For any organization, its core competency refers to the capabilities, knowledge, skills and resources that constitute its "defining strength." A company's core competency is distinct, and therefore not easily replicated by other organizations, whether they're existing competitors or new entrants into its market.
An organization's core competencies -- sometimes called core capabilities or distinctive competencies -- explain what it can do better than any other company, and why. These capabilities provide a strong foundation from which the business will deliver value to customers and stakeholders, seize new opportunities and grow. They set the company apart from its peers and help create a sustained competitive advantage in its industry or sector.
A company can have one or more organization-wide core competencies, such as the following:
Each competency is a positive characteristic that contributes to the company's unique positioning. Having and using them matters because they can make it quite difficult for competitors to exactly duplicate the company's offerings or replicate its success. This is why identifying core competencies is a crucial step in strategic planning.
Which core competencies matter most varies by industry. A company's ability to stand out in those competencies, and ideally uniquely combine them with other competencies, can give it competitive advantage over its industry peers.
For example, Southwest Airlines built and still has a strong position in the competitive airline industry by focusing on its core competencies. As detailed in Mukund Srinivasan's airline industry blog post, those competencies are keeping operational costs low (largely but not entirely through route efficiency), delivering award-winning customer service and creating a fun work culture that promotes employee loyalty.
Many of the world's largest and most successful companies (see more real-world examples below) got there through similar focus on their core competencies.
Evolution of the idea of core competency
The concept of core competency is widely accepted today. But contrary to popular belief, it's not an old idea. It was first proposed in 1990 in the HBR article "The Core Competence of the Corporation" by C.K. Prahalad and Gary Hamel. In this classic, influential piece, the authors suggest a company's core competence is the "most powerful way to prevail" in global commerce and "adapt quickly to changing opportunities."
Evaluating business managers and leaders based on their ability to "identify, cultivate, and exploit the core competencies that make growth possible" quickly became prominent. In the 1980s, the focus was on streamlining, restructuring and decluttering organizations. According to Prahalad and Hamel, successful enterprises viewed themselves as "a portfolio of competencies versus a portfolio of businesses."
This approach encouraged business leaders to rethink the concept of the corporation itself. The authors also noted that a core competence encompasses collective learning, technology integration, communication, leadership and a commitment to working across the organization's boundaries.
In recent years, a variation on core competence has emerged, with the focus on individuals. This idea suggests that job seekers should develop their personal core competencies or specific abilities to stand out in the job market.
These include the following:
- analytical abilities
- communication skills
- digital literacy
- problem-solving
- decision-making
- interpersonal/relationship-building skills
- cultural competency
- business acumen
3 key characteristics of a core competency
Prahalad and Hamel, in that HBR article, list the following three primary conditions a business activity must satisfy to be considered a core competency:
- It must provide superior value (e.g., benefits) to the customer or consumer.
- It should provide potential access to a wide variety of markets.
- It should not be easy to replicate or imitate.
The authors cite Honda to illustrate the concept. According to them, Honda's core competencies in engines and power trains enabled the company to deliver superior benefits to its customers. These capabilities gave Honda competitive advantages in the car, motorcycle, lawn mower and generator businesses. At the time, no other company could match Honda's unique and powerful capabilities.
Sources of core competencies
Contributions to a company's core competencies can come from its:
- people
- capital
- brand equity
- assets
- intellectual property
For long-term growth and success, it's important for an organization to develop and nurture all these elements. It should consistently invest its resources on building and maintaining the skills that contribute to its core competencies. It must identify and isolate its best abilities that can provide a competitive advantage -- as Southwest Airlines did with operational costs -- and then develop them into organization-wide strengths.
Furthermore, the company's development strategy should focus on developing these skills and strengths in ways that are unique from competitors and deliver enhanced value to customers -- as Southwest did with superior service and a fun work culture.
To focus resources on core competencies and strengthen their competitive position, companies can outsource or divest areas that fall outside their primary expertise. Such streamlining was in focus, as Prahalad and Hamel pointed out, in the 1980s; it remains relevant today.
Organizations should constantly devote resources to developing and preserving skills that support their core competencies.More real-world examples of core competencies
Three of the best examples of companies that have enjoyed sustained success by focusing on their core companies are the following:
McDonald's best core competence is its ability to standardize its food service and delivery processes. Every McDonald's offering tastes and looks exactly the same, regardless of its geographical location or outlet -- after accounting for local tastes and exceptions. Since customers always know what they will get when they order a Big Mac or Chicken McNuggets, they trust the brand. That trust continues to drive McDonald's success.
Apple has a unique ability to design and produce electronic devices that appeal to consumers' esthetic sensibilities and material aspirations, such as the iPhone, iMac and iPad. Each product boasts attractive visual esthetics and tactile appeal that have allowed Apple to achieve the status of the world's most valuable company in current market capitalization.
Walmart has the buying power that even its closest competitors cannot match. The company's massive supply chain operations allow it to buy products in bulk and at low rates, and then undersell its competitors to attract and retain more customers.
Every business must aim to maximize its core competencies in every area of operations, including advertising or reputation management, marketing or human resource management, sponsorship and strategic management. This holistic approach will empower a company to pursue long-term growth and success. In addition, it must develop more than one competency to maintain and improve its competitiveness and unique market position.
Competing For Advantage Chapter 4 – The Internal Organization: Resources, Capabilities, and Core Competencies
Outcomes from Organizational Analyses
Factors that Determine Sustainability of Competitive Advantage Rate of core competence obsolescence Availability of substitutes Imitability of core competence
Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies.
Creating Value Key Terms Value – measured by a product's performance characteristics and by its attributes for which customers are willing to pay
Resources, Capabilities, and Core Competencies Resources – the source of a firm's capabilities Capabilities – the source of a firm's core competencies Core competencies – the basis for a firm’s competitive advantages in the marketplace
Components of Internal Analysis Leading to Competitive Advantage and Value Creation
Resources Key Terms Tangible Resources – assets that can be observed and quantified Intangible Resources – assets that are typically rooted deeply in the firm's history and have accumulated over time
Resources Key Terms (cont.) Reputation – level of awareness a firm has been able to develop among stakeholders Social Capital – relationships with other organizations that contribute to the creation of value
Resources Key Terms (cont.) Strategic Value of Resources – degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage
Tangible Resources
Intangible Resources
Increasing Value of Intangible Resources Less visibility and less imitable More sustainability More leverage within network of users
Capabilities Key Terms Capabilities – firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state
Examples of Firm’s Capabilities
Core Competencies Key Terms Core Competencies – resources and capabilities that serve as sources of competitive advantage for a firm over its rivals
Core Competencies – Features Resources that emerge within a firm over time The capacity of an organization to take action The activities that a firm performs well relative to its competitors A representation of a firm's resources and capabilities—including only those with strategic value
Core Competencies – Features (cont.) Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace
Tools for Building Core Competencies Four Criteria of Sustainable Competitive Advantage Value Chain Analysis
Four Criteria of Sustainable Competitive Advantage Valuable Capabilities Rare Capabilities Costly-to-Imitate Capabilities Nonsubstitutable Capabilities
Four Criteria of Sustainable Competitive Advantage Key Terms Valuable Capabilities – allow the firm to exploit opportunities or neutralize threats in its external environment Rare Capabilities – possessed by few, if any, current or potential competitors Costly-to-Imitate Capabilities – cost for other firms to develop is prohibitive, cannot easily be developed by other firms Nonsubstitutable Capabilities – do not have strategic equivalents
Four Criteria for Determining Core Competencies
Core Competencies as a Strategic Capability
Costly-to-Imitate Capabilities Unique historical conditions Causal ambiguity Social complexity
Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Value Chain Analysis Key Terms Primary Activities – involved with a product's physical creation, its sale and distribution to buyers, and its service after sale Support Activities – provide the support needed by the primary activities to be implemented
The Basic Value Chain
The Value-Creating Potential of Support Activities
Source of Competitive Advantage The resource or capability must allow the firm to perform an activity in a manner superior to the way competitors perform it The resource or capability must allow the firm to perform a value-creating activity that competitors cannot perform
Outsourcing Key Terms Outsourcing – purchase of a value- creating activity from an external supplier
Outsourcing Viability When a firm does not have the capabilities in the areas needed to succeed When a firm lacks a resource or possesses inadequate skills needed to implement a strategy When few organizations possess the resources and capabilities needed for competitive superiority in all primary and support activities necessary to compete When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies
Benefits of Outsourcing Increased flexibility Mitigation of risks Reduced capital investments
Essential Skills for Outsourcing Strategic thinking Deal making Partnership governance Managing change
Core Competencies – Cautions Never assume that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities – former core competencies that now generate inertia and stifle innovation
Stakeholder Objectives and Power Key Terms Economic Power – comes from the ability to withhold economic support from the firm Political Power – results from the ability to influence others to withhold economic support or to change the rules of the game Formal Power – refers to laws or regulations that specify the legal relationship between a firm and a particular stakeholder group
Returns and Stakeholders High economic returns – firm can more easily satisfy multiple stakeholders simultaneously Average economic returns – firm is unable to maximize interests of all stakeholders Below-average returns – firm must minimize the amount of support withdrawn by stakeholders
Measures of Firm Performance Capital market performance Product market performance Organizational stakeholder performance
Measures of Firm Performance Key Terms Risk – investor uncertainty about the economic gains or losses that will result from a particular investment
Firm Performance from a Capital Market Perspective
Other Measures of Firm Performance
Sustainable Development Key Terms Sustainable Development – business growth that does not deplete the natural environment or damage society