Core Competency

The ROI of Focusing on Your Core Competency

Overview

In 1990 C.K. Prahalad and Gary Hamel published The Core Competence of the Corporation that to this day is the most reprinted article in the history of the Harvard Business Review (HBR). It keeps getting reprinted because its premise is still very relevant (perhaps more so today). This core competency article argues that every organization needs to focus all of its scarce, limited, and valuable resources (manpower, machines, money, management, and material – the 5Ms) on being the best at one specific thing (your core competency). The idea is that if you try to be a huge diversified conglomerate that attempts to be the best at everything, then you will eventually underperform at everything because you will have to spread your resources out too thinly across too many areas. General Motors used to be a diversified industrial conglomerate that made train engines, airplane engines, cars, trucks, ovens, refrigerators, and generators etc. Focusing on cars and trucks over the last few years has driven large profits.

If someone does something better, faster, and cheaper than anyone else in the world (their core competency), then wouldn’t everyone go to them for it? Think of it this way – Why wouldn’t you outsource your “non-“ core competencies to someone that can do it better, faster, and cheaper than you (because it’s their core competency)? That then leaves you with resources which can be directed towards your core competency (assuming you know what it is). But, isn’t developing a core competency putting all of your eggs in one basket? Answer – no.

Core Competency Examples: 3M & Honda

Look at 3M. What is 3M’s core competency? Answer – Adhesives/glues/sticky stuff. They make the best sticky stuff in the world. What customers, products, and/or industries use sticky stuff? All of them do. 3M has a core competency and is actually diversified and recessionary proof because of it. Every company in every industry for every product needs glue.

How about another example like Honda. What is Honda’s core competency?  Answer – Powertrain (engines and transmissions that last forever). So what products use Honda powertrains? Answer – anything and everything that needs a powertrain  – leaf blowers, snowmobiles, jet skis, ATVs, cars, trucks, generators, motorcycles, chainsaws, etc. That is diversified and recessionary proof by definition.

Companies right now are outsourcing not only their direct and indirect material needs, but also entire functional areas to other companies that have core competencies in these functional areas. For example, companies are outsourcing logistics/transportation/distribution management to 3PLs and 4PLS because these 3PLs and 4PLS can do it better, faster, and cheaper – it is their core competency. Are companies outsourcing purchasing/procurement/sourcing?  Yes – to BPOs (Business Process Outsourcing firms), especially for indirect (e.g., MRO, printers, toilet paper, travel, advertising, etc.) and even direct. Are companies outsourcing manufacturing/production/operations? Yes – to manufacturing subcontractors like Jabil Circuit. Jabil can build circuit boards for industries such as aerospace, automotive, computer hardware, etc. Companies that outsource to Jabil do not have the economies of scale that Jabil attains by consolidating customer volumes across many industries. Furthermore, in some industries like high tech (i.e., Texas Instruments, Hewlitt Packard, Honeywell, Intel, Apple, etc.), their product life cycles are so short that they cannot afford or do not want to make the capital investment that Jabil can and does for circuit boards. Companies like Nike, Mattell Toys, Dell, etc., do not actually even build anything themselves and they outsource everything to manufacturing subcontractors.

Final Thoughts

Here is a final thought before you read the HBR article again. Supply chain management (SCM) has evolved into a core competency for several firms, especially manufacturing firms that deal with global competition, saturated markets, and thin margins. These firms outsource everything and SCM has to be a core competency, otherwise they fail. Think about it. These firms outsource everything and they often do it with the same suppliers that their competitors use. The auto industry is a very good example of that. Who wins in that situation?  Answer: The company that manages their suppliers the best. SCM has allowed them to widen margins and increase asset turnover rates, and that translates into a higher return on investment (ROI = PM x ATR). Recently OEMs and larger Tier I suppliers have started to further review all of their functional areas (like purchasing, operations, and logistics management) and partner with services firms to support part of their supply chain operations. Companies are finding certain processes, such as supplier identification and qualification can be more efficiently executed outside their organization, freeing up value time to focus on other internal supply chain core competencies such as contract negotiations. This strategic outsourcing strategy requires a deeper level of supply partner involvement as it not only includes outsourcing direct and indirect material needs, but also entire functional areas and core processes requiring strong skills sets and a core competency in supply chain management to succeed.

-Sime