The significance of Core Competency of a company
Core competencies allow small businesses to deliver value to their customers. According to management consulting firm Bain & Company, the litmus test for a core competency is that it is hard for competitors to copy or develop. For example, the core, competency of a technology company could be the design of high-speed microprocessors or efficient Internet search algorithms, both of which are difficult to replicate. Businesses can develop core competencies by identifying key internal strengths and investing in the capabilities valued by their customers.
It is helpful to first understand what a core competency is. Core competencies differentiate an organization from its competition – they create a company’s competitive advantage in the marketplace. Typically, a core competency refers to a company’s set of skills or experience in some activity, rather than physical or financial assets. An organizational core competency is an organization’s strategic strength.
Honda’s strategic strength, for example, lies in its small engine design and manufacturing; Sony has a core competency in miniaturization; Federal Express has a core competency in logistics and customer service.
Three tests can be applied to determine a core competency:
- It must be capable of developing new products and services and must provide potential access to a wide variety of markets.
- It must make a significant contribution to the perceived benefits of the end product.
- It should be difficult for competitors to imitate. In many industries, such competencies are likely to be unique.
The concept of core competencies was developed in the management field. C.K. Prahalad and Gary Hamel introduced the concept in a 1990 Harvard Business Review article. They wrote that a core competency is “an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity.” As an example, they gave Honda’s expertise in engines. Honda was able to exploit this core competency to develop a variety of quality products from lawn mowers and snow blowers to trucks and automobiles.
Ever since Prahalad and Hamel introduced the term, many researchers have attempted to further refine the meaning of core competency. According to D. Leonard-Barton, “Capabilities are considered core if they differentiate a company strategically.” Identifying and developing your company’s core competencies are management keys to sustaining your company’s long-term competitive advantage.