Core competencies differentiate an organization from its competition and create a company's competitive advantage in the marketplace. Typically, a core competency refers to a company's set of skills or experience in some activity, rather than physical or financial assets. An organizational core competency is an organization's strategic strength. Honda's strategic strength, for example, lies in its engine and propulsion systems. Sony has a core competency in miniaturization. Federal Express has a core competency in logistics and customer service.
Three tests can be applied to determine a core competency:
• A core competency can lead to the development of new products and services and must provide potential access to a wide variety of markets.
• It must make a significant contribution to the perceived benefits of the end product.
• It should be difficult for competitors to imitate. In many industries, such competencies are likely to be unique.
The concept of core competencies was developed in the management field. C.K. Prahalad and Gary Hamel introduced the concept in "The Core Competence of the Corporation," a 1990 Harvard Business Review article. They wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." They cited as an example Honda's expertise in engines, which enabled it to develop a variety of well-regarded products, including lawn mowers, snow blowers and automobiles.
Identifying and developing your company's core competencies contribute to sustaining your company's long-term competitive advantage.
In determining your company's core competencies, identify the underlying skill, ability, knowledge, experience, technology or process that enables your company to provide its unique set of products or services. Determine how you can use your company's core competencies to develop strategic responsiveness to gain competitive advantage. High-performing companies develop new core competencies and expand their existing ones to enter new and future markets. A company at this level of functioning recognizes the needs and wants of customers in new and future markets and develops the competencies necessary to meet those needs and wants.
Apple's unique competence is its product design process. With the iPod, Apple combined the elements of jukebox software, which can organize a large quantity of songs, and MP3 players, which can store a large quantity of songs in a way that is simple to use. Simplicity turned out to be the core attribute that made the iPod a revolutionary product that changed consumer expectations.
Company leadership should be aware that even the most successful strategy will eventually fail unless it is continually monitored and refreshed to meet changing market conditions.