strategy - core competencies

Introduction Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. The Work of Hamel and Prahalad The main ideas about Core Competencies where developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a best-selling book Competing for the Future. Their central idea is that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth. 'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible - indeed, they'll have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel 1990 These areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products. For example, for a manufacturer of electronic equipment, key areas of expertise could be in the design of the electronic components and circuits. For a ceramics manufacturer, they could be the routines and processes at the heart of the production process. For a software company the key skills may be in the overall simplicity and utility of the program for users or alternatively in the high quality of software code writing they have achieved. Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change. Identifying Core Competencies Prahalad and Hamel suggest three factors to help identify core competencies in any business: What does the Core Competence Achieve? Comments / Examples

Skills in customer relationship management Makes a significant contribution to the perceived customer benefits of the end product Core competencies are the skills that enable a business to deliver a fundamental customer benefit . distribution. To qualify as "core". direct-mailing experience so highly: . . customer satisfaction handling) A core competence should be "competitively unique": In many Difficult for competitors to imitate web site . call centre sales conversion . insurance) and holidays to the older generation? Core Competencies that enable Saga to enter apparently different markets: . a competence should be something that other competitors wish they had within their own business. ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for? Example: Why have Tesco been so successful in capturing leadership of the market for online grocery shopping? Core competencies that mean customers value the Tesco.Reliable and efficient delivery infrastructure (product picking.Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient .g.Clear distinctive brand proposition that focuses solely on a closelydefined customer group . most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation.Designing and implementing supply systems that effectively link existing shops with the Tesco.database management.Provides potential access to a wide variety of markets The key core competencies here are those that enable the creation of new products and other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market.Leading direct marketing skills . Example: Why has Saga established such a strong leadership in supplying financial services (e.

including technical/subject matter know-how.[1] It may also include product development or culture. a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. and involve how to coordinate diverse production skills and integrate multiple streams of technologies. It is not easy for competitors to imitate 2. However it is possible to develop such a process into a core competence with suitable investment in equipment and training. A core competency can take various forms. It follows from the concept of Core Competencies that resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals Wiki pedia A core competency is a specific factor that a business sees as being central to the way it. as it will not differentiate the business from any other similar businesses. Core competencies are the collective learning in organizations. a reliable process and/or close relationships with customers and suppliers. .Minimisation of working capital in the production process . Such a process is highly unlikely to generate a differentiated advantage over rival businesses.reliable products at competitive prices A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence. It fulfills two key criteria: 1. works.Online customer "bespoking" of each computer built . an involvement and a deep commitment to working across organizational boundaries. For example. It is communication. Core competencies are particular strengths relative to other organizations in the industry which provide the fundamental basis for the provision of added value. Few companies are likely to build world leadership in more than five or six fundamental competencies.High manufacturing and distribution quality . or its employees. It can be leveraged widely to many products and markets.Example:Why does Dell have such a strong position in the personal computer market? Core competencies that are difficult for the competition to imitate: . such as employee dedication.

The author used the example of Vikers to demonstrate how to integrate core competences using strategic architecture in view of changing market requirements and evolving technologies. Core competencies are developed through the process of continuous improvements over the period of time. It is important to identify core competencies because it is difficult to retain those competencies in a price war and cost cutting environment. The organization is split into 'primary activities' and 'support activities'. Executives should estimate the future challenges and opportunities of the business in order to stay on top of the game in varying situations. The key to future industry leadership is to develop an independent point of view about tomorrow's opportunities and build capabilities that exploit them. It is even critical to manage and enhance the competences with reference to industry changes and their future. For example. They culminate in the total value delivered by an organization. Competence building is an outcome of strategic architecture which must be enforced by top management in order to exploit its full capacity. Core Competence A core competence is the result of a specific unique set of skills or production techniques that deliver value to the customer. E. . In Competing for the Future. when studying Walt Disney World . It was created by M. discover ways of controlling resources that will enable the company to attain goals despite of any constraints. Prahlad and Hamel illustrated that core competencies lead to the development of core products which further can be used to build many products for end users. NEC utilized its portfolio of core competencies to dominate the semiconductor.For an example of core competencies. Executives should develop a point of view on which core competencies can be built for the future to revitalize the process of new business creation. there are three main core competencies The value chain is a systematic approach to examining the development of competitive advantage. The chain consists of a series of activities that create and build value. Porter in his book. In 1990 with their article titled The Core Competence of the Corporation. the authors Prahlad and Hamel show how executives can develop the industry foresight necessary to proactively adapt to industry changes. To succeed in an emerging global market it is more important and required to build core competencies rather than vertical integration. Such competences empower an organization to access a wide variety of markets. Competitive Advantage (1980). Management must realize that stakeholders to core competences are an asset which can be utilized to integrate and build the competencies. telecommunications and consumer electronics market. In order to be competitive an organization needs tangible resources but intangible resources like core competences are difficult and challenging to achieve.Parks and Resorts. The 'margin' depicted in the diagram is the same as added value.

Prahaled. created 20 years ago. admitting it was foolish. it appears. Fads come and go. Strategic Business Units. The difficult questions may challenge their own ability to view the future opportunities but an attempt to find their answers will lead towards organizational benefits. articles. do indeed have more than just a pecuniary interest as a focal point. Yet there are pieces that are keepers. Corporations. retaining their value to the thought literature over time. . Even ³Neutron´ Jack (Welch). retired CEO of General Electric. I want to look at what¶s referred to as an organization¶s ³core competence. with short shelf lives. Prahalad¶s Thought Leadership May 18. quality and productivity most of the executives do not spend their time to develop a corporate view of the future because this exercise demands high intellectual energy and commitment.Microsoft has expertise in many IT based innovations where for a variety of reasons it is difficult for competitors to replicate Microsoft's core competences. Today. etc. is incurring a resurgence of interest. In a race to achieve cost cutting. Core Competencies. 2010 tags: C.K. Gary Hamel. following years of adherence to the belief that corporations exist for one sole purpose: to maximize shareholder wealth.K.´ The irony is that this concept. Human Capital Development and Global Competitiveness. papers. recently dumped on the concept. Competitveness and Market Share by Jim Taggart Much of the management literature consists of books. and frequently the supposedly best-practice companies profiled disappear or suffer lingering declines to oblivion. Your knowledge portal to leadership & management y y y y y y Home About Archives e-Books Resources Services What Are Your Organization¶s Core Competencies? Remembering C. The Core Competence of the Corporation. Strategic Intent.

K. Casio¶s display systems and Canon¶s laser printers. When core competencies are clearly defined. In fact. and was really struck with just how relevant it is to today¶s highly volatile economic environment. This may sound pretty fancy and conceptual. thinking about the geo-political and economic events that have occurred since 1990 made me realize just how forward-thinking Prahalad and Hamel were when they wrote their article. what opportunities will it lose? ‡ Does the competency enable access to multiple markets? ‡ Do customers benefit from the competency? Examples used include Honda¶s engines. Its employees and technologies are aligned towards focused goals. allocating resources throughout divisions. I re-read the article. the core competencies need to be articulated. but it has worked well for NEC and another company that was profiled in the article: Canon. This involves investing in the appropriate technologies. the late C. with today¶s post is to share some of the article¶s highlights and to encourage you to reflect on the concept and what it means for your organization.So from where did the idea of core competence emerge. it¶s then necessary to strengthen them. or what Prahalad and Hamel call Strategic Business Units (SBUs). having forgotten about it. whose businesses spanned (and still span) a broad spectrum. An organization that has clearly defined and articulated its core competencies is in a solid position to take on competitors and grow steadily. therefore. Corporations have traditionally thought of themselves as divisions. Using technology company NEC as the example.´ Core competencies may be described as the composite knowledge of the organization and the know-how to organize and implement its human capital (skills) and technologies. Just look at what Canon has accomplished since 1990 and you¶ll admit that it¶s a company that knows why it¶s in business. The authors talk about Strategic Intent. with a well-defined mission and energizing vision. they explained that this company. To do so means answering the following questions: ‡ For how long can the organization dominate the market if it¶s not able to control a specific competency? ‡ If it loses the competency. My purpose. in 1990 NEC¶s strategic intent was to ³exploit the convergence of computing and communications. For example.Prahalad and his mentee Gary Hamel co-wrote a seminal piece entitled The Core Competence of the Corporation. which is about defining the organization and the markets it serves.´ Once an organization¶s strategic intent is defined. saw itself not as a collections of SBUs but rather ³core competencies. and . and what does it encompass? In the May-June 1990 issue of the Harvard Business Review. Prahalad¶s recent death has helped refocus attention on the incredibly progressive thinking and writings he shared over many years.

Prahalad¶s and Hamel¶s 1990 HBR article.creating effective alliances. reflect on what are your own organization¶s core competencies. . with managers working across organizational boundaries to engage employees. Of interest. NEC forged an alliance with Honeywell in the late eighties to gain access to mainframe and semi-conductor technologies as part of enhancing its core competencies. is much more important now than when they wrote it. Finally. Though Prahalad and Hamel didn¶t specifically use the words leadership and corporate culture. as opposed to backlighting used in laptops and Apple¶s iPad. The screen is called Mirasol. Current examples abound of corporations that have identified their core competencies. think about what are your personal core competencies when it comes to how you add value to your organization. Qualcomm is a company that continues to push innovation through the effective identification and application of its core competencies. The company has developed a screen that uses ambient light to allow images and text to be viewed. they were in effect speaking to this when they talked about cultivating a core competency mindset. And at the individual level. unquestionably a nation¶s principal competitive asset. For example. For people working in the latter two sectors. In contrast to Amazon¶s Kindle which also uses ambient lighting. The revisiting of the concept and practice of core competencies comes at a critical time for America and Canada. I would propose that the concept of core competency is not just for business but the public and not-for-profit sectors as well. in my view. Qualcomm has created a new technology that will undoubtedly have a huge impact on digital devices used for downloading books. One example I¶ll give is Qualcomm. and at the heart of the core competence concept are people. create energy. video etc. alignment and shared vision. and uses minimal battery power and can be used in direct sunlight. an important part of the process is to start the conversation of the next generation of core competencies. the Mirasol allows color and video. a large wireless telecom R&D company based in San Diego. The same applies at the firm level. The strategic importance of human capital development is receiving much greater recognition now.

NMIMS 2007-08 Strategic Management Dr Amit Rangnekar 7 PEST analysis Quadrants below contain criteria (not exhaustive or exclusive) used to analyse either PEST .

grants and initiatives Lobbies / pressure groups Wars and conflict Domestic / International economy Taxes. IPR issues Disruptive innovation 5 Forces of competition(Porter) 1) Threat of New Entrants: Entry Barriers ‡ . interests Stock markets and exchange rates Seasonality/weather issues Market and trade cycles Industry Specific factors Social Technological Lifestyle trends Demographics Psychographics Consumer attitudes and opinions Law changes affecting social factors Consumption & buying patterns Events and influences Ethnic / ethical / religious factors Competing & emerging technologies R&D Technology/solutions maturity Manufacturing costs / capacity Information and communication Innovation Licensing. FDI. patents. levies.Political Economic Ecological/environmental issues Legislations / regulatory / policy Government term and change Funding.

Independent of Scale. price breaks. Costs of new equipment or retraining employees ‡ Access to Distribution Channels. desirable locations ‡ Government policy. firm experiences as it incrementally increases its size. ‡ Suppliers pose a threat to integrate forward into buyers¶ industry 3) Bargaining Power of Buyers ‡ Buyer power increase when: ‡ Buyers are large and few in number ‡ Buyers purchase a large portion of an industry¶s total output ‡ Buyers¶ purchases are a significant portion of a supplier¶s annual revenues ‡ Buyers can switch to another product without incurring high switching costs ‡ Buyers pose threat to integrate backward into the sellers¶ industry .Responses by existing competitors may depend on a firm¶s present stake in the industry (available business options) 2) Bargaining Power of Suppliers ‡ Supplier power increases when: ‡ Suppliers are large and few in number ‡ Suitable substitute products are not available ‡ Individual buyers are not large customers of suppliers and there are many of them ‡ Suppliers¶ goods are critical to buyers¶ marketplace success ‡ Suppliers¶ products create high switching costs.Stocking or shelf space. favorable access to raw materials. Availability of capital ‡ Switching Costs-One-time costs customers incur when buying from different supplier.Physical facilities. cooperative advertising allowances ‡ Cost 8 Expected retaliation.Unique products. deregulation of industries NMIMS 2007-08 Strategic Management Dr Amit Rangnekar amitrangnekar@gmail. Advantages and disadvantages of large-scale and small-scale entry ‡ Product differentiation. competitive prices ‡ Capital requirements.Licensing and permit requirements. Inventories.proprietary product technology.Economies of scale-Mar g ina l efficiency improvements. Marketing activities. Customer loyalty.

2008) ‡ Good industry analysis looks at average profitability over a period ‡ 3-5 year period can distinguish temporary/ cyclical changes from structural changes ‡ Industry analysis should not declare an industry attractive or unattractive but help understand the underpinnings of competition and the root causes of profitability ‡ Analyse industry structure quantitatively. HBR-Jan. %age of industry sales required to fill a plant or operate logistical network of efficient scale (to assess barriers to entry).(Michael Porter. .com 9 How to analyse Industry . reduce this threat 5) Intensity of Rivalry Among Competitors ‡ Industry rivalry increases when: ‡ There are numerous or equally balanced competitors ‡ Industry growth slows or declines ‡ There are high fixed costs or high storage costs ‡ There is a lack of differentiation opportunities or low switching costs ‡ When the strategic stakes are high ‡ When high exit barriers prevent competitors from leaving the industry Unattractive industry (Low profit potential) Attractive industry (High profit potential) Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors NMIMS 2007-08 Strategic Management Dr Amit Rangnekar amitrangnekar@gmail. valued by customers.4) Threat of Substitute Products ‡ The threat of substitute products increases when: ‡ Buyers face few switching costs ‡ The substitute product¶s price is lower ‡ Substitute product¶s quality and performance are equal to or greater than the existing product ‡ Differentiated industry products. than qualitatively with lists of factors ‡ Quantify the 5 forces: %age of buyer's total cost accounted for by industry's product (to understand buyer price sensitivity).

buyer's switching cost (to determine inducement an entrant or rival must offer customers).profitability levels & reasons. competition ‡ Identify & segment participants. influenced by company. than use it for strategic choice .buyers. suppliers. exclusive/ indirect industry. controlling factors. ‡ Paying equal attention to all forces than focusing on the most important ones. ‡ Framework used to declare industry . are more profitable players better positioned wrt the 5 forces ‡ Analyse future changes (+/-) in each force ‡ Aspects of industry structure. competitors or new entrants Common Pitfalls ‡ Defining industry. substitutes & potential entrants ‡ Assess drivers of each competitive force.too broadly or too narrowly. ‡ Confusing effect (price sensitivity) with cause (buyer economics).determine which are strong & weak. ‡ Using static analysis that ignores industry trends. ‡ Define relevant industry: Products. competitors. ‡ Confusing cyclical or transient changes with true structural changes.Why ‡ Determine overall industry structure & consistency. scope.attractive/ unattractive.

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