What Are Core Competencies?
Core competencies are the resources and capabilities that comprise the strategic advantages of a business. A modern management theory argues that a business must define, cultivate, and exploit its core competencies in order to succeed against the competition.
KEY TAKEAWAYS
Core competencies are the defining characteristics that make a business or an individual stand out from the competition.
Identifying and exploiting core competencies is seen as important for a new business making its mark or an established company trying to stay competitive.
A company's people, physical assets, patents, brand equity, and capital can all make a contribution to a company's core competencies.
The idea of core competencies was first proposed in the 1990s as a new way to judge business managers compared to how they were judged in the 1980s.
Examples of companies that have core competencies that have allowed them to remain successful for decades include McDonald's, Apple, and Walmart.
Understanding Core Competencies
A successful business has identified what it can do better than anyone else, and why. Its core competencies are the "why." Core competencies are also known as core capabilities or distinctive competencies. Core competencies lead to competitive advantages.
Core competency is a relatively new management theory that originated in a 1990 Harvard Business Review article, “The Core Competence of the Corporation.” In the article, C.K. Prahalad and Gary Hamel review three conditions a business activity must meet in order to be a core competency:
The activity must provide superior value or benefits to the consumer.
It should be difficult for a competitor to replicate or imitate it.
It should be rare.
The article pointed out the contrast of how businesses operated in the 1980s versus how they should operate in the 1990s. The article asserted that in the 80s, business managers were "judged on their ability to restructure, declutter, and delayer their corporations. In the 1990s, they'll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible."
The core competencies that distinguish a business vary by industry. A hospital or clinic may focus on excellence in particular specializations, while a manufacturer may identify superior quality control.
Core Competencies in Business
A business can choose to be operationally excellent in a number of different ways. Below are common core competencies found in business:
Greatest Quality Products. This core competency means the company's products are most durable, long-lasting, and most reliable. The company will likely have invested in the strongest quality control measures, technically proficient workers, and high-quality raw materials.
Most Innovative Technology. This core competency means the company is an industry leader in its sector. The company will likely have invested heavy amounts of capital into research & development, holds many patents, and hires experts in respective fields.
Best Customer Service. This core competency means customers have the greatest experience during (and after) their purchase. The company will likely have invested in training for staff, large numbers of customer service representatives, and processes to manage exceptions or issues as they arise.
Largest Buying Power. This core competency leverages a company's economy of scale. This company will likely have invested in mergers or acquisitions and have built up strong relationships with vendors to gain favorable pricing or service.
Strongest Company Culture. This core competency promotes the internal atmosphere of the business. The company aims to attract the best talent by investing heavily in employee recognition, development, or collaborative, fun events.
Fastest Production or Delivery. This core competency means the company is able to make or ship items the fastest. The company will likely have invested in connected software systems as well as production processes and distribution relationships.
Lowest Cost Provider. This core competency means the company charges the lowest price among comparable goods. The company will likely have invested in the most efficient processes the reduce labor or material input.
Highest Degree of Flexibility. This core competency allows the company to quickly pivot in response to business opportunities or challenges. The company will likely have invested in cross-training across employees or nimble software solutions.
Core Competencies in Individuals
A variation of the principle that has emerged in recent years to pivot towards individuals looking for a new job. The variation recommends that job seekers focus on their personal core competencies in order to stand out from the crowd.
These positive characteristics may be developed and listed on a resume. Some personal core competencies include analytical abilities, creative thinking, and problem resolution skills. The notional of individual or personal core competencies gives an individual a platform during interviews (i.e. a candidate can identify themselves as the most experienced, most creative, or most technically sound candidate).
Important: The core competencies an individual lists on their resume should be tailored to suit the job and demonstrate actual, highly proficient skills necessary for the role.
How to Identify Core Competencies
Some core competencies develop naturally, while other core competencies must be consciously and strategically formed over time. Whether a company is yet for form or has existed for a while, here are ways for organizations to identify what their core competencies are or could be.
Review the company's mission statement, value statement, or slogan. If a company has invested time and effort into developing a brand, chances are it has already put some effort into considering what it wants to be known for. A company's mission statement, value statement, or other branded content may identify what the company wants to be or how it wants to seen by customers.
Compare the company to its competitors. A core competency is a unique element that can not be easily replicated by other companies. Therefore, a company can identify its core competencies by thinking through how the company is different from other businesses. This includes differences in products, processes, market areas, delivery customs, pricing, or employee base.
Interview internal staff or major customers. Different key stakeholders of a company may have insights into its strengths (or weaknesses) of a company. In some cases, the day-to-day staff may have a better sense of what the company excels in. In addition, primary customers that have the most real-world experience with the company's products or services may yield feedback as well.
Brainstorm what benefits the company provides customers. Core competencies often relate back to the product or service the company provides. For example, is the product the lowest cost, most user-friendly, or highest quality? If customers gain a benefit from the company's goods (i.e. they pay the lowest prices), that can often be leveraged into a core competency.
Understand the processes required to make goods. In addition to considering the specific products, a company should review what it takes to make the products. This includes the labor, materials, knowledge, processes, equipment, or research that must be refined in advance.
Identify unique aspects of the company. If all else fails, it may be simplest to just consider what about the company is unique. This may relate to the company's history, certain benefits it can give its employees, the industry it resides in, or what it aims to achieve in the world.
Tip: Consider hiring an external consultant to evaluate your company's framework to determine what your core competencies are or could be.
Why Core Competencies Are Important
Core competencies allow a company to better understand how to allocate its resources. For example, it may make sense for a company to outsource certain tasks if it does not care to develop those tasks into company strengths. This also includes stronger direction on the staff to hire and what training to incur.
Core competencies also reduce a company's market risk. By being exceptional or proficient in specific areas, a company can rely on these areas to maintain consistency and reliability in operations. For example, companies with strong internal cultures will experience less employee turnover, training expenses, product deficiencies due to lack of knowledge, or unhappy workers.
As companies determine what they are best at, customers may often recognize and associate the company with that core competency. Therefore, core competencies help a company develop a stronger brand image or market presence. For example, many consumers associate Apple products with being the most cutting-edge and innovative.
Last, core competencies may help create stronger relationships between a company and its employees or customers. Both employees and customers may associate with a company better, knowing its strength or identity; in the example above, employees may take pride in creating the most innovative products, while customers gain satisfaction knowing they possess the most creative solutions.
Fast Fact: Some core competencies do expire. Consider Sears' long-term dominance as the major retailor due to their catalog. Now, that core competency has faded, and an in-home printed catalog may no longer be viewed as a strength.
Advantages and Disadvantages of Core Competencies
Advantages
Core competencies are difficult to imitate. It often takes a long period of time (or large sums of capital) to develop core competencies. Once a company has achieved a core competency, it often has a major advantage over its competitors in the marketplace.
Core competencies may also be transferrable across different industries or product lines. For example, with a platform of being an incredibly innovative company, Apple has expanded into new product lines, different sectors, and varying geographical regions. An advantage of a company may be able to be applied widely.
Last, core competencies naturally enhance the marketability of a product. Spirit Airlines' core competency of offering the cheapest flights on average is not only its strength, it doubles as a company slogan. Though this may mean some consumers are naturally adverse to the company, it also means Spirit's brand image is clearly defined and recognizable.
Disadvantages
Just as difficult as a core competency is to create, it may be equally as difficult to change. This may inadvertently cause the company's brand image to falter and be confusing. For example, McDonald's was once known for indoor playgrounds and Ronald McDonald. Though the company has shifted away from this culture, long-time consumers may still associate the brand with old core competencies.
Core competencies also naturally limit the flexibility of a company. Consider a low-price retailer such as Wal-Mart. The company may struggle to launch high-end, more expensive product lines with greater margins because consumers may not appropriately associate the product with the company.
A company may also "lose the forest among the trees" if it gives too much attention to developing a core competency. The ultimate goal of a company is not to possess core competencies; its purpose is to generate revenue through the sale of products. Therefore, companies may spend tremendous amounts of time or capital without an overarching strategy that makes sense.
Core Competencies
Pros
Are not easily replicable since they take long or large investments Is often difficult for competitors to overcome once a core competency has been achieved
May be able to be translated to different products, sectors, or business opportunities Enhances the company's brand image and may make marketing endeavors more easily understood.
Cons
May result in a company being tied to an outdated, no-longer-used core competency May reduce the overall flexibility of a company May require large time or capital requirements May result in a company focusing too heavily on core competencies instead of a single cohesive strategy.
Real-World Example of Core Competencies
Part 1 of Amazon's 2021 annual report discusses the nature of the company's business.
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The company strives to "be Earth's most customer-centric company." As much, it discusses the following business activities:
Amazon has a core competency of operating scale as their stores "enable hundreds of millions of unique products to be sold by us and by third parties".
Amazon has a core competency of advanced technology as "customers can access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores".
Amazon has a core competency of being a budget-conscious option as it seeks "to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service".
Amazon has a core competency of flexibility and product diversification as it serves "developers and enterprises of all sizes including startups, government agencies, and academic institutions" though a broad set of technology services.
Amazon has a core competency of self-reliance as it serves authors with its own publishing company (Kindle Direct Publishing, Amazon Publishing) to yield products in its own store (Kindle Store) for use on its own physical devices (Kindle).
Amazon has a core competency of innovation as it regards "our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to our success".
What Are the Main Types of Core Competencies?
Core competencies in business often relate to the type of product delivered to a customer or how that product is delivered. For instance, the main types of core competencies include having the lowest prices, best reliable delivery, best customer service, friendliest return policy, or superior product.
How Does a Company Develop Core Competencies?
A company should internally assess what it does best, and it should also assess how its competition approaches the market. Then, a company should evaluate where it feels it has the best chance to be industry leader. Though these areas may not currently be a company's strength, it can make capital investments and process changes to develop core competencies over time.
What Is the Best Type of Core Competency?
One type of core competency is not necessary better than the rest. However, some core competencies may be more difficult for other companies to overcome. For example, consider the Coca-Cola brand. The company's core competency of brand recognition may be very difficult for a new beverage company to overtake. However, Coca-Cola's approach to customer service or company culture may be easier for a competing company to overtake.
Why Do Core Competencies Matter?
Core competencies lead to operational excellence which leads to superior products, happier customers, and/or greater profitability. When a company is able to doing part of the sale process exceptionally well, it gains a positive reputation for its core competence. This reputation may lead to stronger sales, happier employees, and better business operations.
The Bottom Line
Core competencies are the advantages that one company has over its competitors. It's the areas of business that the company excels at, and it's often what the company is known for. Ranging from yielding the highest quality products to having the best customer service to being the low-cost provider, core competencies define a company's identity and guide its operational strategy.
By ALEXANDRA TWIN Updated August 30, 2023
Reviewed by MARGARET JAMES
Fact checked by SUZANNE KVILHAUG
https://www.investopedia.com/terms/c/core_competencies.asp
