In the UK over the last couple of years, political debate has been dominated, almost to the exclusion of any other subject matter, by Brexit. It is a subject tearing the UK apart and the splits on whether it is a good idea are as wide as ever.
The guru for the fundamentalist wing of Brexiteers, the ERG, is Professor Patrick Minford of Cardiff University and his small cohort of free market economists, the Economists for Free Trade (formerly Economists for Brexit).
The EFT has seemingly managed the impossible. There is an old trope that if you ask three economists the same question, you will get three different answers. Well, the EFT has managed to get virtually every other economic forecast group to agree that its work is nonsense.
The London School of Economics has produced an excellent critique of Minford’s work on Brexit and in particular his Liverpool Model. The LSE point to Minford’s lack of an evidence base for his forecasts; that his work relies heavy on political dogma rather than scientific method; that his modelling makes huge assumptions and that it ignores current economic theory.
Two aspects of the LSE critique are prominent.
Firstly, that Minford ignores the concept of economic gravity; the proven fact that irrespective of trading terms, most firms do the majority of their export trade with nations and blocs which are geographically close. So no matter the outcome of Brexit, UK firms will still look at Europe as its primary export destination.
The second huge assumption made by Minford is that manufacturers operate in a market with perfect competition. Perfect competition assumes that there are many manufacturers in a sector all producing identical goods. No one company has the power to set the base price in a market and as a result all market entrants focus on cost reduction and profit maximisation. In markets with perfect competition, the only consumer determinant is price.
Anyone who has studied marketing knows that price is only one element of the marketing mix. We know that some consumers are not driven by price when the purchase. We know that for some consumers, product performance or convenience is a more important purchase factor than price.
We also know that, businesses segment markets and target particular customer groups. That may mean designing products that are different to those of competitors. It is utterly clear that consumers are faced with numerous choice variables.
In my view, the work of Professor Minford is dogma-driven nonsense and it is astounding that some senior politicians take his work seriously.
What is true is that most organisations have aspects of their business they feel they are really good at and which make them stand out for the competition. Businesses have competencies. However, for these competencies to be effective, if they are to have any market effect, they must be core to the expectations of consumers.
Hamad and Prahalad (1990) defined core competencies in an article in the Harvard Business Review entitled Competing for the Future.
- A core competency must provide customer benefits and add value. These benefits must be differentiated from those of your competitors and they must be the reason that consumers choose your products over those of competitors.
- Core competencies must be difficult for competitors to copy. They should be competitively unique. Consumers must not be able to copy them quickly e.g. protected by intellectual property rights. They must be a competency your competitors wished they had.
- You must be able to leverage core competencies across a wide range of products and markets. Competencies belong to an organisation, not a product or service or brand. Does your business have core competencies which allow or enable the production of new products or services.
It is also true that a business cannot be good at everything. If you are good at one competency, it is unlikely that you will be equally good at other competencies At most a business will have two or three core competencies, otherwise your organisational focus is diluted.
There is no point in believing that you are good at a particular competency if that competency is of no interest to your target customers.
Hamad and Prahalad identify four different types of core competency:
- Unique Core Competencies: These competencies are uncopyable skills and knowledge bases. They could include intellectual property and they offer superior customer value and superior returns.
- Latent Core Competencies: These competencies are latent but allow you to operate in a market sector. A hotel chain could not operate without a wide range of competencies from supply chain managers and skilled professionals such as chefs and event organisers; but only some of these competencies are unique.
- Competitive Core Competencies: These competencies allow a firm to compete in its chosen market. They are hygiene factors. For examples retailers will need strong supply chain and logistics skills. Usually these competencies are held by all successful market players.
- Future Core Competences: Competencies need to change over time as consumer expectations change. Many UK retailers are failing because they are relying on historical core competencies such as high street locations when retailing has moved on and internet retailers such as Amazon thrive. Core competencies also need to change so you can dominate tomorrow’s markets.
Core competencies are crucial to your business delivering its proposition to consumers and differentiate your organisation in the marketplace. They need to be at the heart of your business. In fact your business should be structured around them. You must invest heavily in them and you must acquire skills to develop them. Everyone in your organisation should understand the importance of your core competencies as they are the fabric of a successful organisation.
It is said that evolution is better than revolution. Brexit is a revolution and it is likely to cause significant harm to the UK economy. It is stripping the UK of one of its core competencies, as an inward investment gateway into Europe.
The concept of core competencies shows how wrong Professor Minford’s assumption of perfect competition is. No business will succeed if the only advantage it can offer to consumers is a market base level price.