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Watch this short explainer video by Harvard Business Review and find out why Core Competencies are important for strategists in large companies. Gary Hamel and C.K. Prahalad first introduced this concept in 1990 and since then many organisations have used this to define strategy and drive business creation and growth.
How do you know your core competencies?
The challenge is first and foremost to identify what the core competencies of your company are before you can even start to think of how to leverage them for finding new opportunities. Warning: not every company has a true core competence and this may come as a shock to them (even though deep down they probably suspect this is the case). This is what happens in the case of strategy convergence, i.e. when within a particular industry all companies pursue similar strategies to compete with one another. This makes industries vulnerable for disruption when a new entrant finds an alternative way (develop a different core competence) to compete and provide much greater value for customers.
Developing a Core Competence portfolio
Core Competencies are not static. There is a natural evolution as competition catches up over time and what was once a Core Competency evolves to become a basic requirement, it no longer provides competitive differentiation. Organisations need to continuously develop new, technologies, skills, assets etc. that can become future core competencies to remain competitive and play to win.
We also look for what we call latent core competencies, i.e. competencies that are under leveraged and could lead us to defining new areas where we can play to win.
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How Amazon leveraged its Core Competency
The pattern is similar to the Honda example in the video. Amazon started by selling books online but over time developed what became a core competency around developing and operating an e-commerce platform. The Core Competencies needed to successfully operate their online marketplace could now be leveraged to move into cloud computing. AWS contributes around 11% of the total revenue and Amazon has a substantial market share lead over Microsoft Azure, Google’s Cloud platform and IBM, as well as other players like Alibaba and Oracle.
Playing the long game
Gary Hamel once said “Define your company by what you know (core competencies) and own (strategic assets), not by what you do (products or services).”
Core Competencies have a much longer life span than do products or services. What’s important to understand is that core competencies allow you to innovate by thinking how you could leverage them in new ways such as Honda, Amazon and many others have done. Once you know what your Core Competence portfolio looks like you’re in a much better position to compete in the present as well as for the future.
