The Core Competencies Model was introduced by two business management theorists called Hamel and Prahalad. They introduced the model in a 1990 paper called, The Core Competence of the Corporation.
The Core Competencies Model is a strategic tool. Many people believe that strategy is about competing to be the best. It isn’t. It’s about competing to be unique. It is in shaping your uniqueness where the core competencies model can be of service.
A core competency is something unique and important that a business can do strategically well. Let’s break this down so the definition is clear:
Many strategic models, such as Porter’s Five Forces and SWOT Analysis use an outside-in approach. They examine customers and the marketplace then use this analysis to drive and shape the organization and its products.
The Core Competency Model turns this on its head, using an inside-out approach. In the model, a long-term competitive advantage is achieved by having the ability to build a core competency at a lower-cost and faster than competitors.
Thus, real competitive advantage comes from managements ability to bring together technology, skills, and processes and turn them into a core competency. This core competency results in unique and competitive products in the marketplace. Because the products come from a core competency these products can sometimes be unusual or surprising.
In a nutshell, core competencies are about working hard to build uniqueness and then leveraging this uniqueness to be successful in the marketplace. “Me too” businesses with nothing unique to offer the customer can only really compete on price.
To bring the theory to life let’s look at some examples of real companies and their core competencies.
You can probably think of lots of things your company could do well. But would each of them be a core competency?
Hamel and Prahalad provide three tests to determine whether something is a true core competency. If you can answer yes to all of these questions then you might just have identified a core competency.
A core competency must result in something in the marketplace that could strongly influence the customer to purchase your product. If it doesn’t, then it has no impact on your competitive position and isn’t a core competency.
A core competency should be difficult for competitors to imitate. This allows your products to remain unique in the marketplace.
Investing in the continuous improvement of your core competency is important. By doing so you can sustain your competitive advantage into the future.
A core competency should be applicable to many products and markets.
Let’s use these tests to see if IKEA’s unique design capability is a core competency.
Yes. Consumers get great design at very cheap prices.
Yes. It’s very difficult to produce products with great design at very low prices. Even if a competitor could match IKEA’s design it wouldn’t be able to match it on price. This is due to the economies of scale of IKEA’s global distribution network.
Yes. Ikea’s design expertise could be used to produce all kinds of products, from chairs to light fittings.
To use the model to develop core competencies follow these steps:
The following core competencies analysis diagram summaries the approach to take.
From a strategic point of view, Hamel and Prahalad recommended that organizations focus on core competencies. They also recommend that they then outsource all non-core activities.
This explains why IKEA’s design center is based at its HQ in Sweden. It also explains why manufacturing is outsourced as it isn’t a core competency.
Likewise for Apple. Its core competency in design is based in Cupertino, California. The manufacture of these machines designed in California is outsourced to China.
That Hamal and Prahalad recommended outsourcing all noncore activities has resulted in some criticism of the core competencies model.
Criticisms of the Core Competencies Model include:
The Core Competencies Model is an inside-out strategic tool. It advocates focusing on those core activities that give an organization a sustainable strategic advantage.
It then advocates outsourcing everything else.
There are three questions you can use to help you determine if a competency could be a core competency:
Diffusion of Innovation Theory
Business Level Strategy Explained
TOWS Matrix Analysis
McKinsey 7S Framework
Business Model Canvas Explained with Examples
The Hedgehog Concept