Getting the Most Out of Your Organization’s Core Competencies

Identifying core competencies and the capabilities that support them is a strategic must-do

Published: Wednesday, March 14, 2018 - 12:03

Much has been written about the benefits of identifying and leveraging an organization’s core competencies to gain competitive advantage. But are organizations putting this concept into practice, and are they doing it strategically? Do they understand that by not doing so they risk losing substantial ground to their competition? Of course, some do; I will provide examples in this article that you’ll recognize immediately. However, from what I have observed, I’m not convinced that it’s common knowledge that the strategic application of core competencies is a significant key to success.

The concept of organizational “core competencies” is not new. In its broadest sense, it is an inward-looking corporate strategy used by many highly successful organizations to identify what they are best at doing, and they use that understanding to compete in multiple markets. It can be an alternative or supplement to the more traditional Porter’s Five Forces strategy that looks outward at industries that are highly profitable, as well as their business environments, for opportunities to compete in the marketplace. (See “The Porter Five Forces and Core Competences Approaches” presented by Richard Whittington.)

A key challenge for organizations using core competencies as a strategy appears to be in the proper identification of their core competencies and the resources and other capabilities required to apply them. Another challenge is their integration with the strategy, systems, and processes within the organization in a way that produces the desired results—sustainable competitive advantage and improved business performance. Getting the most out of core competencies requires meeting both challenges.

Properly identifying core competencies first requires an understanding of precisely what they are. My quest for understanding led me to an article by C. K. Prahalad and Gary Hamel in Harvard Business Review (“The Core Competence of the Corporation,”1990). These authors appear to be credited with solidifying the concept. The article provided me with a basic understanding of the strategic importance of core competencies, how to identify them in an organization, and how to build them for competitive advantage. It also became clear that misunderstanding exactly what is meant by a “core competency” can have serious negative consequences for an organization.

Defining core competencies

So, what are core competencies? Some define core competencies in terms of organization; others associate them with the individual competencies of workers. In terms of organization, Prahalad and Hamel define them this way: “Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”; they go on to say that core competencies are a “complex harmonization of individual technologies and production skills.” This definition implies that a core competency comprises a collection of differing but integrated organizational capabilities and resources that work together efficiently to produce products and services.

They also set out three conditions that must be true for a competency to be “core.”

“First, a core competence must provide potential access to a wide variety of markets,” say the authors. This means that core competencies, once identified and developed, are leveraged over and over to create a wide variety of products and services. For example, Prahalad and Hamel refer to Honda, where the core competency is its design and development of engines and power trains. Honda had leveraged this competency to access lawn mower, automobile, generator, and motorcycle businesses.

“Second,” they write, “a core competence should make a significant contribution to the perceived customer benefits of the end-product.” At Honda, the perceived benefit to customers is high quality at a competitive price.

A YouTube presentation by MedlockMethod, which analyzes Amazon’s core competencies, provides another excellent example of a business that meets this condition. Amazon’s offering of its Amazon Prime service clearly demonstrates how its core competencies of technological infrastructure and logistics, working seamlessly together, create customer benefits of super-fast, inexpensive shipping of products that are almost always in stock.

“Third, a core competence should be difficult for competitors to imitate” say Prahalad and Hamel. Returning to the Honda example, it seems that this condition is being met, as no other single company competes in all of these markets. In the Amazon example, there are no other companies so far that have developed the ability to offer an Amazon Prime type of package.

Other examples include Sony’s core competence in miniaturization and precision manufacturing (See Tomorrow’s Organization: Crafting Winning Capabilities in a Dynamic World, Jossey-Bass, 1998) along with Apple’s design and software development, Google’s development of algorithms, and Walmart’s supply-chain management.

Why are they important?

So, why pay core competencies so much attention? Jim Riley sums this up nicely in his presentation, “Core Competencies.” He states that core competencies are a necessary focusing mechanism, given the complexity of today’s organizations, so that organizations can devote their resources to areas where they can truly add value for the customer. Core competencies are also an important mechanism for gaining a deeper understanding of the business. This recalls the classic SWOT analysis, where core competencies are among an organization’s strengths; the provision of resources to non-core competencies may be weaknesses; a rapidly changing business environment can be a threat that requires the building of new core competencies; and changing customer demands may provide opportunities, requiring the potential application of existing core competencies or the building of new ones.

Others make the case that core competencies, if applied strategically, help organizations gain sustainable competitive advantage. There is empirical evidence to support this. In the article, “Effect of Core Competence on Competitive Advantage and Organizational Performance” (International Journal of Business and Management, Jan. 2012), author Sabah Agha writes that a study of the paint industry in the United Arab Emirates found that core competencies have a strong and positive impact on competitive advantage. In addition, a study of the Iraqi banking sector by Nada Ismaeel Jabbouri and Ibrahim Zahari titled “The Role of Core Competencies on Organizational Performance: An Empirical Study in the Iraqi Private Banking Sector” (European Scientific Journal, June 2014) found that core competencies can help improve the effectiveness of organizational performance in various banks, helping them gain competitive advantage.

Capabilities that support competencies

Having explored the “what” and “why” of core competencies, let’s return to the original question: How does an organization get the most out of its core competencies? First, they must be properly identified: Find the competencies in an organization that satisfy the conditions referred to by Prahalad and Hamel, and others mentioned here. We already discussed the fact that identifying core competencies provides the organization with the focus to strategically and efficiently deploy resources, and identify and build future core competencies in response to the changing business environment.

But core competencies alone do not help an organization gain sustained competitive advantage. An organization must have other capabilities to ensure that its core competencies are effectively utilized. The YouTube presentation by MedlockMethod previously cited appears to support a broader concept by suggesting that Amazon deploys a much larger set of capabilities that work systematically along with its core competencies to create competitive advantage; capabilities include training, culture, negotiation skills, software development, and customer analysis.

So, it seems that not only is it critical in today’s rapidly changing business world to identify core competencies and how to deploy them, but it’s also critical to ensure that the organization has the capabilities to deploy them effectively. These capabilities may include, for example, a culture of quality and innovation, teamwork, an empowered workforce, learning and development systems, and a focus on results, just to name a few. In fact, some organizations think of these capabilities as core competencies. However, tested against the three conditions defined by Prahalad and Hamel, they don’t quite stack up.

Honda’s core competency of design and development of engines and power trains may not have gotten the organization far without other capabilities working systematically in support. Amazon’s core competencies in logistics and technological infrastructure may not be working so well without support from its competencies in training, supply chain management, and software development, along with a culture supportive of innovation. It appears to take the right alchemy of competencies and capabilities all working together to form a true core competency that achieves competitive advantage.

How the Criteria for Perfomance Excellence can help

Just how do we identify this mix? A good place to start is to study the Baldrige Excellence Framework published by the Baldrige Performance Excellence Program. There are references throughout to core competencies and their links to enabling systems and processes. For example, one of the framework’s core values, “systems perspective,” states that successfully managing organizational performance requires that core competencies be considered in relation to other key business attributes such as strategic objectives, work systems, and workforce needs.

Another core value, “valuing people,” suggests that organizational core competencies begin with learning at the individual level. The study previously noted by Jabbouri and Zahari found that the interaction between the workforce and core competencies led to sustainable competitive advantage.

The Criteria for Performance Excellence, contained within the Baldrige framework, point to other potential capabilities that work systematically with core competencies to improve results. The criteria suggest that senior leaders of the organization must play a key role in creating an environment for success, part of which is setting the vision and mission, then identifying and building core competencies to support the vision and mission both now and in the future. Linking with strategy development, the Baldrige Criteria propose a close relationship between core competencies and work systems when deciding whether related processes are to be accomplished internally or externally.

A criticism of core competencies as part of strategy is that organizations may use them as an excuse to outsource so much that they could be left with a competitive disadvantage. That is one important reason that decisions about outsourcing must be made with great care. Organizations should also consider as part of their strategy for gaining competitive advantage whether it makes sense to structure their work systems around their core competencies. The advantages of doing so could be the efficient use of resources and direct value-add to the customer.

As previously stated, attention to workforce development, specifically building competency in individuals, strongly supports the building of organizational competencies, as long as there is alignment between the two. The Baldrige Criteria point out the link by asking how an organization’s learning and development system addresses core competencies, along with other strategic elements, systematically. Research has shown a positive correlation between the strategic application of core competencies and competitive advantage leading to superior organizational performance. Many of today’s fastest growing and most profitable businesses show, whether by conscious design or serendipity, that successful application of core competencies to products and services achieves amazing results.

Properly identifying core competencies and those capabilities that support their application is a key strategic must-do. Then, ensuring that core competencies are integrated with the organization’s systems, structures, and processes is the way to get the most out of those core competencies in terms of sustained competitive advantage and organizational performance.

About The Author

Bob Hunt

Bob Hunt is a social scientist at the National Institute of Standards and Technology (NIST), responsible for managing the award process and examiner training for the Baldrige Performance Excellence Program. He has more than 30 years of experience in the organizational development field, including several years with International Paper in a variety of positions including work systems and change management consulting.