strategy - core competencies

Introduction

Core competencies are those capabilities that are critical to a business achieving competitive
advantage. The starting point for analysing core competencies is recognising that competition
between businesses is as much a race for competence mastery as it is for market position and
market power. Senior management cannot focus on all activities of a business and the
competencies required to undertake them. So the goal is for management to focus attention on
competencies that really affect competitive advantage.

The Work of Hamel and Prahalad

The main ideas about Core Competencies where developed by C K Prahalad and G Hamel
through a series of articles in the Harvard Business Review followed by a best-selling book -
Competing for the Future. Their central idea is that over time companies may develop key areas
of expertise which are distinctive to that company and critical to the company's long term
growth.

'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit
the core competencies that make growth possible - indeed, they'll have to rethink the
concept of the corporation it self.' C K Prahalad and G Hamel 1990

These areas of expertise may be in any area but are most likely to develop in the critical, central
areas of the company where the most value is added to its products.

For example, for a manufacturer of electronic equipment, key areas of expertise could be in the
design of the electronic components and circuits. For a ceramics manufacturer, they could be the
routines and processes at the heart of the production process. For a software company the key
skills may be in the overall simplicity and utility of the program for users or alternatively in the
high quality of software code writing they have achieved.

Core Competencies are not seen as being fixed. Core Competencies should change in response to
changes in the company's environment. They are flexible and evolve over time. As a business
evolves and adapts to new circumstances and opportunities, so its Core Competencies will have
to adapt and change.

Identifying Core Competencies

Prahalad and Hamel suggest three factors to help identify core competencies in any business:

What does the Core Comments / Examples

Competence
Achieve?
Provides potential The key core competencies here are those that enable the creation of
access to a wide new products and services.
variety of markets
Example: Why has Saga established such a strong leadership in
supplying financial services (e.g. insurance) and holidays to the
older generation?

Core Competencies that enable Saga to enter apparently different

markets:

- Clear distinctive brand proposition that focuses solely on a

closely-defined customer group

- Leading direct marketing skills - database management; direct-mailing

campaigns; call centre sales conversion

- Skills in customer relationship management

Makes a significant Core competencies are the skills that enable a business to deliver a
contribution to the fundamental customer benefit - in other words: what is it that causes
perceived customer customers to choose one product over another? To identify core
benefits of the end competencies in a particular market, ask questions such as "why is the
product customer willing to pay more or less for one product or service than
another?" "What is a customer actually paying for?

Example: Why have Tesco been so successful in capturing

leadership of the market for online grocery shopping?

Core competencies that mean customers value the Tesco.com

experience so highly:

- Designing and implementing supply systems that effectively link

existing shops with the Tesco.com web site

- Ability to design and deliver a "customer interface" that personalises

online shopping and makes it more efficient

- Reliable and efficient delivery infrastructure (product picking,

distribution, customer satisfaction handling)
Difficult for A core competence should be "competitively unique": In many
competitors to imitate industries, most skills can be considered a prerequisite for participation
and do not provide any significant competitor differentiation. To qualify
as "core", a competence should be something that other competitors
wish they had within their own business.

Example:Why does Dell have such a strong position in the personal

 computer market?

Core competencies that are difficult for the competition to imitate:

- Online customer "bespoking" of each computer built

- Minimisation of working capital in the production process

- High manufacturing and distribution quality - reliable products at

competitive prices

A competence which is central to the business's operations but which is not exceptional in some
way should not be considered as a core competence, as it will not differentiate the business
from any other similar businesses. For example, a process which uses common computer
components and is staffed by people with only basic training cannot be regarded as a core
competence. Such a process is highly unlikely to generate a differentiated advantage over rival
businesses. However it is possible to develop such a process into a core competence with suitable
investment in equipment and training.

It follows from the concept of Core Competencies that resources that are standardised or easily
available will not enable a business to achieve a competitive advantage over rivals

Wiki pedia

A core competency is a specific factor that a business sees as being central to the way it, or its
employees, works. It fulfills two key criteria:

1. It is not easy for competitors to imitate

2. 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.[1] It may also include
product development or culture, such as employee dedication.

Core competencies are particular strengths relative to other organizations in the industry which
provide the fundamental basis for the provision of added value. Core competencies are the
collective learning in organizations, and involve how to coordinate diverse production skills and
integrate multiple streams of technologies. It is communication, an involvement and a deep
commitment to working across organizational boundaries. Few companies are likely to build
world leadership in more than five or six fundamental competencies.
For an example of core competencies, when studying Walt Disney World - Parks and Resorts,
there are three main core competencies

The value chain is a systematic approach to examining the development of competitive advantage. It
was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of
activities that create and build value. They culminate in the total value delivered by an organization. The
'margin' depicted in the diagram is the same as added value. The organization is split into 'primary
activities' and 'support activities'.

Core Competence

A core competence is the result of a specific unique set of skills or production techniques that
deliver value to the customer. Such competences empower an organization to access a wide
variety of markets. Executives should estimate the future challenges and opportunities of the
business in order to stay on top of the game in varying situations.

In 1990 with their article titled The Core Competence of the Corporation, Prahlad and Hamel
illustrated that core competencies lead to the development of core products which further can be
used to build many products for end users. Core competencies are developed through the process
of continuous improvements over the period of time. To succeed in an emerging global market it
is more important and required to build core competencies rather than vertical integration. NEC
utilized its portfolio of core competencies to dominate the semiconductor, telecommunications
and consumer electronics market. It is important to identify core competencies because it is
difficult to retain those competencies in a price war and cost cutting environment. The author
used the example of Vikers to demonstrate how to integrate core competences using strategic
architecture in view of changing market requirements and evolving technologies. Management
must realize that stakeholders to core competences are an asset which can be utilized to integrate
and build the competencies. Competence building is an outcome of strategic architecture which
must be enforced by top management in order to exploit its full capacity.

In Competing for the Future, the authors Prahlad and Hamel show how executives can develop
the industry foresight necessary to proactively adapt to industry changes, discover ways of
controlling resources that will enable the company to attain goals despite of any constraints.
Executives should develop a point of view on which core competencies can be built for the
future to revitalize the process of new business creation. The key to future industry leadership is
to develop an independent point of view about tomorrow's opportunities and build capabilities
that exploit them.

In order to be competitive an organization needs tangible resources but intangible resources like
core competences are difficult and challenging to achieve. It is even critical to manage and
enhance the competences with reference to industry changes and their future. For example,
Microsoft has expertise in many IT based innovations where for a variety of reasons it is difficult
for competitors to replicate Microsoft's core competences.

In a race to achieve cost cutting, quality and productivity most of the executives do not spend
their time to develop a corporate view of the future because this exercise demands high
intellectual energy and commitment. The difficult questions may challenge their own ability to
view the future opportunities but an attempt to find their answers will lead towards
organizational benefits.

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What Are Your Organization’s Core

Competencies? Remembering C.K.
Prahalad’s Thought Leadership
May 18, 2010

tags: C.K. Prahaled, Gary Hamel, Core Competencies, The Core Competence of the Corporation, Strategic
Intent, Human Capital Development and Global Competitiveness, Strategic Business Units,
Competitveness and Market Share

by Jim Taggart

Much of the management literature consists of books, articles, papers, etc. with short shelf lives.
Fads come and go, and frequently the supposedly best-practice companies profiled disappear or
suffer lingering declines to oblivion. Yet there are pieces that are keepers, retaining their value to
the thought literature over time.

Today, I want to look at what’s referred to as an organization’s “core competence.” The irony is
that this concept, created 20 years ago, is incurring a resurgence of interest, following years of
adherence to the belief that corporations exist for one sole purpose: to maximize shareholder
wealth. Even “Neutron” Jack (Welch), retired CEO of General Electric, recently dumped on the
concept, admitting it was foolish. Corporations, it appears, do indeed have more than just a
pecuniary interest as a focal point.
So from where did the idea of core competence emerge, and what does it encompass?

In the May-June 1990 issue of the Harvard Business Review, the late C.K.Prahalad and his
mentee Gary Hamel co-wrote a seminal piece entitled The Core Competence of the Corporation.
Prahalad’s recent death has helped refocus attention on the incredibly progressive thinking and
writings he shared over many years.

I re-read the article, having forgotten about it, and was really struck with just how relevant it is to
today’s highly volatile economic environment. In fact, thinking about the geo-political and
economic events that have occurred since 1990 made me realize just how forward-thinking
Prahalad and Hamel were when they wrote their article. My purpose, therefore, with today’s post
is to share some of the article’s highlights and to encourage you to reflect on the concept and
what it means for your organization.

Corporations have traditionally thought of themselves as divisions, or what Prahalad and Hamel
call Strategic Business Units (SBUs). Using technology company NEC as the example, they
explained that this company, whose businesses spanned (and still span) a broad spectrum, saw
itself not as a collections of SBUs but rather “core competencies.”

Core competencies may be described as the composite knowledge of the organization and the
know-how to organize and implement its human capital (skills) and technologies.

This may sound pretty fancy and conceptual, but it has worked well for NEC and another
company that was profiled in the article: Canon. Just look at what Canon has accomplished since
1990 and you’ll admit that it’s a company that knows why it’s in business, with a well-defined
mission and energizing vision.

An organization that has clearly defined and articulated its core competencies is in a solid
position to take on competitors and grow steadily. Its employees and technologies are aligned
towards focused goals. The authors talk about Strategic Intent, which is about defining the
organization and the markets it serves. For example, in 1990 NEC’s strategic intent was to
“exploit the convergence of computing and communications.”

Once an organization’s strategic intent is defined, the core competencies need to be articulated.
To do so means answering the following questions:

• For how long can the organization dominate the market if it’s not able to control a specific
competency?
• If it loses the competency, what opportunities will it lose?
• Does the competency enable access to multiple markets?
• Do customers benefit from the competency?

Examples used include Honda’s engines, Casio’s display systems and Canon’s laser printers.

When core competencies are clearly defined, it’s then necessary to strengthen them. This
involves investing in the appropriate technologies, allocating resources throughout divisions, and
creating effective alliances. For example, NEC forged an alliance with Honeywell in the late
eighties to gain access to mainframe and semi-conductor technologies as part of enhancing its
core competencies.

Current examples abound of corporations that have identified their core competencies. One
example I’ll give is Qualcomm, a large wireless telecom R&D company based in San Diego.
Qualcomm has created a new technology that will undoubtedly have a huge impact on digital
devices used for downloading books, video etc. The company has developed a screen that uses
ambient light to allow images and text to be viewed, as opposed to backlighting used in laptops
and Apple’s iPad. The screen is called Mirasol, and uses minimal battery power and can be used
in direct sunlight. In contrast to Amazon’s Kindle which also uses ambient lighting, the Mirasol
allows color and video. Qualcomm is a company that continues to push innovation through the
effective identification and application of its core competencies.

Though Prahalad and Hamel didn’t specifically use the words leadership and corporate culture,
they were in effect speaking to this when they talked about cultivating a core competency mind-
set, with managers working across organizational boundaries to engage employees, create
energy, alignment and shared vision. Of interest, an important part of the process is to start the
conversation of the next generation of core competencies.

The revisiting of the concept and practice of core competencies comes at a critical time for
America and Canada. Prahalad’s and Hamel’s 1990 HBR article, in my view, is much more
important now than when they wrote it. The strategic importance of human capital development
is receiving much greater recognition now, and at the heart of the core competence concept are
people, unquestionably a nation’s principal competitive asset. The same applies at the firm level.

Finally, I would propose that the concept of core competency is not just for business but the
public and not-for-profit sectors as well. For people working in the latter two sectors, reflect on
what are your own organization’s core competencies. And at the individual level, think about
what are your personal core competencies when it comes to how you add value to your
organization.
NMIMS 2007-08
Strategic Management
Dr Amit Rangnekar
amitrangnekar@gmail.com
7
PEST analysis
Quadrants below contain criteria (not exhaustive or exclusive) used to analyse either PEST
Political
Economic

Ecological/environmental issues Legislations / regulatory / policy Government term and change

Funding, grants and initiatives

Lobbies / pressure groups
Wars and conflict

Domestic / International economy

Taxes, levies, FDI, interests
Stock markets and exchange rates
Seasonality/weather issues
Market and trade cycles
Industry Specific factors
Social
Technological

Lifestyle trends
Demographics
Psychographics
Consumer attitudes and opinions
Law changes affecting social factors
Consumption & buying patterns
Events and influences
Ethnic / ethical / religious factors

Competing & emerging technologies

R&D
Technology/solutions maturity

Manufacturing costs / capacity

Information and communication
Innovation
Licensing, patents, IPR issues

Disruptive innovation

5 Forces of competition(Porter)

1) Threat of New Entrants: Entry

Barriers
•
Economies of scale-Mar g ina l

efficiency improvements, firm

experiences as it incrementally increases
its size. Advantages and disadvantages
of large-scale and small-scale entry

Product differentiation- Unique

products, Customer loyalty, competitive
prices
•

Capital requirements- Physical

facilities, Inventories, Marketing
activities, Availability of capital
•

Switching Costs-One-time costs

customers incur when buying from different supplier. Costs of new equipment or
retraining employees
•

Access to Distribution Channels- Stocking or shelf space, price breaks, cooperative

advertising allowances
•

Cost Disadvantages- Independent of Scale- proprietary product technology, favorable

access to raw materials, desirable locations
•

Government policy- Licensing and permit requirements, deregulation of industries

NMIMS 2007-08
Strategic Management
Dr Amit Rangnekar
amitrangnekar@gmail.com
8
Expected retaliation- Responses by existing competitors may depend on a firm’s present
stake in the industry (available business options)
2) Bargaining Power of Suppliers
•

Supplier power increases when:

•

Suppliers are large and few in number

•

Suitable substitute products are not available

•

Individual buyers are not large customers of suppliers and there are many of them
•

Suppliers’ goods are critical to buyers’ marketplace success

•

Suppliers’ products create high switching costs.

•

Suppliers pose a threat to integrate forward into buyers’ industry

3) Bargaining Power of Buyers
•

Buyer power increase when:

•

Buyers are large and few in number

•

Buyers purchase a large portion of an industry’s total output

•

Buyers’ purchases are a significant portion of a supplier’s annual revenues

•

Buyers can switch to another product without incurring high switching costs
•

Buyers pose threat to integrate backward into the sellers’ industry

4) Threat of Substitute Products
•

The threat of substitute products increases when:

•

Buyers face few switching costs

•

The substitute product’s price is lower

•

Substitute product’s quality and performance are equal to or greater than the
existing product
•

Differentiated industry products, valued by customers, reduce this threat

5) Intensity of Rivalry Among Competitors
•

Industry rivalry increases when:

•

There are numerous or equally balanced competitors

•

Industry growth slows or declines

•

There are high fixed costs or high storage costs

•

There is a lack of differentiation opportunities or low switching costs

•

When the strategic stakes are high

•

When high exit barriers prevent competitors from leaving the industry
Unattractive industry
(Low profit potential)
Attractive industry
(High profit potential)
Low entry barriers
Suppliers and buyers have strong positions
Strong threats from substitute products
Intense rivalry among competitors
High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products
Moderate rivalry among competitors

NMIMS 2007-08
Strategic Management
Dr Amit Rangnekar
amitrangnekar@gmail.com
9
How to analyse Industry - (Michael Porter, HBR-Jan, 2008)
•

Good industry analysis looks at average profitability over a period

•

3-5 year period can distinguish temporary/ cyclical changes from structural changes
•

Industry analysis should not declare an industry attractive or unattractive but help
understand the underpinnings of competition and the root causes of profitability
•

Analyse industry structure quantitatively, than qualitatively with lists of factors

•

Quantify the 5 forces: %age of buyer's total cost accounted for by industry's product
(to understand buyer price sensitivity); %age of industry sales required to fill a
plant or operate logistical network of efficient scale (to assess barriers to entry);
buyer's switching cost (to determine inducement an entrant or rival must offer
customers).

Define relevant industry: Products, exclusive/ indirect industry, scope, competition

•

Identify & segment participants- buyers, suppliers, competitors, substitutes &

potential entrants
•

Assess drivers of each competitive force- determine which are strong & weak- Why
•

Determine overall industry structure & consistency- profitability levels & reasons,
controlling factors; are more profitable players better positioned wrt the 5 forces
•

Analyse future changes (+/-) in each force

•

Aspects of industry structure, influenced by company, competitors or new entrants

Common Pitfalls
•

Defining industry- too broadly or too narrowly.

•

Paying equal attention to all forces than focusing on the most important ones.
•

Confusing effect (price sensitivity) with cause (buyer economics).

•

Using static analysis that ignores industry trends.

•

Confusing cyclical or transient changes with true structural changes.

•

Framework used to declare industry - attractive/ unattractive, than use it for

strategic choice