Cores & Competencies
Introducing Prahalad and Hamel
Friends,
Here we are, at long last, back on track on the disorient express that is my incoherent ramblings about strategy. The minor detours of the past few weeks have, I must admit, made me long for proper analysis – and so I am writing this with smile on my face, entirely concreting the public perception that I am, above all else, a nerd.
Today, we are heading into corporate strategy to discuss the notion of core competence, a term first formally introduced by C.K. Prahalad and Gary Hamel in the 1990 Harvard Business Review article The Core Competence of the Corporation. While it would be remiss to suggest that the authors created the concept (the detailed existence and importance of distinctive capabilities predates their piece by decades; see, for example, Richard Rumelt’s Strategy, Structure and Economic Performance, published in 1974), one can definitely make a strong case for them popularizing it.
The argument
At its core, no pun intended, Prahalad and Hamel’s case is centered around their conclusion that modern competition is less about strategic leaps than incremental innovation that exploits developed organizational capabilities. These core competencies are not merely what Liam Neeson would have called ‘a particular set of skills’, but collective knowledge of how to coordinate and best take advantage of the skills and any thereto relevant technologies. Or to put it in plain English, the skills and their support systems (technology, management and culture).
The authors’ analogy of choice is that of a tree. The trunk and major limbs are the core products, smaller branches are business units, and leaves and fruit the end products. Nourishing and stabilizing it is the root system of core competencies.
The establishment of core competencies tends to start with the definition of a strategic intent that delimits the company and its potential markets. To reuse their analogy perhaps somewhat clumsily, it is only when one has chosen a seed that one can know what kind of tree can grow. The core competencies required can then be put to a three-part ‘test’:
Firstly, a core competence should provide potential access to a wide variety of markets and enable coherent (my phrasing) diversification.
Secondly, a core competence should make a significant contribution to the perceived customer benefits of the end product.
Thirdly, a core competence should be difficult for competitors to imitate.
While the intent provides the direction, the core competencies thus enable the movement in it. This, in my opinion rather important, point is for some reason often lost, leading to a view of core competencies as isolated entities devoid of deeper meaning – establishing what the company does and how but forgetting what for. This unfortunate oversight can easily worsen what one might call core rigidity, but more on that later.
Core competencies stand by explicit design in stark contrast to the common idea of corporations as made up by more or less independent strategic business units (SBUs). In such an organizational structure, there is a risk that no individual unit takes responsibility for obtaining and maintaining a viable market position, causing negative chain-link effects, short-termism and chronic underperformance. Any core competencies that are developed also end up seen as sole property of the SBU in which they were, drastically limiting their value to the wider portfolio.
By instead viewing the competency as an asset of the corporation (as opposed to the individual SBU), the authors argue, managers are able to identify the people who embody critical competencies and move them across organizational boundaries to where they can do most good.
Such moves can also be done proactively, of course. Giving employees the opportunity to work in different teams or units, not least early in their careers, can create a broader understanding of how the various parts of the business tie together while simultaneously increasing valuable diversity of thought.
The complications
It is easy to see the attraction of Prahalad and Hamel’s concept. Managers get to manage (as strategic control is centralized) and key employees get to do what they do best (as their skill is emphasized). Core competencies are very much a human-centered approach to strategy. Instead of focusing on what the company does, it puts a premium on the knowledge required to make it possible in the first place and encourages investment into into supporting technology, managerial systems and company culture. And, to be fair, it makes sense. Competencies are indeed often the glue that binds existing businesses together.
However, there are two inescapable and fundamental flaws to the theory.
Firstly, whenever core competencies show up, whether in practice or discourse, that which is controllable tends to be conflated with that which is emergent.
If one is starting with a tabula rasa, drawing up the core competencies needed to fulfill a strategic intent is a simple (ahem) matter of foresight, planning and control; we will need core competence A, B and C in order to improve our chances of making it to D. Although this inherently means that they will be possible to emulate (proprietary patents etc. notwithstanding), as anything that can be designed can be copied, the first steps can most certainly be taken deliberately.
But as the business adapts and evolves over time, an additional set of core competencies will emerge (if they do not, one would have to worry about the organization’s ability to learn). These will have been enabled by a myriad of uncontrollable factors and thus impossible to replicate in detail. As they are also only ever visible in retrospect, they cannot be created through planning – indeed, it is this that makes them so valuable.
Consequently, the true core competencies of a resilient organization are likely to change as the context changes; they are not exclusively the result of strategic decision-making and planning, but also emergence and co-evolution. This goes counter to the central control and grand vision that Prahalad and Hamel argue for and leads us to the second issue.
In practice, focusing on core competencies often translates to (as is customary in traditional strategic planning) the sacrifice of all else. The key skills are placed on a pedestal, while everything else is considered secondary. As one might expect, a whole host of problems follows.
For example, given that new endeavors - such as new product development or new skill acquisition - to varying degrees depart from current capabilities, they can be seen as less important and misaligned. An organizational inertia, what Dorothy Leonard-Barton calls core rigidity, emerges. The company becomes slow to move and reluctant to adapt to any new circumstance that challenges its view of the world and what is deemed necessary to act in it. Eventually, strategic drift becomes unavoidable.
Similarly, core competencies can lead to two classes of corporate citizens. Those who are deemed to have the crucial skills, e.g. engineers, are given high status, while those that are considered to not, e.g. marketers, become more or less an afterthought (if not outsourced completely). All it takes is to look at job offers on LinkedIn to see this in action; instead of hiring experienced seniors, some companies look for juniors to do it all under the assumption that none of it really matters that much anyway.
Of course, those who are considered most important are likely to enjoy their status, which means that changing the status quo also becomes very difficult. Any subsequent transformation project that is announced (a fatal mistake in itself) or attempt to correct the issue therefore runs the risk of becoming actively obstructed by employees looking to protect their positions.
The verdict
In summary, then, core competencies are yet another concept that solves many problems in theory but has proven to create several others in practice. While I do believe that some of that is down to a strategic planning interpretation of Prahalad and Hamel’s work and not necessarily the work itself, my experience as a strategy consultant also tells me that it is best applied in very general terms. The purpose of core competencies should be to enable continuous movement in a strategic direction defined by intent in an evolutionary process, not to narrowly define the only things that are perceived to matter at the time of inception. Unfortunately, history has told us that companies more frequently do the latter, with poor results to show for it.
Next week, we are going to back to Michael Porter’s to have a look at his famous five forces.
Until then, have a lovely weekend.
Onwards and upwards,
JP