This chapter explores Prahalad and Hamel's idea that ‘core competencies’ constitute the most important source of an MNE's success. Core competencies are really any company's most important FSAs: its vital routines and recombination abilities. According to Prahalad and Hamel, the company's main strategy should be to build or acquire core competencies. This idea will be examined and then criticized using the framework presented in Chapter 1.

Significance

C. K. Prahalad and Gary Hamel have provided the clearest exposition of the importance of higher-order FSAs in their path-breaking HBR article ‘The core competence of the corporation’, published in 1990.

Prahalad and Hamel suggest that senior managers need to rethink the very concept of the large, diversified firm seeking worldwide leadership. This type of firm is more than a group of independently managed strategic business units (SBUs). Senior managers should view their firm as a portfolio of ‘core competencies’, which are its higher-order FSAs, i.e., the firm's routines and recombination capabilities. These higher-order FSAs include the company's shared knowledge (organized into routines), its ability to integrate multiple technologies (reflecting the recombination of internal resources) and the routines/recombination abilities carried by key employees (the so-called competence carriers) that can be deployed across business units. In the authors' words: ‘In the long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products. The real sources of advantage are to be found in management's ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.’