Core Competencies
A
core competency is a concept in management theory introduced by C. K. Prahalad
and Gary Hamel in their 1990 article entitled, “The
Core Competence of the Corporation“, to explain how some
Japanese corporations, such as Sony and Canon, became world market leaders
after acquiring several technological capabilities, which allowed these
firms to create and lead new markets, since innovative product
functionalities and customer interfaces were offered.
It can be defined as "a harmonized
combination of multiple resources and skills that distinguish a firm in the
marketplace" and therefore are the foundation of companies'
competitiveness. Core competencies provide the
companies with a framework wherein they can identify their core strengths and
strategize accordingly
“Core competencies are the collective learning in the
organisation, especially how to co-ordinate diverse production skills and
integrate multiple streams of technologies…core competence is communication,
involvement and a deep commitment to working across organisational
boundaries…core competence does not diminish with use. Unlike physical assets,
which do deteriorate over time, competencies are enhanced as they are applied
and shared.” – C K Prahalad and Gary Hamel.
Some core competencies that firms might have include
technical superiority, its customer relationship management, and processes that
are vastly efficient. In other words, each firm has a specific area in which it
does well relative to its competitors, this area of excellence can be reused by
the firm in other markets and products, and finally, the area of strength adds
value to the consumer. The implications for real world practice are that core
competencies must be nurtured and the business model built around them instead
of focusing too much on areas where the firm does not have competency. This is
not to say that other competencies must be neglected or ignored. Rather, the
idea behind the concept is that firms must leverage upon their core strengths
and play to their advantages.
Skills which are a pre-requisite for becoming an industry
player, should not be confused with core competencies. A core competence is
also not a physical asset. For instance, a factory, a distribution channel,
brand or patent cannot be referred to, as a core competence. The ability to
manage these assets may, however, be a core competence.
For example, the core competencies of Walt Disney Corporation
lie in its ability to animate and design its shows, the art of storytelling
that has been perfected by the company, and the operation of its theme parks
that is done in an efficient and productive manner. Hence, Walt Disney
Corporation would be well advised to configure its strategy around these core
competencies and build a business model that complements these competencies.
Core Competency of some well known companies are as follows:
·
Apple - ability to design, market
and produce user friendly devices with visual and tactile appeal.
·
Singapore Airline - customer centric
service bundling of aircraft comfort, quality in-flight
service, attentive crew.
·
Avon cosmetics - direct sales
process
·
Hubspot - inbound marketing system
·
Sony
– benefit is pocketability- Core competence is miniaturization. Expertise in
electronic technology and ability to translate this technology into developing
and manufacturing innovative products – miniaturized radios and video camera
and LEDs and DVDs with unique feature.
· Motorola – benefit is untethered communication - Core competence is wireless communication.
·
Honda
has a core competence in small engine design and manufacturing.
·
Federal
Express has a core competence in logistics and customer service.
·
Microsoft
has the core competence of designing office software products that are
user-friendly.
·
PepsiCo
has a core competence of mass production and distribution of bottled drinks.
·
Polaroid
has a core competence in manufacturing immediately self-developing film.
·
Ernst
& Young has the core competence of performing audit functions for Fortune
500 corporations.
·
Wal-Marts - one core competencies is their massive real-time information system.
·
Intel
– design of complex chips for computers.
·
Amazone- Innovative Infrastructure
& Logistics for delivery, Superior CRM for customer service, Superior SRM
to procure wide variety of products at competitive prices
Indian Examples
Organizations like
Sundaram Fasteners, Raymond, Infosys Technologies, ICICI Bank, State Bank of
India, WIPRO, Tata Consultancy Services, Sundaram Finance, and the TVS group,
among several others, have been built on the Core Competency model.
·
Reliance
Industries Ltd : Executing world-class, world-scale projects in record time and at
costs that are significantly lower than those of their peers in similar
businesses.
·
Mahindra and Mahindra : Delivering
Strong Value for Money, Products & Widespread Reach
·
Bajaj Auto Ltd: Motor Cycle Manufacturing
& Marketing
· Tata group: Innovation, Design, Mergers & Acquisitions, Alliances with best performing companies and the application of the company’s code of practice, which is built on values and integrity, boosts the marketability of their brand.
· Geojit Financial Services Ltd: Trading Efficiency, Innovation, Technology acumen
· L& T : Construction & Engineering capability
· ICICI Bank –Favorable Funding Profile, Leveraging Digital Technology, Ownership at Granular level The Bank is offering a host of Application Program Interfaces(APIs) and Software Developer Kits (SDKs) which facilitate third-party apps to offer payment solutions for their retail customers
· SBI- Favorable Funding Profile, Personalised services with trigger events in customer life for CRM, Digitilisation and omni-channel access, the brand SBI with reach across geographical areas.
Identifying Core
Competencies
Prahlad and Hamel suggest three factors to help identify core competencies in
any business:
· Find out what your business does best. In many cases, this will be as simple as reminding yourself of the main goods and services your business sells. These are the items and aspects which your customers and clients value most: the things they buy from you. However, you can take this one step further by asking yourself what it is about your particular organization's goods and services that sets them apart from those of other organizations. These are the areas where your company should place the most focus.
· Discover corporate core competencies. Corporate core competencies are those which have a positive effect on your competitive positioning within the industry. These are the things your company does that sets it apart from the rest. To determine whether certain aspects are true core competencies, you must decide whether they are relevant to your customers, difficult to imitate and have a significant enough breadth of application to sustain growth.
· Discover personal core competencies. Personal core competencies are those aspects of a person's skill set that will help that person develop into an employee who can meet the needs of or promote the core competencies of the organization as a whole. It is important to identify individuals within the organization who maintain those personal core competencies that best fit with the mission and vision of the organization. These include, but are not limited to, functional or technical competencies, nontechnical competencies and leadership competencies. You can develop those employees and their varied skill sets so that they can continue to drive your organization toward long-term success.
So look for the following for the
core competencies criteria:
1.
Valuable
2. Rare
3. Costly to imitate
4. Non-substitutable
A core competence
provides potential access to a wide variety of markets, it should make a
significant contribution to the perceived customer benefits of the end product,
and finally a core competence should be difficult for competitors to imitate.
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.
At Raymond, technology is the top end of our focus; they are working on different fabrics and that requires newer technologies. Raymond’s aim is to become a total lifestyle company. To move in this direction, we have started new verticals - shirting, linen, bed & bath, ethnic wear, etc. The Raymond brand can support the different verticals. Over the next five to 10 years, we plan to start many verticals. The opportunities are infinite. Made to Measure (MTM) was started five years ago and took time to stabilise because it is a unique product/ service. Now we are getting into the next level by introducing Made to Fit. Each new vertical takes time. Shirting took a few years to stabilise. Linen started last year and is already generating big business. Like this, we plan to expand the value of the brand.
Sundaram Fasteners. This organization belongs to the TVS group. When one looks at fasteners, which are nothing but nuts and bolts that are essential components of all automobiles, the products may look deceptively simple. However, they are not at all simple. The process of manufacture has an entire range of complex activities built into it. For instance, it takes forty tools to manufacture asingle fastener and Sundaram Fasteners has more than six lakh tools in its tool library. The nearest competitor, called Precision Fasteners, has around half these number of tools. It has been recorded that even if a new competitor were to enter this business, it will take fifteen years for that organization to even come anywhere near the level of Sundram Fasteners. It is sheer common-sense that the complexity of operations would have multiplied by any number of times, at Sundram Fasteners, by then.
Validity of the core competence methods
Hamel and Prahlad, in their various works, claim that other foundations for the
development of strategy, such as industry analysis, are pictures of the past
rather than the future. However, although the logic of core competencies has
much of value behind it, there is a danger that when organisations assess their
core competencies they too will look at the present and past, rather than the
future. The methods for identifying competencies and skills look reasonable and
robust, although very complex in large multibusiness, multinational
organisations, but the chance of error is high, and it is much harder to
determine which are core for the future.
The
core competencies are a useful tool in the corporate appraisal, and will help
strategic decision making, but they do not prevent an organisation from being
wrong footed by turbulent change, nor are they enough by themselves to provide
a total basis for making strategic decisions. They are a method for seeing the
strengths, weaknesses, opportunities and threats in a different way, and they
help move towards a solution, but do not do more than this. However the
corporate appraisal is tackled, whether by any of the methods outlined here or
by a different approach altogether, there is no doubt that it is an essential
first step in the process of strategic planning. It is the springboard from
which the great leap may be made into the mists of the future.
To be considered core competence a skill
must meet three tests:-
a. Customer Value:
Core competencies are the skills that enable a firm to deliver a fundamental customer benefit. The competence must give the customer something that strongly influences him or her to choose product or service. If it does not, then it has no effect on competitive position and is not a core competence; Honda’s ability to produce some of the world’s best engines and power trains does provide customers with highly valued benefits of superior fuel economy, zippy acceleration, less noise and vibration.
b. Competitor Differentiation
A capability must also be competitively unique. The core competence should be difficult to imitate. This allows companies to provide products that are better than those of their competitors. And because it is continually working to improve this competence, it means that it can sustain your competitive position; Power train is a core competence at Honda which has never been so at Ford/s.
c. Extendibility
A core competitive is truly core when it focuses the basis for entry into new product markets. It should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth. SKF, the world’s leading manufacturer of roller bearing has competencies in antifriction, precision engineering and making perfectly spherical devices. In order to achieve extendibility, SKF must be capable of manufacturing the round, high precision recording heads that go inside a VCR, most of which are now manufactured by Japanese firms
|
What does the Core Competence Achieve? |
Comments / Examples |
|
Provides potential access to a wide variety of
markets |
The key core competencies here are those that enable
the creation of new products and services. Example: Why has Saga PLC , Kent,
UK established in 1951 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 contribution to the perceived
customer benefits of the end product |
Core competencies are the skills that enable a
business to deliver a fundamental customer benefit - in other words: what is
it that causes customers to choose one product over another? To identify core
competencies in a particular market, ask questions such as "why is the
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, UK 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 personalizes online shopping and makes it more efficient
• Reliable and efficient delivery infrastructure
(product picking, distribution, customer satisfaction handling) |
|
Difficult for competitors to imitate |
A core competence should be "competitively
unique": In many 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 Corp Ltd, UK 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 • Minimization of working capital in the production
process • High manufacturing and distribution quality -
reliable products at competitive prices |
https://www.ftms.edu.my/journals/pdf/IJABM/Apr2014/6-16.pdf
Core Competencies: Advantages/Benefits
Core competencies help create competitive
advantage. Even good markets will not make a ‘me too’ firm competitive in the
long – run.
• It helps pave way for above – average performance over the long – run.
• It improves chances for long – term
success as competencies are enhanced with time.
• Core competencies lead to the development
of core products. These core products are used to build a larger number of end
– user products.
• The matching of market opportunities
with a firm’s core competencies forms the basis for launching new products, or
entering new markets.
• Constantly improving competencies
provides for new integrated technologies.
• Competencies provide focus for long –
term goals.
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