Core competency

Core competency

Core competency is something that a firm can do well and that meets the following three conditions:

  1. It provides consumer benefits
  2. It is not easy for competitors to imitate
  3. 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 (Mascarenhas et al. 1998). It may also include product development or culture, such as employee dedication.

Core competency versus competitive advantage

Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. Examples of capabilities include management (ability to envision the future of their industry, effective organizational structure), marketing (effective promotion of brand-name products, effective customer service, innovative merchandising), human resources (motivating, empowering and retaining employees), manufacturing, distribution, management information systems and research & development.

The criteria for determining whether a capability is a core competency is whether it is capable of producing sustainable competitive advantage. A capability can deliver competitive advantage without meeting all of the required criteria, but this will only be for a limited time.

Hanson uses an updated model with four criteria of sustainable competitive advantage:

  1. Valuable: the capability allows the firm to exploit opportunities or neutralize threats in its external environment
  2. Rare: capabilities that few, if any, of its competitors possess
  3. Costly to imitate: capabilities that other firms cannot easily develop. Take note however, this does not simply mean it is expensive to imitate, it means it is difficult to imitate (i.e. the capability developed through unique historical conditions, the capability itself is ambiguous or the relationships that underpin the capability are complex to understand and imitate).
  4. Non-substitutable: the capability does not have a strategic equivalent. One example is R&D, the objective of which is obtaining new technology. To obtain new technology you could develop it internally, or you could monitor the external environment for developments then acquire them (a strategy Nucor has followed) - these are strategic equivalents.

Development of the concept

The concept of core competencies was developed in the management field. C.K. Prahalad and Gary Hamel introduced the concept in a 1990 Harvard Business Review article. They wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." As an example they gave Honda's expertise in engines. Honda was able to exploit this core competency to develop a variety of quality products from lawn mowers and snow blowers to trucks and automobiles. To take an example from the automotive industry, it has been claimed that Volvo’s core competency is safety. This, however, is perhaps the end result of their competency in terms of customer benefit. Their core competency might be more about their ability to source and design high protection components or to research and respond to market demands concerning safety.

Ever since Prahalad and Hamel introduced the term in the 1990s, many researchers have tried to highlight and further illuminate the meaning of core competency. According to D. Leonard-Barton (1992), "Capabilities are considered core if they differentiate a company strategically." On the other hand, Galunic and Rodan (1998) argue that "a core competency differentiates not only between firms but also inside a firm it differentiates amongst several competencies. In other words, a core competency guides a firm recombining its competencies in response to demands from the environment."

Example of Black & Decker

Black & Decker's core technological competency pertains to 200 to 600 W electric motors, and this motor is their core product. All of their end products are modifications of this basic technology, with the exception of their work benches, flash lights, battery charging systems, toaster ovens, and coffee percolators.

They produce products for three markets:

  1. the home workshop market: In the home workshop market, small electric motors are used to produce drills, circular saws, sanders, routers, rotary tools, polishers, and drivers
  2. the home cleaning and maintenance market: In the home cleaning and maintenance market, small electric motors are used to produce dust busters, etc.
  3. the kitchen appliance market: In the kitchen appliance market, small electric motors are used to produce can openers, food processors, blenders, bread makers, and fans.

References

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