In The Core Competence of the Corporation (1990), Gary Hamel and C. K. Prahalad proposes a fundamental revision of strategic thinking about corporations. In essence they argue that the dominant paradigm of the diversified corporation suffers from a structural shortcoming, which is the view that organizations should be understood as portfolios of strategic business units (SBUs). Within this perspective, strategy is primarily formulated in terms of product-market combinations (PMC’s), competitive positioning and capital allocation.
Such an approach is inadequate in a context characterized by accelerating technological development, blurring of industry boundaries and the emergence of new markets that do not evolve linearly from existing structures. In such a context, competitive advantage can no longer be understood as a function of existing products or market share, according to the authors. Instead, the central question shifts to an organization’s ability to create new products and enter new markets. In line with this reasoning, the authors argue that the focus should not be on an organization’s position in existing markets, but rather on its underlying ability to create value. Hamel and Prahalad refer to this capability as core competence.
The inadequacy of SBU thinking
The authors explicitly criticize the traditional SBU model. Within such a structure, organizations are divided into relatively autonomous units, each responsible for its own product-market combination and financial performance. Under the SBU approach, competition is viewed as a contest between products. Strategy focuses on optimizing price-performance ratios, increasing market share, and improving cost structures. Capital is allocated among business units based on their relative attractiveness. Hamel and Prahalad demonstrate that this approach has three structural limitations.
First, it leads to the fragmentation of organizational knowledge. Skills and technologies become confined within individual business units, making it difficult to combine them across the organization. As a result, the organization’s full potential is not realized.
Second, it encourages a short-term orientation. Investments are evaluated according to their contribution to the performance of individual units, causing activities aimed at developing underlying capabilities to receive insufficient attention.
Third, it obscures the true source of competitive advantage. By focusing on products and markets, organizations overlook the capabilities that make those products possible.
Hamel and Prahalad argue that the problem does not primarily lie in external circumstances, but in the way organizations conceptualize and organize themselves.
Redefining competitive advantage
Building upon the criticism outlined above, Hamel and Prahalad propose an alternative perspective on competition. They distinguish between two levels of competition.
At the visible level, companies compete through products. These products are evaluated based on price and performance and constitute the direct object of market interaction. However, globalization increasingly leads to convergence in costs and quality, making this level progressively less distinctive.
At a deeper level, competition is determined by an organization’s ability to generate new products. This ability is based on the development of underlying capabilities.
In the long term, competitiveness stems from the ability to build core competences that generate new products. This represents the fundamental shift in their thinking. Competitive advantage is no longer understood as a characteristic of products, but as a characteristic of the organization itself.
The corporation as a portfolio of competences
Based on this shift in perspective, Hamel and Prahalad redefine the corporation. They argue that a corporation should be viewed as a portfolio of competences rather than as a portfolio of business units. This implies that products are merely temporary manifestations of underlying capabilities. The authors illustrate this concept through the metaphor of a tree:
- The roots represent the core competences;
- The trunk and branches represent the core products;
- The fruit represents the end products.
This metaphor demonstrates that the visible level depends on an underlying structure. Organizations that focus exclusively on products fail to recognize the true source of competitive strength.
The nature of core competences
The definition of core competence forms the foundation of the theory and is presented by the authors as follows:
“The collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
This definition indicates that a core competence is a complex organizational capability consisting of three elements. These three elements are briefly discussed below.
1. Collective learning
Core competences emerge through collective learning. This means that they arise from interaction among different parts of the organization. They do not consist of individual knowledge, but of a shared capability that develops through collaboration and experience. This learning is embedded in routines, processes, and relationships, making it difficult to articulate explicitly.
2. Coordination of skills
The second element is the coordination of diverse skills. Organizations possess a variety of specialized functions, but these only become a competence when they are effectively integrated. Competitive advantage lies in the way these skills are combined rather than in their individual existence.
3. Integration of technologies
The third element concerns the integration of technologies. Innovation results from combining different technological domains. Examples provided by the authors include Sony’s expertise in miniaturization and Philips’ capabilities in optical media. These examples illustrate that core competences are expressed through the ability to integrate technologies into new applications.
From competences to products and markets
Building on the definition of core competence presented above, Hamel and Prahalad clarify how these capabilities are related to the products with which organizations compete in the marketplace. They demonstrate that the strength of an organization cannot be understood by examining end products alone.
Underlying competences are translated into components and technologies that are applied across multiple end products. These components, referred to by Hamel and Prahalad as core products, form the link between the organization’s skills and technologies and the products ultimately offered to customers. End products therefore represent the visible outcome of an underlying integration of skills, technologies, and components.
Competition beyond the end product
Hamel and Prahalad argue that competition is not confined to end products. Although end products represent the most visible level of competition, the true source of competitive advantage lies deeper within the organization.
The authors contend that organizations can establish strategic positions in components and technologies that influence multiple products. These positions largely determine which organizations are capable of developing new products and which become dependent on others. Companies that focus exclusively on end products risk relinquishing control over critical components. As a result, they not only lose control over their current products but also over their future development capabilities.
The development of competences
Hamel and Prahalad emphasize that core competences do not emerge automatically but are the result of a long-term process of development. This process involves developing skills, combining technologies, and organizing collaboration throughout the organization. It therefore requires consistent investment and a clear long-term strategic direction. In this context, the authors argue that competence development does not take place within individual business units but emerges from the integration of activities across the organization.
The loss of competences
In addition to discussing the development of competences, Hamel and Prahalad also address the risk that competences may be lost. This occurs when organizations make decisions that undermine their underlying capabilities. Examples include outsourcing activities or withdrawing from markets without distinguishing between products and the knowledge required to create them. In such situations, organizations lose not only a specific activity but also the capability to develop comparable products in the future. According to Hamel and Prahalad, such losses are difficult to reverse because competences are built over an extended period.
Competition at multiple levels
The preceding discussion leads to the conclusion that competition takes place simultaneously at multiple levels. At the surface level, organizations compete through end products. Beneath this, however, competition takes place over components and technologies, and ultimately over the underlying capabilities of the organization. It is these capabilities that determine which organizations are able to develop new products and adapt successfully to changing circumstances.
REFERENCES
Hamel, G., & Prahalad, C. K. (1990). The Core Competence of the Corporation. Harvard Business Review, 68(3), 79–91.
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