36 Internal analysis Part II

How core competences ‘work’

Core competences tend to be both complex and intangible so that it is
necessary to explore the nature of the resources and competences that
underpin them before exploring the concept further (see Figure 2.1).
The purpose of such analysis is to allow managers to identify which
resources and competences act as the foundation of existing or poten-
tial core competences. It is extremely important to note that not all the
competitors in an industry will possess core competences or distinctive
capabilities (Kay, 1995). It is only those players that are producing
above average performance that can be considered as possessing
core competences. Those with only average or below average perfor-
mance possess competences and resources (without which they could
not compete in the industry at all) but not core competences (for
further discussion of these concepts see Prahalad and Hamel, 1990;
Kay, 1993; Heene and Sanchez, 1997; Petts, 1997).

Figure 2.1
The twin sources of
core competences.

Made simple
Core competence (distinctive capability) ¼ superior acquisition and
employment of resources þ superior development of ‘general’
competences

We will now consider these terms in more detail.

Chapter 2 The business organization: competences and activities 37

Resource analysis

Tangible and intangible resources

Resources can be either tangible or intangible. They are the inputs that
enable an organization to carry out its activities. Tangible assets
include stocks, materials, machinery, buildings, human resources,
finance and so on. Intangible assets include skills, knowledge, brand
names and goodwill, patent rights, etc. (see Coyne, 1986; Hall, 1992).
Intangible resources are often produced within the organization, but
tangibles are obtained from outside organizations. Such resources are
obtained in resource markets in competition with businesses from
within and outside the industry. Relationships with the suppliers of
resources can form an important part of the organization’s core com-
petence, for example its ability to attract the most appropriately
skilled human resources in the job market.

Analysing resources
When we analyse a company’s resources as part of an internal analy-
sis, several frameworks can be employed to provide a comprehensive
review.

Analysis by category
Firstly, we might, for example, consider them by category: human,
financial, physical or intangible. These resources are then evaluated
quantitatively (how much or how many) and qualitatively (how effec-
tively they are being employed). Much of this analysis is covered in
Chapters 3–5. Physical resources such as buildings and machinery will
typically be audited for capacity, utilization, age, condition, contribu-
tion to output and so on. Materials and stocks can be assessed on the
basis of quality, reliability, availability, number of suppliers, delivery
times and unit costs. Human resources are considered in terms of
numbers, education, skills, training, experience, age, motivation,
wage costs and productivity in relation to the needs of the organiza-
tion.

Analysis by specificity
Secondly, we can analyse resources according to their specificity.
Resources can be ‘more’ or ‘less’ specific. For example, skilled workers
38 Internal analysis Part II

tend to have specialized and industry-specific knowledge and skills.

Some technology, for example computer software, is for general
(non-industry-specific) business use (e.g. word-processing, database
and spreadsheet software). Other computer software applications,
such as airline computer reservation systems, are written for highly
specialized uses. Whereas non-specific resources tend to be more flex-
ible and form the basis of competences, industry-specific resources are
more likely to act as the foundations of core competences (e.g. the
specialized knowledge of scientists in the chemical industry).

Analysis by performance
Thirdly, resources can be evaluated on the basis of how they contri-
bute to internal and external measures of performance. Internal
measures include their contribution to:
& business objectives and targets – financial, performance and
output measures;
& historical comparisons – measures of performance over time
(e.g. against previous years);
& business unit or divisional comparisons.

External measures can include:

& comparisons with competitors, particularly those who are
industry leaders, those who are the closest competitors and
are in its strategic grouping (see Chapter 5);
& comparisons with companies in other industries.

By employing these techniques of analysis, an organization is able

to both internally and externally benchmark its performance as a sti-
mulus to improving performance in the future. Performance, how-
ever, is based on more than resources, and competences must be
similarly analysed and evaluated.

Competences

Competences are attributes, such as skills, knowledge, technology and

relationships, that are common among the competitors in an indus-
try. For example, all players in the pharmaceutical industry possess
similar competences (basic abilities) in research and development,
marketing, manufacturing and distribution. Competences are less tan-
gible than resources and are consequently more difficult to evaluate.
Chapter 2 The business organization: competences and activities 39

They are more often developed internally but may be acquired exter-
nally or by collaboration with suppliers, distributors or customers.
Competences are distinguished from core competences by the fact
that they do not produce superior performance and by the fact that
they are not distinctive from the competences possessed by other
companies in the industry. On the other hand, competences are
essential for survival in a particular line of business. Competences
also have the potential to be developed into core competences.

Core competences

Distinguishing core competences from

general competences
Core competences are distinguished from competences in several
ways:
& they are only possessed by those companies whose perfor-
mance is superior to the industry average;
& they are unique to the company;
& they are more complex;
& they are difficult to emulate (copy);
& they relate to fulfilling customer needs;
& they add greater value than ‘general’ competences;
& they are often based on distinctive relationships with custo-
mers, distributors and suppliers;
& they are based upon superior organizational skills and knowl-
edge.
In the motor industry, all manufacturers have the competences and
resources required to build motor vehicles, but a company such as
BMW has core competences in design, engine technology and mar-
keting which act as the basis of its reputation for high-quality, high-
performance motor cars. These core competences make it possible
for BMW to charge premium prices for its products. In this way, core
competences are the basis of a organization’s competitive advantage.

Core competences and distinctive capabilities

Kay (1993) presented a slightly different explanation, arguing that
competitive advantage is based upon what he termed distinctive cap-
ability. Distinctive capability can develop from reputation, architecture
40 Internal analysis Part II

(internal and external relationships), innovation and strategic assets.

Marks & Spencer’s competitive advantage can be explained in terms of
its reputation for quality, its special relationships with its suppliers and
its customers. Marks & Spencer has very exacting but mutually profit-
able relationships with the businesses who supply its products. It
demands high quality at reasonable cost, and flexibility in return for
large volumes of business. Its relationship with customers is based
upon its reputation for good service, refunds and exchanges of
goods, and high-quality products. The end result is that it has a per-
formance that is superior to most of its high street competitors.
Core competence arises from the unique and distinctive way that
the organization builds, develops, integrates and deploys its resources
and competences. An existing core competence can be evaluated for:

& customer focus – does it adequately focus on customer needs?

& uniqueness – can it be imitated by competitors and, if so, how
easily?
& flexibility – can it be easily adapted if market or industry con-
ditions change?
& contribution to value – to what extent does it add value to the
product or service?
& sustainability – how long can its superiority be sustained over
time?

Competences, as opposed to core competences, can also be judged

against these criteria in order to evaluate their potential to form the
basis upon which new core competences can be built.
Core competences can never be regarded as being permanent. The
pace of change of technology and society are such that core compe-
tences must be constantly adapted and new ones cultivated. A good
example of the need to adapt comes from an examination of IBM. In
the 1980s, IBM had core competences in the design, production,
marketing and sales of personal computers. The value that customers
attached to these competences was lost in the late 1980s and early
1990s because competitors were able to match IBM’s competences in
design and production of personal computers and at a lower price.
IBM had failed to adapt its core competences so that they became
merely industry-wide competences. Its superiority was eroded because
it failed to sustain its advantage.