Developing Firm Specific Competencies

The ability of firms to track and exploit the technological trajectories described above depends on their specific technological and organizational competencies and on the difficulties that competitors have in imitating them. The notion of firm specific competencies has become increasingly influential amongst economists trying to explain why firms are different, and how they change over time and also amongst business practitioners and consultants trying to identify the causes of competitive success. In the 1990s, management began to shift interest from improvements in short term operational efficiency and flexibility (through de layering, downsizing, outsourcing and business process re-engineering etc.) to a concern that if taken too far the lean corporation could become the anorexic corporation without any capacities for longer term change and survival.

Hamel and Prahalad on Competencies:

The most influential business analysts promoting and developing the notion of core competencies have been Gary Hamel and C K Prahalad. Their basic ideas can be summarized as follows:

The sustainable competitive advantage of firms resides not in their products but in their core competencies. The real sources of advantages are to be found in management’s ability to consolidate corporate wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.

Core competencies feed into more than one core products, which in turn feed into more than one business unit. They use the metaphor of the tree:

End products = Leaves, flowers and fruit
Business units = Smaller branches
Core products = Trunk and major limbs
Core competencies = Root systems

Examples of core competencies include Sony in miniaturization, Philips in optical media, 3M in coatings and adhesive and Canon in the combination of the precision mechanics, fine optics and microelectronics technologies that underlie all their products. Examples of core products include Honda in lightweight high compression engines and Matsushita in key components in video cassette recorders.

The importance of associated organizational competencies is also recognized: Core competence is communication involvement and a deep commitment as working across organizational boundaries.

Core competencies require focus. Few companies are likely to build world leadership in more than five or six fundamental competencies. A company that compiles list of 20 to 30 capabilities has probably not produced a list of core competencies

As the table shows the notion of core competencies suggests that large and multidivisional firms should be viewed not only as a collection of strategic business units (SBUs) but as bundles of competencies that do not necessarily fit tidily in one business unit.

According to Hamel and Prahalad the concepts of the corporation based on core competencies should not replace the traditional one, but a commitment to it will inevitably influence patterns of diversification, skill deployment, resources allocation priorities, approaches to alliances and outsourcing. More specifically the conventional multidivisional structure may facilitate efficient innovation within specific product markets but may limit the scope for learning new competencies, firms with fewer divisional boundaries are associated with a strategy based on capabilities deepening.

The identification and development of a firm’s core competencies depend on its strategic architecture defined as,
A road map for the future that identifies which core competencies to build and their constituent technologies should make resources allocation priorities transparent to the whole organization. Top management must add value by enunciating the strategic architecture that guides the competence acquisition process.

Examples given include:

NEC = convergence of computing and communication technologies
Vickers, USA = being the best power and motion control company in the world.
Honda = lightweight high compressor engines
3M = coatings and adhesives
Source: Strategic Management