Core competency
- 1. THE CONCEPT OF CORE COMPETENCY A presentation by: Alok Kumar Mahankuda 1 BERHAMPUR UNIVERSITY Guided by: Diwakar Panigrahy Professor M.Com., PGDM, Ph.D.
- 2. 2 Authors Graduate of Harvard School of Business Professor at Univ. of Michigan School of Business Advocate of Core Competency Focus for Businesses Business Consultant HBR-“He was one of the foremost business thinkers of our time” Graduate of University of Michigan School of Business Visiting Professor of London Business School Ranked as the “World’s most influential business thinker” by the Wall Street Journal Business Consultant and Media Contributor Gary Hamel 1954 - Present Coimbatore K. Prahalad 1941-2010
- 3. CORE COMPETENCY Core competency is a concept in management theory introduced by, C. K. PRAHALAD and GARY HAMEL. It can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace“ Core competency are the skills, characteristics, and assets that set your company apart from competitors. They are the fuel for innovation and the roots of competitive advantage. The engine for new business development, underlying component of a company’s competitive advantage created from the coordination, integration and harmonization of diverse skills and multiple streams of technologies. 3
- 4. IDENTIFYING YOUR CORE COMPETENCIES Prahalad and Hamel suggest three factors to help identify core competencies in any business: 1. Provides potential access to a wide variety of markets 2. Makes a significant contribution to the perceived customer benefits of the end product 3. Difficult for competitors to imitate 4
- 5. 1. Provides potential access to a wide variety of markets The key core competencies here are those that enable the creation of new products and services. Example: Why has Saga established such a strong leadership in supplying financial services (e.g. insurance) and holidays to the older generation? Core Competencies that enable Saga to enter apparently different markets: - Clear distinctive brand proposition that focuses solely on a closely-defined customer group - Leading direct marketing skills - database management; direct-mailing campaigns; call center sales conversion - Skills in customer relationship management 5
- 6. 2. Makes a significant contribution to the perceived customer benefits of the end product Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for? Example: Why have Amazon been so successful in capturing leadership of the market for online book shopping? Core competencies that mean customers value the Tesco.com experience so highly: - Designing and implementing supply systems that effectively link existing shops with the Amazon.com web site - Ability to design and deliver a "customer interface" that personalizes online shopping and makes it more efficient - Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling) 6
- 7. 3. Difficult for competitors to imitate A core competence should be "competitively unique": In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as "core", a competence should be something that other competitors wish they had within their own business. Example: Why does Dell have such a strong position in the personal computer market? Core competencies that are difficult for the competition to imitate: - Online customer "bespoking" of each computer built - Minimization of working capital in the production process - High manufacturing and distribution quality - reliable products at competitive prices 7
- 8. 8 TIPS ON THE FIVE APPROACHES Telling Need during a crisis when top management pressured to make dramatic change Make it clear whether anything in the vision is negotiable. Then let the organization fill in details. If you provide all details, nothing left for others to contribute Selling Open channels of communication Need to focus on what is important to people throughout the organization Need to show how it ties into what is important to you as well.
- 9. 9 TIPS ON THE FIVE APPROACHES Contd... Testing Supply as much background material. See which bits they support most, which least. Do everything to improve quality of responses-ensuring anonymity of feedback. Don’t test only by questionnaires - face-to-face interviews Consulting If you know you don’t have all the answers yourself. Set the ground rules for the visionary exercise, building the safeguard against distortion. Make sure someone collects anonymous written comments at the end of each session. If your organization is not prepared to coordinate the feedback of flooded ideas testing is a better option.
- 10. 10 TIPS ON THE FIVE APPROACHES Contd... Co-creating Everyone in the organization starts by creating own personal vision. Teams to articulate their sense of common purpose. Teams that are interdependent align visions. The goal is alignment and compatibility not uniformity Combine to create a hierarchy to aligned visions.
- 11. 11 Stage One: Analyze Company Competency Needs Articulate company needs, translate needs into requirements Define what the ideal organization looks like Can be accomplished through alignment exercise involving executives and business area managers Stage Two: Identify Core Competencies Capture current competencies to establish baseline from which organization must start to achieve desired final state. During this stage, assess quality, uniqueness, and value of competencies. There are Six Stages of Core Competency Implementation:
- 12. 12 There are Six Stages of Core Competency Implementation: Contd... Stage Three: Perform Situation Analysis Compare and contrast capabilities from company needs assessment (stage one) and those capabilities that are currently in place (stage two). Stage three creates overall competence profile of organization, classifies issues and opportunities into categories to be addressed through a variety of strategy options.
- 13. 13 There are Six Stages of Core Competency Implementation: Contd... Stage Four: Devise Competency Strategy and Plan Using results from the situation analysis (stage three), this stage devises a strategy for developing and focusing on the core competencies that the company needs for pursuing identified opportunities and for correcting excess, deficient or obsolete capabilities. Document strategies in a plan to map competencies to specific delivery mechanisms.
- 14. 14 There are Six Stages of Core Competency Implementation: Contd... Stage Five: Implement Competency Strategy Perform steps necessary to begin deploying competence strategy. Same issues, problems and requirements as any other implementation. Take long range view towards shifting competencies. Spread implementation effort over two or more years to reduce disruptive effect of many simultaneous changes. Stage Six: Evaluate Results Manage the competency plan evaluation as an ongoing process. Use techniques such as benchmarking, service level agreements and customer satisfaction surveys to help manage and measure plan’s progress.
- 15. COMPETENCIES DO NOT MEAN Outspending competitors on research and development Cost sharing among SBU’s Vertical integration 15
- 16. Roots Of Competitive Advantage16 • The diversified corporation is a large tree. The trunk and major limbs are core products The smaller branches are business units The leaves, flowers and fruit are end product, The root system that provides nourishment, substance and stability is the core product.
- 17. Losing Core Competencies How to lose: A Core Competency is lost: Through outsourcing/OEM-supply relationships => Example: Chrysler vs Honda (Chrysler unlike Honda considered its engines and power trains as simply another component and started outsourcing) Through giving up opportunities to establish competencies that are evolving in existing businesses => Example: television business 17
- 18. More About… STRATEGIC ARCHITECTURE Company’s future is determined by it’s core competencies. These competencies define the architecture and characteristics of the global competitive firm. BOUNDARY LESS ORGANIZATION In the old diversified corporation, ideas and technologies are reluctantly shared from one SBU to the next, if at all. Boundaries seem transparent when SBU’s share core competencies and core products. These resources come from the firm. RESOURCE ALLOCATION When core competencies are the roots of the firm, specialized employees and core products can be allocated to various SBU’s. At Maruti, specialized employees move between camera and printer products regularly. 18
- 19. INNOVATION Using core competencies, new technologies can be developed without heavy R&D costs. Fiat: Drive your way; Maruti Suzuki : Count on us; Hyundai: New thinking new possibilities; Honda: Off-road buggy; Ford: Go further COMPETENCE BUILDING The focus of today’s global firm should be in competence building. Constantly improving competencies provides for new integrated technologies. Competencies provide focus for long-term goals. COMPETITIVE ADVANTAGE Short-term market share can be won by anyone with a good idea. Race to get products on the shelf. Long-term success involves competency structured organizations, innovation, and market consistency. Same core products, integrated into new end products, creating new markets. 19
- 20. SBU vs Core Competence 20 Two Concepts of the Corporation: SBU or Core Competence SBU Core Competence Basic for competition Competitiveness of today’s products Interfirm competition to build competencies Corporate structure Portfolio of businesses related in product- market terms Portfolio of competencies, core products, and businesses Status of the business unit Autonomy is sacrosanct, the SBU “owns” all resources other than cash SBU is potential reservoir of core competencies Resource allocation Discrete businesses are the unit of analysis, capital is allocated business by business Businesses and competencies are the unit of analysis: top management allocates capital and talent Value addedof top management Optimizing corporate returns through capital allocation trade-offs among businesses Enunciating strategic architecture and building competencies to secure the future Figure source: Prahalad, C.K., Hamel, G. (1990). “ The Core Competenceof the Corporation”. HarvardBusiness Review, 86.
- 21. THE LOSS OF CORE COMPETENCIES Cost-cutting moves sometimes destroy the ability to build core competencies. For example, decentralization makes it more difficult to build core competencies because autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents the firm from developing core competencies in those tasks since it no longer consolidates the know-how that is spread throughout the company. Failure to recognize core competencies may lead to decisions that result in their loss. For example, in the 1970's many U.S. manufacturers divested themselves of their television manufacturing businesses, reasoning that the industry was mature and that high quality, low cost models were available from Far East manufacturers. In the process, they lost their core competence in video, and this loss resulted in a handicap in the newer digital television industry. Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb level, and then was unable to enter the 1Mb market on its own. By recognizing its core competencies and understanding the time required to build them or regain them, a company can make better divestment decisions. 21
- 22. CORE PRODUCTS Core competencies manifest themselves in core products that serve as a link between the competencies and end products. Core products enable value creation in the end products. Examples of firms and some of their core products include: • Canon - laser printer subsystems; • Honda - gasoline powered engines; • Black & Decker - small electric motors Because firms may sell their core products to other firms that use them as the basis for end user products, traditional measures of brand market share are insufficient for evaluating the success of core competencies. Prahalad and Hamel suggest that core product share is the appropriate metric. While a company may have a low brand share, it may have high core product share and it is this share that is important from a core competency standpoint. Once a firm has successful core products, it can expand the number of uses in order to gain a cost advantage via economies of scale and economies of scope. 22
- 23. CORE COMPETENCIES TO END PRODUCTS 23
- 24. 24 From Core Competencies to Core Products: Should have distinctions between: Core competencies Core products End products Ability to miniaturized electronics Portable music player Sony Walkman Strong brand & distinct taste “Secret” Coke concentrate Coca-Cola Indexing technologies & large-scale hardware Internet based productivity tools Google doc, mail, search engine, etc
- 25. Case Study 1: HONDA MOTOR CO. It is a Japanese multinational corporation primarily known for automobiles and motorcycles. It is the largest manufacturer of motorcycles and internal combustion engines measured by volume producing more than 14 million internal combustion engines in an year. Apart from core automobiles and motorcycles Honda are also manufacturers garden equipment, marine engines, personal watercrafts They have recently ventured into the aerospace industry with GE Honda Aero engines. The Honda jet was scheduled in 2011. 25
- 26. Case Study 2: Black & Decker Black & Decker 's core technological competency pertains to 200 to 600 W electric motors , and this motor is their core product . All of their end products are modifications of this basic technology, with the exception of their work benches, flash lights, battery charging systems, toaster ovens, and coffee percolators. They produce products for three markets: • The home workshop market: In the home workshop market, small electric motors are used to produce drills, circular saws, sanders, routers, rotary tools, polishers, and drivers. • The home cleaning and maintenance market: In the home cleaning and maintenance market, small electric motors are used to produce dust busters, etc. • The kitchen appliance market: In the kitchen appliance market, small electric motors are used to produce can openers, food processors, blenders, bread makers, and fans. 26
- 27. Summary Learn your competencies Develop your competencies Structure your organization around your competencies Involve core products in all end products Outsource non-competencies with strategic alliances and licensing. 27
- 28. THANK You ! 28
Editor's Notes
- #4: Engines are the core products to which design and development skills are directed that result in end products-cars & motorcycles
- #16: vertical integration is an arrangement in which the supply chain of a company is owned by that company
- #18: OEM- original equipment manufacturure – a company that makes a part i.e. used in another companies end pdt.
- #19: Developing Strategic Architecture >A road map of the future >Consistency in resource allocation & development of appropriate administrative infrastructure >Cannot be copied by competitors