Core Competency

A narrowly defined field or task at which a company excels. A firm's core competencies are difficult for its competitors to mimic, allowing the company to differentiate itself. Most core competencies will be applicable to a wide range of business activities, transcending product and market borders.

A core competency for a firm is whatever it does best. For example, Wal-Mart focuses on lowering its operating costs. The cost advantage that Wal-Mart has created for itself has allowed the retailer to price goods lower than most competitors. The core competency in this case is derived from the company's ability to generate large sales volume, allowing the company to remain profitable with low profit margin.

As a concept in management theory, core competency was introduced by C. K. Prahalad and Gary Hamel. In general, core competencies fulfill three criteria:

1. Provides access to a wide variety of markets.
2. Makes a significant contribution to the perceived customer benefits of the end product.
3. Competitive imitation is difficult.

Other examples of core competencies include precision mechanics, fine optics and micro-electronics. These core competencies will help a company, for example, build cameras, and they may be useful in making a wide variety of relevant products that require a specific set of skills or production techniques that deliver additional value to the customer. Core competencies usually enable an organization to access a wide variety of markets.

Core competencies are developed through the process of continuous improvements over a period of time, rather than a single large change. To succeed in an emerging global market, for example, it is more important and required to build core competencies rather than vertical integration.

Core Competency as a Business Theory

The use and understanding of the concept of core competences can be very important to enterprises. They can use core competences in order to excel at the development of core products. Enterprises could also use core competences to raise the values of customers and stakeholders.

In many respects, the competitiveness of a company is based on its ability to develop core competences, and being able to build core competency is an outcome of strategic architecture, which must be enforced by top management in order to be successful at building core competencies.

According to business theory, company executives should develop a point of view on which core competencies can be built in order to revitalize the process of new business creation. Having an independent point-of-view of tomorrow's opportunities and building capabilities that exploit them is key to the role of executives in industry leadership.