Core competences

Introduction Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. The Work of Hamel and Prahalad The main ideas about Core Competencies were developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a bestselling book - Competing for the Future. Their central idea was that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth. 'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible indeed, they'll have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel 1990 These areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products. For example, for a manufacturer of electronic equipment, key areas of expertise could be in the design of the electronic components and circuits. For a ceramics manufacturer, they could be the routines and processes at the heart of the production process. For a software company the key skills may be in the overall simplicity and utility of the program for users or alternatively in the high quality of software code writing they have achieved. Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change. Identifying Core Competencies Prahalad and Hamel suggest three factors to help identify core competencies in any business: What does the Core Comments / Examples Competence

Achieve? Provides potential The key core competencies here are those that enable the access to a wide creation of new products and services. variety of markets 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; directmailing campaigns; call centre sales conversion - Skills in customer relationship management Makes a significant Core competencies are the skills that enable a business to contribution to the deliver a fundamental customer benefit - in other words: what perceived is it that causes customers to choose one product over another? customer benefits To identify core competencies in a particular market, ask of the end product 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 Tesco been so successful in capturing leadership of the market for online grocery 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 Tesco.com web site - Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient - Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling) 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

Difficult for competitors to imitate

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 - Minimisation of working capital in the production process - High manufacturing and distribution quality - reliable products at competitive prices A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence, as it will not differentiate the business from any other similar businesses. For example, a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However it is possible to develop such a process into a core competence with suitable investment in equipment and training. It follows from the concept of Core Competencies that resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.

Strategy: Resources of a business

In our introduction to the topic of business strategy, we used Johnson & Scholes' definition stating that "Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations". So, what are these "resources" that a business needs to put in place to pursue its chosen strategy? Business resources can usefully be grouped under several categories: Financial Resources

Financial resources concern the ability of the business to "finance" its chosen strategy. For example, a strategy that requires significant investment in new products, distribution channels, production capacity and working capital will place great strain on the business finances. Such a strategy needs to be very carefully managed from a finance point-of-view. An audit of financial resources would include assessment of the following factors: Existing - Cash balances finance funds - Bank overdraft - Bank and other loans - Shareholders' capital - Working capital (e.g. stocks, debtors) already invested in the business - Creditors (suppliers, government) Ability raise funds to - Strength and reputation of the management team and the overall new business

- Strength of relationships with existing investors and lenders - Attractiveness of the market in which the business operates (i.e. is it a market that is attracting investment generally?) - Listing on a quoted Stock Exchange? If not, is this a realistic possibility? Human Resources The heart of the issue with Human Resources is the skills-base of the business. What skills does the business already possess? Are they sufficient to meet the needs of the chosen strategy? Could the skills-base be flexed / stretched to meet the new requirements? An audit of human resources would include assessment of the following factors: Existing staffing resources - Numbers of staff by function, location, grade, experience, qualification, remuneration - Existing rate of staff loss ("natural wastage") - Overall standard of training and specific training standards in key roles - Assessment of key "intangibles" - e.g. morale, business culture Changes required - What changes to the organisation of the business are included in the to strategy (e.g. change of location, new locations, new products)?

resources - What incremental human resources are required? - How should they be sourced? (alternatives include employment, outsourcing, joint ventures etc.) Physical Resources The category of physical resources covers wide range of operational resources concerned with the physical capability to deliver a strategy. These include: Production facilities - Location of existing production facilities; capacity; investment and maintenance requirements - Current production processes - quality; method & organisation - Extent to which production requirements of the strategy can be delivered by existing facilities - Marketing management process - Distribution channels - IT systems - Integration with customers and suppliers Intangible Resources It is easy to ignore the intangible resources of a business when assessing how to deliver a strategy - but they can be crucial. Intangibles include: Goodwill The difference between the value of the tangible assets of the business and the actual value of the business (what someone would be prepared to pay for it) Does the business have a track record of delivering on its strategic objectives? If so, this could help gather the necessary support from employees and suppliers Strong brands are often the key factor in whether a growth strategy is a success or failure Key commercial rights protected by patents and trademarks may be an important factor in the strategy.

Marketing facilities Information technology

Reputation

Brands Intellectual Property

Strategy: Value chain analysis

Introduction Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by

Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). Linking Value Chain Analysis to Competitive Advantage What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. Primary Activities Primary value chain activities include: Primary Activity Inbound logistics Operations Description

All those activities concerned with receiving and storing externally sourced materials The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) Outbound All those activities associated with getting finished goods and services to buyers logistics Marketing and Essentially an information activity - informing buyers and consumers sales about products and services (benefits, use, price etc.) Service All those activities associated with maintaining product performance after the product has been sold Support Activities Support activities include: Secondary Description

Activity Procurement

Human Resource Management Technology Activities concerned with managing information processing and the Development development and protection of "knowledge" in a business Infrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business

Steps in Value Chain Analysis Value chain analysis can be broken down into a three sequential steps: (1) Break down a market/organisation into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage; (3) Determine strategies built around focusing on activities where competitive advantage can be sustained Intangible assets are often overlooked, but they are many times the only source of sustainable competitive advantage (ie. brand, technology, information, culture, etc). Taking the lead from military campaigns in which the goal is to pitch "strength against weakness"(1), business strategy should be defined by resource analysis rather than the inverse. Firms that base their strategy on the development of specific capabilities have shown better adaptability than those that base their strategy on their customers or on how to serve them. One can take Merrill Lynch, American Express and Sears as having examples of failed strategies (being too broad and having an emphasis on customer needs), and Honda and 3M Corporation as having examples of successful strategies (with a focus on the capability of making engines and adhesives respectively). Basically, any element that is traditionally considered to support competitive advantage can be seen as stemming from the correct acquisition and use of resources. For example, barriers to entry can be created by owning a strong brand, patents, or

retaliatory capacity. A monopoly is nothing more than ownership of market share. Cost advantages come from process technology, size of plants, and access to low-cost inputs. Finally, Differentiation advantage comes from a brand, product technology, or marketing, distribution, and service capabilities. [edit]Taking

Stock of Resources and Capabilities

Competitive advantage Capabilities Resources

Tangible

Intangible

Physical assets , financial assets Human technology, reputation, skills

[edit]Tangible

Resources

Tangible resources are the easiest to evaluate since they are visible and quantifiable. Two key questions underlie this procedure(2):
 

What opportunities exist for economizing on finance, inventories, and fixed assets? What are the possibilities for employing existing assets more profitable?

[edit]Intangible

Resources

Much of a company's worth comes from less defined assets such as reputation, technology, or a particular set of cultural attributes within the company. Intel and American Express have successfully protected their intangibles, while Xerox has repeatedly over-looked its core assets. Brand is everything for CocaCola, and Gillette, while software and pharmaceutical companies depend mosty on their technology and patents. [edit]Human

Resources

People in companies provide skills, knowledge, intuition, and reasoning (known as human capital). Additionally, the culture inside an organization consists of relationships, values, and routines, and companies that have a strong set of managerial values have a strategic advantage over those that don't- through employees increased

identity with corporation, increased stability and consistency as well as a guide for appropriate behaviour. [edit]Core

Competences

Hamel and Prahalad introduced the term "core competences" (3) in 1990 to describe those competences that a) "make a disproportionate contribution to ultimate customer value or to the efficiency with which that value is delivered," and b) "provide a basis for entering new markets." So the question to ask in this case is "What can such and such firm do better than others?" The process of identifying core capabilities can begin in many ways; the two more common ones are through a classification of all capabilities according to function, or through a value chain analysis that separates a firm into small sequential activities. Example of a value chain: Technology (patents) >> Product Design (quality) >> Manufacturing (assembly) >> Marketing (brand) >> Distribution (warehousing) >> Service (warranty) [edit]Benchmarking Benchmarking is important because it brings objectivity into the process of identifying competences. It also brings vain imaginations down to the ground. To create a benchmark, one must identify areas of potential improvement; identify world-leading companies in each area; contact the companies (visit, talk to managers, discuss with workers); and define goals based on the learning done at those companies.