C. K. Prahalad and Gary Hamel wrote The Core Competence of the Corporation in the Harvard Business Review back in 1990 and it has been the rationale for outsourcing ever since. The logic behind it is the antithesis of lean thinking, and based 100% on a functional silo mentality. Twenty year old anti-lean thinking doesn’t die easily, but dying is exactly what the theory of core competence is doing, as anything that flies in the face of lean principles inevitably does.
The idea behind lean is that the entire process – the value stream – from the most basic supplier to the final end customer must be optimized. ‘Optimized’ means synchronizing, tightening, and integrating the sequence of steps so as to maximize the efforts creating value for that end customer, and eliminating anything and everything that is not contributing to customer value. Most of that waste – the steps, resources and money expended on activities that don’t add value – is the result of gaps and friction between the different functions along the value stream. Different departmental priorities, capacity imbalances, different planning methods and systems, and geographic space between functions are all typical drivers of waste.
Core Competence thinking ignores all of that – even adds to it. The idea behind it is that a company should pluck a step or two out of the process that it thinks it does particularly well – product engineering, say, or precision grinding – and outsource all of the rest to someone else who thinks those other vale adding steps is more in their wheelhouse. That is the path GE and just about everyone else went down. The hole in the thinking – the problems and waste that inevitably results from disconnecting the value stream – has finally become apparent.
The Wall Street Journal, in an article titled “GE Brings Engine Work Back” said, “By doing more of the work itself, GE hopes to protect its technology, speed up development and secure supplies of needed components. The move is a turnabout for a company that helped pioneer soup-to-nuts U.S. manufacturing and then switched gears to help pioneer industrial outsourcing.”
“Soup-to-nuts U.S. manufacturing” – vertical integration – was the approach driven with ferocity by Henry Ford, and the approach that drove the United States’ manufacturing economy with phenomenal results for some seventy years. It is the underlying principle behind Toyota’s strategy of owning (and thereby controlling) a big share of its key suppliers. While nobody used the term ‘lean’ it was successful for the simple reason that it integrated and optimized the value stream.
Insourcing and outsourcing decisions shouldn’t be based on core competency thinking; rather, they should be based on value adding versus non-value adding. Anything that does not add value – administrative work, accounting, IT, cutting the grass and mopping the floors – should be minimized or even eliminated. Anything that has to stay should be farmed out to someone who can get the job done cheap. But the value adding work – the critical steps along the value stream, should be controlled and optimized.
It makes no sense for a manufacturer to spend time, money and brainpower getting good at IT or maintaining the HVAC system, while outsourcing welding or injection molding. Why would anyone want to get good at things customers won’t pay for, while turning over the things customers view as critical to someone else? You have to wonder why anyone bought into this core competency nonsense in the first place.