Now, this has left me in one of those "on one hand, on the other hand" situations. Strategically speaking, core competencies are the things you think you do well, and quite possibly better than other people. Therefore, it makes sense for your ideas to align to and reinforce your core competencies. However, this approach also means ignoring opportunities outside your comfort zone and doubling down on the things you do well.
Wait for it - here it comes - on the other hand, innovation should be about creating new products and services the market needs and wants. So, using your core competencies as your scope or boundaries may cut you off from significant opportunities or new markets. The question in my mind should be - do we have the competency or can we partner for it or acquire it quickly?
Another way to look at this is to consider the iPhone. Now, Apple does not have core competency in phones - but it does have a lot of core competency in handheld consumer gadgets (iPod) and in computing - especially in the user interface (thanks Xerox Parc). So, Apple could have chosen to ignore the booming cellular phone market, since cell phones weren't in their core competencies, or could choose to redefine their competencies as all handheld computing devices including phones. Then, they needed to partner with someone for the phone electronics, while they developed a handheld platform marrying the phone, the music player and a number of other capabilities. Again, it's the same formula as the iPod - a little later to market with a nicer design and user interface, and a more complete solution. However, in this case Apple is tied to ATT for a while. It will be interesting to see if ATT can live up to the expectations true Apple lovers have.
Anyway, the point is - yes, you do need to consider your core competencies when you generate and consider ideas, but don't define them too narrowly or you'll likely miss a great opportunity - one that exists at the intersection of your capabilities and anothers.