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. Therefore, 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 itself' 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:
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 that 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 corecompetence 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.