In order to anticipate changes in business, management should build an appropriate strategic plan. Focusing on a company’s core competencies establishes a unique integrated system that competitors cannot replicate. By the definition as Prahalad and Hamel (1990) stated, core competency is a collective knowledge about how to combine company’s diverse resources, technologies and know-how. As the foundation of competitive advantages for enterprise gaining long-term stability, core competence has both strengths and weakness.
Resource Based View and Core competence
To focus on the specific contents of core competence, the idea of “resource based view” (1990) is helpful to recognize what will be resource of core competence. The firm resources are classified in to three categories as physical capital resources, human capital resources, and organizational capital resources. These resources can be firm’s competitive advantage as valuable, unique, inimitable and sustainable.
Strengths of core competency
According to Prahalad and Hamel (1990), core competency is helpful for the companies to choose their strategic management pattern flexible and module outstanding enterprise culture as well as value; furthermore, core competency can help company to strengthen the organization management, since the firm has the unique resource.
Firstly, core competency considers the needs and value that customers need. This can significantly improve the efficiency of products and service improvement as well as reduce costs along with the increasing of competitive advantage of the firm. For example, the core competence of FedEx is the high-level logistic management, even it has the relatively more expensive than the peers, it still popular with high reputation among customers with efficient highly-speed delivery. Apple has the product of iPod Nano has the core competence of small size, which can be brought with conveniently. Many firms focusing on strengthening the core competence to distinguished with the rivals to advance the products meeting the demands of customers and earn more profits and reputations. (Hunger, 2012)
Secondly, the innovation ability to invent new products due to a determined core competency is an explicit strength. (Shieh, 2011) The example provided in an article by Prahalad and Hamel (1990) illustrates this situation. According to it, in 1980s few American and European telecommunications companies (such as Motorola, GE, GTE, GEC) made a decision to exit the market of colour televisions, because they considered it as a mature market. However, in the 1990s the colour television industry became an attractive market with $20-billion-a-year opportunities due to the advent of HDTV technology. Had one of the listed companies focused on its core competency in integrated telecommunication technology, it would have probably enabled a company to occupy this profitable niche. Consequently, the core competency concept provides an opportunity to respond quickly to emerging technologies and innovations, and also the rising capabilities of rivals. That might be considered as strength in the concept.
Weaknesses of core competency
As we can see, some enterprises vanish as soon as they appears, some go downhill midway, while some grow stronger after experiencing ups and downs. The reason just lies in that it is extremely hard to maintain the core competency. The following are the weakness of core competency, how to use core competency and how can it have sustainability:
Firstly, core competence is hard to be protected. Even the core competency will not be worn down with the passing of time, but will be improved with their application and sharing. The core competency still needs to be cultivated and protected. It has the potential risk for being copied and imitated by the rivals. The company should improve the “imitation threshold” of the competitors by applying a certain management method or means to make its core competency maintain ahead of its competitors to a certain extent and “make” an isolation zone or safe area for its core competency.
Secondly, the core competence focuses on the internal factors, in other words, it ignores the external factors. As Prahalad and Hamel (1990) claimed, the growth of firms are mostly depend on the organizational accumulated experience and knowledge other than the external power. But in fact, since all the resources will depreciate, too much focus on the internal development and neglect of the outside big environment changes will lead to the failure and surplus competitive advantage.
Thirdly, the blind and excessive diversification will cause the loss of core competency. For example, the Giant Group, which started from IT industry, once determined to become the IBM of China; later it switched to nutritional food, then real estate, and invested a huge amount of money to build a giant building, but was dragged down by it. Of course, to treat diversification prudently does not equal to totally reject it. The principles which rationally diversified operation should abide by are: ①the diversification based on taking one industry as the priority; ②related diversification. For example, Haier Group expanded the core competencies it obtained from refrigerators to various household appliances like air condition, washing machine, and color TV.
Based on all the argument offered above, it is now possible to state that the concept of the core competencies is an advanced tool that could help to make a unique business strategy and to identify the strengths and opportunities. However, this approach cannot warn a company against market’s turbulent changes. Rather, despite the limitation because of generalizability, the study’s results indicate that practitioners should evaluate strengths and weaknesses and incorporate a mix of different approaches to achieve high. Enterprises should be for effective strategic management in order to cultivate and its own core competitiveness. Enterprises should use their own internal and external advantages and opportunities, overcome the shortcoming of internal and risk, convert weaknesses into advantage and risk into opportunities, eventually, will become the enterprise’s core competency.