Why a management concept fails to support managers’ work: The case of the ‘core competence of a corporation’

Core competence: an appealing but difficult notion

Prahalad and Hamel’s (1990) theory of competence-based corporate strategy was brought to widespread public attention in their article ‘The Core Competence of the Corporation’. It offered an appealing strategy tool to implement the resource-based view (RBV) of the firm in strategy-making (Peteraf, 1993; Priem and Butler, 2001; Wernerfelt, 1984). Prahalad and Hamel (1990) defined core competencies as ‘the collective learning in the organization, especially how to coordinate diverse production skills and integrate streams of technologies’ (p. 81). The concept is still one of the most used managerial tools in strategy-making (Nicolai and Dautwiz, 2010; Rigby and Bilodeau, 2015). It ‘arrived at a time when executives in large corporates were aware that many of the traditional portfolio approaches were inadequate and it offered a compelling rationale for corporate strategy decisions, resource allocation and competition’ (Clark, 2000: 115). However, despite numerous post-hoc accounts of successful firms’ core competencies, studies have shown that attempts to apply the concept in strategy-making tend to result in lists of competencies with no clear idea of what is ‘distinctive’ or ‘core’ about them (Clark, 2000; Javidan, 1998).

The emergence of the new integrative strategy concept

The history of the concept of the core competence of a corporation began in the strategy processes of a number of progressive firms that had focused their developmental efforts on a few broadly applicable competencies. Prahalad and Hamel paid attention to the success of these firms and studied their strategies. No first-hand data are generally available from the actual abstraction and generalization processes involved in the firms’ strategy-making, through which these firms defined the competencies they decided to develop and concentrate on, but Prahalad and Hamel’s presentation of them allows us to infer some features of these processes.

According to Prahalad and Hamel (1990: 80), the top management of the Japanese company NEC, for instance, conducted a careful analysis of developments in the information technology sector in the early 1970s. They saw that (1) computing would evolve from large mainframes to distributed processing, (2) components would evolve from simple integrated circuits into very large scale integration and (3) communications would evolve from mechanical cross-bar exchange to complex digital systems (integrated services digital network (ISDN)). Thus, computing, communications and component businesses would overlap, presenting enormous opportunities for companies that had the competencies to serve all three markets. Thus, the managers concluded that semiconductors would be NEC’s most important ‘core product’, and that the firm’s success would hinge upon the competencies of producing semiconductors and integrating systems.

Prahalad and Hamel (1990) also found other similar cases, in which firms concentrated their developmental resources on the competencies that they saw as the core of their future business by coalescing relevant partial competencies from the corporation’s various units. These firms also entered into strategic alliances in order to build competencies rapidly and at low costs, and accelerated the learning and refinement of the core competencies by increasing the diversity of their market experience through original equipment manufacturer (OEM) relationships.

The descriptions of these cases highlight three features of the processes of abstracting and generalizing in the firms’ strategic planning. First, the firms’ managers had carried out thorough analyses of the ongoing changes in and the probable future of the activities of their potential clients, as well as of the relevant markets and technologies. Through these analyses, they had identified an emerging general problem or need, which for instance in NEC’s case, manifested itself as a contradiction between the rising need for integrating technologies and the predominant firm structure of independent business units. Second, they had developed an idea of a general principle of how to solve the problem and meet the need, which NEC concretized in the development of a new core product – semiconductors – and the related competencies, which integrated the existing technologies and competencies of separate units of the corporation and its partner firms. Finally, they had created processes of refining the core competence and learned how to apply it in varying contexts by creating a network of OEM relationships, thus recreating the system of relationships, within which the chosen core competencies could then develop and flourish. Through these processes, the firms had abstracted a constellation of basic functional relationships that defined their future business – a theoretical strategy concept. We see here the hallmarks of theoretical abstraction: the focus is on systemic relationships between diverse objects and the historical change in these relationships. The way in which Prahalad and Hamel highlight, for example, the importance of hybrid solutions and a strategic architecture, hints at a further hallmark of theoretical thinking; the construction of an object or process that unites contradictory processes.

Prahalad and Hamel’s abstraction and generalization process and the creation of the core competence concept

It can be argued that the model of core competence–based competition that Prahalad and Hamel (1990: 82) present, based on their analysis of the strategies of the innovative and successful case firms, is a theoretical abstraction of a general principle of resolving the historically evolved contradiction between the prevalent business unit–based strategic thinking and the increasing pressure for investment in technology and product development in the rapid evolution of technologies and markets in globalized competition. Prahalad and Hamel support their argument by giving examples of firms that had missed essential opportunities by holding on to the prevailing strategy approach.

However, when discussing, in their article, how firms can create a core competence–based strategy, Prahalad and Hamel shift the focus from an analysis of emerging general problems and their local solution principles to the identification of core competencies among a firm’s existing competencies. They advise managers to look for competencies that (1) ‘provide potential access to a wide variety of markets’, (2) ‘make a significant contribution to the customer benefits of the end product’ and (3) ‘are difficult for competitors to imitate’ (Prahalad and Hamel, 1990: 83). It is important to notice what happens here from the point of view of generalizing. The list still hints at the theoretical strategy concepts that the case firms had created, but these attributes of ‘coreness’ are, however, presented as if they were fixed qualities of some separate competencies and could exist and be determined by focusing on competencies as such without an analysis of the relationships between evolving new constellations of technologies and markets and the firm’s resources. This is a case of the ‘fallacy of misplaced concretes’, as a complex set of relationships and a temporal process is presented as fixed properties of isolated objects – the competencies.

Prahalad and Hamel’s model abstracts the general features of the outcomes of the abstraction and generalization processes carried out by the case firms instead of the method and process of the firms’ strategy-making. Therefore, their theory serves the selection of core competencies from a set of existing competencies rather than the creation of a new, broadly applicable competence. The essential content of a core competence of a corporation can, however, only be determined as a solution to an aggravating contradiction within the system of relationships that form the context of a corporation’s business activity. Thus, this form of empirical generalization, objectified in a verbal definition, paradoxically turns managers’ attention away from the changing constellation of actual relationships in their business context and moves it towards building abstract taxonomies of competencies. What Prahalad and Hamel fail to abstract and generalize from their case data are the methods for identifying the ‘great variety of markets’ relevant to a corporation’s business, the methods for determining ‘customer benefit’ and the methods for creating ‘difficult-to-imitate’ competencies. Therefore, the concept they have created does not help managers identify a strategic problem in their business situation which a new, broadly applicable competence would solve. In empirical abstraction, ‘every property can become a basis for generalization and a means of distinguishing appropriate groups of objects – that is, any purely external properties can become the content of a concept’ (Davydov, 1990: 24). Thus, we argue that this feature of empirical abstraction explains the difficulties that managers who follow Prahalad and Hamel’s advice have in reaching an agreement on the essential core competencies of their firm.

The use of the core competence concept as an instrument in practice

According to studies on the use of the core competence concept in practice, Prahalad & Hamel’s theory has led firms to try to identify and list their core competencies. However, instead of discovering ‘hard-to-imitate’ competencies, many organizations find it difficult to distinguish their lists of potential core competencies from similar lists that they imagine their competitors might construct (Eden and Ackerman, 2000: 15). Nicolai and Dautwiz (2010) studied the use of the core competence concept in a large German company that operates in over 50 countries and can be regarded as a ‘heavy adopter’ of the approach. The 44 interviews with the company’s top managers, who were familiar with the concept and had used it actively, generated a total of 112 references to different core competencies, the majority of which was mentioned only once by a single manager. Even more interestingly, 77 percent of the core competencies mentioned gave no indication of the company’s industry.

In the literature, the problems of applying the idea of core competence are usually traced back to the definition of the concept (Clark, 2000; Ljungquist, 2008, 2013; Nicolai and Dautwiz, 2010). Thus, attempts have been made to more accurately verbally define the concept of core competence and to advise how to better distinguish or identify core competence in practice (see, for example, Hafees et al., 2002; Javidan, 1998; Zubac et al., 2010). For example, Javidan (1998) suggests a set of questions with a progressively sharpening focus (i.e. what do we know how to do excellently, are we any better than our competitors in what we do well, how durable is our advantage and so forth). The process continues as managers’ joint contemplation, in which the identified competencies are listed and categorized. Javidan has tried to add dynamism to the process by also including future-oriented questions, which does not, however, alter the basic classificatory approach.

Thus, it can be argued that the attempts to solve the problems in the application of core competence theory have focused on strengthening the empirical character of the abstraction and generalization process rather than questioning it. There is little reference to the problem that the core competence concept was initially created to solve nor to the question of how the local managers could/should analyse their business situation and its complexities in order to come to a diagnosis before planning the cure (as an attempt to address the latter question see, for example, De Leo, 1994). Without such an analysis, there is little basis for reaching an agreement on what competencies constitute the core of the firm’s future business. This is also obvious in the following example of the difficulties the managers of a Finnish road building firm encountered when trying to apply the core competence concept in their strategy process.

An example of problems in applying the concept of core competence

The discussion of this example took place in a senior management’s 1-day seminar, during which the managers jointly tried to define the core competencies of their firm in order to create a new competence strategy. The discussion was recorded and transcribed. It lasted for 1.5 hours and consisted of 262 speech turns by the eight participants (M1, M2, …). The leader of the competence development team and one member of the top management team had prepared a one-sheet draft of the strategy for the discussion.

The starting point was not to create a competence-based business strategy for the firm, but a strategy of developing competencies. This reflects the traditional functional division of labour in the firm, which already delineates competencies as a separate area of responsibility. In addition, the task of creating a competence strategy was already in the draft paper, presented as a task of defining the core competencies. First, we examined how the managers conceptualized ‘competence’ and the task of defining the firm’s core competencies. Then, we looked at the main content and topics of the discussion. The features that strike one’s attention at an early stage in these data are the managers’ difficulty in drawing conclusions and their lack of a clear working method.

In the discussion, the managers listed and discussed competencies as if they were specific objects, with no particular reference to how the challenges of their business could be met through developing new competencies. The competencies the managers labelled as ‘core’ were so general and void of specific content (e.g. ‘innovation of services’), that they seemed to cover almost all the activities and business areas of the organization. This is a typical difficulty in empirical generalization: general applicability of the strategy can only be increased by distancing the competence descriptions from concrete application situations and eliminating the specific and local features of the business substance from the descriptions. The managers also realized this themselves:

We identified three main topics in the discussion: (1) The level of concreteness of the competence strategy (in order to gain applicability; 62 speech turns), (2) The definitions of the concepts used (e.g. of core competence; 23 speech turns) and (3) The ‘names’ of specific core competencies and the division of responsibility for developing them (121 speech turns). Nine of the analysed speech turns were linked to two categories. Totally, 65 turns were left uncategorized, as they contained only co-coordinative talk or joking.

The talk concerning the level of concreteness of the competence strategy (Category 1) concentrated on two issues. First, the managers discussed how concrete the instructions for strengthening a selected competence should be in the strategy paper. The managers called for concrete guidelines for actions, but they also argued that some of the responsibility should be left for the business units to make their own concrete plans. They argued that by giving more precise guidelines for proper implementation, they could enhance the applicability of the strategy, but then faced difficulties in deciding what kind of description is sufficiently accurate. Here as well, we see how the prevalent business unit–based organization and strategy, the problems of which the core competence concept was introduced to solve in the first place, interfered with the managers’ thinking of core competencies. Second, the managers discussed the hierarchical relations between the different strategies in the firm, which also reflects the traditional view of strategy rather than Prahalad and Hamel’s idea of a strategic architecture. As the managers saw strategy-making as a process of descending from general choice decisions to more specific ones, which is a typical characteristic of the creation of empirical taxonomies, the lack of decisions concerning the main strategies was claimed to be one cause of the problems in creating the competence strategy:

This is just so difficult, because it’s connected to all the other decisions to be made, and we don’t have these decisions yet. (M8)

In the discussion on the definition of the core competence concept (Category 2), the managers commended the approach in the strategy draft for being right ‘if we look at theory and literature’, but noticed that it was still suggesting that the organization does ‘everything for everyone’. All in all, what the ‘core’ in core competence actually means, was not explicitly discussed. One conceptualization that emerged in several speech turns was that core competencies are those competencies that the firm has to keep in its own hands for competitive advantage:

… after all, the majority of our people don’t know what core competence means, even if it’s defined. It means that we keep it to ourselves, we do it ourselves. (M3)

The managers unanimously agreed with this idea. However, from the point of view of generalizing, it is yet another feature that does not suggest anything about the content or the developmental logic of a unique core competence.

In the episodes of defining the specific core competencies and organizing their development (Category 3), the participants first attempted to reformulate the wordings of the suggested core competencies in the draft paper, and later proposed an appendix, which would list all the activities concerning competence development in the organization to ease the task of defining the core ones. The first attempt ran into the lack of criteria for deciding on the choice of words, and the latter faced the difficulty of setting boundaries:

… there are quite a few [competencies], when you start to collect them like that. [It’s hard to say] where the limits are. (M8)

The talk about defining specific competencies brought the customer into the discussion for the first time. However, the idea of looking at the customer needs, to decide what competencies are required and relevant, was soon reduced to a question of division of responsibility in developing these, again reflecting the existing unit and project structure of the firm:

… I mean, we should start looking [at this] from the point of view of the customer, and divide the responsibility according to whom each competence belongs to … (M1)

At the end of the discussion, the managers returned to the idea of core competence as one that should be kept in the organization’s own hands. This time, the discussion led to a dead end, when the managers realized how much collaboration they had with external actors:

The salient features in this discussion were its here-and-now-in-our-firm approach and the lack of discussion about developments in relevant markets and technologies or clients’ activities and needs. Another feature was the urge to find the general core competence immediately, without analysing or discussing the problem that could thereby be solved or the method for generating the solution. Determining and defining the core competencies was taken uncritically as the task. It is interesting and probably also symptomatic of the reception of the core competence theory, and perhaps of other management theories, that managers wanted to apply the concept within their business unit structure and current way of understanding the strategy without questioning it or paying attention to Prahalad and Hamel’s original view of surpassing the limits of the prevailing structure. The concept, however, loses its meaning when abstracted from the problem that it was originally created to solve.