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A core competency is a concept in management theory that originally advocated by C. K. Prahalad and Gary Hamel, two business authors. In their view a core competency is a specific factor that a business sees as being 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. The importance of the product/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, etc.
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 in organizations and involve how to coordinate diverse production skills and integrate multiple streams of technologies. It is communication, an involvement and a deep commitment to working across organizational boundaries.[vague] 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
The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organization. The 'margin' depicted in the diagram is the same as added value. The organization is split into 'primary activities' and 'support activities'.
A core competency results from a specific set of skills or production techniques that deliver additional value to the customer. Such competences enable an organization to access a wide variety of markets. Executives should estimate the future challenges and opportunities of the business in order to stay on top of the game in varying situations.[vague]
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. 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.
In Competing for the Future, the authors Prahalad and Hamel show how executives can develop the industry foresight necessary to adapt to industry changes, 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. The key to future industry leadership is to develop an independent point of view about tomorrow's opportunities and build capabilities that exploit them.[vague]
In order to be competitive an organization needs tangible resources but intangible resources like core competences are difficult and challenging to achieve. It is even critical to manage and enhance the competences with reference to industry changes and their future. For example, Microsoft has expertise in many IT based innovations where for a variety of reasons it is difficult for competitors to replicate Microsoft's core competences.
In a race to achieve cost cutting, quality and productivity, most of the executives do not spend their time to develop 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.
- 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.