Core competency


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Strategic Marketing Assignment

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Core competency

  2. 2. Core competencyA core competency is fundamental knowledge, ability, or expertise in a specificsubject area or skill set. A core competency is a concept in management theoryoriginally advocated by CK Prahalad, and Gary Hamel, two business book writers. Intheir view a core competency is a specific factor that a business sees as beingcentral to the way it, or its employees, works. It fulfills three key criteria: • It is not easy for competitors to imitate. • It can be re-used widely for many products and markets. • It must contribute to the end consumers experienced benefits.Core competencies are particular strengths relative to other organizations in theindustry which provide the fundamental basis for the provision of added value. Corecompetencies are the collective learning in organizations, and involve how tocoordinate diverse production skills and integrate multiple streams of technologies. Itis communication, an involvement and a deep commitment to working acrossorganizational boundaries. Few companies are likely to build world leadership inmore than five or six fundamental competencies.A core competence is the result of a specific set of skills or production techniquesthat deliver value to the customer. Such competences enable an organization toaccess a wide variety of markets. Executives should estimate the future challengesand opportunities of the business in order to stay on top of the game in varyingsituations. In order to be competitive an organization needs tangible resources butintangible resources like core competences are difficult and challenging to achieve. Itis even critical to manage and enhance the competences with reference to industrychanges and their future.A core competency will typically meet all rules on the following checklist: • it provides benefit to the customer • it is difficult to imitate • it can be leveraged widely to create many products (or operate in many markets) • it will uniquely identify the organization • it will be difficult to pin down, because it seems to be a combination of things such as technology, process, and know-how.Core Competency Example 1: AppleThe core competency of Apple can be said to be “making user friendly userinterfaces and design”. Let’s examine this statement against our checklist:Criteria Yes/No
  3. 3. Customer benefit? Yes. The customer clearly benefits from great user interfaces Yes. Companies have been trying for years and not yetDifficult to imitate? succeeded. Yes. This core competency has been rolled out to theCan be leveraged? iPod, the iPhone, and most recently, the iPad.Uniquely identifies Yesthe organization? Yes – it’s not just design, but marketing, software, hardwareDifficult to pin down? etcCore Competency Example 2: WalmartThe core competency of Walmart can be said to be “Groceries at a low cost”. Let’sexamine this statement against our checklist:Criteria Yes/No Yes. The customer gets their goods cheaper thanCustomer benefit? anywhere else Yes. A company would require huge scale to replicate,Difficult to imitate? and that is obviously not an easy thing to achieve. Yes. Walmart sells all kinds of goods using the sameCan be leveraged? model Yes, I think in the US at least, most consumers wouldUniquely identifies the identify Walmart as being amongst the cheapest in thisorganization? space. Yes – it’s scale, but also supply chain management, andDifficult to pin down? high inventory turnover etc.SummaryA core competency is defined as something unique that an organization has, or assomething unique it can do. A company that develops a unique core competency cancreate a long lasting competitive advantage. If you are working in a project orprogram management environment then you should understand how what you’reworking on leverages or adds to your organization’s core competencies.
  4. 4. Competitive advantageCompetitive advantage is the advantage that a firm has over its competitors, which isallowing the firm to generate greater sales or margins and/or retains more customersthan its competitors. There can be many types of competitive advantagesincluding the firms cost structure, product offerings, distribution network andcustomer support. It is the advantage over competitors gained by offering consumersgreater value, either by means of lower prices or by providing greater benefits andservice that justifies higher prices.Porter suggested four "generic" business strategies that could be adopted in order togain competitive advantage. The strategies relate to the extent to whichthe scope of a business activities are narrow versus broad and the extent to whicha business seeks to differentiate its products. The four strategies are summarised inthe figure below: Scope of business product Broad Narrow Source of competitive advantage Cost Cost Cost leadership focus Differentiation Differentiation Differentiation leadership focusThe differentiation and cost leadership strategies seek competitive advantage in abroad range of market or industry segments. By contrast, the differentiation focusand cost focus strategies are adopted in a narrow market or industry.Cost leadershipWith this strategy, the objective is to become the lowest-cost producer in theindustry. The traditional method to achieve this objective is to produce on a largescale which enables the business to exploit economies of scale.Why is cost leadership potentially so important? Many (perhaps all) marketsegments in the industry are supplied with the emphasis placed on minimising costs.If the achieved selling price can at least equal (or near) the average for the market,then the lowest-cost producer will (in theory) enjoy the best profits.This strategy is usually associated with large-scale businesses offering "standard"products with relatively little differentiation that are readily acceptable to themajority of customers. Occasionally, a low-cost leader will also discount its product tomaximise sales, particularly if it has a significant cost advantage over the competitionand, in doing so, it can further increase its market share.
  5. 5. A strategy of cost leadership requires close cooperation between all the functionalareas of a business. To be the lowest-cost producer, a firm is likely to achieve oruse several of the following: • High levels of productivity • High capacity utilisation • Use of bargaining power to negotiate the lowest prices for production inputs • Lean production methods (e.g. JIT) • Effective use of technology in the production process • Access to the most effective distribution channelsCost focusHere a business seeks a lower-cost advantage in just one or a small number ofmarket segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Suchproducts are often called "me-toos".Differentiation focusIn the differentiation focus strategy, a business aims to differentiate within just oneor a small number of target market segments. The special customer needsof the segment mean that there are opportunities to provide products that are clearlydifferent from competitors who may be targeting a broader group of customers.The important issue for any business adopting this strategy is to ensure thatcustomers really do have different needs and wants - in other words that there is avalid basis for differentiation - and that existing competitor products are not meetingthose needs and wants.Differentiation focus is the classic niche marketing strategy. Many small businessesare able to establish themselves in a niche market segment using this strategy,achieving higher prices than un-differentiated products through specialist expertise orother ways to add value for customers.There are many successful examples of differentiation focus. A good one is TyrrellsCrisps which focused on the smaller hand-fried, premium segment of the crispsindustry.Differentiation leadershipWith differentiation leadership, the business targets much larger markets and aims toachieve competitive advantage across the whole of an industry.This strategy involves selecting one or more criteria used by buyers in a market - andthen positioning the business uniquely to meet those criteria. This strategy is usuallyassociated with charging premium price for the product - often to reflect the higherproduction costs and extra value-added features provided for the consumer.Differentiation is about charging a premium price that more than covers theadditional production costs, and about giving customers clear reasons to prefer theproduct over other, less differentiated products.There are several ways in which this can be achieved, though it is not easy and itrequires substantial and sustained marketing investment. The methods include: • Superior product quality (features, benefits, durability, reliability)
  6. 6. • Branding (strong customer recognition & desire; brand loyalty) • Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers) • Consistent promotional support – often dominated by advertising, sponsorship etcGreat examples of a differentiation leadership include global brands like Nike andMercedes. These brands achieve significant economies of scale, but they do not relyon a cost leadership strategy to compete. Their business and brands are built onpersuading customers to become brand loyal and paying a premium for theirproducts.
  7. 7. Sustainable competitive advantageA firm is said to have a sustained competitive advantage when it is implementing avalue creating strategy not simultaneously being implemented by any current orpotential competitors and when these other firms are unable to duplicate the benefitsof this strategy. (Barney,1991).Sources of Sustable competitive advantage (SCA)Barney (1991) states that not all firm resources hold the potential of SCAs; instead,they must possess four attributes: rareness, value, inability to be imitated, andinability to be substituted.Hunt and Morgan (1995) propose that "potential resources can be most usefullycategorized as financial, physical, legal, human, organizational, informational, andrelational".Prahalad and Hamel (1990) suggest that firms combine their resources and skillsinto core competencies, loosely defined as that which a firm does distinctively well inrelation to competitors.Therefore, firms may succeed in establishing an SCA by combining skills andresources in unique and enduring ways. By combining resources in this manner,firms can focus on collectively learning how to coordinate all employees’ efforts inorder to facilitate growth of specific core competencies.Five steps to SCAWhile creating a sustainable competitive advantage is not easy, the following stepswill help ensure to remain ahead of the field.1. Establish Brand Loyalty. Customers will often remain with a brand they haveloyalty towards, even though the company does not offer the cheapest or mosteffective product. Focus on building strong relationships with your customers anddelivering a great customer experience and service.2. Patent Your Product. There has been a lot of debate recently about the true valueof a patent. While patents are not a ‘cure all’, they are an important weapon in anentrepreneur’s competitive advantage arsenal.3. Continually Innovate. Customers like updates and upgrades. Keeping yourproduct fresh and compatible with the market place (particularly if software), isessential.4. Hire ‘Connected’ Team Members. If your market includes large companies andgovernment departments, connections to key individuals within these organizationscan dramatically accelerate the ability to meet and secure contracts. Try to have atleast one member on the team who is ‘connected’.5. Use Long Term Contracts and Incentives. This step has to be executed carefully,as it can backfire. If the firm can establish a long term contract with the customer,then clearly they are less likely to switch to a competitor. If the firm only offers long
  8. 8. terms contracts, however, and your competitors are offering short terms contracts,then you are likely to lose business.Ideally one firm want to maintain the customers to enter into a long term contract,possibly by providing a slight reduction in cost or a bonus. Equally, customers aremore likely to be willing to enter into a long terms contract if they have just completeda successful short term contract with the firm.