Netanium - Marketing Innovation

Wednesday, May 10, 2006

Core competencies: What are they and will they guarantee success if I have one?

I was recently at a two-day strategic planning retreat for a company, and we were exploring the current business model for the company. I had proposed that the current design was tired, and perhaps there were other models for furthering the company's mission than what was being done today. One of the other directors, a former CEO of the company, said, "But we're doing what we're good at -- it is our core competency!" That's a common mistake -- assuming that what you are good at is a "core competency". The phrase "core competency" was introduced in 1990 in a Harvard Business Review article called (cleverly) "The Core Competency of the Corporation" by Gary Hamel and C.K. Prahalad. They did give three tests to see if what you've got is a "core competency": 1. It provides customer benefits, 2. It is hard for competitors to imitate, and 3. It can be leveraged widely to many products and markets. Merely being good (even great) at something is NOT a "core competency" if it doesn't meet those three tests. Many companies have offerings or processes that pass the first two tests, but not the third. An example of a company that does have a core competency is Dell Computer -- at least for now -- and that is supply chain management. They have honed their supplier processes (and the terms and conditions under which they buy PC components) to an art form that allows them to turn over inventory at a rate at least 10 times higher than their nearest competitor. This allows them not only to have lower profit margins, but to thrive at those lower margins. (They recently took a hit on the stock price because they cut prices aggressively in the second quarter. They still make billions of dollars.) However, every silver lining has its cloud, and here is Dell's: They have optimized this competency for the PC industry (where they assemble finished goods out of standardized components) with a specific fulfillment model (they don't build until you've ordered, thus avoiding tying money up in inventory). Strategies must evolve as the market environment changes. Dell has been extraordinarily successful over the last 20 years, and particularly the last five or six. But, as TI's CEO recently said in an article on thestreet.com: "We're leaving a PC world where the ratio of equipment to people was one-to-one and going to a world where you have up to 10 devices per person," said [Rich] Templeton, pointing to the cell phones, MP3 players and portable game devices that many people now own.

At the same time, said Templeton, emerging markets such as India, China and Russia are adding billions of new consumers to the market "overnight," as those nations join the global economy.

This combination of more devices per consumer and more consumers overall will allow TI to continue to outgrow the semiconductor industry as it has for the past four years, said Templeton.

To me, this means that Dell's core competency in the PC market might not play as well in the emerging market dynamics of what's been called the "Post-PC Era". To summarize, there are two lessons about core competencies that I've learned throughout my practice and career: 1. Just being good at something doesn't a "core competency" make. 2. Core competencies aren't a guarantee of perpetual success.

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