“Core competence.” We’ve all heard about it. The idea of core competence is one of the most sacred in business. It’s standard in every MBA playbook. It can also be so fundamentally misunderstood that it’s a trap for the unwary. Beware!
While not an entirely new concept per se, the term “core competence” burst onto mainstream vocabulary in 1990 following a landmark Harvard Business Review article by Prahalad and Hamel.[i] The article advocates competence-centric strategy rather than business unit- or product-centric. For example, rather than seeing itself as a “motorcycle company” (product) Honda saw itself as an “efficient engine engineering company,” (competence) allowing for successful diversification into other non-motorcycle products like cars and lawnmowers.
Despite how Prahalad and Hamel orchestrated their thesis, many later interpreters have twanged it into discord. One way to know if someone’s about to blunder core competence is if they ask “what’s my company’s core competence?” While it seems innocent enough, there’s a good chance anyone uttering these words (or spending a lot of time trying to answer this question) has it backwards.
A lot of people think core competence is something you have. Like a heart, some managers believe an immutable core competence beats deep within every business. If found – so the thinking goes – this core competence can be leveraged to convey unique competitive advantage in other industries and create a greater likelihood of success. People in this camp spend a lot of energy debating what their company’s core competence is. To do this, they focus intently on their company’s past. What’s been the key to our success in the past? What have we done well before? How do past strengths define our core competence today?
Problem is, people rarely agree on what any company’s core competence is. What’s Microsoft’s core competence? Google? Intel? United Airlines? Anyone’s? Who is to say? Was Honda really an “efficient engine engineering company” or was it really a “transportation,” “combustion,” or “mechanical engineering” company? Or, was its true competence an ability to understand customers? Innovation? Cash flow management? Leadership? Process control? Marketing? It depends on who you ask and how many beers you’ve bought them.
We need to call core competence what it really is. Far from an immutable holy grail in corporate identity, it’s an entirely subjective determination. Core competence is whatever we decide it should be. It’s a choice. There are any number of candidate core competencies that one can ascribe to their business… and that makes the notion of core competence more helpful, not less. This is what Prahalad and Hamel were talking about.
That’s the first point – core competence is a decision, not an absolute. It’s whatever you decide it should be, as a strategic thinker, to maximize benefit for your organization.
The second point is that core competence is about the future, not the past. When discussing what your firm’s core competence is, don’t look at what it has done well in the past. That’s probably irrelevant. Instead, look to what it must learn to do well in the future. Core competence is forward looking, not retrospective. It’s about figuring out what capabilities your company needs to build in order to compete tomorrow, not what made it do well yesterday.
The third point is that one should be cautious when assuming their core competence will increase the probability of success in new markets and adjacent industries. Remember, your competitors don’t care what you think your core competence is. All they care about is whether or not you’re threatening them. Don’t be wrapped in a blanket of false security.
It’s absurd for this brief article to try and address the full issue of core competence, but it’s worth calling out the notion’s frequent abuse. Core competence is about choosing to do what customers value. It’s not about doing what you think you’re good at. If you see core competence as some immutable property buried deep within your organization, if you look for it by analyzing the past, and if – once found – you think it can be leveraged to increase your likelihood of success in new markets, you’ve got it upside down. Don’t be led astray. While the right understanding of core competence can be a good thing, the wrong inferences can be catastrophic for your business. You’ve been warned… beware!
[i] Prahalad & Hamel, The Core Competence of the Corporation, Harvard Business Review, v.68, no. 3, p. 79-91 (1990)