How to Identify Core Competencies for your Company (Part 1/3)
What parts of my value chain should I keep in-house and what parts should I out-source?
This is a common question any entrepreneur has asked themselves at some point. Identifying the core competencies within your value chain that differentiate your company will reveal your competitive advantages. After reading this article, you will understand what core competencies are, why they are important, and how they can be identified.
Businesses are Puzzles
Jigsaw puzzles are traditionally thought of as a solitary activity. However, reconstructing a puzzle with friends is uniquely interesting. Puzzles do not naturally seem like a team sport, but you can actually strategize who is responsible for what distinguishable section.
I recall settling in one evening with my family, a bottle of wine, and a medieval-themed puzzle. Being an entrepreneur, I am naturally averse to relaxing, so I began formulating a strategy:
I will construct the big, blue dragon,
mom, you find the starry sky,
bro, you find the impenetrable castle, and
sis, build out the knight in shining armor
My dad prefers to man the peanut gallery.
Organized correctly, this is a very efficient way to complete a puzzle. Even though I only focused on the big blue dragon, in the end, I became more adept at identifying those specific, jagged pieces of cardboard. As a family, and despite the wine, we completed the puzzle effectively.
Puzzles are like the value chain of a business. If you insist on doing the whole thing yourself, you will miss opportunities to optimize key capabilities that make your business special. These key capabilities are commonly referred to as core competencies.
What are Core Competencies?
Each company in a market is expected to have a certain set of competencies for it to exist. Every dry cleaner’s value chain must have a brand, take payments, and return your cleaned clothes on hangars decorated with a message that states: “We ❤️ our customers!”.
A core competency is a factor in your value chain that differentiates a business from its competitors. Your business may have multiple core competencies, but usually there is one that supersedes the others and defines your business in relation to the rest of the market. Core competencies should offer superior value to customers, be defensible, and have a narrow definition.
1 – Superior Value
Every core competency worth cultivating should offer superior, perceived value to your customers. When compared to your competitors, it must be an order of magnitude:
- cheaper (think Dell, Zara);
- higher quality (think Bosch, Weber);
- superior design (think Apple, Lego); or
- higher flexibility (think Netflix, Indochino).
Each of these companies has distinguished the core competency that has enabled them to offer superior value in their competitive category. “Cheaper” is an easy one to measure, since an order of magnitude better just means 10 times lower cost to the customer. However, you will need to get a little creative when quantifying the other attributes.
2 – Defensibility
Your core competency must also be difficult to copy; like the impenetrable castle, there must be a proverbial moat between your differentiator and your competitors equivalent competency. Common ways to establish this include:
- patents,
- equity,
- internal talent, or
- physical assets.
A startup operating in “stealth mode” will only afford itself limited time and protection before inevitably being vulnerable to the copycat competition.
3 – Narrow Definition
Before a world of iPhone games and 24 hour news cycles, it was simpler to concentrate on just a few things. The same distractions are leaking into our value chain development. To be effective, you must strive to define your core competencies as narrowly as possible.
Why Identify Core Competencies?
Identifying your core competencies is a mandatory precursor to building a truly scalable business. It is difficult to scale when you attempt to fulfill every aspect of your value chain in-house. In addition, identifying groundbreaking value propositions or unique opportunities to pivot can only happen after truly understanding what differentiates your business in the market.
How to Identify your Core Competencies?
Isolating the core competencies in your company’s value chain can be as intricate as separating the colorful rings in a game of Wonderful Waterfuls, but here are some useful strategies to start the process:
1 – Revisit your mission statement
Usually, when first writing a mission statement, you are identifying those key, superior value differentiators that you offer your customers. If your mission statement is well written, this is the first place to look for core competencies.
2 – Analyze all your competencies
Write down your entire value chain in great detail. Do any of these match all three of the criteria laid out in the previous section?
3 – Study your competition
Repeat the previous step for your competition. Do any of your competencies stand out as uniquely superior to your competitors’?
4 – Talk to your customers
Why do they visit your company as opposed to your competitors? Communicating with your customers can help unearth superior perceived value.
5 – Identify your unique capabilities
Sometimes core competencies are not even a substantial part of your value chain…yet. Is there a special, defensible asset you possess that is not being exploited? Think of ways you can leverage this in your value chain.
Final Thoughts
You may want to reflect your newly found core competencies in your mission statement. Signaling to your market what truly separates your company from its competition is an important part of differentiation.
As your business evolves, it is important to revisit what is truly a core competency and what is merely a distraction. Be sure to stick with optimizing a core competency to a point where you are comfortable with it before taking on another. For example, Amazon made sure to perfect their e-commerce and intelligent warehouses before entering the shipping market to compete with FedEx and UPS.
Identifying your core competencies is only the first step to building a truly scalable business. After you have clearly identified the competitive differentiators in your value chain, the next steps are to cultivate them in-house, while out-sourcing other competencies, and then exploit them to scale by finding further ways to leverage their advantages. I will discuss these in parts 2 & 3, respectively.
Go forth, and build your big, blue dragon!
