No Comments Written by Robert on July 1, 2008 – 10:40 pm

Now that you’ve thought about your firm’s strengths and weaknesses, you can turn to analyzing your firm’s core competency. The core competency is the basis for determining what business you are in and in what industry you will compete. Core competencies are enabled by the underlying strengths of the organization. A core competency must:

• Define and provide a perceived customer benefit.

• Be the reason or common set of abilities the company can provide the customer benefit better than the competition.

• Be truly differentiating and difficult to copy.

Core competencies take a lot of work to figure out. Think of core competencies as the roots of a tree. The roots provide the foundation for the tree and the system of sustaining the tree through nutrient delivery.

That’s what core competencies do for businesses. Core competencies provide boundaries within which hiring of talent is judged, development of products is measured, funding of marketing programs is determined, and operational business strategies are developed.

However, while the branches are visible, the roots are not. In a business, the visible components are things like the products, the offices, the people, and the advertising campaigns and taglines. But the core competencies stay in the background, providing the support for all the visible aspects of a business. Think about the following businesses:

• Anheuser-Busch: The maker of Budweiser, the king of beers. What’s Anheuser-Busch’s core competency? Is it the taste of its beer, the power of the advertising, the ability to introduce new products, or it’s sheer size? Ask anyone in the beer industry who competes against the giant and they’d tell you very quicklyit’s their distribution system. The beer producer has a system of experienced distributors, who solely distribute the Budweiser product to retailers and taverns. The outcome Budweiser gets total attention and support and doesn’t have to “fight” to get the attention of their distributors.

As a result, Budweiser can introduce new products, get shelf space with retailers, and execute marketing programs far more efficiently and effectively. Its competition isn’t so lucky. They often split distributors, with the result that powerful distributors sell multiple brands. The King of Beers is the king, not because of its product, but because of the unique and powerful distribution system it has created.

• Black & Decker: Black & Decker makes literally hundreds of products with its name on them. However, the firm defines its core competency as the ability to make a better motor. As a result, while the most visible aspect of Black & Decker is the many power tools with the brand name, the firm is actually much more prevalent than you might think.

Yes, they are dominant in power tools, such as sanders and drills. But they also make the major component of household cleaning tools, such as the Dustbuster and kitchen appliances, and the motors in food processors. The company’s core competency is motors with the end product simply being the housing for a great motor.

• Procter & Gamble: At business school, students study many cases involving the marketing giant Procter & Gamble. However, marketing is not their core competencythat’s much too broad a way to describe a core competency. It’s two aspects of marketing that make up Procter & Gamble’s core competency.

Over the years, the packaged goods giant has been the best in the world at identifying consumer insights through marketing research and talking and listening to consumers. This, coupled with a historically superior brand portfolio management capability, has fueled the company’s growth and profitability.

The company pioneered brand management and then, during the early 1990s, recognized that individual products could be grouped under target market managers. This resulted in efficiencies and great effectiveness of both insights and marketing expenditures. The company’s ability to manage a portfolio of products has kept it at the forefront through developing products based on customer insights that have unique reasons for being and that support and complement the existing Procter & Gamble product lines.

We started this chapter by stating that Xerox is in the document business, American Girl is in the education business, and Starbucks is in the business of giving customers a little reward in a pleasant third location. Anheuser Busch is really in the distribution business, Black & Decker is in the motor business, and Procter & Gamble is in the consumer insight and product portfolio management business. Determining your business’s core competency is the direct link to answering the questionwhat business are you in?

It’s the combinations of strengths and not any one individual strength that provide the insights into your core competency, which in turn provides the insight into what business you are in. Perhaps the best way to demonstrate this is to use an example we worked on. The client was AAA, the massive automobile club. AAA provides roadside assistance to over 20 million customers in the United States alone. But it also provides a range of financial services ranging from loans to credit cards.

The membership organization is a powerful provider of insurance, with a host of products that range from car insurance to life insurance. Different clubs specialized in different aspects of the product offerings. California had a strong travel orientation.

The New York club was known for roadside assistance. Michigan had a strong insurance orientation. None of them combined the products to form a single guiding direction. When AAA analyzed their strengths and weaknesses, a number of clusters started to emerge as their core competencies:

• Target market behavior was changing to shorter tripsa strength of AAA.

• In a complex business, AAA had superior management of the tow truck network in comparison to competitive offerings.

• There was a shift in roadside assistance toward inclusion of the service with the purchase of new cars. So another competitor was on the horizon who provided customers with this service through the purchase of a car, rather than in a secondary transaction after the purchase of a car. Therefore, AAA would not be able to dominate roadside assistance as it had in the past.

• AAA had a strong land package, air package, cruise package, and road travel capability. Furthermore, the organization had unique travel products with ties to other travel destinations, such as the Disney theme parks. Finally, it was known for directional support via their Triptiks, and for a full spectrum of travel information.

• AAA could bundle products to make superior travel packages (e.g., travel insurance, trip insurance, trip packages, and Triptik information) to create added value.

• AAA had an established branch systembrick and mortar and Internet presencemaking them a multichannel travel retailer. In addition, there was a consistency in the way products and services were delivered.

• AAA had strong brand recognition and trust among consumers. The final list was exhaustive, with pages of strengths and weaknesses that were captured from both top management, mid-level management, and customers. When analyzing the strengths and weaknesses, it started to become clear that AAA was in the business of being a member travel organization.

AAA was not an individual seller of roadside assistance, or insurance, or travel products but an organization that could bundle together travel for its members. To compete against the emerging competition in the different business categories in which AAA competed, the key was to view the organization as a unified entity against unbundled competitors.

A member travel organization would build on the AAA strengths, provide value-added products versus a price orientation, and take advantage of the uniqueness of the AAA organization.

Make sure the core competency truly delivers a customer benefit and is difficult for competitors to imitate. Once we looked at the potential core competency that would answer the question as to the business of AAA, we went through a check to see if we were correct in our assumptions.

We listed all the things that a business focusing on being a member travel organization would need to succeed. We then went back to the list of strengths and weaknesses and checked to see what was needed.