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Core Competencies DefinitionThe core competencies definition is a resource or capability that gives a firm competitive advantage. Core competencies are the business functions or operational activities that a company does best. A company’s core competencies are what differentiate it from the other competitors in its industry. They are also the resources and capabilities that allow the company to achieve profitability. A firm should devise its strategy so as to exploit the resources and capabilities that comprise its core competencies. ResourcesA company’s resources are the operational inputs that allow it to perform its business activities. Resources are often divided into three categories, including the following:
Resources can also be classified as either tangible resources or intangible resources. Tangible resources are physical assets, such as equipment or property. Intangible resources are non-physical assets, such as reputation, brand equity, or superior organizational architecture. Resources become core competencies or contribute to core competencies when they meet the criteria outlined below. CapabilitiesA company’s capabilities are the activities and functions it performs to utilize its resources in an integrative fashion. Capabilities are practiced and honed over time. As they become stronger, the
company enhances its expertise in a particular functional or operational area. This expertise allows the company to differentiate itself from competitors. Furthermore, capabilities are operational activities that the
company has mastered. They are inimitable or difficult for competitors to figure out and replicate. When capabilities meet the criteria outlined below, they contribute to the company’s competitive advantage and
profit potential, and are considered core competencies. Core Competencies CriteriaWhen a company’s resources or capabilities meet certain criteria they can be called core competencies. If a resource or capability meets the following criteria it
contributes to a firm’s competitive advantage over industry rivals and allows the firm to achieve profitability. A resource or capability is a core competency if it is valuable, rare, costly to imitate, and
non-substitutable.  [box]Strategic CFO Lab Member Extra Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to put together your exit strategy and maximize the amount of value you get. Click here to access your Execution Plan. Not a Lab Member? Source: Harrison, Jeffrey S., Michael A. Hitt, Robert E. Hoskisson, R. Duane Ireland. (2008) “Competing for Advantage”, Thomson South-Western, United States, 2008. In the global business environment, traditional factors, like labor costs and superior access to financial resources and raw materials, can still create a competitive advantage. However, these factors are less often a source of competitive advantage in the current competitive landscape. In the current landscape, the resources, capabilities, and core competencies in the firm’s internal organization likely have a stronger influence on its performance than do conditions in the external environment. The most effective organizations recognize that strategic competitiveness and above-average returns result only when core competencies (identified by studying the firm’s internal organization) are matched with opportunities (determined by studying the firm’s external environment). None competitive advantage lasts forever.Over time, rivals use their own unique resources, capabilities, and core competencies to form different value-creating propositions that duplicate the value-creating ability of the firm’s competitive advantages. In general, the Internet’s capabilities are reducing the sustainability of many competitive advantages. Because competitive advantages are not permanently sustainable, firms must exploit their current advantages while simultaneously using their resources and capabilities to form new advantages that can lead to future competitive success. Effectively managing core competencies requires careful analysis of the firm’s resources (inputs to the production process) and capabilities (resources that have been purposely integrated to achieve a specific task or set of tasks). The knowledge possessed by human capital is among the most significant of an organization’s capabilities and ultimately provides the base for most competitive advantages. The firm must create an environment that allows people to integrate their individual knowledge with that held by others so that, collectively, the firm has significant organizational knowledge. Individual resources are usually not a source of competitive advantage. Capabilities are a more likely source of competitive advantages, especially more sustainable ones. The firm’s nurturing and support of core competencies that are based on capabilities are less visible to rivals and, as such, they are more difficult to understand and imitate. Only when a capability is valuable, rare, costly to imitate, and nonsubstitutable is it a core competence and a source of competitive advantage. Over time, core competencies must be supported, but they cannot be allowed to become core rigidities. Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. When it can no longer do so, the company shifts its attention to selecting or forming other capabilities that satisfy the four criteria of a sustainable competitive advantage. Value chain analysis is used to identify and evaluate the competitive potential of resources and capabilities. By studying their skills relative to those associated with primary and support activities, firms can understand their cost structure and identify the activities through which they can create value. When the firm cannot create value in either an internal primary or support activity, outsourcing is considered. Used commonly in the global economy, outsourcing is the purchase of a value-creating activity from an external supplier. The firm should outsource only to companies possessing a competitive advantage in terms of the particular primary or support activity under consideration. In addition, the firm must continuously verify that it is not outsourcing activities from which it could create value. Are the source of a firm's which are the source of the firm's?
What acts as a source of the firm's core competencies?A company's people, physical assets, patents, brand equity, and capital can all make a contribution to a company's core competencies. The idea of core competencies was first proposed in the 1990s as a new way to judge business managers compared to how they were judged in the 1980s.
What are capabilities and core competencies?Core Competencies Criteria
A resource or capability is a core competency if it is valuable, rare, costly to imitate, and non-substitutable. A capability or resource is valuable when it allows the company to capitalize on opportunities or defend against external threats.
What are the capabilities of a firm?A firm's capabilities are the accumulated knowledge and skills embedded in its organizational processes and routines (Day 1994).
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