of customers to switch.
Therefore, by developing unique capabilities through efficient business processes, Dell has been able to attract and retain its customers, suppliers and investors, enabling the company to achieve competitive advantage. This analysis reinforce the notion that core competencies and competitive advantage are interdependent. However not all competencies are core and they might not result in competitive advantage.