Core Cornpetence: What Does it
Mean in Practice?
Mansour Javidan
-.
ARTICLE,
"Core
Cornpetence of the Corp~ration"'~
has generated substantial interest in the notion of core competencies
and capabilities and has helped popularize a new
school of economic thought called The Resourcebased View of the Firm.Z-7.9~17~'g.22
The article has made
two important contributions to the literature in strate$c management; itproposed a new complementary
app~oach.t+rategic planning and it provided a s n :
ceptual too1 for a multi-buiiness corporation to
achievc better synergies among its various business
units.
PRAHALAD AND HAMEL's ~ ~ L ~ E N T I A L
l h e concept of core competency h a s received
increasing attention by managerç a n d
-.deciiion ,makeG..While rnuch.has been wrinen
: ou what it.is,<[email protected]
irifomation.:on:~ow
toil
' ...$ @ # $ ~ í $ & ~ p f ~ h i s article first links core
.-competency.to-thecompanfs strategic planning
-processand then presents .a detailed process
through which senior management can identify
and take strategic.advantage of their
companies' core k m p e t e n c i e s and
capatiilities. l h e process proposed here
-'icónsists 'ofelght' steps, each of ,yhich .are
.~-~~p~ãi"&d~in:detaii..~
1998 ~ l s e v i e Science
r
~td.
.
. --AI1rightsr-rved
:
. .
. .. .. -
Better Planning
In a typical planning process,the corporation starts
with an identification of external threats and opportunities. it analyses the macro environment, the stakeholders, the industry. competitors and customers to
isolate potential trcnds and developments and to
determine their implications. The company then
develops strategies by identihing and assessing various options to address thc thrcats and opportunities.
The last stage in the process is a determination of
implementation plans through which resources are
allocated and stcps are put in place to execute the
plans.
Prahalad and Hamel proposed a different approach.
not to replace the traditional planning proccss but to
supplement it. While the traditional approach is an
outside-in process where the planner starts with
external analysis and then performs internal analysis,
the process advocated by the authors is inside-ou< It
starts with internal analysis and then examines the
external environment.
The authors suggested that companies need to
understand fully their core competencies and capabilities in order to successfully exploit their
PII: S0024-6301(97)00091-5
.. ...-
.
I
.
resources. This suggestion is consistent with the arguments by the proponents of The Resource-Based View
of the Firm. This theoretical approach assumes that
firms own different types of resources which enablc
f i é m to develop different strategies. &company has
a sustained competitive advanta~e
- to the extent that
eiy
exploit
its
resources
and to thccxtcnt
-xE%akm
---- .. ihat its competitors are unable to imitate ~ t s
~ a t e r ~ i l l athe
r , leader in the heavy con-Stiategies.9
..
struction equipment industry, uses its after-sale suppori and service capability as the foiindation of its
competitive strategy. It can get spare parts and service
personnel to any place in the world in tweiity-lour
hours; Toyota's success in the global auto manufacturing industry is to a large extent d u e to its manufacturing capabilities. reflected such techniques as
just-in-time inventory, self-managing tearns and flexible manufacturing. Walt Disney's success since the
early 1980's is mostly d u e to its ability to effectively
exploit such rcsources as its enormous film library
Long RangePlanning. Vol. 51.No. 1. pp. GO to 71.1998
O 1998 Elsevier Science Ltd. All righis rescrved
-:
-.-,:..
r.-:.-:-
61
\
1
I
and its biand name and its film rnaking and animation close co-operation among SBU's in relation to their
core competencies will facilitate organisational iearncapabilities.
By the same token, strategies that are too far from ing and enhance the company's ability to leverage its
the firm's competencies and capabilities are resources.
A company pursuing this approach would define
inherently risky. Exxon's diversification strategies in
the 1970's resulted in major losses because the com- its corporate strategy as no! just a ~ o r t f o l i oo í busipany strayed from its competencies in the energy nesses and SBU's but also ris a portfolio of compctcnbusiness by entering the office equipment and com- cies. It would have a long-terni commitment to
puter business.
developing competencies and would provide a mechAccording to this theory, a detailed analysis of the anism for cross-SBU communicalion. involveitieiil.
firm's resources, capabilities and competencies will and co-ordination. It would regard its corporate stratresult in a better understanding of the sources of com- egy as an important tool for facilitating and exploiting
petitive advantage. Such in-dcpth understanding can horizontal integration among SBU'S.'
Prahalad and Hamel have made a significant conlead to a better match between external opportunities
and interna1 strengths because once the corporation tribution to our understanding of this importarit topic
knows its areas of strength, it can search the external and have helped generale sigiiificant interesl ir1 it.
environment to identify possible ways of better but two important questions need firther work and
exploiting those strengths.lz Walt Disney's core com- elaboration:
petence in entertaining families has directed it into a
seemingly diverse set of businesses such as amuse- ~ ~ ~ J i ~ ) i y . dDe
o , wnee Core Competencies anã
rnent parks, hotels, video channels and moviestudios. i~CapabilitiesF.:~~
i
i~rahalad~~d~amel's'~.aotionof
._.
_- ..
.corecompeten& The authors' definition of core cornpetence as "coiii5.a~ ó r i c é ~ ktoo1
a l for a more rígorous examinatio5 lective learning" needs firther clarification and oper.,and exploitation ofthe firni's.interna1 s t r e n w . They ationalization. They -usethe concepts of competence,
derined core competencies as "the collective learning :core competence and capability as synonymod. Furin the organization, especially how to co-ordinate thermore. they define these terms as a combination
diverse production skills and integrate multiple stre- of production skills and technologies. Thcrc are two
ams of technologies" (p. 82). Core competencies are problems with their definition. First. it is too narrow.
the corporation's fundamental strengths. rThey. are* It only focuses on a limited aspect of the company's
.things that the c,ompaq:does very well. Once core value chain, mostly in manufacturing. ignoring the
c o m p e ~ n c i e sare identified. the company can then many possibilities in other steps throughout rhe value
examine possible opportunities where such com- system.Second1y;theirdefinitionhasgeneratedsomé
petencies can lead to new products or new markekg confusi_qo .as ;:to the . relationship between com:
A core cornpetence is meaningful if it provides poss- petencies imd capabilities? Without A clear operible access to new markets, if it satisfies specific cus- ational definition, it is difficult for an organization to
tomer needs and if it is difficult to imitate.'"
embark on a process of identifying and exploiting its
competencies. In another influential Harvard BosiBe tter Syn ergy
ness Review article titled "Competing on CapaAnother contribution of Prahalad and Hamel's article bilities", Stalk et a!." attempted to differentiate
is their use of core competence as a tool for belter between core competencies a n d capabilities. but tliey
integration among Strategic Business Unit (SBU) stra- do not succeed in providing clearly defined descriptegies. In many multi-business companies, individual tions. In this article, we will not provide a mcaningful
business units may be successful in their markets but and useful operational definition for these important
the corporation may be unable to effectively integrate concepts and will show how they are related.
its SBU's and realize potential synergies. Co-ordination among SBU's is difficult because it requíres :2. How Should a Corporation Identify its Core'
open Iines of communication, an appropriate reward - - Competenciesand.Their Implications? Or
rystem, committed manager and a team-based organ- The literature on core competence does noi provide
.
izational culture. In a typical multi-business corpor- an organizational process for identifying core comation, few of these'requirements exist and there is a petencies and capabilities, a n d for exploring oppornatural tendency among SBU's to become parochial. tunities to exploit them. While there is much taik
1 E T h e a u t h o ç o f f e r e d c o r e i m e ~ about how important it is to understand a cor: .arena';fqr$BUZo~rdination~~..~d
integratiorg They poration's competencies, there is littlo information
1 argued that identifying and exploiting core com- on how a company ean go about doing this. who in
petences requires collective organirational learning.. the company should be involved, and what speciêc
Therefore, the concept of core competence can actas a steps to take to successfully exploit the identified
vehicle for SBU's to find common interests, problems, opportunities.
capabilities or opportunities. They suggested that
These two questions are very important practical
I
rgu'iew
that
able
has
that
ctent
its
consupi f its
anuanu:S as
flex3 the
ively
1
I
Long Range Planning Vol. 31
February 1998
.
-
concerns that face any management group attempting - and
.-------routinc that manage the interaction among its
to impIement Prahalad and Harnel's ideas in their . resourcd. A proccss is a set of activities that transorganizations. The purpose of this article is to address form an input into an output. For cxample. a comthe two questions by prcsenting a decision-making pany's rnarketing capability can bc based. arnong
process which together with the company's strategic other things. on thc interaction among its manpower
pIanning exercise, will help managers and exccutives (marketing specialists). technology (computer hardidentiS and take h11 advantage of their companies' ware and software) and financia1 resources.
cornpetencies and capabilities. The process presented
5The;distinguishing : f e a t v .of capabilities is b k
here has evolved as a result of the author's work with ~ ~ ~ ~ ~ i & ~ i i a l i ~ - b a ~ e d . ~ ~ _ ~ ~ a b ~ ~ t y . & .
severa1 executive groups in different companies and i n k - * p ~ - ~ ~ @ . ~ . r 8 F 0 r ~ & e i ~ ~ ~ : % ~
industries.
.. heting - ~ ;-.--:.-..e-ap&ilities,~u@~o~ni~pabi
.< L
~ ~ ~
;
- .&-&
ré&.
Core Cornpetencies, Capabilities
and Resources
n'y-~he
t i ~ o g ~ s ~ ~,++d
~ i.h-c s P ~ b
inentcap*bi.K#
fact that a capsbility is functionally based does
not preclude it from exploiting resources that may
exist across the organization. For exarnple. Intel's
!The firçt~~tep~~~successfullyiden~ing
and exploit# marketing capability is very much linked to its overall
k.inga companyl comp$e.ncies is to create auniversal corporate image. so its market ing strategies attempt
'undersrStanding.eong
ali management levels 'ks toths to take advantage of the company's reputation. ln con.end orgari- trast, in entering the PC rnarket. Hewlett-Packard was
co,ncepts~f:core~competence;~capability
i......... .
isationál fesoi&&d?Figure I is a good sty-ting point.
initially unable to exploit its strong corporate repuAt the bottom of the hierarchy are resources. They tation in its marketing strategies.
:A competenMthe third level in the hierarchy, is
are the building blocks of competencies. Resources
are the inputs into the organization's value chain. .a cross-functional integratiodl and. co-ordination ofJi
Barney4 categorized resources into three groups: .capabilitie$ In a multi-business corporation. comphysical rcsources such as plant, equipment, location petencies are a set of skills and know-hows housed in
and assets; human resources such as manpower, man- an SBU. ãhey result from interfaces and integratioxf
agernent team, training and experience; and organ- among the SBU8s functional capabilities? For examizational resources such as culture and reputation. ple. a particular SBU may possess the cornpetency of
Some resources are tangible and physical such as dcveloping successful new products. Such a complant and equipment and others are intangible like a petency may be the consequence of integrating MIS
brand name.
capabilities. marketing capabilities. R&D capabilities
Each corporation has a bundle of resources, bui and production capabilities.
not every- firm can pul its resources into best use.
Core competenciet.the highest leve1 in the hieib
Companics vary in how they leverage their resources. :archfl. cross SBU boundaries. ,They resuIt fkom th$)
Capabilities refer.:to - the corporation's ability to* interaction between different SBUs' competenciesl
exploit its resourcesshey are the second level in th6 Core cornpetencies are skills and areas of knowledg6
hierarchy and consist of a series of business processes that are shared across business units and result h6
.theintegration and hannonization of SBU [email protected]. O
competency is a collection of competencieg
that are widespread in the corporatiofi. As Prahalsd
and Hamel pointed out. core competencies require
collective organizational learning, involvements and
a commitment to cross-SBU integration. In the above
example, new product developmeni is a core competency if it goes beyond one SBU.
Severa1 features are important about the hierarchy
in Fig. I. First, each level in the hierarchy is based on
the level below. It results from the integration of the
elements in the lower level. Secondly. each level
encompasses a higher level of valuc added for the
company. Resources on their own add little value.
Functional capabilities generate value by deploying
resources. Competencies add greater value because
they expand the boundaries of capabilities. They
result from synergies arnong capabilities. A bank may
have good MIS capability in the sense that it generatcs
&..
-
core
Core Competencc: What Does it Mean in Practice?