The Importance of Core Competences - cloudfront.net

The Importance of Core

Competences

In business, core competencies could be seen as an organisation’s major attributes allowing

it to pursue and fulfil its objectives. Coined by Dr C.K. Prahalad & Prof. Gary Hamel in the 80s,

they defined the concept of core competencies by observing and comparing different

businesses in the US and in Japan. By highlighting the common misinterpretation among

business managers of the concept of corporation as a mere recollection of small businesses

(Small Business Units) with each unit managed separately, they outlined through their study the

critical importance of strategies based on competencies: which enable a firm to optimise its

capabilities and create a beneficial symbiosis between its different elements. A common way to

understand this approach is to visualise a starting business as a germinating seed planted in the

soil. After being properly nourished, it grows into a plant with its trunk developing as its core

competencies, which lead to the different branches bearing leaves and fruits. After the

concept’s approval by the business community, corporations started to function more like a

group of core competencies rather than just a list of mutually exclusive business units. From a

business’ perspective, its core competencies represent the intangible part of the assets it owns

and can use to reach its target. Tangible assets such as land, plant & equipment are often

overlooked in comparison to intangible assets since they are often more difficult to define and

measure – e.g. forward thinking, conceptual thinking and collaborative relationships. In the

following course, the definition and importance of core competencies will be developed and

illustrated by example; questions at the end will help you assimilate this knowledge.

I. Recognition of Core Competencies

Business owners and managers’ ability to make sound and wise decisions is directly related

to their aptitude to recognise, optimise and use in the most efficient manner the organisation’s

core competencies. As suggested by Dr C.K. Prahalad & Prof. Gary Hamel, managers can follow

a specific set of guidelines to help themselves to recognise core competencies.

1. Openness to markets

Openness to markets implies that a firm’s core competency should be allowing it to enter

new markets and industries in order for the business to remain competitive and expanding in

the long run. Amazon for instance started out in the book selling industry exclusively at first. By

concentrating on a specific segment online, it created its network of customers based on a single

type of product by delivering reliable and convenient services. Rapidly, it increased the

company’s reputation, allowing Amazon to diversify its services to a customer base which was

already rapidly increasing.Through diversification and acquisition, the business exponentially

increased its yearly revenues to reach almost $89 billion in 2014.

2. Serves as a major catalyst for providing Value

In order to be competitive, a business requires core competencies which can effectively

contribute in the process of bringing value to the end users. Customer satisfaction is a way of

evaluating the results by looking at how a product or service provided by a business equals or

exceeds customer expectation. Therefore, it is essential for a firm to cultivate and optimise core

competencies which provide with value to customers in a significant manner. A perfect example

of this could be found in Zappo, a business (1999) involved in online retailing and distinguished

by the level of satisfaction it brings to customers. By putting an emphasis on the employee’s

commitment into “going for the extra mile,” the founder Nick Swinmurn set the tone and

attitude toward providing more value than what was expected by customers. This led to the

rapid growth of the firm which became the largest online shoe retailer worldwide. Also, it is

interesting to note that the business was acquired a decade after its creation by Amazon in a

transaction worth $1.2 billion.

3. Difficult to emulate

The product or service provided should be harder to emulate by competitors due to a core

competency the company developed. A good example could be found in Nike, which

differentiates its products thanks to its brand and the reputation it built around it. This could be

explained by its core competencies which have been optimised to provide the business with

continued growth since 1964. By paying attention to its core competencies, it pictured itself in

the public’s mind as athletes’ favourite brand thanks to ads, sponsorships, promotion campaigns

and so one. It made more than $25 billion in revenues in 2014 as it kept on growing and

capitalising on its brand recognition.

4. Classification & example of core competencies

Core competencies are usually classified under three types: interpersonal, personal and

business competencies. The following illustration lists examples of some important core

competencies which are not limited to these lists common for many businesses:

II. The Major Role of Core Competencies

After they identify a business’s core competencies, business manager need to plan

accordingly in order to use them at their full potential. For this reason, the first step which

consists of defining the main core competencies is crucial.The next step which consists of

understanding the implications is considered by Dr C.K. Prahalad & Prof. Gary Hamelas much

important as the first step. Conducting a business venture based on its core competencies’ could

be advantageous, particularly in regard to the optimisation of the three following benefits: the

facilitation of the strategic build-up,the promotion of innovation and improvement of the

recruiting and the selection process of an organisation.

1. It eases strategic build-up

In strategy, one has to know one’s self and the surrounding environment in order to

succeed. While this concept is true on a personal level, it is especially relevant for strategic

matters when it comes to an entity such as an organisation. Core competencies, when

recognised and clearly defined, represent both the strengths and substance of an organisation –

i.e. what it is based upon. By focusing on the strengths and by limiting weaknesses, managers

can leverage and develop the company’s core competencies so that they could reach their

objectives.

According to Michal Porter, Professor at the Institute for Strategy and Competitiveness and

writer, a business can do better than competitors only when it can differentiate itself clearly in

customers’ perception of the market. He points out the importance of the planning phases

which imply the recognition and fructification of the core competencies. The principle of

uniqueness is essential for a firm so that it can gain a relevant competitive advantage which is

difficult to reproduce by competition.

2. It promotes innovation

Core competencies are designed in such a way that they arealso intended to promote

diversification of the business’s activity. It is therefore primordial for managers to exploit in the

most efficient manner the organisation’s core competencies. Forward thinking and innovation

within the organisation can be greatly influenced by core competencies which promote the

acquiring of new knowledge and skills. In the process, core competencies encourage creative

thinking and innovative methods for problem solving; it leads to a workforce constantly

involved in the search of new ways to contribute to the evolution of the business through

growing revenues and a higher ability to compete with other market participants.

Most creative and successful businesses motivate employees to participate in the process

and share some of the rewards with those who contributed to achieve goals. A perfect example

would be Google Inc., the world’s most popular search engine takes special care of its employees

so that they use their skills at their fullest potential. In fact, it has been rated number one as the

“Best Company to Work For” in 2015 by Fortune for the sixth consecutive year. Google

succeeded in cultivating a creative workforce by paying attention to its people, listening

seriously to their suggestions and by treating them better than they would expect. In return, the

company’s vision and mission is carried out with enthusiasm by a highly creative workforce. The

strategy adopted by Google Inc. in terms of Human Resources certainly proved to be highly

profitable for the firm, its shareholders &/or employees and most remarkably to the way of life

of millions of users.

3. It affects HR processes

Core competencies are realised in part because they state the actions and

behavioursnecessary in order to effectively complete the business strategy. These behaviours

and actions might be compatible with some employees and not with others. In this respect,

many companies came to form a “model” of the sort of people it attempts to employ. This way,

the recruiting process would be facilitated, improved and better controlled, creating a

workforce which reflects the organisation’s ways.

Surveys show that most successful organisations have a comprehensive set of guidelines for

recruiting processes. Development Dimensions International (DDI – consulting firm) and

Electronic Recruiting Exchange (ERE –online recruiting resource) highlighted through a survey

the common hiring practices which contributed to the success of the business’ strategies:

Job interviews during which applicants are required to specifically describe some of

their skills;

Computerised automatic screenings and searches

Evaluations revealing the motivations of applicants and their compatibility with a

position or a firm’s culture;

Tests aimed at measuring the ability of the candidate to fulfil the position.

III. Limits of the Concept

The focus on core competencies has shown a positive influence on the management of the

organisations’ key resources. However, the approach has its own limits which can be

categorised as such appropriateness, flexibility and durability.

1. Appropriateness

Appropriateness points out the importance for the executive team to address the issue

related to the discrimination of what is adequate over what is not. The ultimate objective should

be oriented toward promoting creative enterprises within the organisation aimed at improving

processes and the management of its assets.

Also, the process for identifying core competencies, as advocated by Prahalad & Hamel

through the three major steps (as shown in the previous part of this course)may be too

challenging for some managers to be conducted in its integrity. Sometimes, managers despite

their good intention might be making an exaggerated list of the competencies they wish the

organisation had. Coupled with failure to distinguish between personal and organisational

competencies, this mistake might be fatal for the firm’s survival.

2. Flexibility

A common mistake made by managers is to limit the scope of influence of a core

competency to a contained compartment of the business and miss on opportunities arising in

other sectors that could have been otherwise seized thanks this specific bounded competency.

Core competencies are also often wrongly considered as being able to affect customers only.

For some businesses, the best solution is sometimes found on building the company’s core

competencies based on the employees’ competencies so that it create a whole more

homogenous and which is compatible to its workforce. Also, it is important to mention that core

competencies do not need to fulfil every criterion as what’s more relevant is in regard to how

the combination of the different core competencies impacts the different aspects of the

business.

3. Durability

Durability refers to the problem arising from the fact that prized competencies can be

found in some type of people. The concern for the organisation is to lose key competencies as

employees fulfilling the criterion leave the business. A competitive workforce might create a

competitive edge against rivals while it can also create troubles for the organisation as it might

struggle to find substitutes providing the same level of competency.

Depending on timing and the kind of external environment, core competencies may not be

suited to grow and produce wealth in excess. Like the seed, a business’s core competencies may

succeed under certain environments or it might not be adequate the time and/or place. For this

reason, it is essential to know the internal and external forces interacting with the entity itself.

Core competencies approaches provide with effective tools allowing managers to be conscious

of the organisation’s “personality,” strengths and weaknesses. This understanding provide them

with a better control of the internal forces driving the business in order to have a positive

impact on its immediate external environment.

Multiple Choice Questions 1. What are the 3 major criterions managers can use to determine a business’ core

competencies?

a. Openness to markets, major factor for the value perceived by customers and uniqueness;

b. Major catalyst in the value creation process, specific to a market and common among rivals;

c. Hard to emulate, limited to customer satisfaction and major factor in value creation;

d. a. & c.

2. What is implied by the principle of “openness to markets” in regard to core competencies?

a. They should be widely used on markets;

b. They should be able to extend to different types of markets;

c. They should promote the business on markets;

d. a. & c.

3. What does Nick Swinmurn, founder of Zappo meant about “going for the extra mile?”

a. Provide customers with more than what they would expect;

b. Encourage employees to exercise physically before working hours;

c. Creating a loyal and highly satisfied customer base;

d. a. & c.

4. What are the 3 major benefits of approaches based on core competencies?

a. It eases strategic build up, promotes consumption and contributes to HR processes;

b. It eases strategic build up, promotes innovation and contributes to HR processes;

c. It eases customer management, promotes innovation and contributes to HR processes;

d. All false.

5. What list is made of intangible assets a business may own?

a. Plant building & equipment;

b. Conceptual thinking, collaborative relationships;

c. Critical and forward thinking;

d. b. & c.

6. What does the concept of uniqueness provide to a business?

a. It ensures a more sustainable growth;

b. It allows it to gain a competitive edge against competition;

c. It makes it more difficult for others to emulate;

d. All of the above.

7. What core competency did Google optimise to deal with its HR?

a. Customer orientation;

b. Empowering & developing others;

c. Persuasive communication;

d. a. & c.

8. Which guideline is not a recommended hiring practice?

a. Automatic screening and search for new candidates;

b. Adapt the interview depending on the person interviewed;

c. Tests aimed at measuring the ability of the candidate to fulfil the position;

d. a. & c.

9. What are the limits of strategies based on core competencies?

a. Scale, flexibility and durability;

b. Flexibility and durability;

c. Appropriateness, flexibility and durability;

d. All false.

10. What list describes best interpersonal skills?

a. Learning, training, flexibility, reliability, risk taking;

b. Communication, motivation, teamwork, leadership, creativity;

c. Organisational, marketing, economics, finance, legal, customer service;

d. All of them.

Answers

1: a; 2: b; 3: d; 4: b; 5: d; 6: d; 7: b; 8: b; 9: c; 10: b.