Core Cornpetence: What Does it Mean in Practice? Mansour Javidan - .

PRAHALAD AND HAMEL's ~ ~ L ~ E N T I A L ARTICLE, "Core Cornpetence of the Corp~rat ion" '~ has generated sub- stantial interest in the notion of core competencies and capabilities and has helped popularize a new school of economic thought called The Resource- based View of the Firm.Z-7.9~17~'g.22 The article has made two important contributions to the literature in stra- te$c management; itproposed a new complementary app~oach.t+rategic planning and it provided a s n : ceptual too1 for a multi-buiiness corporation to achievc better synergies among its various business units.

Better Planning In a typical planning process,the corporation starts with an identification of external threats and oppor- tunities. it analyses the macro environment, the stake- holders, the industry. competitors and customers to isolate potential trcnds and developments and to determine their implications. The company then develops strategies by identihing and assessing vari- ous options to address thc thrcats and opportunities. The last stage in the process is a determination of implementation plans through which resources are allocated and stcps are put in place to execute the plans.

Prahalad and Hamel proposed a different approach. not to replace the traditional planning proccss but to supplement it. While the traditional approach is an outside-in process where the planner starts with external analysis and then performs internal analysis, the process advocated by the authors is inside-ou< It starts with internal analysis and then examines the external environment.

The authors suggested that companies need to understand fully their core competencies and capa- bilities in order to successfully exploit their

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resources. This suggestion is consistent with the argu- ments by the proponents of The Resource-Based View of the Firm. This theoretical approach assumes that firms own different types of resources which enablc f iém to develop different strategies. &company has a sustained competitive advanta~e to the extent that - -xE%akm - --- .. - eiy exploit its resources and to thccxtcnt ihat its competitors are unable to imitate ~ t s Stiategies.9 ~ a t e r ~ i l l a r , the leader in the heavy con- - .. struction equipment industry, uses its after-sale sup- pori and service capability as the foiindation of its competitive strategy. It can get spare parts and service personnel to any place in the world in tweiity-lour hours; Toyota's success in the global auto manu- facturing industry is to a large extent due to its manu- facturing capabilities. reflected such techniques as just-in-time inventory, self-managing tearns and flex- ible manufacturing. Walt Disney's success since the early 1980's is mostly due to its ability to effectively exploit such rcsources as its enormous film library

Long RangePlanning. Vol. 51. No. 1. pp. GO to 71.1998 PII: S0024-6301(97)00091-5 O 1998 Elsevier Science Ltd. All righis rescrved

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capabilities. core competencies will facilitate organisational iearn- By the same token, strategies that are too far from ing and enhance the company's ability to leverage its

the firm's competencies and capabilities are resources. inherently risky. Exxon's diversification strategies in A company pursuing this approach would define the 1970's resulted in major losses because the com- its corporate strategy as no! just a ~or t fo l io o í busi- pany strayed from its competencies in the energy nesses and SBU's but also ris a portfolio of compctcn- business by entering the office equipment and com- cies. It would have a long-terni commitment to

puter business. developing competencies and would provide a mech- . According to this theory, a detailed analysis of the anism for cross-SBU communicalion. involveitieiil.

firm's resources, capabilities and competencies will and co-ordination. It would regard its corporate strat- result in a better understanding of the sources of com- egy as an important tool for facilitating and exploiting petitive advantage. Such in-dcpth understanding can horizontal integration among SBU'S.' lead to a better match between external opportunities Prahalad and Hamel have made a significant con- and interna1 strengths because once the corporation tribution to our understanding of this importarit topic knows its areas of strength, it can search the external and have helped generale sigiiificant interesl ir1 i t . environment to identify possible ways of better but two important questions need firther work and exploiting those strengths.lz Walt Disney's core com- elaboration: petence in entertaining families has directed it into a seemingly diverse set of businesses such as amuse- ~ ~ ~ J i ~ ) i y . d o , w e De ne Core Competencies anã rnent parks, hotels, video channels and moviestudios. i~CapabilitiesF.:~~ i I i~rahalad~~d~amel's'~.aotionof ._ . _ - .. .corecompeten& The authors' definition of core cornpetence as "coi-

ii5.a ~ ó r i c é ~ k a l too1 for a more rígorous examinatio5 lective learning" needs firther clarification and oper- .,and exploitation ofthe firni's.interna1 s t r e n w . They ationalization. They -use the concepts of competence, derined core competencies as "the collective learning :core competence and capability as synonymod. Fur- in the organization, especially how to co-ordinate thermore. they define these terms as a combination diverse production skills and integrate multiple stre- of production skills and technologies. Thcrc are two ams of technologies" (p. 82). Core competencies are problems with their definition. First. it is too narrow. the corporation's fundamental strengths. rThey. are* It only focuses on a limited aspect of the company's .things that the c,ompaq:does very well. Once core value chain, mostly in manufacturing. ignoring the compe~ncies are identified. the company can then many possibilities in other steps throughout rhe value examine possible opportunities where such com- system.Second1y;theirdefinitionhasgeneratedsomé petencies can lead to new products or new markekg confusi_qo .as ;:to the . relationship between com: A core cornpetence is meaningful if it provides poss- petencies imd capabilities? Without A clear oper- ible access to new markets, if it satisfies specific cus- ational definition, it is difficult for an organization to tomer needs and if it is difficult to imitate.'" embark on a process of identifying and exploiting its

competencies. In another influential Harvard Bosi- Be tter Syn ergy ness Review article titled "Competing on Capa- Another contribution of Prahalad and Hamel's article bilities", Stalk et a!." attempted to differentiate is their use of core competence as a tool for belter between core competencies and capabilities. but tliey integration among Strategic Business Unit (SBU) stra- do not succeed in providing clearly defined descrip- tegies. In many multi-business companies, individual tions. In this article, we will not provide a mcaningful business units may be successful in their markets but and useful operational definition for these important the corporation may be unable to effectively integrate concepts and will show how they are related. its SBU's and realize potential synergies. Co-ordi- nation among SBU's is difficult because it requíres : 2. How Should a Corporation Identify its Core' open Iines of communication, an appropriate reward - - Competenciesand.Their Implications? Or rystem, committed manager and a team-based organ- The literature on core competence does noi provide

. izational culture. In a typical multi-business corpor- an organizational process for identifying core com- ation, few of these'requirements exist and there is a petencies and capabilities, and for exploring oppor- natural tendency among SBU's to become parochial. tunities to exploit them. While there is much taik

1 E T h e a u t h o ç o f f e r e d c o r e i m e ~ about how important it is to understand a cor- : .arena';fqr$BUZo~rdination~~..~d integratiorg They poration's competencies, there is littlo information 1 argued that identifying and exploiting core com- on how a company ean go about doing this. who in 1 petences requires collective organirational learning.. the company should be involved, and what speciêc

Therefore, the concept of core competence can actas a steps to take to successfully exploit the identified vehicle for SBU's to find common interests, problems, opportunities. capabilities or opportunities. They suggested that These two questions are very important practical

I Long Range Planning Vol. 31 February 1998

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concerns that face any management group attempting - and .------- routinc that manage the interaction among its to impIement Prahalad and Harnel's ideas in their . resourcd. A proccss is a set of activities that trans- organizations. The purpose of this article is to address form an input into an output. For cxample. a com- the two questions by prcsenting a decision-making pany's rnarketing capability can bc based. arnong process which together with the company's strategic other things. on thc interaction among its manpower pIanning exercise, will help managers and exccutives (marketing specialists). technology (computer hard- identiS and take h11 advantage of their companies' ware and software) and financia1 resources. cornpetencies and capabilities. The process presented 5The;distinguishing : f e a t v .of capabilities is b k here has evolved as a result of the author's work with ~ ~ ~ ~ ~ i & ~ i i a l i ~ - b a ~ e d . ~ ~ _ ~ ~ a b ~ ~ t y . & . : ~ e s i d e n ~ severa1 executive groups in different companies and i n k - * p ~ - ~ ~ @ . ~ . r 8 F 0 r ~ & e i ~ ~ ~ : % ~ industries. .. heting - ~ ; a p & i l i t i e s , ~ u @ ~ o ~ n i ~ p a b i ~ -.--:.-..e-- .< L ~ ~ ~ t i ~ o g ~ s ~ ~ ~ i c s P ~ b ~ ~ ~ t i ~ ~ ,++d . h-

ré&. ;- .&-& inentcap*bi.K# Core Cornpetencies, Capabilities n'y-~he fact that a capsbility is functionally based does

and Resources not preclude it from exploiting resources that may exist across the organization. For exarnple. Intel's

!The firçt~~tep~~~successfullyiden~ing and exploit# marketing capability is very much linked to its overall k.ing a companyl comp$e.ncies is to create auniversal corporate image. so its market ing strategies attempt 'undersrStanding.eong ali management levels 'ks toths to take advantage of the company's reputation. ln con- co,ncepts~f:core~competence;~capability i......... &.. . .end orgari- trast, in entering the PC rnarket. Hewlett-Packard was isationál fesoi&&d?Figure I is a good sty-ting point. initially unable to exploit its strong corporate repu-

At the bottom of the hierarchy are resources. They tation in its marketing strategies. are the building blocks of competencies. Resources :A competenMthe third level in the hierarchy, is are the inputs into the organization's value chain. .a cross-functional integratiodl and. co-ordination ofJi Barney4 categorized resources into three groups: .capabilitie$ In a multi-business corporation. com- physical rcsources such as plant, equipment, location petencies are a set of skills and know-hows housed in and assets; human resources such as manpower, man- an SBU. ãhey result from interfaces and integratioxf agernent team, training and experience; and organ- among the SBU8s functional capabilities? For exam- izational resources such as culture and reputation. ple. a particular SBU may possess the cornpetency of Some resources are tangible and physical such as dcveloping successful new products. Such a com- plant and equipment and others are intangible like a petency may be the consequence of integrating MIS brand name. capabilities. marketing capabilities. R&D capabilities

Each corporation has a bundle of resources, bui and production capabilities. not every- firm can pul its resources into best use. Core competenciet.the highest leve1 in the hieib Companics vary in how they leverage their resources. :archfl cross SBU boundaries. ,They resuIt fkom th$) - . Capabilities refer.:to - the corporation's ability to* interaction between different SBUs' competenciesl exploit its resourcesshey are the second level in th6 Core cornpetencies are skills and areas of knowledg6 hierarchy and consist of a series of business processes that are shared across business units and result h6

.the integration and hannonization of SBU competen@- . .ies. O

core competency is a collection of competencieg that are widespread in the corporatiofi. As Prahalsd and Hamel pointed out. core competencies require collective organizational learning, involvements and a commitment to cross-SBU integration. In the above example, new product developmeni is a core com- petency if it goes beyond one SBU.

Severa1 features are important about the hierarchy in Fig. I. First, each level in the hierarchy is based on the level below. It results from the integration of the elements in the lower level. Secondly. each level encompasses a higher level of valuc added for the company. Resources on their own add little value. Functional capabilities generate value by deploying resources. Competencies add greater value because they expand the boundaries of capabilities. They result from synergies arnong capabilities. A bank may have good MIS capability in the sense that it generatcs

Core Competencc: What Does it Mean in Practice?