A core competency is a concept in management theory introduced by, C. K. Prahalad and Gary Hamel. It can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace".
Core competencies fulfill three criteria:
- Provides potential access to a wide variety of markets.
- Should make a significant contribution to the perceived customer benefits of the end product.
- Difficult to imitate by competitors.
For example, a company's core competencies may include precision mechanics, fine optics, and micro-electronics. These help it build cameras, but may also be useful in making other products that require these competencies.
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 (Strategic Business Unit) 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.
Core competencies and product development
Core competencies are related to a firm's product portfolio via core products. Core products contribute "to the competitiveness of a wide range of end products. They are the physical embodiment of core competencies." Approaches for identifying product portfolios with respect to core competencies and vice versa have been developed in recent years. One approach for identifying core competencies with respect to a product portfolio has been proposed by Danilovic & Leisner (2007). They use design structure matrices for mapping competencies to specific products in the product portfolio. Using their approach, clusters of competencies can be aggregated to core competencies. Bonjour & Micaelli (2010) introduced a similar method for assessing how far a company has achieved its development of core competencies. More recently Hein et al. link core competencies to Christensen's concept of capabilities, which is defined as resources, processes, and priorities. Furthermore, they present a method to evaluate different product architectures with respect to their contribution to the development of core competencies.
- Resource-based view
- Core business
- Competitive advantage
- Dunning–Kruger effect, the tendency for incompetent people to grossly overestimate their skills
- Prahalad, C.K. and Hamel, G. (1990) "The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91.
- Schilling, M. A. (2013). Strategic management of technological innovation, p.117 International Edition, McGraw-Hill Education.
- "Distinctive Competencies: How to Use Your Capabilities". Inevitable Steps. June 10, 2015. Retrieved January 31, 2016.
- Prahalad, C. K., & Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review, 68(3), 79-91. p.84
- Danilovic, M., & Leisner, P. (2007). "Analyzing core competence and core products for developing agile and adaptable corporation." In Proceedings of the 9th Dependency Structure Matrix (DSM) International Conference, 16–18 October 2007, Munich, Germany.
- Bonjour, E., & Micaelli, J. P. (2010). "Design core competence diagnosis: a case from the automotive industry". Engineering Management, IEEE Transactions on, 57(2), 323-337.
- Hein, A.M., Metsker, Y., Sturm, J.C., "Towards a Capability Framework for Systems Architecting and Technology Strategy". Proceedings of the 16th International DSM Conference 2014, Paris, France.
- Christensen, C. M., & Kaufman, S. P., 2006. Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities. Burgelman, R. A.; Christensen, C. M.; Wheelwright, S. C. (Eds.), Strategic Management of Technology and Innovation. McGrawHill, pp.153-163.
- 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.
- Slywotzky, Adrian (1995). Value Migration: How to Think Several Moves Ahead of the Competition