In the world of business understanding your company is just as important as understanding your customer. Companies produce a variety of products and services for their customers. They are based a range of information on what their customer’s desire. Companies go in and out of business as the desires of their customer’s change over time.
However, business that thrive and survive the ebbs and flows of customer desires are the ones that understand themselves and the products and services they produce. The Harvard Business Review article ‘The Core Competence of the Corporation’ by Professor Coimbatore Krishnarao Prahalad and Professor Gary Hamel outlines that understanding the core competencies of a business is the key to its success.
A core competency is defined as a ‘collective leaning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies.’ An example of a core competency is Honda’s ability to create engines. This core competency leads to it being competitive in a series of businesses such as cars, motorcycle, lawn mower and generators.
Firstly, it provides potential access to a wide variety of markets. The example of Honda illustrates this as its core competency opens it up to a variety of businesses. Secondly, it should provide a significant contribution to the perceived customer benefits of the end product. For Honda the use of engines is vital in the variety of businesses it is involved in and ultimately the end products it producers for consumers. Thirdly, it should be difficult for competitors to imitate. While some companies may possess a technology that comprises part of a core competency. They may not have the professional skill or organisational structure to fully utilise it. Therefore, some businesses may be less competitive because they have not fully understood or developed their core competency.
Once the core competencies of a business are understood they must be reflected in their organisational structure. The organisation of a business should be centred on its core competencies and the core products it produces. For Honda the core competency is producing engines and the core products are its engines for cars, motorcycle, lawn mower and generators. The key is understanding that Honda can transfer its knowledge and skill from one core product to another. Honda learnt first how to make a high-revving, smooth-running, lightweight engine for motorcycles and then transferred this to its car engines. This allows it to enter the car business and create a variety of end products.
Developing and nurturing core competencies will ensure that if the end products change over time the business can easily adapt. The business will simply utilise its core competency and transfers it to a different core product that open it up to a variety business with a variety of end products for consumers. The diagram below illustrates how core competencies, core products, business and end products interrelate.