A company should not only be viewed as a portfolio of products or services but also as a portfolio of core competencies.
A company that does not analyse itself and its competitors in terms of core competencies is subject to certain risks.
These risks include:
1. Opportunities for growth will be needlessly reduced.
2. Competencies may be imprisoned and under leveraged. This occurs when a new opportunity is identified but the core competencies needed for the opportunity lie within a different business unit and there is no way to position these competent people into the new opportunity area, for example
3. Competencies may become weak and fragmented when a company forms divisions and breaks up into smaller business units.
4. The lack of a core competence viewpoint can desensitise a company to its growing reliance on outside suppliers of core products. Companies who rely on external competencies instead of building them themselves may move towards a dangerous shortcut to competitiveness.
5. Companies that focus solely on the end products may fail to invest adequately in new core competencies that would increase growth into the future – in the words of Hamel “Tomorrow’s growth depends on today’s competence building”
6. If a company fails to understand the core competence basis for competition, other competitors who rely on competencies developed in other end markets, may enter the market.
7. Companies who are insensitive to the issues of core competencies may unintentionally abandon valuable skills when they divest an under performing business.
One of the "trade secrets" of top strategic management is uniting a company's technological, production, and marketing know-how into competencies that improve its competitiveness.
A core competence is a bundle of skills and technologies that enables a company to provide a particular benefit to customers. It is something a company does especially well in comparison to its competitors.
It is easier to build competitive advantages when a firm has a core competence in an area important to market success, when rivals do not have offsetting competencies, and when it is costly and time-consuming for rivals to match the competence. Core competencies are therefore valuable competitive assets.
There are many examples of core competencies including the following:
Manufacturing excellence
Exceptional quality control
The ability to provide better service
More know-how in low-cost manufacturing
Superior design capability
Unique ability to pick out good retail locations
Innovativeness in developing new products
Better skill in merchandising and product display
Mastery of an important technology
A strong understanding of customer needs and tastes
An unusually effective sales force
Exceptional skill in working with customers on new applications and uses of the product
Expertise in putting together multiple technologies to create families of new products
Core competence addresses the collective learning of an organization and it is not a particular skill, but could be made up of many different skills within the organisation.
Prahalad and Hamel, introduced the concept and said three tests can be applied to determine a core competency:
1. A core competence provides potential access to a wide variety of markets
2. A core competence should make a significant contribution to the perceived customer benefits of the end product
3. Finally, a core competence should be difficult for competitors to imitate
For the core competence to be entrenched in an organisation, the entire management team must understand the concept and participate in key competence management tasks (Hamel 1994)
Identifying Existing Core Competencies – competencies must be separated from the products and services that they are embedded in.
Core must be distinguished from non-core and must be clustered in a meaningful way and there must be a shared understanding among general management. This process must be carried out by a group of managers and not just one group of personnel, such as the technical group.
Assets and infrastructure do not fall under core competencies. There must be an understanding of the skills underlying the competencies and an inventory of the people possessing the competencies must be recorded.
Establishing the Core Competence Acquisition Agenda – the competence-product matrix developed by Hamel and Prahalad is used in this step to distinguish between existing and new competencies, and between existing and new product-markets. This will be discussed in detail later.
Act on the Positioning on the Competence Product Matrix – this entails building new competencies, deploying existing competencies and protecting and defending existing competencies as core competencies can be lost in many ways. E.g. through lack of funding, divisionalisation, inadvertently given to alliance partners, lost when an under performing business is divested.