Through the years that I’ve served clients as a business advisor, I’ve often observed how some executives confuse core competencies with competitive advantage. Not their fault entirely, because the root cause of such confusion lies in the provenance of these expressions - in fact, in the definition itself. Quelle surprise!
Be that as it may, here’s a simple clarification that, hopefully, might prove useful:
Core competencies are those that an organization excels in, especially when compared to their other competencies (an inward-looking comparison)
Areas of competitive advantage are those that enable an organization to outperform their rivals in the marketplace (an outward-looking comparison)
The two are not mutually exclusive or unrelated. In fact they do indeed have a causal relationship - competitive advantage mainly derives from core competencies - but that doesn’t alter the fact that these are two entirely distinct concepts.
Let me illustrate by means of an example: let’s say I’m a sports nut, and like to play many games. Of those different games, let’s say I play two games with some degree of proficiency - basketball and cricket. Of these two, let’s say my basketball game is far better than my performance on the cricket pitch, and for that matter, better than any other game I play. In this context we may say that my core competency is basketball. If I move to a different town where everybody plays great basketball, but very few play cricket of any standard, then I would really outshine everyone else as a cricketer. The same people who consider me a great cricketer may not think much of me as a basketball player, though I may have a pretty high opinion of my own basketball game. So, while basketball is my core competency, my competitive advantage in that environment - or marketplace, in a manner of speaking - comes from being the best cricketer in town (though my friends at my cricket club back home might laugh at the very idea).
This distinction is important to remember when formulating business strategies - especially when it comes to outsourcing strategy, wherein critical decisions are called for, in terms of what to outsource and what to retain. Mistakes are often made by executives who confuse one for the other, and such mistakes could be very costly and very difficult to undo (if at all). You could outsource your core competency: just because you’re better at a particular thing than you are at other things, doesn’t mean that someone else isn’t even better at that particular thing than you are. But you should not outsource areas where you hold a competitive advantage: areas where you’re better than your competitors, though they may not necessarily be areas where you excel compared to other areas.
It is always possible that your core competency also happens to give you your competitive advantage, and in such cases it is prudent to stick to your proverbial knitting, and outsource only those other extraneous functions and processes that specialized agencies are far better, cheaper and faster at performing than you are. In simpler words, feel free to outsource pretty much everything you do (there’ll always be someone who does it better than you), except that which gives you an edge over your rivals (i.e., your areas of competitive advantage). And if that happens to tap into your greatest strength (i.e., your core competency), so be it.
Of course, I’m assuming all the while that both - core competencies, as well as areas of competitive advantage - have been clearly identified by relevant leaders in the enterprise. This may not be a valid assumption in all cases. Quite a few clients I’ve served have struggled to get clarity on these concepts. But that’s a topic for another post.
A significant distinction in many fields, not just business, as your sporting analogy shows clearly.
I thought of Erwin Schrodinger, who considered his own core competency to be in the study of Philosophy, only to find his competitive advantage was in Physics. He adjusted his curriculum appropriately and became a professional physicist and amateur philosopher. He then excelled in both fields, but he was a bit special.