The term “core competence” was coined by C.K. Prahalad and Gary Hamel in a Harvard Business Review article to describe “the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
It’s a mindset shift. By thinking of your company as a “portfolio of core competencies” rather than a “collection of strategic business units,” you can begin to imagine a tree-like structure, with core competencies making up the root system.
Everything grows from the roots — the trunk and major limbs are the core products, the smaller branches make up the business units, and the leaves and fruit are the end products (Prahalad). The root system is by far the most important. Unfortunately, most people are distracted by the colorful, tasty fruit — the end product. Indeed, the roots are usually hidden from view.
The challenge is to identify how the root system interacts with the environment. Roots are not passive agents — they interact and respond to the soil, other root systems, and many other complex signals. Roots have to change direction and continue branching outward to grow. Your organization must do the same.
By identifying your core competencies, the true value of your business, you can begin to support and enhance the things that give your organization a competitive advantage. Reimagining your business as a portfolio of core competencies allows you to see yourself in new markets, spawning unanticipated products and services.
In today’s rapidly changing world, it’s important for businesses to adapt quickly. Your business can change, which is why the real source of advantage lies in your core competencies — corporate-wide technologies and skills.
And of course, your core competencies can change through new focus, talent, acquisitions, or partnerships. Think of Netflix adding original content to its core competencies. Or Nike breaking into digital technology (Nike+). But in order to build partnerships and break into new markets, you need a clear understanding of the core competency you are trying to build.
Core competencies can be a combination of technologies, knowledge, and production skills that allow your organization to be competitive. It’s basically what your company does best and what distinguishes it from your competitors.
How to Establish Core Competencies
3 Tests of a Core Competency
According to Prahalad and Hamel, you can identify core competencies with three tests:
- Provide potential access to a wide variety of markets
- Make a significant contribution to the perceived customer benefits of the end product
- Are difficult for competitors to imitate
Come up with a list of up to six core competencies based on these rules. Any more than six and they probably aren’t core competencies.
Start thinking about your organization’s internal strengths and what makes you valued by your customers. Keep in mind that core competencies should not be seen as static. Competencies should adapt and change in response to the environment, just like real roots.
Core Competency Examples
It’s important to be able to distinguish core competencies from core products and end products.
Here are some examples of core competencies:
- User-friendly interfaces and design (Apple)
- Low-cost groceries (Walmart)
- Proprietary algorithms (Google)
- Small, reliable, and high-performance combustion engines (Honda)
- Low-cost home furnishings (IKEA)
- Superior supply chain management at a low cost (UPS)
- Superior IT systems and customer service (Amazon)
- Designing and marketing athletic wear (Nike)
Core competencies vary from industry to industry. Governmental agencies may have core competencies in budget and management. Other industries may outsource these core competencies. Hospitals and clinics may have core competencies in patent care and medical knowledge, or health and nutrition.
Take an honest look at your strengths and weaknesses. When your organization’s managers and leaders have a good idea of your core competencies, you are able to think about long-term success and how to win future opportunities, hire people who embody these core competencies, and branch out into multiple markets.
Since core competencies can change over the years, it’s important to invest in next-generation competencies by investing in technology, resources, and strategic alliances.
Core Competencies at the Management Level
The goal of thinking about core competencies is to focus on the most important aspects of organizational success. This starts with upper management.
In order to start focusing on core competencies, top management must assume the responsibility. If you think your business unit is sacrosanct, think again. Businesses are meant to adapt and change.
One of the greatest causes of business failure is stubborn adherence to the original business model. By focusing on just one thing — the business unit — you won’t be able to exploit the wide pool of talent, tools, and technology at your disposal.
Core competencies are all about flexibility and recognizing opportunities for using your expertise in new and interesting ways. And remember, knowledge and skills fade when not used.
Core Competencies at the Human Resource Level
The humans that make up your business or organization are your strongest asset — not end products or services. Resources, such as human resources, can be a core competency itself. At the very least, a strong HR department contributes to your core competencies.
Once you have identified the organization’s core competencies, it’s important to analyze existing management and the human resources department to see how they can be directed toward supporting these core competencies.
For instance, instead of wasting precious time and resources on things like compliance and legal issues, paperwork and payroll, your HR department can focus on things like business strategy, culture, and relationship building.
- Relationship Management
- Leadership and Navigation
- Global and Cultural Effectiveness
- Ethical Practice, Critical Evaluation
- Business Acumen
- Emotional Intelligence
- Decision-Making Skills
- Negotiating and Influencing
- Technological Savvy
- Critical Thinking
We don’t see payroll and compliance issues on that list. That’s because technology and Professional Employer Organization (PEO) companies like Resourcing Edge have automated many of the administrative tasks associated with traditional HR departments.
Gain the Competitive Edge
Think about your organization’s core competencies and how you can get management and HR to contribute to this new focus. For instance, understanding core competencies enables you to find, promote, and develop talent that matches them. This is a major part of management and human resources. Core competencies are the glue that connects all the different aspects of your business. Let them guide you.
If payroll and benefits plans aren’t one of your core competencies, consider outsourcing them to a company that does consider them a core competency. By taking on the burden of employee administration, you can be more strategic with your HR team. It’s time to rethink your business.
To help free up your HR department to start applying their skills and knowledge to increase your competitive edge, contact Resourcing Edge. We have the team and technology necessary to take on time-consuming administrative tasks such as payroll, employee benefits, and workers comp.
Resourcing Edge is your #1 HR Solution. We offer a wide range of HR solutions to help manage your staff, minimize risk, and reduce expense.
Contact us today for more information