Core Competency

The term core competence gets thrown around a lot, but it has a specific meaning, one that's especially important for strategists and companies with multiple business units or product lines. CK Prahalad and Gary Hamel, 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. To 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.