What is Core Competency ?

'Core Competency' is one of the most misused words in the Information Technology domain and maybe in other domains too. This short note attempts to explain what it is actually. For a more detailed note one must read the HBR article by C K Prahlad and Gary Hamel ' The core competence of the corporation'.

The main objective of an organization is to develop some competitive advantages. This is because competitive advantages actually leads to better sales and higher profits. But to develop a competitive advantage managers must first understand the industry in which the company is operating. Say for example if the company is a FMCG (Fast moving consumer goods company) then managers can drill down to some factors that are essential to survive and grow in that industry. For example for FMCG industry in India some of the factors are
- Strong distribution or channels
- An efficient Sales force
- Economies of scale
- Quality of product
- Media advertising etc . There can be many more. But which one of these are absolutely critical and essential for success ? These are called Key Success Factors . The Key Success Factors , if handled properly provide competitive advantage to the firm. But that is not enough. Some of these advantages are easy to duplicate or substitute. If a company is able to communicate to the customer about its superiority then customers are actually able to see the value position.

For example a company developed a soap that is of high quality( Quality being a Key success factor in that industry). But other companies can copy quality. Where is the advantage then? Well , this company is able to communicate to its customers about the excellent quality and consumers actually perceive this soap to be of better. This perception is difficult to copy and this is called Sustainable Competitive Advantage. There can be different ways to achieve Sustainable competitive advantage but the value must be communicated to customer in different ways.
- Better Product
- Assets of the Company
- Capabilities of the Company
- The market itself can create barriers
- Synergy etc.

Hold on ! What is Synergy ?
Well different firms and different business units of a firm collaborate together to make a product or provide a service. We can say Synergy is achieved when the ultimate product or the outcome of the service is better than the sum of the individual parts.
For example consider Airtel and MChek. If the alliance has strength then Airtel will be able to offer its huge customer base a very useful mobile payment service. On the other hand MChek , a new company will be able to access potential a few million customers of Airtel. This is synergy. Provided separately users could have still gone ahead and installed mchek. But penetration would be more difficult that way.
Similarly Synergy can be obtained within a firm for different business units.

So we now see the link between Key Success Factors. How Key Success factors if implemented and communicated properly to customers can provide the company with Sustainable Competitive Advantages. We can also see that Competitive Advantages can be enhanced by Synergy.

Now lets see what are the assets or capabilities that lead to synergy. As we can guess assets are easier to share if there is a feasible way to share it. Capabilities are more difficult to share. For example the same distribution warehouses can be used to distribute product items. Similarly the salesman's selling expertise can be used to sell two different products if he has the expertise on both. So we can say that the distribution framework of warehouses and the salesman's capabilities are something that provides advantages to both product lines. Hence this is a core asset or a core capability.

This asset and capability that can be shared by multiple units of a firm or different businesses in an alliance is called the core competency.

Prahlad and Hamel suggested a tree structure where the core competency is the root. The branches are the major products or services. The leaves and flowers are the end features or smaller products.

This is why many companies , for example Infosys/Wipro etc major services companies developed a framework or knowledge base of skills that can be used across the domains, verticals, business units, clients etc. While the movement of engineers may be easy the difficult part is to map it to Synergy and finally Sustainable Competitive Advantage.

The top down approach for a mature company would be
- Determine the Key Success factors in the business ( well try to stick to a few important ones - use research methods like factor analysis , conjoint analysis etc to drill down to few factors)
- Find out what are the competitive advantages that have developed or can be developed. Note , Key Success Factor to Competitive Advantage is a many to many mapping. Many factors can lead to single competitive advantage. Similarly one factor can contribute to different types of advantages.
- Determine whether the competitive advantage is sustainable or not ( Be honest in this evaluation. Please note while skills in a particular programming language may be a Key Success factor , it doesn't provide any sustainable competitive advantage. All companies have such programmers. Companies sometimes use patents to show value to customers. Well if patents are collecting dust its not sustainable competitive advantage. The strength of a patent or its level of implementation, reference in other implementations or patents is what give sustainable advantage.)
- Once the factors for sustainable competitive advantage is determined all that is left is to see which internal strengths lead to that advantage. For example a set of different factors like experience , domain knowledge, skills in programming languages etc can emerge. While it is not necessary but companies can actually try to figure out those competencies ( assets and capabilities) that provide synergy. If a company can identify these core competencies at a business unit level for large companies and maybe at company level for smaller ones that will help them to nurture further growth. This time it will be a conscious decision.

For a smaller company, maybe in the inception of its life cycle, just trying to survive it may not make sense to have a top down approach. Rather they can identify core competencies at base level , then at firm level easily with a bottom-up approach.

The last but not the least is the development of core competencies. Well the core is the smallest part and what's outside the core is still important. I feel companies should focus on Key Success Factors which will lead to Competitive advantages and competencies. rather than trying to develop the core develop natural competencies and let the core develop itself. This would be a conscious development and a controlled one, but not a force fit.