The Explainer: Locating Your Company's Core Competencies

0:29This episode is brought to you by Google Chrome. meaning, one that's especially important for strategists and companies with multiple business units or product lines. CK Prahalad and Gary Hamill, who introduced the concept, described the diversified corporation as a large tree. The core products are the trunk and major limbs, the business units are smaller branches, and the end products are the leaves. The core competence is the root system that provides nourishment and stability. It's essentially what your organization knows about coordinating production and technology. If you only compare end products, you'll miss the real strength of your company.

1:04To figure that out, start by identifying specific core competencies, the five or six things at most that your company does better than anyone else. These meet three requirements. First, they provide access to a wide variety of markets. Consider what Honda knows about engines. It gives them a distinctive advantage in cars, lawnmowers, and generators. Second, core competencies contribute to the benefits of the product as perceived by the customer. Clearly Honda's expertise in engines fits the bill here too. Finally, core competencies are hard for competitors to imitate. It's been tough for Honda's competitors to match their engine design and development skills, even with bigger R &D budgets.

1:48Competencies not only bind existing businesses together, they also nourish new lines of business. For instance, when Honda first decided to make cars, they knew they were capitalizing on what they'd learned about engines from years of making motorcycles. Understanding your competencies can prevent you from making disastrous outsourcing mistakes. Chrysler, for example, considered engines an expensive commodity and outsourced them to Mitsubishi and Hyundai. That didn't work out so well for Chrysler. Knowledge fades if it's not used. In a world of intense global competition, understanding core competence helps you figure out how to create sustainable advantage that's more than just the sum of your current products.