Strategy

Core competence and the resourcebased view

These models help a firm to understand and to develop their internal capabilities so that they become a source of competitive advantage

Firms do not become profitable simply because they have chosen a generic strategy. Sometimes their internal resources and capabilities are so distinct that no other company can match them. These models assist a company in understanding and developing internal capabilities so that they can become a source of competitive advantage.

When to use it

● To comprehend why one firm is more profitable than another, even when they occupy the same market position.
● To increase your company's profitability and growth.

Origins

Thinking about strategy in the 1980s was all about how firms positioned themselves within their chosen industry, thanks largely to Michael Porter's influential work – it was externally focused. However, in order to be successful, a company must also focus on its internal resources and competencies – it must be able to translate its intentions into action.

There was a shift in thinking toward these internal perspectives around 1990. In that same year, a seminal paper titled 'The core competence of the corporation' by Gary Hamel and C.K. Prahalad proposed that the key to long-term success was to understand and build on the underlying competencies that distinguish your company. Around the same time, Jay Barney published a seminal academic paper arguing that success is built on having valuable, rare, and difficult-to-copy resources. Barney's work built on previous academic studies, but it was his contribution that really opened up the resource-based perspective to academic researchers worldwide.

What it is

A 'core competency,' according to Hamel and Prahalad, is a coordinated combination of multiple resources and skills that distinguishes a company in the marketplace. This competency meets three criteria:

● It offers potential access to a wide range of markets;

● It should contribute significantly to the perceived customer benefits of the end product.

● It is difficult for competitors to imitate.

Canon's core competencies in precision mechanics, fine optics, and micro-electronics, or Disney's core competency in storytelling, are examples used by Hamel and Prahalad.

Core competencies are valuable not only in existing markets, but they can also be used to build a variety of products and services in new markets. Amazon, for example, used its cutting-edge IT infrastructure to launch an entirely new business, Amazon Web Services. Core competencies emerge through continuous improvement over time, which is one of the reasons they are difficult to replicate.

The'resource-based view' is a competitive advantage theory that is based on how a company applies its bundle of tangible or intangible resources to market opportunities. If certain criteria are met, resources have the potential to create a competitive advantage:

● valuable;

● rare (not freely available for everyone to buy);

● inimitable (not quickly copied);

● non-substitutable.

A company that owns a diamond mine, for example, has the potential for a competitive advantage because its diamonds meet these criteria. A more interesting example would be McKinsey, the consulting firm, which has built a set of valuable relationships with its key clients over the years that its competitors cannot match.

Many observers argue that it is useful to distinguish between'resources,' which are assets that can be bought and sold, and 'capabilities,' which are bundles of resources used in combinations to achieve desired outcomes.

The 'core competence' and'resource-based' perspectives have obvious parallels, but they are not identical. The resource-based view is the preferred way of thinking about these issues in academic research, whereas core-competence thinking has been used more appliedly, with many firms talking colloquially about what their core competencies are.

How to use it

When analyzing your company's core competencies, it is beneficial to use a structured framework. Here's one common approach:

● Begin by brainstorming what is most important to your customers or clients: what do they require, what is valuable to them? What problems do they have that you might be able to solve?
● Then consider the competencies that lie behind these requirements. Customers who value small products (such as mobile phones) may require expertise in miniaturisation and precision engineering. If they require high-level advice, the relevant competence could be relationship management.
● Brainstorm your existing competencies – the things that people believe the firm is good at and the things that you outperform your competitors in. Screen each of these against the criteria of relevance, difficulty of imitation, and breadth of application.
● Now compare the two lists and ask yourself where there is overlap between the really difficult or important things your customers require and what your company is really good at. The areas of overlap are essentially your core competencies.
● In many cases, the overlap between the two lists is not perfect, which raises a number of additional questions. For example, if you lack core competencies, consider which ones you could develop and work to develop them. Alternatively, if you don't have any core competencies and it doesn't appear that you can develop any that customers would value, you might consider other ways to differentiate yourself in the market, such as through clever positioning.

Top practical tip

The definition of a core competence is very exclusive. In other words, if you apply the criteria very strictly, most firms do not end up with any core competencies at all. So the framework provided here should typically be applied fairly loosely – it is useful to consider the various criteria around value, rarity and inimitability, but only as a way of thinking through how a competitor might attempt to beat you, or how you might sharpen up your own competitive position, rather than as an end in itself.

Top pitfall

The greatest risk with core-competence analysis is that it becomes overly internalized. It's often entertaining to argue about what you're good at because everyone has an opinion. However, it frequently devolves into a very negative discussion about what went wrong, with finger-pointing between departments. This is why a core-competence discussion should always alternate between what your company excels at and what customer needs you are attempting to meet.