useful for learners of strategic management

1. THE CONCEPT OF
CORE COMPETENCY
A presentation by:
Sajeed Mahaboob
2011ME1111
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Indian Institute of Technology Ropar

2. CORE COMPETENCY
 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 competency are the skills, characteristics, and assets that set your company
apart from competitors.
 They are the fuel for innovation and the roots of competitive advantage.
 The engine for new business development, underlying component of a company’s
competitive advantage created from the coordination, integration and
harmonization of diverse skills and multiple streams of technologies.
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3. COMPETENCIES DO NOT MEAN
 Outspending competitors on research and development
 Cost sharing among SBU’s
 Vertical integration
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4. Roots Of Competitive Advantage
 Consolidate corporate wide tech. & production skills
 Binds the existing business and an engine of new business development.
 Involvement and a deep commitment to work across organizational boundaries.
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5. IDENTIFYING YOUR CORE
COMPETENCIES
 Prahalad and Hamel suggest three factors to help identify core competencies in
any business:
1. Provides potential access to a wide variety of markets
2. Makes a significant contribution to the perceived customer benefits of the
end product
3. Difficult for competitors to imitate
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6. 1. Provides potential access to a wide variety of markets
 The key core competencies here are those that enable the creation of new products and
services.
Example: Why has Saga established such a strong leadership in supplying financial
services (e.g. insurance) and holidays to the older generation?
 Core Competencies that enable Saga to enter apparently different markets:
- Clear distinctive brand proposition that focuses solely on a closely-defined customer
group
- Leading direct marketing skills - database management; direct-mailing campaigns; call
center sales conversion
- Skills in customer relationship management
- ITC
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7. 2. Makes a significant contribution to the perceived
customer benefits of the end product
Core competencies are the skills that enable a business to deliver a fundamental customer
benefit - in other words: what is it that causes customers to choose one product over
another? To identify core competencies in a particular market, ask questions such as "why is
the customer willing to pay more or less for one product or service than another?" "What is a
customer actually paying for?
Example: Why have Amazon been so successful in capturing leadership of the market
for online book shopping?
Core competencies that mean customers value the Tesco.com experience so highly:
- Designing and implementing supply systems that effectively link existing shops with the
Amazon.com web site
- Ability to design and deliver a "customer interface" that personalizes online shopping and
makes it more efficient
- Reliable and efficient delivery infrastructure (product picking, distribution, customer
satisfaction handling)
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8. 3. Difficult for competitors to imitate
A core competence should be "competitively unique": In many industries, most skills
can be considered a prerequisite for participation and do not provide any significant
competitor differentiation. To qualify as "core", a competence should be something
that other competitors wish they had within their own business.
Example: Why does Dell have such a strong position in the personal computer
market?
Core competencies that are difficult for the competition to imitate:
- Online customer "bespoking" of each computer built
- Minimization of working capital in the production process
- High manufacturing and distribution quality - reliable products at competitive prices
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9. Losing Core Competencies
How to lose: A Core Competency is lost:
 Through outsourcing/OEM-supply relationships
=> Example: Chrysler vs Honda
(Chrysler unlike Honda considered its engines and power trains as simply another
component and started outsourcing)
 Through giving up opportunities to establish competencies that are evolving in
existing businesses
=> Example: television business
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10. More About…
STRATEGIC ARCHITECTURE
 Company’s future is determined by it’s core competencies. These competencies
define the architecture and characteristics of the global competitive firm.
BOUNDARY LESS ORGANIZATION
 In the old diversified corporation, ideas and technologies are reluctantly shared from
one SBU to the next, if at all.
 Boundaries seem transparent when SBU’s share core competencies and core
products. These resources come from the firm.
RESOURCE ALLOCATION
 When core competencies are the roots of the firm, specialized employees and core
products can be allocated to various SBU’s.
 At Maruti, specialized employees move between camera and printer products
regularly.
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11. INNOVATION
Using core competencies, new technologies can be developed without heavy R&D costs.
Fiat: Drive your way; Maruti Suzuki : Count on us; Hyundai: New thinking new possibilities;
Honda: Off-road buggy; Ford: Go further
COMPETENCE BUILDING
The focus of today’s global firm should be in competence building.
Constantly improving competencies provides for new integrated technologies.
Competencies provide focus for long-term goals.
COMPETITIVE ADVANTAGE
Short-term market share can be won by anyone with a good idea.
Race to get products on the shelf.
Long-term success involves competency structured organizations, innovation, and market
consistency.
Same core products, integrated into new end products, creating new markets.
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12. SBU vs Core Competence
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13. THE LOSS OF CORE COMPETENCIES
 Cost-cutting moves sometimes destroy the ability to build core competencies. For
example, decentralization makes it more difficult to build core competencies because
autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents
the firm from developing core competencies in those tasks since it no longer
consolidates the know-how that is spread throughout the company.
 Failure to recognize core competencies may lead to decisions that result in their loss.
For example, in the 1970's many U.S. manufacturers divested themselves of their
television manufacturing businesses, reasoning that the industry was mature and that
high quality, low cost models were available from Far East manufacturers. In the
process, they lost their core competence in video, and this loss resulted in a handicap
in the newer digital television industry.
 Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb level,
and then was unable to enter the 1Mb market on its own. By recognizing its core
competencies and understanding the time required to build them or regain them, a
company can make better divestment decisions.
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14. IMPLICATIONS FOR CORPORATE MANAGEMENT
 Prahalad and Hamel suggest that a corporation should be organized into a portfolio
of core competencies rather than a portfolio of independent business units.
Business unit managers tend to focus on getting immediate end-products to market
rapidly and usually do not feel responsible for developing company-wide core
competencies. Consequently, without the incentive and direction from corporate
management to do otherwise, strategic business units are inclined to underinvest in
the building of core competencies.
 If a business unit does manage to develop its own core competencies over time,
due to its autonomy it may not share them with other business units. As a solution
to this problem, Prahalad and Hamel suggest that corporate managers should have
the ability to allocate not only cash but also core competencies among business
units. Business units that lose key employees for the sake of a corporate core
competency should be recognized for their contribution.
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15. CORE PRODUCTS
 Core competencies manifest themselves in core products that serve as a link
between the competencies and end products. Core products enable value creation
in the end products. Examples of firms and some of their core products include:
• Canon - laser printer subsystems;
• Honda - gasoline powered engines;
• Black & Decker - small electric motors
 Because firms may sell their core products to other firms that use them as the basis
for end user products, traditional measures of brand market share are insufficient
for evaluating the success of core competencies. Prahalad and Hamel suggest that
core product share is the appropriate metric. While a company may have a low
brand share, it may have high core product share and it is this share that is
important from a core competency standpoint.
 Once a firm has successful core products, it can expand the number of uses in
order to gain a cost advantage via economies of scale and economies of scope.
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16. CORE COMPETENCIES TO END PRODUCTS
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17. Case Study 1: HONDA MOTOR CO.
 It is a Japanese multinational corporation primarily known for automobiles and
motorcycles.
 It is the largest manufacturer of motorcycles and internal combustion engines
measured by volume producing more than 14 million internal combustion engines
in an year.
 Apart from core automobiles and motorcycles Honda are also manufacturers
garden equipment, marine engines, personal watercrafts
 They have recently ventured into the aerospace industry with GE Honda Aero
engines. The Honda jet was scheduled in 2011.
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18. CORE COMPETENCIES OF HONDA
 R&D
 FINANCIAL RESOURCES
 MANUFACTURING
COMBINATION OF CORE COMPETENCIES LET TO CORE PRODUCT i.e.
ENGINES WHICH THEY DIVERSIFIED INTO VARIOUS BUSINESS LIKE
AUTOMOBILES,MOTORCYCLES,POWER PRODUCTS,HONDA JETS AND
ROBOTICS.
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19. Case Study 2: Black & Decker
Black & Decker 's core technological competency pertains to 200 to 600 W electric
motors , and this motor is their core product . All of their end products are modifications
of this basic technology, with the exception of their work benches, flash lights, battery
charging systems, toaster ovens, and coffee percolators.
They produce products for three markets:
• The home workshop market: In the home workshop market, small electric motors
are used to produce drills, circular saws, sanders, routers, rotary tools, polishers, and
drivers.
• The home cleaning and maintenance market: In the home cleaning and
maintenance market, small electric motors are used to produce dust busters, etc.
• The kitchen appliance market: In the kitchen appliance market, small electric
motors are used to produce can openers, food processors, blenders, bread makers,
and fans.
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20. Summary
 Learn your competencies
 Develop your competencies
 Structure your organization around your competencies
 Involve core products in all end products
 Outsource non-competencies with strategic alliances and licensing.
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21. “
”
If you don't have a
competitive advantage, don't
compete
- Jack Welch
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22. “
”
“ The ability to learn faster than
your competitors may be only
sustainable competitive
advantage.”
- Arie De Geus
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23. References:
 Article Study sent by you
 Gary Hamel and C. K. Prahalad, (1990) “The Core Competence of the Corporation”
Harvard Business Review , vol. 68, no. 3, May-June 1990, pp 79-93.
 http://www.quickmba.com/strategy/core-competencies
 http://www.tutor2u.net/business/strategy/core_competencies.htm
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24. THANK You !

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