Identifying Your Company’s Core Competencies

In a prior edition of Management Tips, I commented that essential competencies are a set of deep-rooted capabilities undergirding a company’s business and products / services.

We return to the topic today to discuss how to identify a company’s core competencies. Let’s take a look at the foundational article “The Core Competence of the Corporation,” published by Prahalad and Hamel in Harvard Business Review in May/June of 1990.

In the article, the authors state that a company’s competitiveness stems from its core competencies and key products. The core competence is collective learning in the organization, in particular the ability to coordinate various production skills and the ability to integrate technology flows.

Being able to identify, develop and explore the essential skills that make the company’s growth possible remains an important, differentiating factor.

Well, how do we identify the core competencies of a company?

The authors propose the application of “three tests,” or questions, as I call them, to identify if the competencies that a company possesses are in fact core competencies.

The three questions are illustrated in Figure 1.

The first question verifies that an identified competence provides potential access to a wide variety of markets. If the identified competence does not allow a company to operate in different businesses, it is not a core competence.

The second question that must be asked is whether this competence represents a significant contribution to the benefits perceived by customers of the end product / service. In other words, for a competence to be classified as core, it is essential that it be relevant to and perceived by your customers.

Finally, the third question is whether the imitation by your competition of the competence analyzed is difficult or not. A competence that can be easily copied is definitely not core.

In the article, Prahalad and Hamel leave us with two equally important lessons. The first is that the cost of losing a core competence can be calculated in advance only partly. The total cost of the loss will be known only after it has already become difficult to recover it. The second is that considering that core competencies result from a process of continuous improvement, a company that has stopped investing in the development of a core competence will have difficulty entering an emerging market, unless it is to serve as merely a distribution channel.

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