In This Article

  1. Introduction
  2. What are Core Competencies?
  3. Identifying Core Competencies
  4. Examples
  5. Developing Competencies
  6. Strategic Implications
  7. Conclusion

Introduction

The concept of core competencies was introduced by C.K. Prahalad and Gary Hamel in their seminal 1990 Harvard Business Review article "The Core Competence of the Corporation." It shifted strategic thinking from products and markets to organizational capabilities.

What are Core Competencies?

Core competencies are the collective learning in the organization—how to coordinate diverse production skills and integrate multiple streams of technologies.

Prahalad & Hamel's Definition: "Core competencies are the wellspring of new business development. They should constitute the focus for strategy at the corporate level."

Key Characteristics

  • Provide potential access to wide variety of markets
  • Make significant contribution to perceived customer benefits
  • Difficult for competitors to imitate

Three Tests for Core Competencies

TestQuestionExample
Customer ValueDoes it contribute significantly to customer benefits?Honda's engine technology improves performance
Competitor DifferentiationIs it unique and difficult to imitate?Apple's design capability is rare
ExtendabilityCan it be leveraged into new products/markets?3M's adhesives across many products

Classic Examples

Honda

Core Competency: Engine and powertrain design

  • Applies across motorcycles, cars, lawn mowers, generators
  • Enables entry into multiple markets

Sony (Historical)

Core Competency: Miniaturization

  • Walkman, portable TVs, camcorders
  • Applied across consumer electronics

3M

Core Competency: Adhesives and substrates

  • Post-it Notes, Scotch Tape, medical products
  • Over 60,000 products from core technology

Developing Core Competencies

Building Blocks

  • Skills: Technical and managerial expertise
  • Knowledge: Tacit and explicit organizational knowledge
  • Technologies: Proprietary technologies and processes
  • Coordination: Ability to integrate skills across boundaries

Management Actions

  • Invest in core competency development
  • Protect competencies from erosion
  • Build competencies across SBU boundaries
  • Avoid outsourcing core competencies

Strategic Implications

  • Corporate strategy: Portfolio should leverage competencies
  • Diversification: Enter markets where competencies apply
  • Outsourcing: Only non-core activities
  • Alliances: Fill competency gaps through partnerships
  • M&A: Acquire competencies you can't build

Conclusion

Key Takeaways

  • Core competencies are collective organizational capabilities
  • Three tests: Customer value, competitor differentiation, extendability
  • Competencies span products and markets
  • Examples: Honda engines, 3M adhesives, Apple design
  • Build competencies through investment and coordination
  • Don't outsource core competencies
  • Use competencies as basis for diversification