Death To Core Competency: Lessons From Nike, Apple, Netflix

In a world of rapid disruption, the idea of having a core competency—an intrinsic set of skills required to thrive in certain markets—is an outmoded principle. Apple, Nike, and Netflix have better ideas.

Known for decades as a shoe company, Nike is undergoing a digital revolution. In recent years, it's launched everything from apps that are standard issue on the iPhone to wearable devices to web services. But why? Nike CEO Mark Parker laughs at the questions and interrupts: "I think I know where you're going with this." He grins and shoots back a quick answer to why Nike's so willing to transition so far from the thing it's known for—shoes—to software. "Business models are not meant to be static," he explains. "In the world we live in today, you have to adapt and change. One of my fears is being this big, slow, constipated, bureaucratic company that's happy with its success. That will wind up being your death in the end."

Parker's thinking goes like this: In a world of rapid disruption, having a core competency—that is, an intrinsic set of skills required to thrive in certain markets—is an outmoded principle of business. Just as Google needed Android to attack mobile and Apple needed Siri to pursue search, thriving businesses need to constantly evolve, either through partnerships, new talent, acquisitions—or all three. Nike, No. 1 on Fast Company's 2013 list of Most Innovative Companies, proves this idea more than most. Last year, it launched FuelBand, a high-end electronic wristband that tracks your energy output and signaled Nike's growing strength in the digital realm. "Think about it: Nike is now included in conversations around technology—it's shifted into an adjacent industry, breaking out of apparel and into tech, data, and services," says Forrester Research analyst Sarah Rotman Epps. "That strategic shift is incredibly important to Nike's future."

Mark Parker | Photo by Art Streiber

Lead Nike engineer Aaron Weast chalks up Nike's success in the space to the company's willingness to disrupt itself (a core tenet of a group of innovators we've dubbed Generation Flux). "The circle of competency is blurred these days," Weast says. "You can't have a barrier or restriction to that core competency. If we constrain ourselves by a circle of competency, we'll do ourselves a disservice. You need a willingness to punch through it."

Nike+ Fuelband App

Nike has arguably been trying to break through its core competency since it first began work on Nike+, its digital platform, in the early aughts. "Mark's mantra then was, ‘Innovate or die,'" says Albert Shum, a founder of Nike's digital team and now head of Microsoft’s Windows Phone design group. "We had to change with the times, and he saw that [digital technology] was coming. It wasn't just about manufacturing shoes anymore."

However, Nike wasn't necessarily equipped for its deep dive into digital. It's why the company worked with Apple for some of its earliest Nike+ products, and why it turned to outside partners such as Astro Studios and R/GA for help with the FuelBand's industrial design and user experience. Not that Nike outsourced the product development. "You will never get good work out of anyone if you hand over a brief and go, 'We have no clue what we want, but why don't you just do it for us,'" says Digital Sport division VP Stefan Olander.

Ironically, it was one of Nike's early digital partners that first advised the company against straying outside its core competency. In 2003, when Nike partnered with Philips for an MP3 player, Parker got a call from the Apple CEO Steve Jobs. "Why the blankety-blank are you now in the MP3 business?" Jobs is supposed to have said. "Why are you doing this? It's not your core business!"

Jobs may have been right then, but if he had followed his own advice years earlier, would Apple have become such a dominant player in the music industry? After all, who would've thought MP3 players were Apple's core business before it launched the iPod in 2001?

Siri

Apple's core competency, most would say, is design. It's that core competency which allowed the company to attack all types of hardware and software. But it didn't always own all the skills required for success—nor could it. Apple acquired Siri to gain a foothold in search, and it went on a hiring spree in order to prop up its struggling maps service. Would Apple have entered either space if it stuck to the barrier of its own core competency? Some would even say the iPhone demonstrates how Apple was willing to punch through its core competency to enter the mobile world. "Apple is a great example," says Weast. "They hired a great number of RF [radio frequency] engineers before anyone knew they were doing iPhone."

Netflix is another example. Some would argue its core competency is content delivery. But it has expanded that competency to not only include both physical and digital content but also original content. In 2011, when the company announced it was testing the waters of original content, it was clear CEO Reed Hastings was hesitant to acknowledge the company had punched through its core competency. It had just spent a reported $100 million on a new series (which it just released) called House of Cards. It would also be investing in more original content ranging from series Lilyhammer to Arrested Development. "When we start taking creative risks—that is, reading a script and guessing if it was going to be a big hit and who might be good to cast in it—it's not something that fundamentally as a tech company or a company run by a tech CEO like myself is likely to build a distinctive organizational competence in," Hastings said at the time. "We think that we're better off on letting other people take creative risks, and get the rewards for when they do that well."

Netflix Original Programming, House Of Cards

In other words, creativity was not Netflix's core competency, according to Hastings. This, frankly, was just corporate boilerplate—a way to reassure shareholders that Netflix wasn't stepping too far outside its own bounds. "There's no creative risk for Netflix," Steve Swasey, then-VP of corporate communications, told Fast Company at the time. "This is a business risk, which is very, very slight."

The fact is, in order to catch up to HBO and stay ahead of Hulu and Amazon, Netflix needed to do original content. Netflix hates to acknowledge its creative intuition. ("Nobody came to us with a script and said, 'What about buying this?'" Swasey once told me. "They came with a whole package—David Fincher, Kevin Spacey, a storyline—it was the perfect storm of great material [and] great talent.") But in reality, the company is betting on a creative idea, if not a script; a creative talent, if not a storyline. It had to. Otherwise, the company would not evolve.

The same could be said of Google. If it had followed its own core competency (which some argue is an unrivaled expertise in algorithms), would the company have entered the smartphone business? Or would it have embarked on any number of projects at Google X, its innovation lab—self-driving cars, space elevators, or its futuristic eyewear concept Google Glass?

Still, there is perhaps a limit to how far a company should stray outside its core competency. Parker, for example, acknowledges that music was too far from the mark for Nike. "Doing MP3 players, even though runners would use MP3 players—it was a whole different business," Parker told me. He calls Nike+ and FuelBand "a natural extension" that "relates more directly to what we do and who we are as a company."

But for how long?

[Image: Flickr user Adropp]

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44 Comments

  • Sidvaz

    I get a feeling the author has mixed up core competency and brand extensions. or maybe, I am wrong. The comments are well worth a read, perhaps more so than the article itself.

  • Tim Blake

    I'm not sure that this article has as much to do with core competency as brand extension. In other words, if these companies didn't already have strong brands, then they would have never been able to successfully make the leap into other product offerings.

    After all, Richard Branson would have never been able to make the leap from selling records to running an airline or mobile phone company, without the Virgin brand underpinning the entire enterprise.

  • Bill Young

    Yes, Virgin is partly about brand extension, but to a level that exceeds the most extreme limits of anything ever dreamed of in marketing textbooks.  What it shows dramatically is Virgin's core competency in brand management.

  • Breean E. Miller

    If we think about a core competency based on vision and purpose, versus a line of products, then we have the right idea.

  • Carel Venter

    I don't agree with the article. Core competency is essential to be successful in adding value within any industry value chain and to any target market segment on a sustainable basis. Should a company consider vertical or horizontal integration within the industry value chain or market segments, it will normally leverage from existing core competency (lowest risk for highest gain strategy). Should it consider moving to a perceived opportunity (current or future) outside the scope of your core competency (in the same or new industry), it will have to adapt / develop it's core competencies to be able to leverage the opportunity. Part of that strategy, to lower the risk, is to outsource the competency through partnering (like Nike did with Apple). Maybe they just did not understand that they were (instinctively) doing it the right way and thought they were creating new business models.

  • Rjaravaza

    In the context of coping and anticipating change, competencies here would mean the same as having business acumen. This applies to successful companies whether run by the owner or a team of directors. Acumen includes skills as well as sound judgement. 

  • Eugene Fernandez

    The concept of 'Core Competency', like sticking to your knitting or operating within your own self created boundaries has
    had its day, not that many of its principles are still not relevant.
    However, it originates from an outdated concept influenced by an overtly
    rational lens that contained 'strategy' to the known domain. A Resource
    based, emergent, futures oriented and chaodic view of strategy lifts the constraints and promotes play, creativity, risk and capability.

  • Chris Lynn

    Well, this is the fashionable view espoused by this article, supplemented by a few buzzwords and the ritual condemnation of rationality so beloved of people who see it as antithetical to creativity. But it misunderstands 'core competencies' as defined by the orginal authors (see my earlier post). There is nothing to stop an organization from looking for new markets, products, technologies or services beyond its core competencies, but - as many academic studies have shown - the likelihood of success diminishes radically with every new component of the model. And there is nothing uncreative in applying core competencies to new products and markets; to pick an example at random: Honda's competency in small engine design has been applied in markets as diverse as car, motorbikes, generators, boats and lawn-mowers.

  • Tony MacFarlane

    There is an elephant in the room, though: you have got to be able to afford ditching your core competency-- which requires massive capital. I do not think that this is an appropriate case study for small businesses. All of these companies (yes, even including NetFlix!) had enough capital resources to assume the risk. I seriously doubt anyone outside of F500 can afford to even start up with this paradigm.

  • Mnhyman

    As companies evolve competencies evolve and i am not sure that they are in conflict at all. 

  • Dennis van der Spoel

    The author is mistaken core competencies with core activities. Core activities are dead, core competencies are very much alive.

  • mobo

    In the long run, I believe disrupting one's self is cheaper than having your competitor doing it.

  • Stephen Boney

    Core competencies are not dead.  In fact, they are living and must continue to be nurtured, fed, pruned, hybridized and harvested in the right "season" in order to produce the most benefit to the organization.  The human environment is changing more rapidly than ever, therefore organizations must be able to adapt the boundaries of their core competency at or above the pace of the change around them.  But to think that having a core competency will keep you mired in the present is a dangerous assumption.  Every organization must be able to define their core competency, and to clearly express their vision of that competency.  They then must manage that competency according to the changing demands of the market.  

  • Khoo Boo Boon

    Change and Disruption - the "Ying" and "Yang" in Innovation. One follows the other.

  • Phani Tipparaju

    This totally contradicts outliers. but yes, 10,000 hours spent in excelling something can make you an excelling expert!! 

  • jac fitzenz

    Competency has alwyas been a behind the curve notion as I've been explaining for years.  With the market in a constantly disruptive state an organization needs to let go of structure for agiility.  By that I mean, focus on capabilities, which is a future oriented view.  We need to keep up to date on technical, admin, professional skills that will be needed tomorrow as well as today.  By the time companies went through the time wasting competency program a goodly percentage of those competencies were no longer a competitive advantage.  The questions are: what are we trying to be in the constantly moving market?  What is our brand promise?  How are we to operate as a culture?  Don't confuse tactical responses to market trends.  Think strategically always about our vision-brand-culture.  Think competitive advantage!!!

  • arshada2

    I dont think that the author completely understands what core competeny is. What Nike is doing is completely in line with its core competency. I would refer the author to an article from Fastcompany to understand why, what Nike is doing is exactly inline with its core competency http://www.fastcompany.com/300....