Sunday, June 28, 2009

Core Competency

One of the most misunderstood management concepts is that of core competency. The following three features define a core competency:

  • It is a source of competitive advantage
  • It cannot be easily replicated by competitors
  • It is applicable across a wide range of fields

The concept of core competency does not tell companies not t diversify. Instead, it gives companies a framework to aid in rational diversification. Several companies have used this concept to diversify meaningfully. Honda defined its core competency as its ability to make great engines and it has used this rationale to get into new businesses like generator sets, lawn mowers, outboard motors, etc. ITC has defined its core competency as its distribution reach and has used it to expand into other FMCGs like mints, salty snacks, biscuits, etc. 3M has defined its ability to innovate as its core competency and its product range is consequently mindboggling.

Several other companies have also expanded successfully by using other rationale to map out their growth. Reliance has used the concept of backward and forward integration. Telco has expanded their passenger car business to offset the cyclical risk they face in their business of commercial vehicles.

It is important to note that not all businesses need to have a core competency. It is not strange for a successful company to have no core competencies. Similarly, a given company may have more than one core competency.

‘Core competency’ does not say that you should stick to your original business and not expand. Instead the message is to find out:

  • What is it that you do better than others that makes you successful in what you do
  • In which other sector will it also help you to be successful

Now you have a valid reason to expand.

So Coco Cola is not an example of a company that is sticking to its core competency. At best it is an example of a company that either failed to identify its core competency or one that is cautious in its expansion plans.


  1. Sir, as you mentioned in the above post that "it is not strange for a successful company to have no core competencies."

    Keeping in mind the example of Reliance which is ubiquitous in almost every business ranging from petrochemical refinery to textiles, from telecom to retail--what actually is the core competency here and if there is no core competency as such keeping in backdrop the above statement --wont that undermine the concept of core competency as a whole--or these kind of examples are only an exception?

  2. from what i understand of core competency, its not essential that we're talking of a particular product per se, it may even be the technique employed to manufacture, or say, the way an organisation markets its products. we've already covered examples like honda and ITC..

    I do have a query in mind; would we consider Hindustan Unilever as an org. which identified its core competency or not? considering it diversified itself, but again only the field of consumer durables.

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  4. here i would like to say Hindustan unilever and the example which you mentioned like ITC have their core competencies as the "supply chain management" or "distribution network" . though these companies have an ambit of products in FMCG but, it doesnt mean that they havent diversified at all, but its their afore mentioned core competency which makes them so successful.

    But my question for the core competency of a company like reliance still stands.

  5. The core competency for a company like ITC and Unilever would be their distribution reach.

    Several of Reliance's expansions can be explained on the basis of 'project management' as a core competence. The success of refinery, telecom and retail depended on their ability to get the infrastructure ready ASAP.

    But I still think that Reliance's expansions are more a result of considerations other than core competency.

    It does not undermine the concept of core competency. Core competencies is one of the strongest justifications for expansions but not the only one.