Authors C.K. Prahalad and Gary Hamel, in a 1990 "Harvard Business Review" article entitled "The Core Competence of the Corporation," defined core competency as the collective learning in an organization. It means knowing how to coordinate diverse production technologies, integrating evolving technologies and delivering value to customers. For example, Intel's core competency is semiconductor design. Core competencies lead to core products that are integrated into other products for customers.
A company can use its core competencies to build on existing markets and create new market opportunities. Consumers and businesses did not realize they needed desktops until they started to use them. Apple showed the world the delights of owning an iPod. A small business should identify, develop and then focus on its core competency or competencies to build products and services that serve specific needs in the marketplace and that competitors cannot imitate.
Prahalad and Hamel identify three tests for identifying core competencies: First, a core competency must expand the addressable market. For example, Intel's microprocessor design competency allows it to participate in diverse technology markets such as laptops, hand-held devices, desktop computers, storage systems and complex servers. Second, a core competency must provide customer benefits. For example, Boeing's expertise in airplane assembly has made fast and convenient travel possible. And finally, a core competence should be difficult to imitate, allowing the business to compete effectively in its market. For example, Intel dominates the microprocessor market, Boeing is one of two leading airplane manufacturers and Wal-Mart revolutionized big-box retail.
Once core competencies are identified, companies should build on them. Investing in needed technologies is a necessary first step. For example, a technology startup developing a new software product must invest in the latest software development tools and in multiple operating systems to comprehensively test its product. Second, sufficient human resources -- technical and sales -- and financial resources should be allocated because a half-hearted effort usually leads to failure. Third, partnerships should be explored. For example, small biotech startups often partner with research institutions and established pharmaceutical companies to get their products through clinical testing and regulatory approval. And finally, businesses should develop a core competency mindset, which involves working across organizational boundaries and identifying the resources required to cultivate the next generation of competencies.
Consideration: Risk Management
In the aftermath of 9/11 and the 2008 financial crisis, DePaul University professor Mark Frigo suggests that risk management has also become a necessary organizational core competency. Stakeholders are interested in the risks facing companies and the measures management is taking to deal with them. Frigo suggests that businesses should identify and quantify the impact of the risks, communicate the impact of disruptions internally and externally and make strategic risk management an integral part of overall strategic management.