Core competence and the resource-based view

Industry position alone does not explain why one company outperforms another. Advantage can also arise from resources and capabilities that competitors cannot readily obtain, reproduce or replace. Core-competence analysis and the resource-based view help managers identify those internal strengths, connect them to customer value and develop them deliberately.

When to use it

• Use the models to explain performance differences between firms occupying similar market positions.
• Apply them when deciding which internal capabilities to protect, build or deploy for growth and profitability.

Origins

Michael Porter’s influential work made industry structure and competitive positioning central to strategy in the 1980s

• an outside-in perspective. Execution and differentiation, however, also depend on a firm’s resources and its capacity to combine them.

Attention shifted towards this internal perspective around 1990. C.K. Prahalad and Gary Hamel’s landmark article “The Core Competence of the Corporation” argued that durable success depends on the collective capabilities beneath individual products. Jay Barney’s subsequent article then synthesised earlier resource-based scholarship by explaining how valuable, rare, imperfectly imitable and non-substitutable resources can support sustained advantage. These contributions helped bring competence thinking into management practice and the resource-based view into mainstream strategy research.

What it is

For Prahalad and Hamel, a core competence is a coordinated combination of technologies, knowledge and skills that distinguishes the organisation. It should pass three tests:

• it opens potential access to several markets;
• it contributes materially to the customer benefit of the end product; and
• competitors find it difficult to imitate.

Prahalad and Hamel used Canon’s integration of precision mechanics, fine optics and microelectronics as an example; Disney’s storytelling offers another. Because a genuine competence crosses products, it can support entry into different markets. Amazon, for instance, transformed infrastructure developed for its retail operation into Amazon Web Services. Such capabilities usually accumulate through repeated learning, which helps make them difficult to copy.

The resource-based view explains advantage through the way a firm owns and deploys a bundle of tangible and intangible resources against market opportunities. A resource is a candidate for sustained advantage when it is:

• valuable;
• rare rather than readily available to every rival;
• difficult or costly to imitate; and
• not easily replaced by an equivalent substitute.

Ownership of a diamond mine illustrates a scarce physical resource. McKinsey’s accumulated relationships with important clients illustrate a less visible asset that competitors cannot simply purchase. It is useful to distinguish resources, which are individual assets that may be traded, from capabilities, which are repeatable ways of combining resources to accomplish an outcome. Core-competence thinking and the resource-based view overlap but are not identical: competence language is widely used in managerial diagnosis, while the resource-based view provides a broader academic theory of firm-level advantage.