Core Competency - Explained
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What is Core Business Competency?
Core competency is the primary skill or ability of a firm in the process of delivering value to the consumer. The term was coined in a research article, The Core Competencies of the Corporation, by Professors CK Prahalad and Gary Hamel published in the Harvard Business Review. Basically, it refers to what a company does better than industry competitors.
A core competency can take place or arise at any point in the value chain. Generally, it relates to the manner in which the firm integrates available resources into its value creation process. The introduction of resources directly relates to the internal knowledge, skills, or abilities of the firm. As the knowledge, skills, and abilities of the firm change (and the available resources vary) the core competencies of the firm may evolve or change. A business strategy must evolve along with the companies core competencies to establish or maintain a competitive advantage over competitors.
- Examples of core competency might include: resources access or generation; production methods or processes; creativity or innovative activity; supplier/buyer relationships; specific areas of superior technical knowledge; internal or external communications or information transfer; etc.
Back To: BUSINESS STRATEGY
More on Resources, People, and Core Competency
As discussed above, a core competency depends upon the integration of resources into the value delivery process. Resources might include: financial capital, human capital, technology, physical or intellectual property, or organizational processes/structure. The ability to integrate resources into the value chain is all about the individuals who work to establish, integrate, and maintain those resources. The attributes of those individuals contributes equally to the creation of core competency. The extent to which a company has access to these resources and is able to integrate them into the value delivery process affects the strength of the firms core competency. The availability of resources and the inability to integrate them may have the same effect as limited resources with the ability to effectively integrate them. In any event, the integration of resources is absolutely necessary for a firm to be competitive among competitors. It will affect the advantage a firm is able to establish over competitors and the sustainability of that competitive advantage. The availability of resources will therefore affect a companies strategy (strategic goals or implementation of a strategic plan).
Core Competency and Strategy
The strategic theory of core competency implies that a firm should operate or provide value in a manner that utilizes its core competency. The strategy or using or taking advantage of ones core strength results in the best opportunity for establishing a temporary or sustainable advantage over competitors in the market. That is, a firms core competency should allow the firm to provide unique value to the customer. That is, it should provide a cost advantage or level of differentiation to the entire market or some niche market. Core competency strategy indicates that firms must focus on establishing and organizing their efforts around their core competencies. Drs. Prahald and Hamel broke down the value delivery process into core products or value that derives from the core competency. This core product is used to develop, create, and deliver any number of end products (or value propositions) to the consumer. The end products may beget the formation of unique business units for the firm. In this way, the result of core competency is to allow a firm to innovate in a given market, improve market position, develop new markets, allocated resources, define operational decisionmaking, and promote internal strategic thinking.
Core Competency and the Strategic Business Unit
This strategy runs in the face of a commonly accepted strategy of focusing efforts around isolating value delivery to the value generating strategic business unit. Firms focusing on the strategic business unit look solely to growth and profit generation as sources of value. This leads to the devaluation of operational areas (resources or people) characterizing the firms core competency. This lead firms to outsource services or fail to maintain ownership of resources (such as intellectual property) that could constitute a core competency. This, in turn, results in a loss of particular competencies. This ultimately causes the firm to lose its ability to compete in a given market or industry. For example, assume a firm focuses on a sales unit to the exclusion of its engineering department. The firm begins to outsource engineering to other firms. If the company needs to innovate or develop new products or add product attributes in the industry, it has lost its ability or efficiency in doing so. See our discussion of the BCG growth matrix for more on strategies focusing on the strategic business unit.
Developing Core Competencies
Look to develop access to resources and abilities of individuals in the corporation. These are the elements that give rise to core competencies. This requires understanding the value proposition provided to customers and identifying the resources and internal abilities that allow the firm to better provide that value. The firm must then foster these resources and abilities by allocating resources to them. This may include: allocating capital and existing resources; changing business structure (see vertical and horizontal integration); making external relationships; engaging in research and development; promoting employee training and creativity; introducing (developing, purchasing, or licensing) technology and novel operational methods; seeking diverse inputs; etc.