Core Competencies: Creating Tomorrow’s Markets

In the area of ​​strategy, one of the authors I most admire is C. K. Prahalad.

I was present at his lectures in São Paulo, and I am very fond of my autographed copy of his book Competing for the Future, written in partnership with Gary Hamel.

Sadly, Prahalad died prematurely in 2010, at the age of 68, with so many contributions to the study of strategy still ahead of him.

Prahalad and Hamel, one of his closest partners, wrote in 1990 the widely read article “The Core Competence of the Corporation,” where they proposed the concept of “core competencies.” Among his innumerable valuable ideas, Prahalad alerted companies to the strength of the low-income consumer.

Competing for the Future, published in 1994, reinforced the promising perspective of development. According to the authors, “in business, as in art, what distinguishes leaders from laggards is the ability to imagine with originality what is possible.”

In this issue of Management Tips, I want to talk a little about the concept of Core Competence.

(I previously addressed another of their important concepts, namely strategic intent, in the article “Re-signifying the essential purpose of the organization using strategic intent.” I recommend reading it!)

Your core competence is in its essence what you do that no one else does the same way. It is a positive differential that puts you or your company far ahead in the market, ahead of competitors, whether as a professional or an organization. The core competence model focuses on a combination of specific, collaborative, integrated, and applied knowledge, skills, and attitudes.

Core competencies are, therefore, a set of deeply embedded capabilities that undergird a company’s business and products / services. They stem from the collective learning of the company, particularly on the integration and coordination of skills and technologies.

Companies often confuse core competence with technology, infrastructure, ability, or aptitude. For Prahalad core competence is not infrastructure: Having a nationwide distribution system is no core competence; it just means you have a networked logistics infrastructure. Nor is mastering a technology a core competence. The fact that a company is competent in designing microprocessors does not necessarily imply a core competence.

Prahalad recommends three tests to see if what we imagine to be our core competence really is. The first test is to determine if what we think we are is indeed a unique set of skills that includes a technological component and a learning component, and whether that set is disseminated throughout the company’s business units. Thus, it is important to have a set of skills, but also that these skills are widespread in the company. The second is to check if other companies have difficulty imitating us. Something that can be easily copied cannot be a core competence. The third test is to assess whether this competence creates – and can be used in – new business opportunities. If our answers to these questions are indisputably “Yes,” it is a sign that we have identified our core competence.

To recap, you should answer the following questions to find out if what you believe to be your core competence in fact is.

  1. Is it a unique set of skills that includes a technological component and a learning component?
  2. Is this set of skills spread across multiple business units?
  3. Do other companies have difficulty imitating you?
  4. Does your competence / do your competencies create new business opportunities?

If you answer in the affirmative, you have a core competence.

Organizing around core competencies demands a profound transformation in the way the company structures itself. This transformation must be carried out in three main steps. The first requires the identification of core competencies, which meet these three requirements: they provide potential access to a wide variety of markets, contribute to the benefits of the product for the customer, and are difficult to imitate. The second is to redesign the company’s architecture (its organizational structure) and establish conditions for learning through partnerships and a special focus on internal development. Management must ask, “How long can we preserve our competitiveness if we do not maintain this core competence?” Finally, the last step is to evaluate how central this competence is for customer satisfaction and being able to take advantage of opportunities that would otherwise be lost.

Core competencies, as Prahalad and Hamel affirm, are not natural in the majority of businesses. More important than focusing on products and services is the developing of core competencies and the vision of the company as a portfolio not of products and services, but of core competencies.

Does your company have a core competence?

Think about it!

See you in the next MANAGEMENT TIPS!

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