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A core competency is a concept in management theory originally advocated by two business authors, C. K. Prahalad and Gary Hamel. In their view a core competency is a specific factor that a business sees as central to the way the company or its employees work. It fulfills three key criteria:
- It is not easy for competitors to imitate.
- It can be reused widely for many products and markets.
- It must contribute to the end consumer's experienced benefits and the value of the product or service to its customers.
A core competency can take various forms, including technical/subject matter know-how, a reliable process and/or close relationships with customers and suppliers. It may also include product development or culture, such as employee dedication, best Human Resource Management (HRM), good market coverage, or kaizen or continuous improvement over time.
Core competencies are particular strengths relative to other organizations in the industry, which provide the fundamental basis for the provision of added value. Core competencies reflect the collective learning of an organization and involve coordinating diverse production skills and integrating multiple streams of technologies. It includes communication, involvement, and a deep commitment to working across organizational boundaries, such as improving cross-functional teams within an organization to address boundaries and to overcome them. Few companies are likely to build world leadership in more than five or six fundamental competencies.
As an example of core competencies, Walt Disney World Parks and Resorts has three main core competencies:
- Animatronics and Show Design
- Storytelling, Story Creation and Themed Atmospheric Attractions
- Efficient operation of theme parks
A core competency results from a specific set of skills or production techniques that deliver additional value to the customer. These enable an organization to access a wide variety of markets.
In an article from 1990 titled "The Core Competence of the Corporation", Prahalad and Hamel illustrate that core competencies lead to the development of core products which further can be used to build many products for end users. Core competencies are developed through the process of continuous improvements over the period of time rather than a single large change. To succeed in an emerging global market, it is more important and required to build core competencies rather than vertical integration. NEC utilized its portfolio of core competencies to dominate the semiconductor, telecommunications and consumer electronics market. It is important to identify core competencies because it is difficult to retain those competencies in a price war and cost-cutting environment. The author used the example of how to integrate core competences using strategic architecture in view of changing market requirements and evolving technologies. Management must realize that stakeholders to core competences are an asset which can be utilized to integrate and build the competencies[vague] Competence building is an outcome of strategic architecture which must be enforced by top management in order to exploit its full capacity.
Please note: according to Prahalad and Hamel's (1990) definition, core competencies are the "collective learning across the corporation". They can therefore not be applied to the SBU and represent resource combination steered from the corporate level. Because the term "core competence" is often confused with "something a company is particularly good at", some caution should be taken not to dilute the original meaning.
In Competing for the Future, the authors Prahalad and Hamel show how executives can develop the industry foresight necessary to adapt to industry changes and discover ways of controlling resources that will enable the company to attain goals despite any constraints. 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. Developing an independent point of view of tomorrow's opportunities and building capabilities that exploit them is the key to future industry leadership.[vague]
For an organization to be competitive, it needs not only tangible resources but intangible resources like core competences that are difficult and challenging to achieve. It is critical to manage and enhance the competences in response to industry changes in the future. For example, Microsoft has expertise in many IT based innovations where, for a variety of reasons, it is difficult for competitors to replicate or compete with Microsoft's core competences.
In a race to achieve cost cutting, quality and productivity, most executives do not spend their time developing a corporate view of the future because this exercise demands high intellectual energy and commitment. 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.
- Resource-based view
- Core business
- Competitive advantage
- Dunning–Kruger effect, the tendency for incompetent people to grossly overestimate their skills
- Mascarenhas et al. 1998
- "10 Reasons Why DCA is a Bad Idea - Part Two". Retrieved 2010-10-01.
- Prahalad, C.K. and Hamel, G. (1990) The core competence of the corporation, Harvard Business Review (v. 68, no. 3) pp. 79–91.
- Galunic, D.C. and Rodan, S. (1998). Resource recombinations in the firm: knowledge structures and the potential for Schumpeterian innovation. Strategic Management Journal 19. p. 1193–1201.
- Leonard-Barton, D. (1992). Core capabilities and core rigidities: A paradox in managing new product development. Strategic Management Journal 13-S1. p. 111–125.