Everybody’s talking about … core competency

16 May 2014 by in Business and finance

In the second of an ongoing series of explorations of key business ideas we investigate a much-abused and little understood term. Core competency is one of those over-used business phrases that often sneak out in high level meetings or when someone is trying to look a little more interesting than they really are. But is it useful or is it just stating the obvious?

Where did it come from?

The phrase core competency was coined by Coimbatore Krishnarao Prahalad, more commonly known as C. K. Prahalad (for obvious reasons) and Gary Hamel – both US based management ‘gurus’ and business authors. It was first referenced and described in a 1990 article they published in the Harvard Business Review called ‘The Core Competence of the Corporation.’

Both Hamel and Prahaled have been consistently regarded by major business publications such as Business Week, The Wall Street Journal and Fortune magazine as amongst the most influential business thinkers in the world.

But what does it mean?

According to Prahalad and Hamel core competency is a concept in management theory that relates to the specific attributes or factors that a business considers as central to the way it operates. A core competency is only a core competency when it meets three criteria:

  1. It’s not easily replicated by competitors.
  2. It can be widely used and re-deployed for many products and markets.
  3. It contributes to the customer’s experienced benefits and the value of the product or service.

appleCore competencies are particular strengths relative to the competition which provide added value in the eyes of the customer. They can relate to anything from technical expertise to processes and procedures to strong working relationships to innovation to customer loyalty. For example Apple’s user interface is a core competency. People who use Apple products love that they are intuitive and easy to use. So much so that people who are converted to Apple rarely leave Apple. Even though the products have their faults (such as low battery life) and are significantly more expensive than the competition their customers are passionate and loyal about Apple, something that’s not easy to replicate. Their intuitive operating system and user interface also translates across product categories and markets and definitely contribute to the customer’s experienced benefits and perceived value of the products.

Where will I find ‘core competency’ used?

Those who actually know what it means and understand Prahalad and Hamel’s definition use it to describe the ‘collective learning across the corporation’. This collective learning is only possible with outstanding cross-functional cooperation, and a willingness to coordinate and integrate diverse production skills and multiple technologies. Few companies are likely to create world leadership in more than five or six fundamental core competencies.

Those who don’t know what it means but like to throw the term around to impress people and look more knowledgeable than they are often simply use it to describe something a company is particularly good at. But being good at something does not necessarily mean that it’s a core competency. It’s only a core competency when it manifests into core products that serve as a link between the competency and the end user. For example 3M enjoy a core competency in the manufacture of substrates, coatings and adhesives that manifest as a product range that is being added to and developed all the time.

Basically core competency is just Darwin’s theory of evolution but applied to business. As a business grows and evolves it should get better at certain things that help it survive. Those evolutionary improvements that ensure the survival of the fittest should emerge from the collective efforts of the business not just from the individual strengths of the people in the business. That way, they are ‘baked into’ the business. The reality however is often very different: the core competencies within a business are, frequently, actually the core competencies of certain individuals within the business. When those individuals leave, so does the competency.

What’s my core competency?

Most businesses don’t operate around core competencies – they operate around business silos or a portfolio of independent businesses. As a result there is little incentive to share knowledge, experience and competency between the units. Prahalad and Hamel suggest this is an error and actively stops business from developing a significant competitive advantage.

Plus they argue that unless a business understands its core competency it is in danger of losing it without even realising what it’s lost until it’s too late. For example US manufacturers divested themselves of their TV manufacturing business in the 1970s because they believed the market was mature and low cost imports from Asia would render the sector obsolete. In doing so they lost their core competency in video which later handicapped them when everything went digital. Motorola divested itself of its semiconductor DRAM business at 256kb only later to realise they had divested a core competency in electronic data storage and were unable to get back in to the 1Mb market alone. Had they recognised their core competency and the time it took to develop and build it they would have made better strategic choices.

To identify what your core competencies are or could be you need to answer the following questions:

  1. Is there any part of your manufacture or delivery of your product or service that strongly influences your customer’s willingness to buy? If not it’s probably not a core competency.
  2. Is the value-adding competency difficult to imitate?
  3. Is the competency relevant and useful across different products and markets?

As a strategic exercise it is essential to identify and foster core competencies. Not only will this knowledge help direct resources and assist decision making but it will also help to avoid expensive strategic mistakes such as those experienced by the US manufacturers and Motorola.