Core Competency - C. K. Prahalad and Gary Hamel

A core competency is a concept in management theory introduced by, C. K. Prahalad and Gary Hamel. Core competencies are the combination of pooled knowledge and technical capacities that allow a business to be competitive in the marketplace. Core competency should allow a company to expand into new end markets as well as provide a significant benefit to customers. It should also be hard for competitors to replicate. In short it can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace".

Development of a firm's core competencies is identified as the key for global leadership and competitiveness in the 1990s. NEC, Honda, and Canon are used as exemplars of firms that conceive of themselves in terms of core competencies. Core competencies are the organization's collective learning and ability to coordinate and integrate multiple production skills and technology streams; they are also about the organization of work and delivery of value in services and manufacturing. A firm must conceive of itself as a portfolios of competencies, instead of a portfolio of strategic business units (SBUs). The latter limit the ability of firms to exploit their technological capabilities; they are often dependent on external resources. The real source of advantage lies in management's ability to consolidate corporate-wide technologies and production skills into competencies, which will allow individual businesses to adapt to emerging opportunities. Cultivating core competencies does not mean outspending rivals on R&D, sharing costs among SBUs, or the price/performance of end products.

Three tests identify such competencies:

•  they should provide potential access to a wide variety of markets
• they should significantly contribute to the customer benefits of the end-product
• they should be difficult for competitors to imitate

Cultivating core competencies also means benefiting from alliances and establishing competencies that are evolving in existing businesses. The tangible links between core competencies and end products are core products, which embody one or more core competencies. Companies must maximize their world manufacturing share in core products. Global leadership is won by core competence, core products, and end products; global brands are built by proliferating products out of core competencies.

Top management must add value to a firm by developing strategic architecture, which will avoid fragmenting core competencies, establish objectives for competence building, make resource allocation priorities transparent and consistent, ensure competencies are corporate resources, reward competence carriers (personnel who embody core competencies), and focus strategy at the corporate level. A firm must be conceived of as a hierarchy of core competences, core products, and market-focused business units.