Developing competitive advantage

What are your firm's core competencies? What does your company do better than any other company?

Many organizations will readily answer this question with statements such as: "We make the best cars." "We provide the best financial advice." "We're the number one supplier of luxury homes." "We have the largest selection of furniture in the city." But many of these same companies may fail to capitalize on their core competencies. Let me explain.

The problem with being really good in one (or a few) areas is that sometimes being the best propels companies to expand into areas where they are unable to maintain their competitive advantage. In other words, they forsake their core competencies.

Consider, for example, Target. This company failed to capitalize on its core competencies of "low cost and high volume sales" in Canada. Its demise may be the result of poor due diligence or perhaps it cheekily assumed that Canadians would embrace its arrival despite its stores being under-par with those in the U.S.A. Either way, it lost billions of dollars.

According to the Business Insider, Target blamed its colossal failure on four key factors: its large-scale opening, supply chain problems, pricing and product assortment issues, and a lack of online presence. However, it's more than that: Target failed to provide Canadians with the same low costs experienced in the U.S.A. And, for this reason, it fell short on high volume sales.

The lesson from Target's demise and other organizations that experience similar fates is this: Pushing into areas where you are unable to sustain your competitive advantage is folly. The litmus test must be that your core competencies are difficult for competitors to copy or purchase.

To develop core competencies, Bain & Company suggest that the organization should do the following:

Isolate its key abilities and hone them into organization-wide strengths
Compare itself with other companies with the same skills to ensure that it is developing unique capabilities
Develop an understanding of what capabilities its customers truly value and invest accordingly to develop and sustain valued strengths
Create an organizational road map that sets goals for competence building
Pursue alliances, acquisitions and licensing arrangements that will further build the organization's strengths in core areas
Encourage communication and involvement in core capability development across the organization
Preserve core strengths even as management expands and redefines the business
Outsource or divest non-core capabilities to free up resources that can be used to deepen core capabilities

Core competencies are the collective learning in the organization and they do not diminish with use. Ignoring them is at the organization's peril.

Strengthening core competencies

An organization's core competencies are useful in a variety of situations. For example: helping employees understand management's priorities, deciding where to allocate resources, making decisions in outsourcing, divesting or partnering, and enhancing corporate image.

It behooves the organization to continuously hone its identity - an identity built on its strengths. In doing so, confidence of investors and customers increases in the organization. And so do profits.

The Harvard Business Review identified 11 capabilities common to all well-managed companies. They also identified steps on how to audit these capabilities to ensure future success of the company.

In brief, they recommend the following steps for capability audits:

Select a business unit for audit
Create the content of the audit (questionnaire based on the 11 capabilities and/or other capabilities relevant to your organization)
Gather data from multiple groups on current and desired capabilities
Synthesize the data to identify the most critical capabilities requiring managerial attention
Develop an action plan with clear steps to take and measures to monitor; and assign a team to the job of delivering on the critical capabilities

The keys to ensuring your action plan gains traction include:

Maintaining focus and tackling the few capabilities that will give a higher return on your efforts (i.e., 80/20 Rule)
Recognizing that there may be overlap in the capabilities (i.e., improving one may also improve another area)
Using benchmarks (i.e., how does your organization compare to world-class performance in your target capabilities?)
Creating a cycle of continuous assessment/audit of your company's capabilities
Comparing capability perceptions (i.e., not all employees or customers may agree with the executives' perception about organizational capabilities)
Matching capability with delivery (i.e., leaders need to "walk the talk")
Avoid measuring what is easy. Instead, measure what is in greatest need of repair
Don't confuse capabilities with activities - for example, instead of asking what percent of leaders receive 40 hours of training, ask what capabilities the leadership training creates.

While a capabilities audit allows companies to assess their strengths and weaknesses, it also defines organizational strategy. But even more important, the audit helps customers, investors, and employees recognize the intangible value of an organization. And that is an organization's true value at its core.

Developing competitive advantage, strengthening core competencies