Core Competency is a business term used to describe the core advantages a company has over their competitors. Core competency helps a firm develop competitive advantage by focusing on the unique features or abilities of the firm that competitors find hard to copy, usually by expertise and experience. Core competency not only helps a firm develop a competitive advantage in its industry, but also allows it to focus on aspects of the business benefiting long-term growth and expansion into other industries. Firms that cannot identify its core competency tends perform weaker than a firm that has identified, and is continuously developing it.

    Core competence in a firm is not only about gaining market share or dominance, but to specialize the firm into a position that makes them unique compared to its competitors. If an airline company focuses on only the logistics of the airline and outsources the maintenance of the aircraft, it can be said to have focused on its core competency. But if the airline starts to find problems with the aircraft because of maintenance issues, it should add back the maintenance of aircraft to its core competency to keep its logistics and schedule efficient.

    In order to identify core competency, a firm must consider its competitive advantage in every term possible spanning from its products to supply chain to corporate culture and etc. These then must fit criteria to be core competency and should help in the long-term survival of the firm. This tends to be one of the hardest part about core competency. For firms like Yamaha that spreads itself into many unrelated industries, it may be quite hard to know what to focus on as one company.

The criteria for core competency are:

-it should increase sales for the firm by creating increased value for the consumer.

-it must be something hard for competitors to imitate.

-it must open the firm to new markets that it previously could not have gone to without focusing on the core competency.

For example, Honda's core competency is engines. This core competency is hard for others to imitate; Honda was the first car company in 1974 to comply with strict U.S. emissions regulations on gasoline engines and produced cars without catalytic converters with its CVCC engine. Since then Honda has led the industry in efficient engine design. This core competency not only works in their famous automobile division, but also spreads itself to boat engines, portable generators, motorcycles, airplanes, and even robots. All of the areas require the engine to be the most important parts of the product.

The idea of core competency came about by C.K. Prahalad and Gary Hamel's articles in the Harvard Business Review in 1990. The two compared struggling companies with top performers at the time to understand the latter's success. They concluded that the latter businesses focused mainly on what they did best as a company, being able to identify the firm's core competencies. This specialization of the companies is not just its product but can also be the knowledge, unique position of the firm, its company culture, and etc.

A firm's core competency is not permanent. As the market changes, firms also need to change their focus depending on the market conditions and other determining factors. IBM, for example, has changed its core competency from producing hardware to offering services such as consulting due to diminishing profits and increased competition in the previous market.

Core competency is associated with outsourcing because when a firm decides to focus on their core competencies, they sometimes choose to outsource other business activities to outside firms.