When to use it

• To understand why one firm is more profitable than another, even when they have the same position in the market.
• To improve profitability and growth in your own firm.

Origins

Thanks largely to Michael Porter’s influential work, thinking about strategy in the 1980s was all about how firms positioned themselves within their chosen industry – it was externally focused. But, to be successful, a firm has to also give attention to its internal resources and competencies – it has to have the skills to translate its intentions into action.

Around 1990 there was a shift in thinking towards these internal perspectives. In that year, a landmark paper by Gary Hamel and C.K. Prahalad, called ‘The core competence of the corporation’, suggested that the secret of long-term success was to understand and build on the underlying competencies that make your firm distinctive. Around the same time, Jay Barney wrote a highly influential academic paper arguing that success is built around having valuable, rare and hard-to-imitate resources. Barney’s work built on some earlier academic studies, but it was his contribution that really opened up the resource-based view to academic researchers around the world.

What it is

According to Hamel and Prahalad, a ‘core competency’ is a harmonised combination of multiple resources and skills that distinguish a firm in the market-place. Such a competency fulfils three criteria:

• It provides potential access to a wide variety of markets.
• It should make a significant contribution to the perceived customer benefits of the end-product.
• It is difficult for competitors to imitate.

Examples used by Hamel and Prahalad include Canon’s core competencies in precision mechanics, fine optics and micro-electronics, or Disney’s core competency in storytelling.

Core competencies are not just valuable in existing markets, they can also be used to build many products and services in different markets. For example, Amazon used its state-of-the-art IT infrastructure to develop an entirely new business, Amazon Web Services. Core competencies emerge through continuous improvements over time, and indeed this is one of the reasons they are hard to copy.

The ‘resource-based view’ is a theory of competitive advantage based on how a firm applies its bundle of tangible or intangible resources towards market opportunities. Resources have the potential to create competitive advantage if they meet certain specific criteria:

• valuable;
• rare (not freely available for everyone to buy);
• inimitable (not quickly copied);
• non-substitutable.

For example, a firm owning a diamond mine has the potential for competitive advantage, because its diamonds meet these criteria. A more interesting example would be McKinsey, the consultancy, which over the years has built a set of valuable relationships with its key clients that its competitors cannot match.

Many observers have argued that it is useful to separate out ‘resources’, which are assets that can be bought and sold, from ‘capabilities’, which are bundles of resources used in combinations to achieve desired ends.

There are obvious parallels between the ‘core competence’ and ‘resource-based’ views, but they are not identical. Core-competence thinking has been used on a more applied basis, with many firms talking colloquially about what their core competencies are, whereas the resource-based view is the preferred way of thinking about these issues in academic research.

How to use it

It is useful to use a structured framework for analysing your firm’s core competencies. Here is one standard approach:

• Start with brainstorming what matters most to your customers or clients: what do they need, what is valuable to them? What problems do they have that you can potentially address?
• Then think about the competencies that lie behind these needs. If customers value small products (such as mobile phones), then the relevant competence might be around miniaturisation and precision engineering. If they are looking for advice on high-level matters, the relevant competence could be relationship management.
• Brainstorm your existing competencies – the things people think the firm is good at, and the things you are better at than your competitors. For each of these, screen them against the tests of relevance, difficulty of imitation and breadth of application.
• Now put the two lists together, and ask yourself where there is overlap between the really challenging or important things your customers need and what your firm is really good at. The points of overlap are, in essence, your core competencies.
• In many cases, the overlap between the two lists is far from perfect, which opens up a number of supplementary questions. For example, if you have no core competencies, look at the ones you could develop and work to build them. Alternatively, if you have no core competencies and it doesn’t look as if you can build any that customers would value, then you might consider other ways of creating uniqueness in the market, perhaps through clever positioning.

Further reading

Barney, J.B. (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, 17(1): 99–120.

Barney, J.B. and Hesterley, W. (2005) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Prentice Hall.

Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, 68(3): 79–91.