Core competence

tauringhuang.

Sep 15th 2008
From Economist.com

The idea of core competence was introduced into management literature in 1990 by C.K. Prahalad and Gary Hamel. The two business academics wrote:

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.
Prahalad and Hamel went on to outline three tests to be applied to determine whether something is a core competence:

• First, a core competence provides potential access to a wide variety of markets.

• Second, a core competence makes a significant contribution to the perceived customer benefits of the end product.

• Third, a core competence is difficult for competitors to imitate because it is a complex harmonisation of individual technologies and production skills.

The two academics painted a picture of the corporation as a tree whose roots are its particular competencies. Out of these roots grow the organisation’s “core products” which, in turn, nourish a number of separate business units. Lastly, out of these business units come “end products”.

It was Prahalad and Hamel’s contention that if a company could “maintain world manufacturing dominance in core products”, it would “reserve the power to shape the evolution of end products”. Many of the examples on which they based their theories were large, successful Japanese companies. Before the end of the century, however, the performance of many of these companies had become distinctly less exemplary.

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The core competence idea was useful to managers not only for focusing them on the essentials, but also for identifying those things that were not “at the core”. Why, management might ask, were these non-essential things being allowed to consume valuable resources?

Prahalad and Hamel succeeded in persuading managers to look at strategy as something fluid and imprecise. Their writing is spattered with references to things like “strategic intent”, “strategy as stretch and leverage”, “competitive space” and “expeditionary markets”. It was a switch from the more modular approach of Michael Porter (see article) and of the tradition of scientific management. Porter had turned strategic thinking back in the direction of Frederick Taylor; Prahalad and Hamel changed that direction by several degrees.

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The drive to identify core competencies moved in line with the growing popularity of outsourcing. When companies were suddenly able to outsource almost any process that came under their corporate umbrella, they needed to know what lay in the hard core of activities that they were uniquely well qualified to carry out, the activities that it made no sense for them to hand over to a third party. In some cases the answer was very few.

The idea spread from core competencies to core everything—core processes, core businesses—everything that constituted the essence of what a company was and did. Management consultants encouraged companies to focus on their core as a source of untapped potential in a time of rapid change and unpredictability.

Chris Zook, a strategy consultant, has written a trilogy around the idea of getting more growth from core businesses. His second book, “Beyond the Core”, was subtitled “Expand Your Market Without Abandoning Your Roots”.

Further reading
Goddard, J., “The Architecture of Core Competence”, Business Strategy Review, Vol. 1, 1997

Prahalad, C.K. and Hamel, G., “The Core Competence of the Corporation”, Harvard Business Review, May–June 1990

Hamel, G. and Prahalad, C.K., “Competing for the Future”, Harvard Business School Press, 1994

Zook, C. with Allen, J., “Profit from the Core: Growth Strategy in an Era of Turbulence”, Harvard Business School Press, 2001

Zook, C., “Beyond the Core: Expand Your Market Without Abandoning Your Roots”, Harvard Business School Press, 2004