Business strategists should be familiar with C. K. Prahalad and Gary Hamel’s classic business concept, the core competency. For those folks who aren’t familiar (or who slept through the strategy portion of their degree), a core competency is one of the most important, misunderstood, and ignored concepts in business. The classical definition of core competency is this:
- A core competency provides access to a wide variety of markets.
- A core competency provides the value behind end-product benefits.
- A core competency provides unique attributes difficult for competitors to imitate.
What are some examples of core competencies?
Apple is one of the most valuable companies in the world. Why? Their core competency is outstanding design. Great design gives them the ability to access lots of markets in ways that no one thought possible. Design provides the essence of many Apple products.The tablet computer has been around for years but it wasn’t until the iPad that the market exploded. There were plenty of MP3 players before the iPod, but it was design that made it a wild success. Design is also extremely difficult to imitate well, as demonstrated by the sheer number of failed iPod, iPad, and MacBook knockoffs and imitations that fail to capture any market share.
Consider the period when Steve Jobs wasn’t at Apple, from the late 1980s through 1997. Was Apple a paragon of outstanding design? No – and they nearly vanished because they lost sight of their core competency.
Google is another company with a deep core competency: the understanding and development of algorithms. Algorithms are the heart of the company, from search results to contextual advertising to in-home products like Google Assistant. Their ability to develop great algorithms provides them access to markets and allows for eventual dominance in those markets. Algorithms drive all their successful products and services. And their algorithms are so secret that entire communities of SEO experts spend most of their careers trying to stay ahead of and decode Google algorithms, often to no avail.
Google also stumbles frequently when they step outside their core competency, with tools like Google Glass, Google+, etc.
These are two examples of core competencies by companies that understand their core competencies and execute on them very well. Note that in both cases, these competencies aren’t products or features – they’re attributes of the companies themselves, characteristics of their culture and people.
The Netflix Pivot
Let’s examine a third company: Netflix. For those folks with less grey in their hair, once upon a time, Netflix was a mail order DVD rental company. You’d sign onto their website, browse movies you want to rent, and wait for a red envelope to arrive at your home with your movie. You’d watch it, then return it.
What is Netflix’s core competency? Convenient content delivery to the home. Their original business model was to spare us the trip to a video rental store. Their change in business model from DVDs only to DVDs and streaming reflected this competency and allowed them to access the streaming video market. Convenient content delivery to the home informed all of their products, and the integration of DVD by mail and streaming allowed them to outcompete Blockbuster and many other companies in their space.
Many years ago, Netflix announced a decision to split the company into streaming video and rental video, which was roundly and properly lambasted by shareholders and its board of directors. They pivoted back, and over time simply phased out emphasis on the DVD rental business. Today, Netflix is known primarily as a streaming video service.
Breaking the company in two would have created two companies with the same competing core competency, which would have been bad for both of them. Instead, by pivoting to streaming first over time, they avoided creating more marketplace confusion.
Consider what Netflix is today – not only does it deliver content conveniently to our homes, they’ve now turned to creating original content. Does this latest business decision break their alignment with their core competency? Not at all. Creation of original content reduces their licensing costs, but as long as the content is what we customers want, they are still in alignment with their core competency. As long as they continue to make decisions which deliver content conveniently to our homes (or devices, at least), they will continue to do well.
What’s Your Core Competency?
Determine what your core competency is based on Prahalad and Hamel’s 3 rules. What is it that makes you unique, that provides value to your services and products, that permits you to access more markets? If you can’t answer these three questions, stop everything else you’re doing until you answer them with great clarity. Your business is in danger until you can do so.
Once you know your core competency, ensure that everyone in your business understands it and uses it to guide their decision-making. What you choose to do in the months and years to come must reinforce your core competency and not detract from it. Learn from Apple, Google, and Netflix – and their stumbles when they veered away from what they’re best at.
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Also published on Medium.