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Identifying and Developing Core Competencies in Small Businesses

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1 Identifying and Developing Core Competencies in Small Businesses
Brian Baldus Marriott School of Management Brigham Young University Brian Baldus is a business management student (entrepreneurship focus) at Brigham Young University’s Marriott School of Management. His interests include entrepreneurship, project management, and process improvement. With questions or comments, contact December 2006

2 Agenda Introduction Competition Core Competencies Meta competencies
Trends you know What you’ve learned Competition Core Competencies Meta competencies Sustained Competitive Advantage Too much of the literature about core competencies deals with the extreme ends of the spectrum, gigantic corporations with hundreds of millions of dollars in revenue, and the seemingly endless supply of self-help fad books targeted at individuals. Today’s presentation is an attempt to take the abstract, and frequently misunderstood concept of core competencies and simplify it so that the small businesses can benefit from the massive amounts of research done in this field. You as small business owners and managers will learn several new tools to help direct your company’s growth and future.

3 Business Trends You Know
1980’s Restructuring 1990’s Cultivation of culture 2000 and beyond Increased Turnover Decreasing Product Lifecycle Expansion of Globalization The business world in the last 30 years has undergone a radical transformation because of technology and globalization. Thomas Friedman, in his famous book The World is Flat, identified 10 “Flatteners” that in his opinion have led to a dramatic change in the modern business landscape. The things or products that made your company great last year might be outdated or outsourced next year. In this new economy firms must continually strive to innovate. It is therefore critical for businesses to establish a competitive structure to accommodate these rapid changes.

4 What You’ve Learned Past performance does not guarantee future performance Many small businesses fail to compete effectively So you’ve learned these two points. (generate a discussion based on the following points, undoubtedly there will be some people who hold to the “if it aint broke don’t fix it”, and some from the “I’m too busy keeping up to do anything else”, and perhaps some people looking for something better, but don’t know what to do). How do you plan on keeping your company competitive? Is having a great product or lots of market share good enough? Why? So your company isn’t some international Fortune 500 company, have things really changed for you in the last 20 years? How do you identify how competitive your company is?

5 Competition Competition is Three planes Market Share R&D Budget
Product Price/performance Three planes Core Competencies Core Products End Products Forget everything you learned about in Accounting 101 that taught you to evaluate competitors using ratios and the things that Finance 101 taught you about market share. Market share and ratio analysis focuses on the here and now, how well your current products selling. You could branch out your analysis to compare R&D budgets, but does finding out who spends the most really indicate the success of their future products? Again, decreasing product lifecycles and increased turnover places firms with this snapshot mentality dangerously susceptible to the turbulent business environment. C.K. Prahalad and Gary Hamel, in a revolutionary Harvard Business Review article, “The Core Competence of the Corporation”, identified three different planes of competition. The lowest plane being competing with end products, a market share mentality. The middle plane of competition is competing based on “Core Products” or groups of products that represent what a company is really good at making, e.g. Honda’s engines. To succeed competing at a core product level, firms must be really good at making the “components or subassemblies that actually contribute to the value of the end products” (85). The highest plane of competition is based on core competencies, or building “world leadership in the design and development of a particular class of product functionality—be it compact data storage and retrieval, as with Philip’s optical-media competence” or the rugged, simple, and reliable iPod (85). Companies looking for long-run success must therefore discover the things they do that competitors find hard to imitate and consumers find valuable, a concept called core competencies. Source: Prahalad and Hamel

6 Core Competencies Three-way test
Potential access to wide variety of markets Make a significant contribution to the perceived customer benefits to consumer Difficult for competitors to imitate A core competency must pass a three-way test to provide a sustainable competitive advantage. Core competencies provide access to a wide variety of markets, are important to customers’ evaluation of value, and are difficult for competitors to imitate. Frequently, these competencies are developed through various learning experiences and over an extended time. They can include close relationships with suppliers, superior research and development programs, or a “complex harmonization of individual technologies and production skills” (84). Core competencies can therefore be thought of as processes or combinations of skills more than a single skill or technology. Source: Prahalad and Hamel

7 Name for a grouping of core competencies
Meta competencies Name for a grouping of core competencies A closely related concept to core competencies is meta competencies, or general groupings of meta competencies. Think of going to the store to buy eggs. A customer doesn’t go to the store and pick up 12 individual eggs in their hands, can you imagine trying to make it through the check out line without breaking one. Instead they go pick up a carton of eggs, and put that in their cart. This is a lot like meta-competencies, the customer won’t go to 12 different firms to pick a core competency from each, instead they will pick the best package of competencies. Let’s take a look at a familiar company to understand the distinction between meta competencies and core competencies. Source: Shirish Srivastava

8 An Example Constituent skills – BARCODING
– Packaging items Core Competencies – PACKAGE TRACKING – Rapid delivery – People Meta competency – Logistics Constituent skills – everyday business process abilities Package Tracking The information about a package is as important as the delivery of the package itself." —Frederick W. Smith (1979) FedEx founder and chairman Fred Smith's vision for FedEx technology in 1979 was a radical idea. Yet today's FedEx is a world leader in technology, and that vision remains the heart and soul of our technology story. Core competencies – passes the 3 way test Rapid Delivery Chad Walsh When the North American east coast suffered a complete power failure, FedEx Express operations support analyst Chad Walsh of Mississauga, Ontario, responded. With the help of his colleagues, he set up a manual sort process and directed every incoming driver to an offload position. He organized the processing of packages using hand-held scanners and used telephone lines to download the information from those scans. When power was restored later that night, Chad restarted his facility's systems to ensure they worked properly. He set the equipment for the morning sort, left the facility at 3 a.m. and returned a few hours later for his regular morning shift.   Ed Walker Although her employer didn't have a scheduled Friday pickup, a jewelry store employee contacted FedEx Express about a shipment that desperately needed to go out that afternoon - a ring for a wedding scheduled for the next day. FedEx Express courier Ed Walker of Scottsdale, Ariz., reacted quickly. With no time to explain the situation to his manager or find an alternate vehicle, Ed picked up the ring in his personal vehicle and it was delivered as scheduled in time for the wedding. People: Buster Knull Alcoa Company had a critical shipment of wheels it needed to ship via FedEx Freight. The wheel stems, which had to be installed before the wheels could be shipped, arrived late. FedEx Freight driver Buster Knull arrived to pick up the wheel shipment, but it wasn't ready. Not one to just sit in the truck and wait, Buster helped install the stems, lubricate the wheels and help in every way to prepare the shipment and move it on time. James Bush, Jr. Courier James Bush, Jr. did not intend to go swimming during the work day, especially with harsh winds and rain covering much of Honolulu, Hawaii. However, when a gust of wind plucked a package form the back of his truck and flung it into the ocean, James did not think twice about diving in. James recovered the package and, soaking wet, delivered it to the customer. Meta competency – generic grouping of core competencies Logistics, FedEx helps firms with their logistical needs. KEY POINT: These are not only isolated incidents and PR stunts, but are actual cases. Check out FedEx’s website to see more stories. For a company that ships an average daily volume of over 6 million packages, they have managed to create a logistics meta competency comprised of people, package tracking, and rapid delivery core competencies. FEDEX FACTS FY06 Revenue $32.3 billion Consolidated Information for All FedEx Companies Average Daily Volume More than 6 million shipments for express, ground, freight and expedited delivery services   Service Area More than 220 countries and territories, including every address in the United States   Workforce More than 275,000 employees and contractors worldwide Over 15 million unique visitors monthly; more than 3 million tracking requests daily and more than 15 million packages shipped via FedEx Ship Manager monthly   Operating Facilities Express 894 express stations; 10 air express hubs 29 ground hubs; over 500 pickup/delivery terminals Freight 324 service centers Kinko's More than 1,500 locations including FedEx Kinko's Office and Print Centers, FedEx Kinko's Ship Centers, commercial production centers and managed services locations.   Air Operations 670 aircraft; 375 airports served worldwide   Ground Fleet More than 70,000 motorized vehicles for express, ground, freight and expedited delivery service   Dropoff Locations 714 FedEx World Service Centers 1,458 FedEx Kinko's Office and Print Centers 7,499 FedEx Authorized ShipCenters® 41,793 FedEx Drop Boxes (including 4,975 U.S. Postal Service locations)   Recent Awards FORTUNE: No. 2 among "America's Most Admired Companies" (2006) FORTUNE: No. 4 among "World's Most Admired Companies (2006) Harris Interactive and Reputation Institute: No. 9 on “The Annual Reputation Quotient” (2005) Adapted from Shirish Srivastava

9 Brainstorming What skills gives your company potential access to wide variety of markets? Of those, what about it makes a significant contribution to the customer value? Of those, which of them are difficult for competitors to imitate? Think about your company (Give them enough time to list at least several things for each number)

10 What Makes a core competency?
Meta competencies (one to two) Core Competencies (dozen or less) Most of you can easily list your company’s routine skills and resources, as well as the generic service you offer your customers. But how many of you can identify the core competencies that will give you a sustained competitive advantage. For individuals Jim Collins calls this the hedgehog concept, something that you are best at in the world, drives your economic engine, and you are passionate about. For multi nationals, Honda in the Honda Yamaha war implemented their core competency of rapid R&D to cut 50% of Yamaha’s market share and demoralize them to the point that they issued a written statement saying they would compete at in their relative market positions. Are you starting to feel the power of core competencies? Routine Skills, Resources, and Capabilities (many) Adapted from Shirish Srivastava

11 Discovering Meta competencies
Cost Efficiency Reliable Systems Innovation Close External Relationships Agility Strategy Structure Systems Style Staff Shared Values Skills This map was designed by Shirish C Srivastava of the National University of Singapore’s Business School. His article, Managing Core Competence of the Organization, is the first to my knowledge to actually teach how to identify and build your business around core competencies. In this map, he creatively relates a company’s primary parts, corresponding capabilities of a business, and competitive advantages. This matrix enables us to discover larger groupings of capabilities and begin to critically analyze our firm for core and meta competencies. Source: Shirish Srivastava (used with permission)

12 Discovering Meta competencies
Soft Hard Cost Efficiency Reliable Systems Innovation Close External Relationships Agility Strategy Structure Systems Style Staff Shared Values Skills Organizational Components These 7 S components were first coined by McKinsey Consulting to help their employees get inside a company, quantify the elements of their business and identify areas to improve. A meta competency should be represented in most/all of the 7 S’s. In the McKinsey Quarterly, Craig M. Watson wrote an article titled “Leadership, management and the seven keys”. Here he explained that the 7 S’s challenge the traditional notion that structure, strategy, and systems are the critical for success. He proposed that in addition to these three, four more aspects are needed: style, staff, skills, and shared goals (values). By adding these four dimensions he argues that managers can become more leaders of their companies and achieve previously unattainable changes. To help understand each of the rows and columns in Srivastava’s map, I’ll briefly describe each S. The first three S’s are easy to change. Strategy how the firm plans on reaching their goals, in terms of resource allocation. A lot of strategy comes from the business environment, namely technology, markets, and regulation. Structure is how the firm is organized, stemming largely from the strategy. Some basic organization types are simple structure, bureaucracy, matrix, virtual, team, or boundaryless. Systems are the policies and procedures that track, implement, and report business activities. Just like structure, most of the systems are determined by technology and regulation. The last 4 S’s are the soft skills that differentiate leaders from managers. Style is basically describing the “patterns of action, symbolic and actual, which top management communicates to the organization at large, and which the organization itself ultimately adopts as a cultural orientation” (44). Staff describes the quantity and positions of the company as well as the development and socialization process within the company. Shared values describes the basic values of the organization that motivates their business activities. Skills are other individual and company-wide abilities. Source: Shirish Srivastava

13 Discovering Meta competencies
Cost Efficiency Reliable Systems Innovation Close External Relationships Agility Strategy Structure Systems Style Staff Shared Values Skills Competitive Aspects These five categories identify potential aspects of the firm that will offer long term/sustainable competitive advantages for the firm. Cost efficiency are aspects that help the company achieve low costs. Reliable systems are robust, and able to deliver customer demands consistently, rapidly, and efficiently. Innovation is focused on “understanding emerging customer needs… [and design products] which add superior customer value” (56). Close external relationships include those with “suppliers, regulators, professional organizations, and customers” that provide benefits to the company. Being able to manage these relationships will help with understanding customers (innovation), JIT systems (cost efficiency), and adaptability to changing conditions (agility). Agility is the ability to shorten process times in order to meet customer demands. Source: Shirish Srivastava

14 Example – Ideal Hardware
Cost Efficiency Reliable Systems Innovation Close Ext. Relationships Agility Strategy Purchasing (buy bulk/discount), sell at higher price Handymen salespeople Structure Flat organizational structure Several key knowledgeable employees Systems Reliable computer and communication system Communication system Style Traditional feel, fun displays Staff Handymen, Conflict: low wages Handymen Shared Values Conflict: low wages Customer service is key Skills Ideal Hardware is a small town hardware store. The owner, Phil, loves technology and is not afraid to buy what it takes to save that extra dollar or two. Within the last few years, his small hardware store has gone through two distinct growth phases. Even through this store has been in the same location for 50 years, there is nothing outdated about. It is the store that people come to in order to find that impossible part and the salespeople that know how to make it work. His handymen salespeople are very knowledgeable about the departments they work in and the products they sell. Many customers have their favorite salesperson, and will even make repeated trips just to get their help. These handymen are all good friends and have worked together for years. As Phil hired students from the local high school to take care of some of the lower skilled jobs, he found that they were often stumped by customers’ questions. To solve this Phil purchased a set of Motorola radios for all the employees. Now employees don’t have to listen for the intercom and then walk to one of the 3 phones, they now can ask questions, check on inventory, and call for assistance without ever leaving the customer. One criticism the employees have is that the owner is known for his thrift. Employees are regularly juggling excess inventories from the latest bulk order. Sometimes, with the long days employees are known to complain that they could get higher wages working somewhere else. Most of them stay because of the traditional feel, great customers, and convenient location. Many customers even choose their favorite salesperson to answer all of their questions.

15 Discovering Meta competencies
Cost Efficiency Reliable Systems Innovation Close External Relationships Agility Strategy Structure Systems Style Staff Shared Values Skills Identify firms capabilities Link each capability to one of the 7 S’s Write the capability under the column that best describes the capability’s competitive advantage to the firm (can occur more than once) Identify capabilities occurring in most/all of the 7 S’s Exercise: Look back to the notes you made earlier for brainstorming. To fill in this matrix for your company you are not only going to need to incorporate those items, but also more skills and capabilities of your organization. Take the next 20 minutes and try to fill in as much of this diagram as possible. Remember that it will take time to develop an accurate picture of your company. Collaboration with various individuals throughout the company will help make this map a more accurate representation of your company. (Give participants enough time to reflect on their company. It will take a significant amount of time for them to identify competencies of their firm and group them in meaningful ways. Refer back to the Ideal Hardware Store example if there are questions about what they should put within each cell.) Adapted from Shirish Srivastava

16 New Focus Look internally Success depends on continually reevaluating
Now you have a tool to see aspects of your company that are currently giving you a competitive advantage, as well as providing opportunities for sustainable competitive advantage. You now know that looking externally at the market does not give you enough information to gauge the long-term competitiveness of your company. The next model that we would like to present shows how to continually evaluate core competencies to develop a sustained competitive advantage.

17 Sustained Competitive Advantage Skills, Resources, and
Competencies Pool Sustained Competitive Advantage Looking at the circular diagram above conveys the sense that core competencies can be used as the guiding force for your company’s growth. (encourage participants to draw this diagram in their notes using their own words) Starting at the top, “competencies pool”, is a list of your company’s skills, both the useful and less than useful. At this level you can expect to have a very large list of day to day operational skills. After you identify what your company does, you can begin to search for skills, competencies, or resources that have the potential to give your company a sustainable competitive advantage. Key things to look for when selecting these are: 1. Value—either neutralizes a threat or provides an opportunity 2. Rare among competitors 3. Imperfectly imitateable—unique to your company 4. No comparable substitutes Your list should be getting shorter at this point. Now it becomes essential to further narrow these skills or competencies into three action groups, nurture, develop, or abandon. Competencies that should be abandons are skills or capabilities that are outdated Competencies that should be developed are skills or capabilities that are promising new technologies or methods that pass the 3 way test. Competencies that should be nurtured are skills or capabilities that pass the 3 way test and that your company is already using. Not all companies should make every product or pursue excellence at every capability. Only competencies that fit both the company’s culture and customers perception should be implemented and brought to market. Dr. Ronald Kooller, a Managerial Economics professor at Brigham Young University said that many firms fail not because entrepreneurs don’t know how to manage a new venture, but because they chose the wrong business to enter in the first place. Simply put, their venture does not fit the market, and they are not able to compete effectively in the long-run. After identifying competencies that fit the company and market, it is important to implement them to grow the business and core (or key) products. Existing Develop Abandon Adapted from Shirish Srivastava

18 Implementing Define Meta Competency Level 5 Leadership Style
Assemble the team Attract and Retain Resources Turning the Flywheel Jim Collins identified an important model for implementing change from good to great in a supplement to his acclaimed book, Good to Great. This model basically states that the first step in implementing change is to accurately define great. In our case, great is not the financial ratios or market share, great is clearly defining a meta competency and core competencies. Next he identifies the importance of having a committed, competent, humble leader to see the company through the change. Collins’ explains this as “the whole point of Level 5 is to make sure the right decisions happen—no matter how difficult or painful—for the long-term greatness of the institution and the achievement of the mission, independent of the consensus or popularity” (monograph, 11). Additionally, this leader needs to gather people that will add to the core competencies, searching for additional talent inside or outside of the company if necessary. Once you have the group of people, attract and retain resources that will fuel the core competencies (he calls this the Hedgehog Concept). Turning the flywheel is how Collins describes the circular process presented on the previous slide. His description of the flywheel adds to our understanding of the compounding benefits of core competency development. He wrote, “This is the power of the flywheel. Success breeds support and commitment, which breeds even greater success, which breeds more support and commitment—round and around the flywheel goes. People like to support winners!” (monograph 24). You will find that it will be difficult the first few times you go through the process of identifying, evaluating, and developing competencies. However, the more times that you go through this process the easier it will get. In time, you will find that your firm is better able to address its challenges and competitors. Adapted from Jim Collins, Good to Great Monograph

19 Summary Core competencies are a better measure of long-run competitive advantage Core competencies can be grouped into larger groupings or meta competencies Sustained competitive advantage comes seeing core competencies as a cycle In conclusion, this presentation has focused on the following three points: Core competencies are a better measure of long-run competitive advantage. Competing on end product market share is a dangerous strategy in the new world of increased turnover and decreased product lifetime. Core competencies can be grouped into larger groupings or meta competencies. Identifying these meta competencies can help your company zero in on the key service offered to customers (e.g. FedEx and logistics). Sustained competitive advantage comes seeing core competencies as a cycle. Continually reevaluating competencies, and choosing to nurture, develop, or abandon will strengthen your company’s long-run competitive advantage. I will put up two slides with suggested readings while I answer questions. Does anyone have any questions?

20 Reading List Craig M. Watson. Leadership, Management and the Seven Keys, The McKinsey Quarterly, Autumn 1983, pp Stephen R. Covey. The 7 Habits of Highly Effective People, 1989. C.K. Prahalad & Gary Hamel. The Core Competence of the Corporation. HBR, May-June 1990, pp Jim Collins. Good to Great, 2001. Jim Collins. Good to Great and the Social Sectors: A Monograph to Accompany Good to Great, 2005. Shirish Srivastava. Managing Core Competence of the Organization. Vikalpa: The Journal for Decision Makers, 2005, Oct.-Dec. 2005, pp Alan Deutschman’s May 2005 article, Change or Die, published in Fast Company Magazine, observed that most change efforts fail because of human behavior. He observed that the hardest changes to make are social ones. Jim Collin’s monograph is an excellent resource for people implementing core competencies and trying to cope with the shifting the company’s focus inward, struggling to redefine success from the old monetary measures to more difficult to define, but meaningful measures of competencies.


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