Jensen defines free cash flow as cash generated by a firm in excess of what is required to fund all projects with a positive NPV. This concept forms the basis of the capital market foundation of core competence by guiding managers to maximize the return from their specific businesses and letting the investor diversify his/her risks by mapping his/her risk/return profile with investment avenues available through the free market. On a more functional plane, Peters argues that since managers are usually more competent in their own sphere of work, it is logical to expect thatthey would be able to return a better gain in business that use their special competence. Peters defines core competence in terms of specific strategic capabilities, like Domino's Pizza's capabilities in delivery, P&G's marketing competence in fast moving consumer goods (FMCGs) segment, and not in terms of specific products or industry.

What makes core competence so attractive and exceptions not withstanding an empirically satisfactory concept? To evaluate the effectiveness of core competence, let us first understand the contexts in which it has been found to be successful. Core competence typically works under the following conditions: a) When both products as well as capital markets are mature -- market maturity, b) when a company is growing -- industry life cycle, c) when the customer is willing to pay for specialisation, that is, high involvement purchases-product considerations, d) when it is defined and practiced at a competence/capability level and not at a product/industry level-strategic bestpractices.

Market maturity: As markets mature through increased penetration and high repeat sales, customers become more aware of the product and the market and are in a position to demand enhanced allround performance. When selling to these sophisticated buyers, therefore, having an established competence is a great advantage. In mature markets, companies in the industry have advanced on the learning curve, posing significant barriers to competitor entry. These companies are also in the best position to pursue innovations that can extend the life cycle of their products.

Vertical integration in a stable, price sensitive environment proves further competitive opportunities for these companies. In mature markets, therefore, core competence is a valued strategy.

Capital markets also play a significant role in rewarding core competence as shareholders can extract higher returns on their investment by encouraging companies to develop and maintain core competencies. As a mature capital market has at itsdisposal remedial actions like LBOs, to ensure that companies do actually stick to what they know best, thereby providing competitive returns on equity.

Industry life-cycle: `Most new industries are initially characterised by a great deal of uncertainty about such things as the potential size of the market, optimal product configuration and the nature of potential buyers. The uncertainty often leads firms to a high degree of experimentation, with many different strategies adopted, representing different bets about the future. Rapid growth provides slack to allow these differing strategies to co-exist for a long period of time. Product innovation can widen the market and hence promote industry growth and/or it can enhance product differentiation. Competition then shifts toward greater emphasis on cost and service. As a result of slower growth, more knowledgeable buyers, usually greater technological maturity, competition tends to become more cost and service- oriented. When a company is in its growth phaseit makes sense to stick to its knitting, thereby, developing a competence in the industry, which becomes critical for its survival as the industry matures.

Product Considerations: Core competence is typically more critical to companies in high-involvement -product industries like aircraft engines, machine tool manufacturers, pharmaceutical companies, etc. These companies are characterised by high investments in capital goods, commitment to research and development, represented by long product pipelines, and an ability to attract and retain specialised skills. For the customer, these products represented a high cost proposition which are routinely accompanied by long term service contracts. These characteristics compel companies without the required strategic capabilities to exit the market while posing significant entry barriers to new entrants. Impulse-product industries, on the other hand, are more tolerant to experimentation, given their specific product characteristics.

Strategic best practice:Surprisingly, the concept of core competence is not universally understood. A lot of companies make the mistaken assumption that, core competence necessarily has got to do with their products or industry. This is not the whole story, any business can be broken into competencies or strategic capabilities in which a company enjoys a comparative advantage. An auto major can have a superior competence in design, a FMCG company could be competent in distribution, an elevator company could have a superior ability at providing after sales service, a transformer manufacturer could distinguish itself on the basis of superior production and cost. The ideas is to define competencies in suitably focused frames of reference, while not limiting it too narrowly to industry or product terms. Xerox defines itself as the document company, as it understands the process and use of documents and commits itself to technology changes to exploit this competency. Citibank claims anytime banking and the citi never sleeps, toencapsulate its competence in superior delivery. When competencies are practiced in the above sense, companies commit themselves broadly to the industry, while not being limited to specific products. Core competence is best practiced, therefore, at a business level and not at the corporate level, where its relevance gets diluted.

(The author is a consultant with one of the world's leading strategy consulting firms)To evaluate why core competence does not deliver results in certain contexts, let us now, look at the theory of the firm and explore the peculiar demands of emerging markets. The Jensen-Peterian perceptual framework of `sticking to one's knitting' rests on the tenets of specialisation and efficient markets, while ignoring the evolutionary/ regulatory context, the implications of portfolio theory, and the inherent agency conflicts.The following section evaluates the oversights in the classical interpretation of core competence and the specific applicability of core competence to emergingmarket contexts.Specialisation Core competence, rests on the theory of the firm and perfect competition, which assumes, a. Standard products, b . Multiple buyers and sellers, c. freedom of entry & exit. These conditions, especially b.& c., have limited relevance in highly regulated economies. Although much of the economy has mature industries, govrnment licensing and tariff proections, create asymmetries in the market. These seller and price control mechanisms, provide the vendors with monopoly powers, creating an artificial seller's market, where a free market explanation does not find much currency. Also emerging markets are much more price sensitive, which has encouraged companies to pursue low cost strategies to the exception of all else. Most importantly, the selective interpretation and use of the concept in narrow product terms has also led to the abandonment of core competence, as the preferred strategy to deal with competitive challenges. Further, customers in emerging markets, not only expectindividual businesses to posses core competence in their particular industry, but given the poor infrastructural context, they also prefer that these businesses be part of a larger group, ensuring pooling of risks inherent in stand-alone businessesCapital MarketsPerhaps the most significant impact on this debate is that of the maturity and sophistication of the capital markets in an economy. The primary driver of market sophistication is institutionalisation. With an army of dedicated analysts and market watchers, institutions like pension funds and mutual funds can materially alter market dynamics. Pension funds alone now own 25 per cent, by value, of all corporate shares traded in the United States and that figure is expected to keep growing. Together, institutional investors account for over 80% of all trades in the US capital markets. In comparison these figures are substantially lower in emerging markets. The biggest drawback of a non-institutionalised market is its dependence on sentiments as a keymarket driver - a dependence more on noise than on information. A highly fragmented market of individual investors lacks the power demonstrated by shareholder activists in mature markets. This fundamental difference has encouraged numerous participants to operate on the assumption that markets have short memories, making fine print jugglaries rather common. These market-information asymmetries forces the individual investor, lacking adequate resources to perform due diligence, to stick to ventures backed by large groups. The prestige premium these groups command ensures atleast a limited deliverance, thereby, perpetuating the investor confidence in the group name.The breadth of the market is the other key driver. The patent lack of venture capital firms, which specialize in dealing with risk capital, severely limits entrepreneurial ventures. Concept stocks, or idea based ventures, the mainstay of Silicon Valley and biotechnology firms and some would argue, one of the forces driving the Dow's current run, isvirtually non-existent in emerging markets. The lack of real assets in these ventures limits funding by conventional firms, driven primarily by collateral based finance. This also eliminates entirely the other key source of finance - debt. Debt assuming institutions in these markets, tend to be stronger than equityk providers. This places the well-established groups in a prized position, as they can leverage their real assets in other ventures to secure both debt & equity funding. This phenomena is sos pronounced that large groups often secure funding to further invest in fledgling ventures. An activity that appears prominently as revenues from other sources or interest from investments, adding to the bottomline of almost all established groups. Some groups, realising the premium their name commands in the capital market, have started very successful financial subsidiaries.Cost of transactions is also higher in the emerging markets, which have inadequate depository functions to pool transaction risks andinadequate dealer networks to bring down high spreads maintained by brokers. These costs, limit smaller players from becoming active in the market. The high transaction costs over the premium required for takeovers, the preferred means of enforcing market discipline on errant managers, thus, become highly restricted.Capital market regulations exerts a significant impact on market efficiency. Equity markets in emerging economies tend to be highly regulated. Issues as varied as short sales, corporate buy-back of shares, repatriation of funds and even takeover codes are zealously regulated, in a quest for stable markets. Especially LBOs and takeovers, methods suggested by Jensen, to correct market inefficiencies, are either banned or are subject to extra market considerations. Speculatory actions, so central to market efficiency, is strictly discouraged. This exacts a heavy toll on efficiency by allowing cozy relations to develop between financial intermediaries and company boards. Restriction on internationalfunds movements makes the economy insular, limiting the market from attaining equilibrium with international norms, owing to which, the large emerging market companies show a lower return on equity and especially its return on asset, compared to their counterpart in mature economies. Limited regulatory reporting standardisation and requirements further increases the information asymmetries. The poor information availability and dependability restricts the deepening of equity markets on the supply side.