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Core Competence & Its Role In Differentiation

In this article I will look at the idea of core competence as developed by CK Prahalad and Gary Hamel in their classic Harvard Business Review article The Core Competence of the Corporation and their book, Competing For The Future.

Core Competence & Resource Based Strategy

Very important work was done in the early nineties by academic strategists following the resource based view of strategy as the true origin for competitive advantages that deliver superior profits.

Unfortunately there was little agreement in terminology, so we have resources, competence, competencies and capabilities being used almost interchangeably which can create some confusion.

In this article I’ll try to stick to the Prahalad and Hamel version (but add my own thoughts on what it means for differentiation) and write further articles looking at related concepts.

Core Competence & Competencies According To CK Prahalad & Gary Hamel

If you want the full details, you should read Competing For The Future.

Core Competence & Corporate Strategy

While I have a preference for looking at competitive strategy through the lens of an individual business competing in a product-market against competitors, Gary Hamel and CK Prahalad put a convincing argument forward that corporations should be built around shared competences which open up opportunities to compete in the new markets of the future.

Since many groups manage linkages across business units badly, it is a challenge to make the most of current competencies, let alone to deliberately develop competencies which may be useful for the future, somewhere, sometime.

Any corporation that does, can expect to have created a powerful advantage if the competence can be applied.

What is A Core Competence?

Hamel and Prahald define it as…

“A core competence is a bundle of skills and technologies that enable a company to provide a particular benefit to customers.”

A common example quoted is Sony who with products like the Walkman provide the customer benefit of “pocketability” and draw on the core competence of miniaturisation.

This link between customer benefit and core competence is important. The idea is not to develop special skills for the sake of it but to establish a class leading position in a key attribute of customer value across multiple product-market opportunities.

It is a bundle of skills and technologies and not a single, discrete skill which might be more rapidly overtaken. It’s also not likely to reside with one person or a small team.

Core Competences Are Difficult To Develop

The very fact that core competences are difficult to develop and build upon both new innovations and continuous learning and development means that competitors find it difficult to imitate, providing an opportunity for building a sustainable differentiation advantage.

Competition for competencies is between corporations. Each may be competing with different corporations across different competencies.

Losing leadership in a core competence can be very damaging since it potentially undermines many current and future product-market positions. It requires commitment and efforts can be undermined by short term management decisions and constant changes in the senior management team of the corporation.

A Hierarchy Of Competencies

If you try to analyse your competencies, expect to find five to fifteen. More and you’re looking at individual skills, less and you’re probably generalising too much.

Hamel and Prahalad use Fedex to explain a hierarchy of competencies from the mega-competency of logistics, through core competencies like package tracking to constituent skills like barcoding.

The Core Competence Test

There are three tests to establish whether a competence is a core competence:

  1. Does it make a disproportionate contribution to customer perceived value?
  2. Is it competitively unique (ie. not an industry wide key success factor) or does the company have a competence which is significantly better than all the other competitors or could be developed to be excellent?
  3. Can the competence be applied in multiple product-markets?

Competition For Competence

If you tend to think of competitive strategy, you’ll think of competition in terms of profit and market share but a different view is needed if you are going to use the core competencies idea.

Prahalad and Hamel argue that competition for competence happens at four levels:

  1. Competition to develop skills and technologies which are the ingredients of the core competence cake.
  2. Competition to mix the core competence cake in the right proportions
  3. Competition to maximise production of an intermediate  product which embodies the core competence and can be sold to many original equipment manufacturers.
  4. Competition to maximise share in the final product-markets where the core competence brings customer benefits.

It’s number 3 that is controversial.

If you’ve successfully developed a core competence which can be applied in many product-markets, you’re now letting your competitors share in the benefits in return for a share of their profit.

This can be a difficult decision to accept since it erodes your competitive advantage in the final product-market or a more positive interpretation is that it puts pressure on your marketing and sales operations to be as good or better than your competitors rather than relying on the advantage that comes from the core competence.

If competitors don’t want to buy it, then the core competence is more in the mind of the management team than the market.

However, the big advantage of selling the intermediate product is that it extends your advantage in your core competence. It meets new challenges that create spurs for innovation, it creates extra economies of scale and pushes the business down the experience curve faster and it makes it much more difficult for a competitor to imitate.

Customers of the intermediate product can become dependent which gives the supplying business significant market power.

What Do You Think About Core Competence?

I’d like to know what you think about the core competence theory for corporate strategy put forward by Gary Hamel and CK Prahalad in their book Competing For The Future.

Theoretically I like it and I can see the logic but my bias is towards business unit strategy and the capabilities that underlie customer value benefits that apply in one product market or a series of very closely related markets.

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