How would you identify the core competencies of a company?

10 MIN READ

Building Sustainable Competitive Advantage

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Find the value of uniqueness

What makes your business, or you as a person, stand out from the crowd? What are the unique things that you do that your competitors can't imitate, and bring you real value?

They can be products and services, or your own expertise and knowledge – and they are your "core competencies."

In this article we explain what core competencies are, and how you can identify them and use them, on both corporate and personal levels, to get ahead of your competition – and stay ahead.

By using the idea, you'll make the very most of the opportunities open to you:

• You'll focus your efforts so that you develop a unique level of expertise in areas that really matter to your customers. Because of this, you'll command the rewards that come with this expertise.
• You'll learn to develop your own skills in a way that complements your company's core competencies. By building the skills and abilities that your company most values, you'll win respect and get the career advancement that you want.

What Are Core Competencies?

The starting point for understanding core competencies is understanding that businesses need to have something that customers uniquely value if they're to make good profits.

"Copycat" businesses (with nothing unique to distinguish them from their competition) are doomed to compete on price: the only thing they can do to make themselves the customer's top choice is drop price. And as other "copycat" businesses do the same, profit margins become thinner and thinner.

This is why there's such an emphasis on building and selling USPs (Unique Selling Points) in business.

If you're able to offer something uniquely good, customers will want to choose your products and will be willing to pay more for them.

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The question, though, is where this uniqueness comes from, and how it can be sustained.

In their key 1990 paper "The Core Competence of the Corporation," C.K.Prahalad and Gary Hamel argue that "Core Competences" are some of the most important sources of uniqueness: these are the things that a company can do uniquely well, and that no-one else can copy quickly enough to affect competition.

Prahalad and Hamel used examples of slow-growing and now-forgotten mega corporations that failed to recognize and capitalize on their strengths. They compared them with star performers of the 1980s (such as NEC, Canon and Honda), which had a very clear idea of what they were good at, and which grew very fast.

Because these companies were focused on their core competencies, and continually worked to build and reinforce them, their products were more advanced than those of their competitors, and customers were prepared to pay more for them. And as they switched effort away from areas where they were weak, and further focused on areas of strength, their products built up more and more of a market lead.

There might be a range of things that a company does that it can do well. However, Hamel and Prahalad give three tests to see whether they are true core competencies:

1. Relevance – The competence must give your customer something that strongly influences them to choose your product or service. If it does not, then it has no effect on your competitive position and is not a core competence.
2. Difficulty of imitation – The core competence should be difficult to imitate. This allows you to provide products that are better than those of your competition. And because you're continually working to improve these skills, means that you can sustain its competitive position.
3. Breadth of application – It should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth.

For example, you might consider strong industry knowledge and expertise to be a core competence in serving your industry. However, if your competitors have equivalent expertise, then this is not a core competence. All it does is make it more difficult for new competitors to enter the market. More than this, it's unlikely to help you much in moving into new markets, which will have established experts already. (Test 1: Yes. Test 2: No. Test 3: Probably not.)

Reproduced with permission from "The Core Competence of the Corporation" first published in Harvard Business Review, May-June, 1990.

Using Core Competencies in Your Business and Career

To identify your core competencies, use the following steps:

1. Brainstorm the factors that are important to your clients.

   If you're doing this on behalf of your company, identify the factors that influence people's purchase decisions when they're buying products or services like yours. (Make sure that you move beyond just product or service features and include all decision-making points.)

   If you're doing this for yourself, brainstorm the factors, for example, that people use in assessing you for annual performance reviews or promotion, or for new roles you want. (It might be difficult to come up with truly unique core competencies, but keep the idea in mind and work to develop some.)

   Then dig into these factors, and identify the competencies that lie behind them. As a corporate example, if customers value small products (for instance, cell phones), then the competence they value may be "component integration and miniaturization."

2. Brainstorm your existing competencies and the things you do well.
3. For the list of your own competencies, screen them against the tests of relevance, difficulty of imitation, and breadth of application, and see if any of the competencies you've listed are core competencies.
4. For the list of factors that are important to clients, screen them using these tests to see if you could develop these as core competencies.
5. Review the two screened lists, and think about them:
   • If you've identified core competencies that you already have, then great! Work on them and make sure that you build them as far as sensibly possible.
   • If you have no core competencies, then look at ones that you could develop, and work to build them.
   • If you have no core competencies and it doesn't look as if you can build any that customers would value, then either there's something else that you can use to create uniqueness in the market (see our USP Analysis article), or think about finding a new environment that suits your competencies.

6. Think of the most time-consuming and costly things that you do either as an individual or a company.

   If any of these things do not contribute to a core competence, ask yourself if you can outsource them effectively, clearing down time so that you can focus on core competencies.

   For example, as an individual, are you still doing your own cleaning, ironing and decorating? As a small business, are you doing you own accounts, HR and payroll? As a bigger business, are you manufacturing non-core product components, or performing non-core activities?

Tip:

You may find it quite difficult to find any true core competencies in your business. If you've got a successful business that's sustainably outperforming rivals, then maybe something else is fueling your success (our article on USP Analysis may help you spot this).

However, if you're working very hard, and you're still finding it difficult to make a profit, then you need to think carefully about crafting a unique competitive position.

Criticisms of Core Competencies

While highly influential, Prahalad and Hamel’s work on core competences has not been without its critics.

For example, British economist John Kay examined how 11 of the 12 companies profiled by the pair had performed in the decade since publication of their work, and found they had underperformed compared with the market average at the time.

Author and industry analyst Daniel W. Rasmus has argued that focusing too strongly on core competencies can limit organizations' ability to adapt and can "distance themselves from people who do the non-strategic work."

Discussing what he calls the "emotional infrastructure" of an organization, Rasmus said, "Here’s the problem with the core competency model. As parts of the organization are lopped off, the workforce becomes more fragmented. People work for different organizations with different goals and objectives, different business cycles and different cultures.

"An outsourced receptionist, for instance, spends his or her entire day working with people from company other than the one who writes their check. How should this person relate to those they work with? How should the 'employees' relate to this 'service worker'?"

Key Points

Core competences are the capabilities that are critical to an organization's achievement of competitive advantage. They are the products, services, process and expertise that set you apart from your competitors.

They can also be used at a personal level to develop your own skills to help you to advance your career.

Originated by C.K.Prahalad and Gary Hamel, there are three tests for core competencies:

1. Relevance: why your customer chooses you over any competitor.
2. Difficulty of imitation: your offering must be unique and robust.
3. Breadth of application: your competency provides access to a range of new markets.

How are competencies identified?

Why is it important to identify core competencies?

Which competencies do you consider core for your organization and why?

How are core competencies analyzed?