A core competence is something unique that a firm has, or can do, strategically well. Premiered by Prahalad and Hamel in their 1990 Harvard Business Review article (and their 1994 book), an assessment of an organisation’s core competencies is an essential element in formulating strategy nowadays. Giving proper attention to what your organisation stands for and what strengths it has to stand out from the competition helps to answer the question as to what future possibilities your organisation possesses. The concept of core competencies is based on Barney’s (1991) resource-based view of the firm: the idea that an organisation’s inimitable and valuable tangible and intangible assets are key aspects of a firm’s sustainable competitive advantage (Figure 9.1).
The core competencies model is a strategic tool to determine the unique assets that can be used to create and offer value to customers. The process of defining core competencies encourages management to think about the strengths and capabilities that set the company apart from competitors. Whereas Porter’s five forces model (Chapter 8) takes an outside-in approach and places the external environment at the starting point of the strategy process, the core competence model does the opposite. It builds on the assumption that competitiveness derives ultimately from a company’s ability to build core competencies that spawn unanticipated products at lower cost and more speedily than competitors can. In this way, the core competence model can be used to create sustainable competitive advantage.
Figure 9.1 Core competencies
Source: after ‘The core competence of the corporation’, Harvard Business Review, Vol. 68 (3), pp. 79–91, (Prahalad, C.K. and Hamel, G. 1990), Copyright © 1990 by the Harvard Business School Publishing Corporation; all rights reserved. Reproduced by permission of Harvard Business Review
The starting point for understanding core competencies is to realise that a business needs to have something that it can do well and that meets the following three conditions:
A company that identifies, develops or acquires unique assets with which to build valuable products may create a long-lasting competitive advantage. The fundamental question relates to where this uniqueness comes from and how it can be sustained. Typically fundamental questions are asked such as:
Thinking about and trying to define a company’s core competencies will stimulate management to rethink and – ideally – mobilise the organisation’s intrinsic strengths. Foresight is a key ingredient in this process. The future will see the introduction of products and services that are not yet feasible. New industries and products will exist that are unimaginable today. Management needs to realise the impact of these uncertainties and to consider what the competitive arena might look like in the future. Hamel and Prahalad (1990) claim that the process of thinking about core competencies helps to identify the extent to which an organisation has the capability to seize a part of that unknown future. In order to develop foresight, managers need to do two things:
Some tips for determining core competencies
Once management has an idea (‘foresight’) of what core competencies the company has or should have, it must build the strategic architecture. This is not a business plan, but a framework that prepares the company to capture a (potentially) large share of future revenues in emerging opportunities. The strategic architecture addresses issues and timing for what is called a broad opportunity approach:
In theory, the process of defining core competencies stimulates management to think about the strengths and capabilities that set the company apart from competitors. In practice, however, defining core competencies clearly is so difficult that even Hamel and Prahalad seem unable to put their finger on it sometimes. In their zealous efforts to offer enough examples to bolster the universal application of core-competency thinking, they confuse core products and core competencies themselves.
Even with the benefit of hindsight, it is apparently difficult to identify core competencies, let alone come up with sharp definitions for the unknown future. Furthermore, it is frequently obvious that core competencies are not as unique and inimitable as management would like to think. Finally, if your core competencies are locked inside the heads of people that walk away from the organisation, you may want to reconsider what your core competencies really are.
Barney, J.B. (1991) ‘Firm resources and sustainable competitive advantage’. Journal of Management 17, 99–120.
Hamel, G. and Prahalad, C.K. (1994) Competing for the Future: Breakthrough Strategies for Seising Control of Your Industry and Creating the Markets of Tomorrow. Boston, MA: Harvard Business School Press.
Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of corporation’. Harvard Business Review 68, 79–91.
