Essay: Core competency

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  • Subject area(s): Business essays
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  • Core competency
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The concept of core competency is derived from the 1990 article by C.K. Prahalad and Gary Hamel published in Harvard Business review in 1990. Core competencies are defined as what organisations need in order to stand out and seem superior amongst competitors especially in the critical areas of the organisation where the utmost value is added to its products (Prahalad and Hamel 1990).
 
Preceding the development of Prahaland and Hamel’s theory of core competence, it was suggested that organisations are a collection of Strategic Business Units (SBUs); this definition was seemingly faulty as this system failed to value the parts of the organisations that really conveyed the business strategy (Prahalad and Hamel 1990). However, the theory by Parahalad and Hamel (1990) contends that core competence is a collection of all the learning in the organisation mainly, the manner in which various production skills are coordinated and the streams of technologies are integrated. (Prahalad and Hamel 1990). To put it simply, Prahalad and Hamel suggested that core competencies are not the technologies or products the organisation has but, the application as well as the skills of those products or technologies. Hafeez et al (2002) perceives core competence to be more of a flexibility in the company’s strategy. They believe that the core competence of a company is the incorporation of significant skills to the company’s business activities. This simply means that the core competencies are those unique strengths of an organisation, that span over numerous markets and or products (Hafeez et al., 2002). A suitable outcome of the research by Hafeez et al (2002) is that even though a company considers its core business to be manufacturing or engineering, the core competencies of that company exists in the sales and marketing of the product.

The development of competencies begins with the strategic intent of becoming a front-runner in the market by leveraging the organisations key resources. Competencies may be difficult to determine and entail having a basis of comparison (Kachru, 2005). According to Prahalad and Hamel (1990), there are three tests which are useful for identifying a core competence. A core competence should: “offer potential access to a wide variety of markets, contribute significantly to consumer benefits, and be difficult for competitors to replicate” (Prahalad and Hamel, 1990).

In order to provide access to a wider range of markets, the main core competencies of the organisation should be those skills which create opportunities and an allowance for the conception of new ideas and entry into new markets to retain competitive advantage (Kachru, 2005). A real life example of this might be Tesco; Tesco is a supermarket which started behind its competitors Sainsbury’s and ASDA in terms of market penetration, size and quality. Tesco’s strategy was to launch itself as a more quality alterative. Their strategic intent has proven to be successful as they now dominate the supermarket industry. Their managers implemented strategies which produced a reputation for the size and quality of their products and also room for growth for the organisation. Thus, allowing Tesco to preserve its spot as one of the world’s largest retailers. The second criteria suggests that core competencies are the skills that allow a business to convey an important customer benefit. In other words, core competencies are what distinguishes a product from all the others. Tesco achieved this and gained their leadership in by creating an online shopping experience based on core competencies which their customers value. With their ability to plan and convey a “customer interface” that personalises online shopping and makes it more efficient. Building on the third criteria of core competence as put forward by Prahaland and Hamel (1990), there is a difference between being good at something and being good at something no one else can do. The core competency should generate inimitability which is unique to the organization. The key here is to ensure that it is better than the competition (Kachru, 2005).

Using Apple as an example, for a certain period of time now, Apple has been known to be very innovative with their products offering new concepts and designs and launching various products successfully and has become one of the most appreciated organisations worldwide. Their core competency lies in their exceptional design which seems to meet all the three criterion of core competencies which Prahaland and Hamel (1990) suggested. Their impressive designs and innovation skills are what gives them the ability to penetrate a lot of different markets in ways that no one imagined they would. For example, mp3 players and tablets were already in pre-existence before Apple introduced the iPod and iPad but, their unique design is what made theirs exceptional and a wild success. They were able to knock other brands such as Nokia out when they launched the iPhone, and their design is also really difficult to imitate, this is proved by the failure of replications and knock-offs that have been unsuccessful in capturing any market share.

One of the most important advantages of having a core competency is that it brings about long term competitive advantage. “When core competencies are considered as unique information for problem solving, they can form the foundation of an organisation’s competitive advantage and can additionally be leveraged in a wide array of markets for potential products” (Srivastava, 2005). Core competencies are a very important asset to have as an organisation. Unlike physical assets, they do not deteriorate or diminish with use over time but instead, they get better as they are shared and applied (Prahalad and Hamel 1990). They however, need to be nourished as they will degrade if ignored. This is very important as competencies are what organisations are built upon therefore, a business is at risk of failing when organisations fail to progress (Prahalad and Hamel, 1990). In order to be successful as an organisation and sustain its core competencies, it is important to show some focus in building a core competency which will be used to guide all strategic visions, along with its management primacies.

Having competitive advantage enables an organisation to offer something original to their customers that they cannot get anywhere else (Prahalad and Hamel 1990). The real sources of competitive advantage are to be found in management’s ability to combine corporate-wide skills and production skills into competencies that allow individual businesses to adjust quickly to changing environments and opportunities” (Prahalad and Hamel, 1990). Having a core competence also enables organisations to understand all parts of their operations and recognise their values as well as resources. All organisations are distinctive in terms of its resources; therefore, by building an organisation’s core competencies, top managers are more able to identify the strengths and weaknesses of their business and use this information to identify aspects of their business which is in need of improvement, helping companies with the development of their abilities and skills which could turn into motivation as employees tend to frequently look for new ideas and new ways to improve the organisation; in regards to profit generation and competitive advantage (Prahalad and Hamel, 1990). With this, managers can also decide which of their skills are in need of further development and may choose to outsource some activities so as to free more resources and be able to focus more on their core competencies. However, organisations, particularly big ones, should be careful when outsourcing activities because while outsourcing of certain activities can increase competitive advantage, it is only short term.

It is essential for organisations to rely more on the core competencies which are their internal strengths in order to deliver more added customer value, strong distinction and extendibility. Thus, their strategy intent has to change from competing for leadership of products and services to competing in leadership of core competence (Agha, Alrubairee and Jamhour, 2012). The core competence of the organisation should be a main factor when formulating company strategies because it is a crucial source of profitability for the organisation. Although, business organisations must act fast
to protect their market positions as the organisational environment becomes more and more competitive. Organisations are constantly determined to find means to manage and sustain their competitive advantage (Agha, Alrubairee and Jamhour, 2012).

Core competencies grow form a resource-based view which have implications at the strategic level; the organisations should thoroughly work upon recognising their core competence and developing them to gain sustainable competitive advantage (Srivastava, 2005). Most successful organisations often find it difficult to sustain the qualities and skills which brought them their success to begin with. Certain factors such as, “the extent to which a company’s competencies are valuable, rare, imperfectly imitable and non-substitutable, the dynamism of the industry context, and the capabilities of competitors” can influence the sustainability of competitive advantage (Kachru, 2005). The issue of sustainability gives address to the subject that the core competency of an organisation may sometimes exist in in a certain employee (Prahalad and Hamel, 1990). Using Apple as an example, from the late 1980s through 1997, without Steve Jobs, Apple lost sight of their core competency and almost failed as a company; if an employee who is considered to be the core competence leaves the organisation, the core competency departs as well. As stated in previous paragraphs, “organisational core competencies need to be nourished”; they need to be updated, improved on and developed in order to keep that organisation at the forefront of its industry. Thereby, in order to be sustainable, core competencies should be flexible and change according to change in the organisational environment (Kachru, 2005).

Having a competitive advantage is significant only if it is associated to a quality which is of value to the market. Customers need to be able to recognise a consistent difference in substantial qualities between the business products and that of their competitors (Agha, Alrubairee and Jamhour, 2012). Core skills and qualities which are prioritised in times where they are no longer competitively relevant can also act as a weakness. Danny Miller, who was a well-known academic, wrote about the growing unseemliness of strategic decisions with time. Miller (1992) suggested that, “the seeds of decline are sown in the very success of past strategies” (Haberberg and Rieple, 2008). This means, an organisations success can eventually lead to a lack of variety in its skill base as well as the organisational structures causing that organisation to fail. Miller (1992) also suggested that the reason organisations fall from their competitive advantage can be found in this decline which he termed as the Icarus Paradox (Rao, Rao and Sivaramakrishna, 2008). The Icarus paradox is derived from a Greek myth of which Icarus and his father Daedalus were imprisoned and so, Daedalus made wings of feathers and wax to help them escape. Icarus was so engrossed with his unique wax wings that he flew close to the sun, melting his wings and crashing to his demise. The paradox of this is that Icarus’ greatest capability, which was the wings which helped him escape imprisonment, was also what ultimately led to his demise (Rao, Rao and Sivaramakrishna, 2008). This can be applied to management when successful organisations fail because, they ignore their core competencies and become too satisfied with their success. The case of Nokia can be cited here; Nokia had achieved early success because of their mobile phones and back in the 1990s, they had competitive advantage and dominated the mobile phone industry; but then the company became so obsessed with the details that they lost track of market realities that when Apple emerged with the concept of the iPhone, customer preferences changed and by the time Nokia caught up with the smartphone trend, it was too late.

Nokia was blinded by their accomplishments and did not foresee such a drastic change in the organisational environment; they seemed to have overrated their importance in the industry and neglected other competitors and that ultimately led to failure. If we look at some other organisations which have encountered embarrassing failures, it is obvious that Icarus Paradox is in play. This again proves the point that an organisation’s core competence cannot be fixed for long in an extremely competitive market. Many successful organisations which get too confident with controlling their industry or their own exceptional core competencies, develop a strength which eventually leads to a fall. (Rao, Rao and Sivaramakrishna, 2008).

Core competences ae an organisation’s greatest strength but with time, they can become weaknesses. In order to prevent your strengths from becoming weaknesses in the future, it is important that managers understand the organisation, and fully assess its strategic intent. By doing this, organisations will be able to decide on an approach which is most suitable in building their competencies. The solution to developing great core competencies is eventually gaining competitive advantage and learning with time how to sustain them. Icarus died due to the fact that he depended too much on his existing resources and capabilities. It may be that the same predisposition plagues executives as shown in the above example of Nokia. Managers are mistaken when they believe that the core competence of the organisation is free from external threats Therefore, it is vital to recognise that it is possible for organisations to understand that they may bring about their downfall through their own successes.

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