The Concept of Core Competency: Indian Institute of Technology Ropar

THE CONCEPT OF
CORE COMPETENCY
Indian Institute of Technology Ropar
A presentation
by:
Sajeed Mahaboob
2011ME1111
2 CORE COMPETENCY
Core competencyis a concept in management theory introduced by,

C. K. PRAHALADandGARY HAMEL.
It can be defined as "a harmonized combination of multiple resources and
skills that distinguish a firm in the marketplace
Core competency are the skills, characteristics, and assets that set your
company apart from competitors.
They are the fuel for innovation and the roots of competitive
advantage.
The engine for new business development, underlying component of a
companys competitive advantage created from the coordination,
integration and harmonization of diverse skills and multiple streams of
technologies.
3 COMPETENCIES DO NOT MEAN
Outspending competitors on research and development

Cost sharing among SBUs
Vertical integration
4 Roots Of Competitive Advantage
Consolidate corporate wide tech. & production skills

Binds the existing business and an engine of new business
development.
Involvement and a deep commitment to work across organizational
boundaries.
5 IDENTIFYING YOUR CORE
COMPETENCIES
Prahalad and Hamel suggest three factors to help identify core
competencies in any business:
1. Provides potential access to a wide variety of markets
2. Makes a significant contribution to the perceived customer
benefits of the end product
3. Difficult for competitors to imitate
1. Provides potential access to a wide variety of markets
The key core competencies here are those that enable the creation of new
products and services.
Example: Why has Saga established such a strong leadership in supplying
financial services (e.g. insurance) and holidays to the older generation?
Core Competencies that enable Saga to enter apparently different markets:
- Clear distinctive brand proposition that focuses solely on a closely-defined
customer group
- Leading direct marketing skills - database management; direct-mailing
6 campaigns; call center sales conversion
Skills in customer relationship management
ITC
2. Makes a significant contribution to the
perceived customer benefits of the end product
Core competencies are the skills that enable a business to deliver afundamental
customer benefit -in other words: what is it that causes customers to choose one
product over another? To identify core competencies in a particular market, ask
questions such as "why is the customer willing to pay more or less for one product or
service than another?" "What is a customer actually paying for?
Example: Why have Amazon been so successful in capturing leadership of
the market for online book shopping?
Core competencies that mean customers value the Tesco.com experience so highly:
7 - Designing and implementing supply systems that effectively link existing shops
with the Amazon.com web site
- Ability to design and deliver a "customer interface" that personalizes online
shopping and makes it more efficient
- Reliable and efficient delivery infrastructure (product picking, distribution, customer
satisfaction handling)
3. Difficult for competitors to imitate
A core competence should be "competitively unique": In many industries,
most skills can be considered a prerequisite for participation and do not
provide any significant competitor differentiation. To qualify as "core", a
competence should be something that other competitors wish they had
within their own business.
Example: Why does Dell have such a strong position in the personal
computer market?
Core competencies that are difficult for the competition to imitate:
- Online customer "bespoking" of each computer built
8 - Minimization of working capital in the production process
- High manufacturing and distribution quality - reliable products at
competitive prices
9 Losing Core Competencies
How to lose: A Core Competency is lost:

Through outsourcing/OEM-supply relationships
=> Example: Chrysler vs Honda
(Chrysler unlike Honda considered its engines and power trains as simply
another component and started outsourcing)
Through giving up opportunities to establish competencies that are

evolving in existing businesses
=> Example: television business
More About
STRATEGIC ARCHITECTURE
Companys future is determined by its core competencies. These
competencies define the architecture and characteristics of the global
competitive firm.
BOUNDARY LESS ORGANIZATION
In the old diversified corporation, ideas and technologies are reluctantly
shared from one SBU to the next, if at all.
Boundaries seem transparent when SBUs share core competencies and core
products. These resources come from the firm.
10
RESOURCE ALLOCATION
When core competencies are the roots of the firm, specialized employees
and core products can be allocated to various SBUs.
At Maruti, specialized employees move between camera and printer
products regularly.
INNOVATION
Using core competencies, new technologies can be developed without heavy
R&D costs.
Fiat: Drive your way; Maruti Suzuki : Count on us; Hyundai: New thinking new
possibilities; Honda: Off-road buggy; Ford: Go further
COMPETENCE BUILDING
The focus of todays global firm should be in competence building.
Constantly improving competencies provides for new integrated technologies.
Competencies provide focus for long-term goals.
COMPETITIVE ADVANTAGE
Short-term market share can be won by anyone with a good idea.
11
Race to get products on the shelf.
Long-term success involves competency structured organizations, innovation,
and market consistency.
Same core products, integrated into new end products, creating new markets.
SBU vs Core Competence
12
THE LOSS OF CORE COMPETENCIES
Cost-cutting moves sometimes destroy the ability to build core
competencies. For example, decentralization makes it more difficult to
build core competencies because autonomous groups rely on outsourcing
of critical tasks, and this outsourcing prevents the firm from developing
core competencies in those tasks since it no longer consolidates the know-
how that is spread throughout the company.
Failure to recognize core competencies may lead to decisions that result in
their loss. For example, in the 1970's many U.S. manufacturers divested
themselves of their television manufacturing businesses, reasoning that
the industry was mature and that high quality, low cost models were
available from Far East manufacturers. In the process, they lost their core
competence in video, and this loss resulted in a handicap in the newer
13 digital television industry.
Similarly, Motorola divested itself of its semiconductor DRAM business at
256Kb level, and then was unable to enter the 1Mb market on its own. By
recognizing its core competencies and understanding the time required to
build them or regain them, a company can make better divestment
decisions.
IMPLICATIONS FOR CORPORATE MANAGEMENT
Prahalad and Hamel suggest that a corporation should be organized into
a portfolio of core competencies rather than a portfolio of independent
business units. Business unit managers tend to focus on getting
immediate end-products to market rapidly and usually do not feel
responsible for developing company-wide core competencies.
Consequently, without the incentive and direction from corporate
management to do otherwise, strategic business units are inclined to
underinvest in the building of core competencies.
If a business unit does manage to develop its own core competencies
over time, due to its autonomy it may not share them with other
business units. As a solution to this problem, Prahalad and Hamel
suggest that corporate managers should have the ability to allocate not
14 only cash but also core competencies among business units. Business
units that lose key employees for the sake of a corporate core
competency should be recognized for their contribution.
CORE PRODUCTS
Core competencies manifest themselves in core products that serve as a
link between the competencies and end products. Core products enable
value creation in the end products. Examples of firms and some of their
core products include:
Canon - laser printer subsystems;
Honda - gasoline powered engines;
Black & Decker - small electric motors
Because firms may sell their core products to other firms that use them as
the basis for end user products, traditional measures of brand market
share are insufficient for evaluating the success of core competencies.
Prahalad and Hamel suggest that core product share is the appropriate
15
metric. While a company may have a low brand share, it may have high
core product share and it is this share that is important from a core
competency standpoint.
Once a firm has successful core products, it can expand the number of
uses in order to gain a cost advantage via economies of scale and
economies of scope.
CORE COMPETENCIES TO END PRODUCTS
16
Case Study 1: HONDA MOTOR CO.
17
It is a Japanese multinational corporation primarily known for

automobiles and motorcycles.
It is the largest manufacturer of motorcycles and internal combustion
engines measured by volume producing more than 14 million internal
combustion engines in an year.
Apart from core automobiles and motorcycles Honda are also
manufacturers garden equipment, marine engines, personal watercrafts
They have recently ventured into the aerospace industry with GE Honda
Aero engines. The Honda jet was scheduled in 2011.
18 CORE COMPETENCIES OF HONDA
R&D
FINANCIAL RESOURCES
MANUFACTURING
COMBINATION OF CORE COMPETENCIES LET TO CORE PRODUCT i.e.

ENGINES WHICH THEY DIVERSIFIED INTO VARIOUS BUSINESS LIKE
AUTOMOBILES,MOTORCYCLES,POWER PRODUCTS,HONDA JETS AND
ROBOTICS.
Case Study 2: Black & Decker
Black & Decker 's core technological competency pertains to 200 to 600 W
electric motors , and this motor is their core product . All of their end products
are modifications of this basic technology, with the exception of their work
benches, flash lights, battery charging systems, toaster ovens, and coffee
percolators.
They produce products for three markets:
The home workshop market: In the home workshop market, small
electric motors are used to produce drills, circular saws, sanders, routers,
rotary tools, polishers, and drivers.
19
The home cleaning and maintenance market : In the home cleaning
and maintenance market, small electric motors are used to produce dust
busters, etc.
The kitchen appliance market: In the kitchen appliance market, small
electric motors are used to produce can openers, food processors,
blenders, bread makers, and fans.
20 Summary
Learn your competencies

Develop your competencies
Structure your organization around your competencies
Involve core products in all end products
Outsource non-competencies with strategic alliances and licensing.
If you don't have a
competitive advantage,
don't compete
21
- Jack Welch

The ability to learn faster
than your competitors may
be only sustainable
22
competitive advantage.
- Arie De Geus

References:
Article Study sent by you
Gary Hamel and C. K. Prahalad, (1990) The Core Competence of the
Corporation Harvard Business Review , vol. 68, no. 3, May-June 1990, pp
79-93.
http://www.quickmba.com/strategy/core-competencies
http://www.tutor2u.net/business/strategy/core_competencies.htm
23
24
THANK You !

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THE CONCEPT OF

Core competencyis a concept in management theory introduced by,

Outspending competitors on research and development

Consolidate corporate wide tech. & production skills

How to lose: A Core Competency is lost:

Through giving up opportunities to establish competencies that are

It is a Japanese multinational corporation primarily known for

COMBINATION OF CORE COMPETENCIES LET TO CORE PRODUCT i.e.

Learn your competencies

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