Revised final essay, 15th December 2005
A business can only become a sustainably prosperous enterprise if it has a clear understanding of what it can do and can not do. Every budding business needs to have some kind of feature or skill that justifies its existence by setting the business apart from the competition. This could mean being able to produce something others can not, being able to do it more efficiently, increasing the product's perceived benefits, or providing goods and services for a specific market niche whose needs are not covered yet.3 Concentrating on what a business is good at doing allows optimizing resource usage and maximizing profit.
To make the topic more accessible, some examples will be in order. Nokia Corporation used €3.7 billion in research and development over 2004 - a huge amount. Why? Their core competency, and their whole business, lies in developing mobile device electronics and software solutions for the things, and they intend to remain on top of the competition by retaining a technological skill advantage. If they did not realize this, the highly competitive industry would soon come up with innovations to obsolete Nokia's products. Their competency keeps them alive and at the top. To take an example closer to us, Wisconsin International University (Ukraine) possesses what is termed location advantage. They are pretty much the only business school in the country who manage to drag foreign students through the bureaucracy to do fully English-taught business degrees. If someone who knows English but is completely illiterate in Ukrainian and Russian wants to study business in Ukraine, they probably have one choice. Were there other universities offering the same basic service, WIUU would quickly sink under the waves, unless the faculty refocused the university's operations into providing better value than the competitors.
The theoretic concept of a core competency is relatively fresh, but nonetheless explains well why some companies have succeeded and others failed. In a sense, it is a new way to see an old issue. To put it in business terms, core competency means "firm skills that competitors can not easily match or imitate".1 Having such a firm-specific advantage is crucial even at national level. Its importance no doubt soars when an enterprise goes multinational and the whole world becomes its playground. Because it is a big wide world, you can be sure that whatever you can do, someone else can do better. Because it is also a world of competitors, a business can be sure that if a competing business can offer the same product to the same people with better quality and lower price, the weaker business will be terminated. This is common sense and brutal, but very true to life. An MNE must be able to be the best, in some way.
When considering doing business abroad, the firm needs to consider its core competency. It is assumed that firms have to pay "costs of foreigness" when dealing in foreign countries, and therefore they must have some thing that makes operations particularly profitable. As noted during classes, returns on investment surpassing 20% are desirable. There is a famous "OLI paradigm" developed by John Dunning, which mixes three foreign direct investment theories to explain why companies will move to do business in a foreign country. Core competency is a key explanation in two of those theories. First, ownership advantage refers to a core competency that allows the business to overcome the costs of operating in a foreign country. Such competencies could consist of a brand name, know-how or economies of scale. If the benefits gained from these are greater than the costs of operating in the new location, doing the move will be sensible and hopefully profitable. Second, location advantage refers to taking a core competency to an environment where local factors can be used to create synergy.2 A good example is how four of the nine Nokia's mobile phone manufacturing plants are located in China with its cheap land and labor instead of, say, in Finland with comparatively expensive land and labor, not to mention stricter environmental standards.
Competition, competency, more competition. But wait, there is also room for cooperation. In fact, working together with other businesses is a vital part of exploiting core competency. If it seems that the enterprise's core competency will not provide sufficient returns from some activities, the activities had best be abstained from. It could be said that a core competency limits business, but then it must also be noted that no single company can be competent in everything. Instead of wasting resources on business ventures other enterprises could perform more efficiently, acknowledging and developing core competency allows a firm to specialize and maximize profitability as well as minimize the total costs to society. In essence, one company can specialize in development, one in production, another in packaging, yet another in retailing. By allowing everyone to do what they do best, everyone benefits! Due to the sheer number of businesses in the global market, multinational enterprises have to pay special attention to optimizing their operations by using other business' specialties and exploiting their own.
Finally, to turn everything upside down, core competency is not necessarily everything. Because today's markets twist and turn, business management must adapt. With some luck, market opportunities crop up and can be exploited even if they are outside the sphere of core competency. Remember that Nokia used to only produce really good car tires and rubber boots until they stepped outside their core competency, at the right time and in the right way.
To summarize: Core competency is a critical factor for any multinational enterprise. Being aware of it, developing it and exploiting it are drivers of modern businesses. Sensible company management will realize that and limit business operations strategically, to guarantee optimal performance and returns on investment.