by Ray McKenzie
Vice President of Management Consulting, Fujitsu Consulting

Forget any debate about whether it was Philip Selznick's work with the armed forces (1957), or focused criticism of Theodore Levitt (1960) or Kenneth Andrews' approach to strengths, weaknesses, opportunities and threats (1963) that brought enterprise competencies to the forefront. It was the article by C.K. Pralahad and Gary Hamel published in the Harvard Business Review (May/June 1990) that made "core competencies" a household notion — and the new focus of corporate strategy.

Pralahad and Hamel argued that core competencies are the source of competitive advantage. Any organization seeking to improve its competitive advantage, they wrote, could provide "nourishment, sustenance and stability to core products, end products and business units" with a focus on core competencies.

To fully appreciate their influence, try a quick search of the Internet. Google returns 374,000 hits for "core competencies," and another 127,000 hits for "core competency." Focusing on an organization's core competencies seems to have become an obsession. Today, most corporations identify their core competencies on their Web sites, and so does nearly every government agency and institute. And to top this all off, why not buy your toddler a copy of Reader Rabbit? After all, advertisements for this line of educational products proclaim that it is a way for your child to "build core competencies in language, art, math, logic and science."

Conventional Wisdom
The attention to core competencies is not only an obsession — through omission it has created a kind of conventional wisdom that can be paraphrased as follows: "If it is important to focus on those parts of the business that are core, then those activities that are non-core ought to be relegated to the status of commodities, and purchased on the open market." Jack Welch, in Straight from the Gut (Warner Business Books, 2001), suggests that a company's back rooms or non-core activities will never attract a company's employees or best efforts.

He goes on to suggest that through outsourcing, a company can convert its back office functions (read: non-core) into a supplier's front office functions (read: core). And when these non-core activities become someone else's core activities, one can and should expect the very best.

All of this may have been fine prior to the mid-1990s or during the Industrial Age, when size and strength through the accumulation of assets created barriers to entry and isolated or minimized competitive threats. With a business strategy that emphasized size and strength, the watchwords were efficiency and cost control, and hence the need to focus on those things that were core and to reduce the energy given to anything that seemed to be non-core.

Old Tactics, New Reality
Today, these Industrial Age tactics seem to be crashing headlong into the Information Age, where physical prowess and physical production have given way to digital prowess and digital production. For executives of the Information Age, the watchwords are no longer size and strength; instead, they are knowledge and information.

Surveys conducted by organizations such as The Gartner Group report the priorities of today's executives are speed, flexibility, adaptability and agility. These priorities are not easily achieved in most organizations and, in particular, very large ones. Focusing on core competencies does not easily give way to such priorities, whether a company is striving for adaptability or agility or any of the other goals.

Smart Idea
To step up to the challenges created by this new set of priorities, it would seem that some organizations are creating new and interesting business models. For example, MCC, the spin-off of DaimlerChrysler, has established a novel manufacturing facility in Hambach, France for production of its vehicle known as the Smart Car or, more simply, as Smart.

The facility itself is widely known as "Smartville" and is absolutely unique. Never before has a company created such a tightly integrated supply chain. The suppliers are co-located with MCC on the same physical site with direct access to the production line.

With the design of this facility and its business model, MCC has pushed investment, risk and production out to its suppliers. It would seem that almost everything in Smartville is outsourced. Not just non-core activities but also what one might have previously considered to be core activities.

With this business model, MCC is not only creating a vehicle that can be customized to meet the needs of its customers, but it has also created a business model that can address the need for flexibility, adaptability, speed and agility.

A comprehensive study conducted by researchers from the Cranfield School of Management and Erasmus University of Rotterdam considered the unique nature of the business model employed by MCC. Through their in-depth interviews with the management of MCC, Professor Remko van Hoek and Dr. Harm Weken identified the priorities of each of the critical dimensions of MCC's supply chain design and business model. These priorities are directly in line with the observations reported by Gartner.

• Plant design - Investment and start up time should be reduced to the maximum, while production process time should be increased to the maximum.
• The supply chain - Inflexibility, cost and lead-time should be reduced to the maximum. Responsiveness, innovation and quality should be increased to the maximum.
• Logistics - Order delivery lead-time and redundancy in stock should be reduced to the maximum. Flexibility should be increased to the maximum.
• Supplier relationships - Transactional behavior and waste in interaction should be reduced to the maximum. Trust, motivation and sharing of responsibilities should be increased to the maximum.
• Sourcing Strategy - Waste created by traditional nationalistic purchasing behaviors should be reduced to the maximum.
• Selling - Sales and distribution layers, coast and lead-time should be reduced to the maximum.

If the priorities of today's executives are indeed speed, flexibility, adaptability and agility as reported by Gartner, then it would seem that MCC has the same priorities. More importantly, MCC would appear to have outsourced a great deal because van Hoek and Weken estimate that during production, the added value of MCC could be as little as 10 percent of the final production cost.

It may be a while before there is sufficient proof that the model adopted by MCC meets all of the goals established for it, but, in the meantime, it is clearly a "shot over the bow" of every automobile manufacturer in North America. It may also represent a competitive warning to other manufacturers and large corporations.

So what's the bottom line? The bottom line is that if corporations start to employ the business model used in Smartville, then what has been traditionally thought of as a core competency may disappear — because almost every activity is a candidate for outsourcing.

To meet the demands of today's marketplace with the necessary speed, adaptability, flexibility and agility, organizations may choose to outsource what was traditionally seen as core. So the only true core competency may well be the ability to build and sustain business relationships.

An Unhappy King
I define "relationships" as being a series of conversations that occur over an extended period of time, with each conversation involving a number of exchanges. This is complicated because a relationship requires joint responsibility and ownership. In other words, a single party — either the customer or the supplier — cannot take the sole responsibility for the relationship.

This is not the kind of joint relationship characterized by the speech of King Gustaf Wasa of Sweden in the sixteenth century, as reported by Hakan Hakansson and Lars-Erik Gadde in their book Professional Purchasing (Routledge, London/New York 1993):

"…I have decreed unto you to forge one thousand suits of armor and ten thousand arrowheads. You have failed to obey this command! At the peril of having your heads fall to the axe, to the amusement of the inhabitants of Stockholm, in the city square one holiday eve at my discretion…"

Business relationships demand significant investments of time, energy, money and skill. Successful business relationships enable the parties involved to create value that can be shared; and they are collaborative, requiring commitment and trust.

To find out more about how Fujitsu companies work together to create unparalleled value for customers, please visit: http://us.fujitsu.com/together/