Core Competency

A core competency 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 companys 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 to exploit the resources and capabilities that comprise
its core competencies.

Resource vs Capability

A companys resources are the operational inputs that allow it to perform its business
activities.

A companys capabilities are the activities and functions it performs to utilize its resources
in an integrative fashion. Capabilities are operational activities that the company has
mastered. They are inimitable or difficult for competitors to figure out and replicate.

Core Competency Criterion

A resource or capability is a core competency if it is valuable, rare, costly to imitate,

and non-substitutable.

A resource or capability is valuable when it allows the company to capitalize on

opportunities or defend against external threats.

A resource or capability is rare when few or no other industry competitors possess

the resource or expert capability.

A resource or capability is costly to imitate when competitors must incur heavy costs
to replicate them or they are altogether inimitable.

A resource or capability is non-substitutable when no other resource or capability can

be utilized as an equivalent.

Example: For instance, the core competencies of Walt Disney Corporation lie in its ability to
animate and design its shows, the art of storytelling that has been perfected by the
company, and the operation of its theme parks that is done in an efficient and productive
manner. Hence, Walt Disney Corporation would be well advised to configure its strategy
around these core competencies and build a business model that complements these
competencies.
 Strategic Clock

Bowmans Strategic Clock is a model that explores the options for strategic positioning i.e.
how a product should be positioned to give it the most competitive position in the market.

The purpose of the clock is to illustrate that a business will have a variety of options of how
to position a product based on two dimensions price and perceived value.

Low Price and Low Value Added (Position 1)

Not a very competitive position for a business. The product is not differentiated and the
customer perceives very little value, despite a low price. This is a bargain basement
strategy. The only way to remain competitive is to be as cheap as chips and hope that no-
one else is able to undercut you.

Low Price (Position 2)

Businesses positioning themselves here look to be the low-cost leaders in a market. A

strategy of cost minimisation is required for this to be successful, often associated with
economies of scale. Profit margins on each product are low, but the high volume of output
can still generate high overall profits. Competition amongst businesses with a low price
position is usually intense often involving price wars.
Hybrid (Position 3)

As the name implies, a hybrid position involves some element of low price (relative to the
competition), but also some product differentiation. The aim is to persuade consumers that
there is good added value through the combination of a reasonable price and acceptable
product differentiation. This can be a very effective positioning strategy, particularly if the
added value involved is offered consistently.

Differentiation (Position 4)

The aim of a differentiation strategy is to offer customers the highest level of perceived
added value. Branding plays a key role in this strategy, as does product quality. A high
quality product with strong brand awareness and loyalty is perhaps best-placed to achieve
the relatively prices and added-value that a differentiation strategy requires.

Focused Differentiation (Position 5)

This strategy aims to position a product at the highest price levels, where customers buy the
product because of the high perceived value. This the positioning strategy adopted by luxury
brands, who aim to achieve premium prices by highly targeted segmentation, promotion and
distribution. Done successfully, this strategy can lead to very high profit margins, but only the
very best products and brands can sustain the strategy in the long-term.

Risky High Margins (Position 6)

This is a high risk positioning strategy that you might argue is doomed to failure eventually.
With this strategy, the business sets high prices without offering anything extra in terms of
perceived value. If customers continue to buy at these high prices, the profits can be high.
But, eventually customers will find a better-positioned product that offers more perceived
value for the same or lower price. Other than in the short-term, this is an uncompetitive
strategy. Being able to sell for a price premium without justification is tough in any normal
competitive market.

Monopoly Pricing (Position 7)

Where there is a monopoly in a market, there is only one business offering the product. The
monopolist doesnt need to be too concerned about what value the customer perceives in
the product the only choice they have is to buy or not. There are no alternatives. In theory
the monopolist can set whatever price they wish. Fortunately, in most countries, monopolies
are tightly regulated to prevent them from setting prices as they wish.

Loss of Market Share (Position 8)

This position is a recipe for disaster in any competitive market. Setting a middle-range or
standard price for a product with low perceived value is unlikely to win over many consumers
who will have much better options.
 VRIO Framework

It is a tool used to analyze firms internal resources and capabilities to find out if they can be
a source of sustained competitive advantage.

A firms resources must possess four attributes in order to become a source of

sustained competitive advantage. These are:

Valuable: The first question of the framework asks if a resource adds value by enabling
a firm to exploit opportunities or defend against threats. If the answer is yes, then a
resource is considered valuable. Resources are also valuable if they help organizations
to increase the perceived customer value. This is done by increasing differentiation
or/and decreasing the price of the product. The resources that cannot meet this
condition, lead to competitive disadvantage. It is important to continually review the value
of the resources because constantly changing internal or external conditions can make
them less valuable or useless at all.

Rare: Resources that can only be acquired by one or very few companies are
considered rare. Rare and valuable resources grant temporary competitive advantage.
On the other hand, the situation when more than few companies have the same
resource or uses the capability in the similar way, leads to competitive parity. This is
because firms can use identical resources to implement the same strategies and no
organization can achieve superior performance. Even though competitive parity is not
the desired position, a firm should not neglect the resources that are valuable but
common. Losing valuable resources and capabilities would hurt an organization because
they are essential for staying in the market.

Costly to Imitate: A resource is costly to imitate if other organizations that doesnt have
it cant imitate, buy or substitute it at a reasonable price. Imitation can occur in two ways:
by directly imitating (duplicating) the resource or providing the comparable
product/service (substituting). A firm that has valuable, rare and costly to imitate
resources can (but not necessarily will) achieve sustained competitive advantage.
Barney has identified three reasons why resources can be hard to imitate:

Historical conditions: Resources that were developed due to historical events or

over a long period usually are costly to imitate.

Causal ambiguity: Companies cant identify the particular resources that are the
cause of competitive advantage.

Social Complexity: The resources and capabilities that are based on companys
culture or interpersonal relationships.

Organized to Capture Value: The resources itself do not confer any advantage for a
company if its not organized to capture the value from them. A firm must organize its
management systems, processes, policies, organizational structure and culture to be
able to fully realize the potential of its valuable, rare and costly to imitate resources and
capabilities. Only then the companies can achieve sustained competitive advantage.
 Steps in VRIO Analysis

1. Identify valuable, rare and costly to imitate resources

There are two types of resources: tangible and intangible. Tangible assets are physical
things like land, buildings and machinery. Companies can easily by them in the market so
tangible assets are rarely the source of competitive advantage. On the other hand, intangible
assets, such as brand reputation, trademarks, intellectual property, unique training system or
unique way of performing tasks, cant be acquired so easily and offer the benefits of
sustained competitive advantage. Therefore, to find valuable, rare and costly to imitate
resources, you should first look at companys intangible assets.

Finding valuable resources:

An easy way to identify such resources is to look at the value chain and SWOT analyses.
Value chain analysis identifies the most valuable activities, which are the source of cost or
differentiation advantage. By looking into the analysis, you can easily find the valuable
resources or capabilities. In addition, SWOT analysis recognizes the strengths of the
company that are used to exploit opportunities or defend against threats (which is exactly
what a valuable resource does). If you still struggle finding valuable resources, you can
identify them by asking the following questions:

Which activities lower the cost of production without decreasing perceived customer value?

Which activities increase product or service differentiation and perceived customer value?

Have your company won an award or been recognized as the best in something? (most
innovative, best employer, highest customer retention or best exporter)

Do you have an access to scarce raw materials or hard to get in distribution channels?

Do you have special relationship with your suppliers? Such as tightly integrated order and
distribution system powered by unique software?

Do you have employees with unique skills and capabilities?

Do you have brand reputation for quality, innovation, customer service?

Do you do perform any tasks better than your competitors do? (Benchmarking is useful here)

Does your company hold any other strengths compared to rivals?

Finding rare resources:

How many other companies own a resource or can perform capability in the same way in
your industry?

Can a resource be easily bought in the market by rivals?

Can competitors obtain the resource or capability in the near future?

Finding costly to imitate resources:

Do other companies can easily duplicate a resource?

Can competitors easily develop a substitute resource?

Do patents protect it?

Is a resource or capability socially complex?

Is it hard to identify the particular processes, tasks, or other factors that form the resource?

2. Find out if your company is organized to exploit these resources

Following questions might be helpful:

Does your company has an effective strategic management process in organization?

Are there effective motivation and reward systems in place?

Does your companys culture reward innovative ideas?

Is an organizational structure designed to use a resource?

Are there excellent management and control systems?

3. Protect the resources

When you identified a resource or capability that has all 4 VRIO attributes, you should
protect it using all possible means. After all, it is the source of your sustained competitive
advantage. The first thing you should do is to make the top management aware of such
resource and suggest how it can be used to lower the costs or to differentiate the products
and services. Then you should think of ideas how to make it more costly to imitate. If other
companies wont be able to imitate a resource at reasonable prices, it will stay rare for much
longer.

4. Constantly review VRIO resources and capabilities

The value of the resources changes over time and they must be reviewed constantly to find
out if they are as valuable as they once were. Competitors are also keen to achieve the
same competitive advantages so theyll be keen to replicate the resources, which means
that they will no longer be rare. Often, new VRIO resources or capabilities are developed
inside an organization and by identifying them you can protect you sources of competitive
advantage more easily.
 VRIO example
Googles capability evaluated using VRIO framework

Googles ability to manage their people effectively is a source of both differentiation and cost
advantages. Unlike other companies, which rely on trust and relationship in people
management, Google uses data about its employees to manage them. This capability allows
making correct (data based) decisions about which people to hire and the best way to use
their skills. As a result, Google is able to hire innovative employees that are also very
productive ($1 million in revenue per employee). Besides being valuable, it is also a rare
capability because no other company uses data based employee management so
extensively. Is it costly to imitate? It is costly to imitate, at least, in the near future. First,
companies should build the highly sophisticated software, which is both costly and hard to
do. Second, HR managers should be newly trained to make data based decisions and forget
their old management methods. Is Google organized to capture value from this capability?
Certainly, it has trained HR managers that know how to use the data and manage people
accordingly. It also has the needed IT skills to collect and manage the data about its
employees.