Core Competence
(Hamel Prahalad)

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Inside-out strategy. Explanation of Core Competence of Hamel and Prahalad.


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Core CompetenceThe Core Competence model of Hamel and Prahalad is a corporate strategy model that starts the strategy process by thinking about the core strengths of an organization.

 

Inside-out Corporate Strategy

The Outside-in approach (such as the Five Forces model from Porter) places the market, the competition, and the customer at the starting point of the strategy process. The Core Competence model does the opposite by stating that in the long run, competitiveness derives from an ability to build a Core Competence, at lower cost and more speedily than competitors. The Core Competence may result in unanticipated products. The real sources of advantage are to be found in management's ability to consolidate corporate-wide technologies and production skills into competencies, through which individual businesses can adapt quickly to changing circumstances. A Core Competence can be any combination of specific, inherent, integrated and applied knowledge, skills and attitudes.

 

In their article "The Core Competence of the Corporation" (1990), Prahalad and Gary Hamel dismiss the portfolio perspective as a viable approach to corporate strategy. In their view, the primacy of the Strategic Business Unit is now clearly an anachronism. Hamel and Prahalad argue that a corporation should be built around a core of shared competences. Compare: Horizontal Integration.

 

Business units must use and help to further develop the CC(s). The corporate center should not be just another layer of accounting, but must add value by articulating the strategic architecture that guides the process of competence building.
 

Three tests for identifying a Core Competence

  1. Provides potential access to a wide variety of markets.
  2. Makes a significant contribution to the benefits of the product as perceived by the customer.
  3. A CC should be difficult for competitors to imitate.

Building a Core Competence

A Core Competence is built through a process of continuous improvement and enhancement (compare: Kaizen). It should constitute the focus for corporate strategy. At this level, the goal is to build world leadership in the design and development of a particular class of product functionality. Top management can not be just another layer of accounting, but must add value by articulating the strategic architecture that guides the process of competence building.
 

Once top management (with the help of Strategic Business Units managers) have identified an all-embracing Core Competence, it must ask businesses to identify the projects and the people that are closely connected with it. Corporate auditors should perform an audit of the location, number, and quality of the people related to the CC. CC carriers should be brought together frequently to share ideas.

 

Core rigidities?

Care must be taken not to let core competencies develop into core rigidities. A Corporate Competence is difficult to learn, but is difficult to unlearn as well. Companies that have spared no effort to achieve a competence, sometimes neglect new market circumstances or demands. They risk to be locked in by choices that were made in the past.

 

E-Article: C.K. Prahalad, Gary Hamel - The CC of the Corporation -

Book: Michael Goold, Andrew Campbell - Corporate-Level Strategy -

Book: C.K. Prahalad, Gary Hamel - Competing for the Future -

 

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Core Competence Forum

Recent User Comments
Samir Randive - Australia Core Competency Should be Challenged "A Core Competency should be difficult for competitors to imitate. But I would like to add that it should also be challenged from time to time by the competitors. Otherwise it will fail to deliver desired results. History says innovation is important for sustanability. High quality and revolutionary innovations are not possible without challenges. Competition brings-in challenges which drive innovations and changes. Competition and challenges to CC's are two main drivers of innovation and change."    0
Tony Bok - United Kingdom Examples of Core Competencies for Hospitality and Tourism? "What exapmples of core competencies can be seen from a hospitality and tourism perspective, based on Hamel's and Prahalad's argument on 'core competencies progressive organisations are able to differentiate and position their products to maximise their potential'?"    0
Mohamed - Egypt Core Competences Change due to ICT "(In what way) Did core competences change after the ICT evolution?"    0
Paul Russo - USA Core Rigidity "Please reference Dorothy Leonard-Barton (1992) for the concept of Core Rigidities."    0
Hans-Erik - Netherlands Examples of Core Competences "Here are few examples of Core Competencies you frequently see in literature on CCs:
Apple: user-friendly design of electronic consumer devices
Intel: innovative design and manufacturing of computer processors
Honda: building very efficient engines
Sony: miniaturizing of consumer electronics
Toyota: continuous improvement of car manufacturing and quality"		    1



Best User Comments
Ali Thiab - Jordan Why Protect Core Comp "Why a firm has to ensure it's CC hard to imitate? the whole market should be aware about a firm CC and the firm should use it in thier marketing activities for branding its culture, it's like using the ISO (I think!!)."    27
Wilbert T. Nzuma - Zimbabwe CC as an Organisational Trait(s) "Try to define your organisation's Core Competency and you find yourself with the same problem as trying to identify your son's talent! He may be a good runner, but, not good enough.
Many companies do a lot of activities exceedingly well and still grapple with competition in their respective industries. It takes practise, branding and consistency to build distinctive competencies."		    20
Irina - Russia Identifying a Core Competence "How can a firm identify its CC?"    13
Mac - USA Imitation of Core Competence "How can a firm ensure that its core competence(s) are hard to imitate?"    13
Michael - USA Utilizing a Core Competence "Once an organization has defined its Core Competence, finding or creating new markets to leverage the CC becomes a crucial task. Who can give some advise or suggest a generic method how such markets can be discovered? Please share your experiences."    10
Mohit - India Always link Strategy to CC "Core competencies are the activities in which any organization does exceedingly well and they are always built over time. Therefore corporate strategies should be linked to CCs."    9
Editor - NL The Virtual Company and Core Competences "It's interesting to consider a Virtual Business when you are thinking about Core Competences:
1. The Virtual Company focuses as much as possible / entirely on its own Core Competence (Typically Marketing, Visioning, Innovation)
2. It outsources all it's other functions to strategic partners, who are very good at performing those functions or even have that function as their core competence.
The Virtual Enterprise therefore could be said to derive its strength primarily from the way it deals with core competences..."		    6
Ullhas Pagey - India Integrating the Core Competence "Having identified the core competence of the organisation, the real challenge - particularly in knowledge intensive organisations - lies ahead in integrating it with the competences of its people so as to enhance the overall organisational capability; which ultimately should result in rendering competitive advantage to the organisation."    6
Dr. Uditha Liyanage - Sri Lanka Outside- in vs. Inside-out "I think the debate on the wisdom of an "outside- in" vs. "inside-out" approache is misplaced. CC is clearly the latter but unless you match your CC with market opportunities, CC will not yield desired results."    4
Tim - Australia Is CC REALLY different? "The trouble with this article and concept is that it begins by suggesting that CC is opposite to Porter's FF approach in that it places CC at the start as opposed to FF which places market, competition and customer first. Then you read down to the "Three test for identifying a Core Competence" and find market, competitor and customer. "    3
Mac - USA Collaboration and CC "How can a firm avoid that its core competence(s) are threatened when it is collaborating with other firms such as in demand chain collaboration or outsourcing?"    2
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  └► Tony Bok (United Kingdom) Examples in tourism and Hospitality "What about examples from hospitality and tourism perspective?"

  └► Mark Williams (Sudan) CC "Interesting"

  └► Trevor Malele (RSA) Defining Core Competency "It is so, so difficult to consider and adhere to your organisation's Core Competency which should be imitation-proof, substitutable-proof and rare; while competition is gradually eroding your market-share. Core Competency never IS, but is always BECOMING. This means that an organisation cannot bask in the success of its competencies, while the competition is always improving their side of products/services."
  └► Dr.P.L.Narasimhan (India) Customer Focus in Core Competence "Core competence and its continuous improvement will go with existing market, and staying in business with lower cost and increased reliability. But in changing market customer focus and their expectation should become the starting point. Adding competence within or sourcing competence from outside will be the next process. "
  └► Lutfi Nurcholis (Indonesian) Linking Market Orientation-Organizational Learning- Capability-Competency "Difficult to add other variable in this link. May be someone can help me to add new variable and give reason that this new variable have value to achieve competency via organizational learning. Thanks for your kind attention."

  └► Editor (NL) Identify a Core Competence "See text at "Building a Core Competence" (1-2-3). A well-known example is Sony's competence in miniaturization. Sony uses this capability in multiple product lines (audio, video, photo, etc). Customers appreciate small electronic devices. The miniaturization skill is hard to imitate by other companies."
  └► Irina (Russia) CC technique "Yes, you have the three tests and Sony is an example... But I'm looking for a more specific technique how to identify a core competency in practise. If it exists?"
  └► Sanju (India) How to identify your CC "A firm has to identify what its core competence could be for a particular product segment, given the product life-cycle and maturity curve, consumer expectations, and technology sustainability, also the competitive environment. A firm may not have any core competence but may still be successfully present in the market for many years if the product technology and consumer class are both matured. But certainly the sustainability of core competence will decide how profitable the organization would be."
  └► Rajiv (India) Core competencies "Core competencies are fundamentally a relative measure competency. It changes with time and business context. As long as the competency helps the organization to create & sustain a place in the market its core competency otherwise competencies are of no value. The core competency needs to be decided based on value perception of the competency by customer and market ."

  └► Odukoya Oladimeji Seye (Nigeria) Imitation of Core Competences "A firm can ensure that its core competences are hard to imitate by frequently strategizing and re-strateging, branding and re-branding all in a bid to avoid product obsolescence and to ensure that the company maintains a lion share of the market in which it sells her products and for overall corporate effectiveness."
  └► Editor (NL) Imitation of CC "See also the RBV Forum: How to avoid imitation? for this issue."
  └► Sanju (India) Core Competence - How to avoid Imitation "If the competence is built around technological innovation, keeping in mind consumer needs and preferences, it gives the organization a distinct competitive advantage and market leadership in a niche segment, though it may not last too long if the organization does not innovate continuously. But if the competence is also built around the processes through which to deliver superior service in the least possible time, it becomes extremely difficult to imitate. It also depends on the market being targeted, and product life-cycle, and consumer maturity curve."
  └► Biney Jacob (Ghana) Avoiding Imitation of Core Competence "I think a firm who want to make it difficult for competitors to imitate it's core competence should always be on the market to get up-to-date and accurate information to use these information to continuously improve upon their services to meet customers needs and wants."
  └► Samir Randive (Australia) Imitation of Core Competencies "Core Competencies are usually built upon one of the most important key success factors of the business which most certainly provides the competitive advantage to the company. Competitors will always try to imitate the CC. Arguably the best way to protect a CC is - be aggressive and attacking, be innovative, continuous improvement, quest for effeciency without effecting the quality."

  └► Burt Miller (US) Finding Markets for Core Competences "Each year, we ask our SBU's to come up with new ideas. On top of that we established a Center of Excellence to assist in the process, nurture the CC and help think out of the box. Competitive Benchmarking is another track you may want to explore."
  └► Sjef (Netherlands) Tool to find new markets "Try Blue Ocean Strategy - Four Actions Framework."
  └► Rajan Mani (India) Markets for Core Competence "I doubt whether any generic method is feasible. After all, every market is unique and in the process of synchronising with core competence, the process of seeking best fit has to be undergone. I suppose this is where the concept of a 'strategic window' becomes relevant"

  └► Arjunbabu (India) Agree "I accept what Mohit has said: The core competence can be found by SWOT analysis and CC is all about strengthening your strengths and and removing the threats and weaknesses. As it is mentioned the corporate strategies need to be aligned with core competences (SBU strategies) rather than working as separate unit. And not to forget the customer, he is the beneficiary and all the strategies need to be flexible enough to meet the changing customer needs........."

  └► Jackson (UK) Virtual Outsourcing... "Is there a particular case that comes to mind where a virtual organisation has enjoyed incremental success having outsourced its functions (and which ones?) and chosen to focus towards its core competence(s). And what were these competences? How were they for instance, able to benefit going forward, as a direct consequence of releasing control of specific aspects of their operations?
Or does virtualisation in this context remain merely conceptual as many have suggested?"
  └► Editor (Netherlands) Outsourcing Example "I have seen Nike mentioned as an example of succesful outsourcing of many functions except for marketing which is viewed as its core competence.
By the way the outsourcing is not virtual, but indeed very real and physical. A company can be considered virtual if it outsources almost all of its processes or functions."

  └► Norazian (Malaysia) Build Image and Brand Name "Companies should really do serious soul searching to come up with a core competence that can be sustained for a period of 3 to 5 years. This would allow the company to build up their image and brand name acting on this identified CC."

  └► Jennifer (USA) Market or Competence first? "There is an important reason for considering carefully if an outside-in or an inside-out approach is adviseable: in reality you will often end up with different conclusions, results and strategies, depending on your initial choice.
Of course it is agreed that you should always consider both aspects, irrespective of your starting point."
  └► John Keifer (USA) Outside or Inside? "Hamel and Prahalad wrote 14 years (1994) ago about core competencies. Since then, firms have disintermediated to a large extent across many industries. The need now is for firms to rapidly specialize and leverage their specialization across other firms likewise specializing. The idea of "core competencies" or key value creating processes now must be viewed now through a dynamic, constantly evolving prism. Stated differently, my impression is that speaking to the externality of the market or the internality of the firm no longer captures the essence of their key contribution to understanding the essence of firm competitiveness."
  └► K (NL) Use of Inside out "Agree to Mr Uditha: As the main goal of companies serving the market and make money doing so, the whole idea of inside out seems a bit useless. If you have a CC that nobody recognizes as added value then what's the use? Market needs are leading - adjust yourself to that and develop a CC."

  └► Kim Warren (UK) Core Competence differences "Of course CC is different from FF. FF is an industry-level framework for assessing profit opportunities generally, and says nothing about any particular firm at all. CC seeks deep competences that may allow a firm to perform strongly in its industry. No-one said you only need CC and can forget about the competitive environment. Like most strategy tools CC and FF are merely individual tools that may be necessary to identify a strong strategic position."
  └► Christine Nakimbugwe (Uganda) Core competencies "CC and FF are tools that an organisation can use to sustain their presence in the environment. It is the issue of sustainability that drives the above tools to be considered.
Secondly, it is a contigency to the organisation. CC is to do with resource audit. FF is in relation to environment setting."

  └► Pete (US) Outsourcing Parts of a CC "In general, mixing outsourcing and core competence strategies is not a good idea. Knowledge is at the heart of most CCs and by outsourcing parts of a CC you risk to loose the leading edge know-how that is necessary to sustain your CC.
Furthermore you risk transfering crucial know-how to the outsourcing provider who may emerge later as a strong competitor."
  └► Wael (KSA) An Example "I totally agree with Pete. IBM PCs are one of the greatest examples. When IBM outsourced its processors to intel, IBM lost its CC and therefore competitive advantage. The above resulted in consumers wanting to buy any PCs which are "intel inside" instead of IBM PCS."