Firms don’t just become profitable because of the generic strategy they have chosen. Sometimes, their internal resources and capabilities are sufficiently unique that other firms cannot match them. These models help a firm to understand and to develop their internal capabilities so that they become a source of competitive advantage.
Thanks largely to Michael Porter’s influential work, thinking about strategy in the 1980s was all about how firms positioned themselves within their chosen industry – it was externally focused. But, to be successful, a firm has to also give attention to its internal resources and competencies – it has to have the skills to translate its intentions into action.
Around 1990 there was a shift in thinking towards these internal perspectives. In that year, a landmark paper by Gary Hamel and C.K. Prahalad, called ‘The core competence of the corporation’, suggested that the secret of long-term success was to understand and build on the underlying competencies that make your firm distinctive. Around the same time, Jay Barney wrote a highly influential academic paper arguing that success is built around having valuable, rare and hard-to-imitate resources. Barney’s work built on some earlier academic studies, but it was his contribution that really opened up the resource-based view to academic researchers around the world.
According to Hamel and Prahalad, a ‘core competency’ is a harmonised combination of multiple resources and skills that distinguish a firm in the market-place. Such a competency fulfils three criteria:
Examples used by Hamel and Prahalad include Canon’s core competencies in precision mechanics, fine optics and micro-electronics, or Disney’s core competency in storytelling.
Core competencies are not just valuable in existing markets, they can also be used to build many products and services in different markets. For example, Amazon used its state-of-the-art IT infrastructure to develop an entirely new business, Amazon Web Services. Core competencies emerge through continuous improvements over time, and indeed this is one of the reasons they are hard to copy.
The ‘resource-based view’ is a theory of competitive advantage based on how a firm applies its bundle of tangible or intangible resources towards market opportunities. Resources have the potential to create competitive advantage if they meet certain specific criteria:
For example, a firm owning a diamond mine has the potential for competitive advantage, because its diamonds meet these criteria. A more interesting example would be McKinsey, the consultancy, which over the years has built a set of valuable relationships with its key clients that its competitors cannot match.
Many observers have argued that it is useful to separate out ‘resources’, which are assets that can be bought and sold, from ‘capabilities’, which are bundles of resources used in combinations to achieve desired ends.
There are obvious parallels between the ‘core competence’ and ‘resource-based’ views, but they are not identical. Core-competence thinking has been used on a more applied basis, with many firms talking colloquially about what their core competencies are, whereas the resource-based view is the preferred way of thinking about these issues in academic research.
It is useful to use a structured framework for analysing your firm’s core competencies. Here is one standard approach:
The definition of a core competence is very exclusive. In other words, if you apply the criteria very strictly, most firms do not end up with any core competencies at all. So the framework provided here should typically be applied fairly loosely – it is useful to consider the various criteria around value, rarity and inimitability, but only as a way of thinking through how a competitor might attempt to beat you, or how you might sharpen up your own competitive position, rather than as an end in itself.
The biggest risk with core-competence analysis is that the exercise becomes highly internally focused. It is often quite interesting to debate what you are good at, because everyone has a view. But it often devolves into a very negative conversation about what goes wrong, with finger-pointing between departments. This is why a core-competence discussion should always go back and forth between what your firm is good at and what customer needs you are attempting to satisfy.
Barney, J.B. (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, 17(1): 99–120.
Barney, J.B. and Hesterley, W. (2005) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Prentice Hall.
Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, 68(3): 79–91.