Core Competence for Sustainable Competitive Advantage

Core Competence for Sustainable Competitive Advantage

Ján Papula, Jana Volná

Faculty of Management, Comenius University in Bratislava, Slovakia

[email protected], [email protected]

Abstract

The concept of core competence refers to the possibility of an organization to build

permanent and sustainable competitive advantage in todays ever-changing and unpredictable

environment. To achieve long-term success, it is better to find the source of its competitiveness

within the company, because the only stable certainty in a constantly changing environment is the

internal capacity stemming from a desire to be successful in the future. This paper responds to

current issues related to building and maintaining a sustainable competitive advantage.

Keywords: Core Competence, Sustainable Competitive Advantage, Intangible Assets,

Intellectual Capital

Main Conference Topic: Technology and innovation management

Introduction

Organizations must learn to manage future opportunities as well as they must be able to

manage existing ones. In the environment of the 21st century, companies have to compete within

a complex and challenging context created by many factors - from globalization, technological

development and the rapid dissemination of new technologies, to the development and

exploitation of knowledge. This new environment requires from the organizations to do things

differently as they have used to. They must find new sources of competitive advantage and

engage in new forms of competition. This requires a clear understanding of the nature of the

competition, as well as the competitive dynamics (Huľvej, 2008) The utilization of resources is

being shifted from current capital strategic resources to strategic resources in the form of

information, knowledge, creative thinking and innovation. Skills and knowledge belong to

critical factors of production. Companies can gain competitive advantage by implementing

continual and on-going innovations and the managerial skills and knowledge are in the center of

the process of innovations (Papulová, Mokroš, 2007).

1. Resource-based view on strategy development

Clarifying of the company’s success and of its strategic performance now begins with

looking at resources and capabilities of the company and with understanding their impact on

competitiveness. Resources are no longer analyzed and evaluated only in terms of the

implementation of the chosen strategy, but they become an important factor in deciding the actual

choice of strategy.

Traditional models of strategy creation (such as Porter model) focus mainly on external

environment. They analyze products, market position, industry trends, and the effects of factors

of global environment. Little attention is paid to look inside the organization for internal abilities

and predispositions. Internal environment tends to be judged primarily in terms of ability to meet

the opportunities arising from the external environment.

Resource-based view over strategy development (which stands behind the basic concept

of company’s core competences) brings the innovation in looking at the internal environment of

Papula, Ján - Volná, Jana (2013) “Core Competence for Sustainable Competitive Advantage“, Multidisciplinary Academic Research. Praha: MAC Prague consulting, ISBN 978-80-905442-2-2.

mailto:[email protected]

mailto:[email protected]

reference


organizations. It presents that the internal resources and capabilities of the company are more

critical factors for determining the organizational strategy as the outputs from the analysis of

external environment. The strategy of a company should allow the best use of its internal

resources and capabilities in relation to opportunities of external environment. Behind this change

(even in comparison with so often preferred SWOT analysis) definitely stands the phenomenon

of hyper competition, which slowly but surely changes the view over the opportunities of

competitive advantages in today's conditions. Organizations are trying to find ways how to

eliminate imperfections in setting of competitive strategies in terms of their easy imitability or

recognition of identical opportunities within external environment by the competition.

Uniqueness, and hence the possibility of a longer validity of chosen competitive strategy

lies within the internal environment of the organization, not external. The ability to identify

opportunities does not make the competitive ability long-term, or even sustainable. Sustainability

is built and affected by the ability of a company to set up correctly its internal resources (tangible

and intangible) with a focus on maximizing the creation of value added in the value chain. In

relation with this view, the explanation why some companies have long been successful, while

others fail, may just be answered through the analysis of their resources and capabilities.

In terms of classification of the company resources we can think over basic breakdown of

tangible resources and intangible resources (as drafted in picture 1). Tangible assets, or assets that

have a physical form, include financial assets, fixed assets, such as machinery, buildings and land

and current assets, such as inventory. Intangible assets or nonphysical assets, often called

intellectual capital, include human capital, structural capital, customer capital and relational

capital.

Figure 1. Classification of company’s resources into tangible and intangible

Tangible as well as intangible resources alone cannot provide the rivalry with competitors

for the organization. Tangible resources form an essential basis, which is then used for further

work at the level of intangible resources, creating an assumption for making the right capabilities

needed for building competitiveness. Businesses in order to increase their value gradually move

away from an exclusive focus on the management of physical assets and shift their attention to

manage their intangible assets with important contributions to economical and strategic effects on

the company.


According to Guthrie, in a knowledge-based economy, the source of companies’

economic value no longer depends on the production of material goods but on the creation and

manipulation of intellectual capital (Guthrie, 2004). In terms of resources and their relationship to

the development of skills, it can be distinguished between replicable and specific abilities (as in

figure 2).

Figure 2. Division of abilities into replicable and specific

While replicable abilities are such that can be purchased or reproduced by competitors

(and therefore they cannot be a source of competitive advantage), specific skills are the basic

prerequisite for the formation of long-term competitive advantages, since they join the specifics

of organizational resources with strategically orientated management of these resources. Even

specific abilities by themselves cannot ensure competitiveness of the organization; an

involvement of reproducible capabilities is desired. The aim of the organization should be to

build and own the adequate combination of replicable and specific abilities to achieve the correct

strategic synergies. The relationship between resources and abilities is shown in picture 3.

Figure 3. Relationship between company resources and abilities

2. Basics of the Core Competence concept


As early as in 1990, the authors C. K. Prahald and G. Hamel in their article “The Core

Competence of the Corporation” developed the concept of Core Competencies (key

competencies). They have conceived the concept through collective learning and the coordination

of skills and abilities, which run behind the production system of companies. According to them,

these key capabilities - core competencies are the main by source of competitive advantage and

they allow the organizations to create a new level of products and services. The beginning in

identifying key competencies lies in understanding the basic skills (or capabilities) of the

organization. It can begin by analyzing the functional areas, respectively by analyzing the value

chain. It is needed to realize that key capabilities do not make them the importance or urgency in

short-term. Key competences are only those skills that meet these following criteria: (Ireland &

Hoskisson & Hitt, 2009).

- Valuable: They contribute to value creation for customers by exploiting new opportunities

or neutralizing threats.

- Rare: They are held by few if any competitors.

- Difficult to imitate: They are difficult to re-create because intangible resources or their

specific contribution to the capability cannot be easily identified.

- Nonsusbstitutable: No resource/capabilities exist that can complete the tasks and provide

same value to customers.

Put it simply, if the organization has abilities, which can be used to create something for

the customer value and which other organizations do not have and at the same time which are

difficult to imitate and are unable to substitute, then it can be said that the organization has key

competences that will ensure its sustainable competitive advantage.

Reckless cost-cutting that has long been widespread in many companies in Slovakia, can

often destroy the opportunity and the ability to build core competences. Also too much

decentralization and business management at the level of business units complicates the situation,

since business units sometimes rely too much on other business units in building competitiveness,

and knowledge is fragmented in the organization while it is difficult to integrate it for the purpose

of innovation and change.

Core competence changes view on strategy development, with priority concentrating

insight into the company. To achieve long-term success, it is better to find the source of its

competitiveness within the company, because the only stable certainty in a constantly changing

environment is the internal capacity stemming from a desire to be successful in the future. It is

important to find that for which it is possible to build such a success and build (Papula, Papulová

2013).

3. Building sustainable competitive advantage through the use of the concept of core

competence

Business strategy is all about competitive advantage. In general, strategy is to do with

long-term prosperity. It is concerned with long-term asset growth, not short-term profit. Thus

businesses need strategy in order to ensure that resources are allocated in the most effective way.

This is particularly important when it comes to major resource allocation decisions. Real

competitive advantage implies companies are able to satisfy customer needs more effectively

than their competitors. (Huľvej, 2010) It is achieved if and when real value is added for

customers. A business must add value if it is to be successful (Papulová, Papulová, 2006).

Companies need to avoid thinking that the present way of doing things is the best way. They

cannot be satisfied with the current situation for a long time. Without the determination to try


something new, all the knowledge is useless and current knowledge will eventually deteriorate

(Fekete, 2011).

Length of the validity of competitive strategies and competitive advantages are the main

point of strategic management. The use of analytical methods should actually cause strengthening

of sustainability of formulated and implemented strategies. The focus should be given not only on

maintaining or improving the market position of a company, but also on the economic efficiency

and on return of investments put into processes of building the competitive advantage.

As a sustainable competitive advantage is considered such advantage, which allows long-

term (permanent) holding or improving the competitive position in the market. It is not

considered automatic long-term advantages over competitors. This is the initial stage, which can

be constantly and flexible developed and improved by the organization thanks to its built

abilities. This enables the company to keep the “safe distance” ahead of the competition. We have

returned again to the company’s’ resources and abilities.

According to the resource-based view on the organization, the sustainable competitive

advantage is being achieved by continuous development of existing and by creating of new

company’s’ resources and capabilities in response to quickly changing market conditions. The

main sources of a company, which have been developed in terms of today’s economy, are

intangible resources (also referred to as the intellectual capital of the company).

During recent years, intellectual capital has been a subject of great interest of many

researches in many scientific areas including management. In managerial literature we can find

many references and definitions of intellectual capital. Many are strictly limited to a specific area

of organizational activity, do not describe it as a whole, thus for whole organization level of

detachment. Intellectual capital, defined as any knowledge convertible into value (Edvinsson,

1997), brings the right schema for presenting qualities and potentials for business partners and

other stakeholders. The concept of intellectual capital provides a comprehensive insight into the

different areas that are essential for the organization. It allows organizations to monitor the

interactions between different activities and gives impetus to the skilled management of all

critical resources of the organization. It shows the system linking to various elements and

highlights the importance of a systematic approach to intangible resources. This means that the

temporary emphasis on an element and its development can stimulate the development of the

whole system. Management of intellectual capital is then focused on a comprehensive assessment

of the organization's approach to identify the components of intellectual capital, its rigorous

measurement via so called intellectual capital indicators, continuous monitoring of developments

and changes of its individual components, benchmarking the key factors affecting the business

segment and planning to ensure the necessary resources and their capacity for building

sustainable competitive advantage.

4. Conclusions

The key to building a sustainable competitive advantage is in constantly monitoring and

influencing the value chain. That company, which not only has a better performance than its

competitors, but which also creates the correct value for the customer, brings competitive

advantage.

In fact, all organizations have certain skills and capabilities that enable them to compete.

There are after all a prerequisite for their very existence in a competitive environment. For

example, to be able to compete in the automotive industry, organizations must have knowledge of

the design and manufacturing of engines and chassis. Without this knowledge, businesses could

not compete in this sector, regardless of their other sources. It must be distinguish between basic


capabilities and the core competences. Basic capabilities are those that are considered as standard

and do not achieve a competitive advantage (Henry, 2007).

The concept of Core competencies is based on the estimated effort of the company to

maximize value-added products and the related decisions about specialization and "division of

labor" in the whole chain of value creation. The organization focuses on the area in which it

achieves uniqueness (in quality, performance, diversity, etc.), and which holds resources for

creating sustainable competitive advantage. In other areas, there is a scope for outsourcing or

partnerships. Important from this point of view is to "own a competitive advantage", what means

not to transfer it to an external partner (at the level of resources, processes or capabilities). The

relationship between abilities and core competencies is drafted in figure 4.

Figure 4. Relationship between abilities and core competencies

Brief biographies of the authors

Ján Papula is an associate professor at the Comenius University in Bratislava, Faculty of

Management, Department of Strategy and Entrepreneurship. His research activities are focused

on the topics of strategic management development, particularly in relation to resource-oriented

approach and strategies to build sustainable competitiveness. He currently works on the research

project VEGA 1/0920/11 called "Intellectual capital management as part of the strategic

management of the company's value" with the duration of the project: January 2011 - December

2013.

Jana Volná is an internal doctoral candidate at Comenius University in Bratislava, Faculty

of Management, Department of Strategy and Entrepreneurship. Her main research subject covers

intellectual capital and its management primarily at the level of SMEs. She currently works on

the research project VEGA 1/0920/11 called "Intellectual capital management as part of the

strategic management of the company's value" with the duration of the project: January 2011 -

December 2013.


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