Identifying Organizational Core Competencies

When C.K. Prahalad and Gary Hamel first introduced the idea of core competencies to the broader public in their 1990 Harvard Business Review article, the idea caught on quickly. Today, it is basically impossible to find a manager or business school graduate who is not familiar with the concept. The term is part of our common business lexicon, but… how many people actually know what their organization’s core competencies are? Or why they are so important?

If you can’t answer the second question, then you are wasting your time trying to answer the first. Luckily, understanding the importance of core competencies is not hard, and the answer is the same for everyone.

Core competencies are important because they are one of the three elements of competitive advantage, along with resources and capabilities. To elaborate on this trio in brief, resources are the elements the firm expends in order to create capabilities; they can be physical, financial, human, or technological, and can be intangible just as easily as they can be tangible. Buildings and equipment are resources, but so are public image and brand recognition. Capabilities are simply the things the firm is capable of doing. An auto parts manufacturer is capable of making a fuel filter, a bank is not. However, both are capable of marketing and making investments to help their business along. If they are not capable, they use their financial resources to acquire the needed capability.

And that brings us back to core competencies: those capabilities that truly distinguish a company from its competitors and give it a competitive advantage. These core competencies are often reflective of the organization’s personality, and in short, are what make the company special. Here are a sampling of well-known and easily recognizable core competencies:

Apple Innovation and design
Walmart Inventory tracking and logistics
Adobe Deep understanding and relationships with their core user base
Southwest Airlines Empowering employees

How do we determine our core competencies?

I recently spent a little time trying to determine if the internet held the answer to this question. Turns out, it doesn’t. Not really. What I did find was a number of articles and blog posts claiming to answer this question, but then not actually answering it. One in particular, from a professional organization that you would think should be among the best places to find the answer, actually held some very bad advice and very little useful information.

So, since I was unable to find an answer already out there, I decided to go ahead and put the answer out there myself. Here goes:

The first step in determining your organizational core competencies is to poll several of your firm’s decision makers. I would recommend, at minimum, pulling together the executive team. Ask them very simply to identify the things which they believe the organization excels at in relation to not only their competition, but even other companies operating in totally unrelated areas. Each person should come up with their own list. (Ideally, I would like to see each person take a couple days to think about it and make their own list before coming together as a group; this eliminates the problem of dominant personalities taking over the meeting and some ideas never being heard.) The number of people you query is entirely up to you, but you need enough to get a saturation of ideas.

Once you have collected the suggested core competencies, you want to assess each one against the VRIO scale developed by Jay B. Barney in 1991. Briefly, the VRIO scale examines a competency against four criteria:

  1. Value – Do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat?
  2. Rareness – How many competing firms already possess particular valuable resources and capabilities?
  3. Imitability – Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?
  4. Organization – Is a firm organized to exploit the full competitive potential of its resources and capabilities?

A capability is not considered a core competency unless it meets all four of these criteria. Another criteria I would add is that core competencies should be aligned with the mission and vision of the organization. If they don’t align, then either the competencies or the mission/vision should change.

Yes, it is possible to change your core competencies, and in the interest of full disclosure, it is probably easier to change your mission and vision statements and do all of the change management associated with that than it is to change core competencies. Changing core competencies is difficult, expensive, time consuming, and requires absolute commitment on the part of leaders at all levels. But it is possible.

A list of core competencies is typically going to be fairly short. If it isn’t, then that’s a good sign that you haven’t been quite critical enough when weighing things against the VRIO scale. Don’t be surprised if you find yourself in this situation. A lot of leaders believe their organizations are good at a lot of things, and they probably are, but very few of those are truly core competencies that provide competitive advantage.

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