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What is core competence and how does a firm build them? What are the characteristics of a firm that build core competencies? Explain with examples for core products

By: Manoj Kumar Singh Roll no. 10327 Sec B VJIM

INTRODUCTION
Core competence can be defined as bundle of skills and technologies resulting in a pool of experience, knowledge, and systems that together can act as a catalyst that create and accumulate new strategic assets. These strategic assets are very difficult to imitate by competitors thereby providing competitive advantage to the firms possessing them. All firms have competencies. However, competencies are considered to be core when these skills result in a firm achieving best in the world status and provide the customer with unique value. Not all competencies are core competencies unless they provide the organization with superior skills, sustainability of the superiority, value generated vis--vis other economic levers, and is an integral part of the value proposition.

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 itself.' 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? Provides potential access to a wide variety of markets Comments / Examples

The key core competencies here are those that enable the creation of new products and services. Example: Why has Saga established such a strong leadership in supplying financial services (e.g. insurance) and holidays to the older generation? Core Competencies that enable Saga to enter apparently different markets: - Clear distinctive brand proposition that focuses solely on a closelydefined customer group - Leading direct marketing skills - database management; direct-mailing campaigns; call centre sales conversion - 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 - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, 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.com experience so highly: - Designing and implementing supply systems that effectively link existing shops with the Tesco.com web site - Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient - Reliable and efficient delivery infrastructure.

Difficult for competitors to imitate

A core competence should be "competitively unique": In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as "core", a competence should be something that other competitors wish they had within their own business. Example: Why does Dell have such a strong position in the personal computer market? Core competencies that are difficult for the competition to imitate: - Online customer "bespeaking" of each computer built - Minimisation of working capital in the production process - High manufacturing and distribution quality - 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, as it will not differentiate the business from any other similar businesses. For example, a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However it is possible to develop such a process into a core competence with suitable investment in equipment and training. 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.

CATEGORIES OF CORE COMPETENCIES

Competencies can be broadly categorized into two categories: physical product production competencies and service-product production competencies. Production competencies can be further sub-divided into material competencies and fabrication and assembly competencies. Material competencies are production and technological skills related to transforming raw material to a new and more valuable end product material. Fabrication and assembly competencies involve manufacture and assembly of components, subsystems, and systems.

Service competencies can be grouped into knowledge-based competencies and knowledgeembedded competencies. Knowledge-based competencies are services in which the value derived by the purchaser is directly dependent on the skills and expertise of the individual

providing services. In Knowledge embedded competency the value derived by the purchaser is embedded in the system that delivers the product. Management capabilities and technical competencies are both important for an organisation. Former helps in creating or expanding the new corporate competence, and provide foundation for corporate learning. The process and routines by which firms manages technologies and skills are central to the firms ability to gain potential benefits associated to the technologies and skills that at the least form a competence, but hopefully represent a core competence.

DEVELOPING CORE COMPETENCIES

Creating core competency for an organisation, if it does not have in it, is not easy, but possible. But even before starting to create core competencies in an organisation it should be ensured that world-class competence must steer the power structure and core competency strategy should be chosen by CEO, not by independent department heads. Different ways by which core competencies can be developed in organizations are: evaluation, incubation, and acquisition. Evolutionary approach involves building skill simultaneously when individuals involved perform their usual jobs. Companies involved in this core competency building demands payoffs from their initiatives along their way. Incubation approach involves in creating a separate group to focus exclusively on the chosen competence. A small team develops the competence over two-three year period and then transferred to other parts of organisation once it is becomes strong enough to drive value within incubator. Finally by acquisition, firms obtain the skill it seeks by acquiring another company. Among the three, this approach is more likely to fail, and to increase success rates acquired company is not fully integrated and retains autonomy. There are several factors that provide advantages to the organizations that possessed them: economies of scale, integration and non-integration, and process based core competencies. Competitive advantages obtained by economies of scale and scope are rooted in market positions, and others in business models. Although values of market positions and the relevance of business models can wax and wane, tacit competencies are thought to be more enduring because they are very difficult to copy by the rival companies. Every competitive advantage is contingent upon the conditions present at that point of time. The very existence of competitive advantage triggers creative innovations that, as competitors strive to level the playing field, cause the advantage to disappear. But firms possessing core competence are able to create competitive advantage for organizations are dynamic environment thereby ensuring the sustainability of competitive advantage leading to better performance.

CHARACTERISTICS OF FIRMA THAT BUILD CORE COMPETENCIES Distinctive Capabilities Distinctive capabilities are the basis of your competitive advantage. According to the new resource-based view of the company, sustainable competitive advantage is achieved by continuously developing existing and creating new resources and capabilities in response to rapidly changing market conditions. Among these resources and capabilities, in the new economy, knowledge represents the most important value-creating asset. The opportunity for your company to sustain your competitive advantage is determined by your capabilities of two kinds distinctive capabilities and reproducible capabilities - and their unique combination you create to achieve synergy. Your distinctive capabilities - the characteristics of your company which cannot be replicated by competitors, or can only be replicated with great difficulty - are the basis of your sustainable competitive advantage. Distinctive capabilities can be of many kinds: patents, exclusive licenses, strong brands, leadership, teamwork, or tacit knowledge. Reproducible capabilities are those that can be bought or created by your competitors and thus by themselves cannot be a source of competitive advantage. Leadership Leadership is the necessary condition for long-term competitiveness. In particular in the knowledge economy, what is proving to be most effective is "the emerging style of valuesbased leadership, both as motivation for constant innovation up and down all organization levels and as a source of unity and coherence across fragmented firm boundaries." Harnessing your abilities to lead through the power of intellect, will, persistence, and vision creates synergies that propel successful companies in the quest for, and achievement of, competitive advantage. Systemic Innovation Innovation used to be a linear trajectory from new knowledge to new product. Now innovation is neither singular nor linear, but systemic. It arises from complex interactions between many individuals, organizations and environmental factors. Firms which are successful in realizing the full returns from their technologies and innovations are able to match their technological developments with complementary expertise in other areas of their business, such as manufacturing, distribution, human resources, marketing, and customer relationships. Radical Innovation Long-term corporate success linked to the ability to innovate. Although corporate investment in improvements to existing products and processes does bring growth, it is new game changing breakthroughs that will launch company into new markets, enable rapid growth, and create high return on investment.

CORE PRODUCTS
According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. This flow from core competencies to end products is shown in the following diagram:

Core Competencies to End Products End Products 1 2 3 4 5 6 7 8 9 10 11 12 Business 4

Business 1

Business 2

Business 3

Core Product 1

Core Product 2

Competence 1

Competence 2

Competence 3

Competence 4

The intersection of market opportunities with core competencies forms the basis for launching new businesses. By combining a set of core competencies in different ways and matching them to market opportunities, a corporation can launch a vast array of businesses. Without core competencies, a large corporation is just a collection of discrete businesses. Core competencies serve as the glue that bonds the business units together into a coherent portfolio. EXAMPLES: Honda core product: engines

Canon core product: laser printer subsystems