What Qualifies As a Core Competence?

Editor's Note: Take a look at our featured best practice, Organizational Design and Capability Analysis (31-slide PowerPoint presentation). Organizational Design involves the creation of roles, processes, and structures to ensure that the organization's goals can be realized. Organizational Design span across various levels of the organization. This framework focuses on the following 3 initial steps of the full 10-step Organizational [read more]

Also, if you are interested in becoming an expert on Strategy Development, take a look at Flevy's Strategy Development Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

* * * *

The concept of Core Competence was first introduced by C. K. Prahalad and Gary Hamel in 1990, in their article The Core Competence of the Corporation.  Since then, this term has become part of the general business vernacular.

Companies constantly claim various things to be part their “core competencies.”  But, are these really Core Competencies?  How do we determine if something qualifies as a Core Competence?  Perhaps most importantly, how do we develop Core Competencies?

To address these questions, let’s introduce the Core Competence Model.  This is a strategy framework that starts the strategy process by thinking about the core strengths of an organization.  Whereas the traditional outside-in approach (e.g. Porter’s Five Forces, BCG Matrix) places the market, competition, and customer at the starting point of the strategy process, the Core Competence Model does the opposite. It states that in the long run, competitiveness derives from an ability to build a Core Competence at lower cost and more quickly than competitors.

A Core Competence can be any combination of specific, inherent, integrated, and applied knowledge, skills, and attitudes.  Leveraging our Core Competence may result in the creation of unanticipated products and services.

Per the Core Competence Model, a Core Competence is comprised of 4 dimensions:

1. Skills and Knowledge Base
2. Technical Systems
3. Managerial Systems
4. Values and Norms

Let’s dig deeper into each of these 4 dimensions of a Core Competence.

Skills and Knowledge Base

The first dimension, Knowledge and Skills embodied in people, is the one most often associated with core capabilities and the one most evidently relevant to New Product Development (NPD).  This dimension encompasses both firm-specific techniques and scientific understanding.

It includes the internal knowledge, technical expertise (e.g. software proficiency, engineering principles), technical skills (e.g. data analysis, project management), business process know-how (e.g. workflow optimization, supply chain management), capabilities in strategic planning and market analysis, and competencies specific to employees’ functional areas and roles, such as financial modeling for finance teams or customer relationship management for sales teams. Furthermore, this dimension covers the continuous development and application of this expertise, ensuring employees stay adept at navigating complex business environments and contributing to the organization’s strategic objectives.

Technical Systems

Knowledge that has been embedded in Technical Systems results from years of accumulating, codifying, and structuring the tacit knowledge in peoples’ heads.  Such physical production or information systems represent compilations of knowledge, usually derived from multiple individual sources.

Therefore, the whole technical system is greater than the sum of its parts.  This knowledge constitutes both information and procedures.

Information includes blueprints, technical specifications, standard operating procedures (SOPs), maintenance manuals, and software documentation, providing essential data and insights for business operations. For instance, an engineering team relies on a detailed database of past project specifications and outcomes to guide current projects.

Procedures refers to systematic processes and methods that employees follow to complete tasks efficiently and accurately. These include workflows, quality assurance protocols, assembly line processes, and troubleshooting guidelines. For example, a manufacturing unit may have a set procedure for calibrating machinery to maintain product quality, while an IT department follows specific procedures for software updates to minimize disruptions. By embedding these elements, organizations create a reliable framework guiding daily operations and supporting strategic goals, ensuring effective performance and optimal results.

Managerial Systems

This third dimension, Managerial Systems, represents formal and informal ways of creating knowledge–such as via sabbaticals, apprenticeship programs or networks with partners–and of controlling knowledge–such as incentive systems, reporting structures.

Managerial Systems are crucial in shaping the organizational culture and driving the deployment of strategic initiatives. These systems include performance management processes, leadership development programs, decision-making frameworks, and communication protocols. For instance, regular performance reviews and feedback sessions help align individual goals with the organization’s strategic objectives.

Having effective Managerial Systems ensures that knowledge flows seamlessly across different levels of the organization. This involves creating platforms for knowledge sharing, such as internal wikis, cross-functional teams, and collaborative software tools. By facilitating open communication and collaboration, these systems enable the organization to leverage collective expertise, respond quickly to market changes, and drive innovation. For example, a robust internal communication system can help disseminate best practices across global offices, ensuring consistency and efficiency in operations.

Values and Norms

Infused through the 3 aforementioned dimensions is the last: Values and Norms.  This represents the value assigned within the company to the content and structure of knowledge (e.g. computer engineering vs. marketing expertise; open source software vs. proprietary systems), means of collecting knowledge (e.g. formal degrees vs. experience) and controlling knowledge (e.g. individual empowerment vs. management hierarchies).

Be aware that even physical systems embody values.

According to Prahalad and Hamel, Core Competencies can be identified and clarified following a 3-step process.

1. Articulate Strategic Intent.

We must first articulate our Strategic Intent, which is our company’s vision of what we want to achieve in the long term.  A Strategic Intent must have the following 4 components:

1. Sense of direction
2. Emotional element
3. Sense of discovery
4. Sense of destiny

2. Identify Core Competencies.

There are 3 tests for identifying a Core Competence:

1. Provides potential access to a wide variety of markets.
2. Makes a significant contribution to the benefits of the product as perceived by the customer.
3. A Core Competence should be difficult for competitors to imitate.

3. Enhance Core Competencies.

After we have identified our Core Competencies, we need to enhance them by redesigning the architecture of our organization.  For instance, we should invest in required technologies that support and strengthen the competency.  Another example is we can develop strategic partnerships that further nurture this Core Competence.

Once we clarify our Core Competencies, our whole organization will know how to support  our Competitive Advantage.  We will then have clarity and direction as to how to allocate resources appropriately.

One final caveat:   care must be taken not to let Core Competencies develop into Core Rigidities.  A Core Competence is difficult to learn, but is difficult to unlearn as well.  Thus, a Core Rigidity is caused by over-reliance on any Core Competence for too long, even after its competitive advantage has turned obsolete.

What are the Core Competencies of your organization?

You can learn more about Core Competencies and download an editable PowerPoint about the the Core Competence Model here on the Flevy documents marketplace.

Want to Achieve Excellence in Strategy Development?

Gain the knowledge and develop the expertise to become an expert in Strategy Development. Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

"Strategy without Tactics is the slowest route to victory. Tactics without Strategy is the noise before defeat." - Sun Tzu

For effective Strategy Development and Strategic Planning, we must master both Strategy and Tactics. Our frameworks cover all phases of Strategy, from Strategy Design and Formulation to Strategy Deployment and Execution; as well as all levels of Strategy, from Corporate Strategy to Business Strategy to "Tactical" Strategy. Many of these methodologies are authored by global strategy consulting firms and have been successfully implemented at their Fortune 100 client organizations.

These frameworks include Porter's Five Forces, BCG Growth-Share Matrix, Greiner's Growth Model, Capabilities-driven Strategy (CDS), Business Model Innovation (BMI), Value Chain Analysis (VCA), Endgame Niche Strategies, Value Patterns, Integrated Strategy Model for Value Creation, Scenario Planning, to name a few.

Learn about our Strategy Development Best Practice Frameworks here.