Sometimes an idea can seem so astounding, so insightful, so revolutionary and smart that its influence is legendary. That's the way you could describe the 1990 Harvard Business Review paper The Core Competence of the Corporation. In a dozen printed pages, C.K. Prahalad and Gary Hamel laid out the notion that corporations had missed a principle that was critical to success--core competencies.

As the pair write in the first paragraph of the paper:

The most powerful way to prevail in global competition is still invisible to many companies. During the 1980s, top executives were judged on their ability to restructure, declutter, and delayer their corporations. In the 1990s, they'll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible--indeed, they'll have to rethink the concept of the corporation itself.

Few other ideas in business have been so influential. Talk to entrepreneurs today and chances are you'll hear about supporting core competencies and possibly outsourcing non-core aspects of their companies. Unfortunately, as influential as Prahalad and Hamel have been, they were also widely and profoundly misunderstood.

Reexamining Core Competencies

Many in business have taken the concept of core competencies to mean, find what you excel at--or perhaps what you enjoy doing--and to minimize the work you need to do in other areas. For example, a company might decide that it is exceedingly good in marketing and assume that it could leave product development, IT support, accounting, and fulfillment to others through outsourcing.

But the two authors explicitly argued against treating support of core competence as a way of reducing costs:

Nor does core competence mean shared costs, as when two or more SBUs use a common facility--a plant, service facility, or sales force--or share a common component. The gains of sharing may be substantial, but the search for shared costs is typically a post hoc effort to rationalize production across existing businesses, not a premeditated effort to build the competencies out of which the businesses themselves grow.

A competence is an area in which the company either already has or can obtain expertise, knowledge, and experience and that can contribute to a variety of products, possibly aimed at disparate markets. But rather than a random assortment of goods, what the company does is make use of deep competencies, the way 3M excelled in Post-It notes, coated abrasives, pressure-sensitive tapes, and magnetic and photographic films because of its competencies in "substrates, coatings, and adhesives."

A core competence exhibits at least three factors:

    • "provides potential access to a wide variety of markets"
    • "[it] should make a significant contribution to the perceived customer benefits of the end product"
    • "should be difficult for competitors to imitate"

But nowhere in the paper did the authors suggest that companies do nothing but build core competencies. If you think about it, building a competence requires infrastructure, communications, IT, and financial support. Someone has to keep the lights on, the computers humming, the building open, and the paychecks mailing for employees to build the core competencies.

Can some functions be outsourced? Of course. But the degree to which you trust others with essential aspects of doing business is the degree to which you are depending on the kindness of vendors. And outsourcing what can be outsourced doesn't mean that what is left is a collection of core competencies that offer a strategic path forward. For example, marketing as a core competence? Forget it. You need marketing, but that doesn't create products or services that are fundamentally important to customers. Nor does it watch the development of markets and redirect efforts to direct the company to satisfy evolving needs.

Powerful ideas can transform a business. But it depends on the entrepreneur's understanding as to whether the transformation is for better or worse.