3 Tests To Determine Core Competence

Businesses must have something that customers value and is uniquely theirs. Businesses with nothing unique to distinguish them from their competition are doomed to competing on price and as others enter the market and attempt to do the same thing, profit margins become thinner and thinner.

If you offer something unique, potential customers can separate you from the crowd and easily justify buying from you and create demand. Increase in demand makes it easier to collect premium prices and higher margins.

The question is, where does uniqueness comes from, how can it be defined and how it can be sustained?

In The Core Competence of the Corporation, C.K.Prahalad and Gary Hamel argue that identifying and developing core competences are the easiest way to be unique and separated from the competition. They are the things a company does well, and that cannot be easily or quickly copied.

Star performers and market leaders have a very clear idea of what they’re good at and focus on those strengths. By staying focused on core competences, and continually working to reinforce them, market leaders are able to create that products that were more competitively superior to those of their competitors. Customers were prepared to pay more for them. By switching their effort away from weaker products or services, and concentrating on their strengths, they continuously and consistently tighten the hold on their markets.

Prahalad and Hamel identified three tests to identify true core competences. They are:

1. Relevance: First, the competence must give customers something that strongly influences them to choose your product or service. If a product or service is not relevant it has no effect on competitive position and is not a core competence.

2. Difficulty of Imitation: Second, the core competence must be difficult to imitate allowing you to jump ahead of your competition and putting you in a position to have less competitive pressure in order to improve and sustain the advantage.

3. Breadth of Application: Third, a good core competency opens up potential markets to make committing resources to ensure continued sustainability easier to justify.

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