Supply Chain

Core Competencies: The Road to Innovation Ruin

April 13, 2010

Does this sound like your mode of operation?

Step 1 - Invest blood, sweat, tears and money to innovate a product or service
Step 2 - Sell it through the largest distributor possible
Step 3 - Maximize the volume of sales through that distributor

And then simultaneously deal with:
- cost-cutting demands
- export capital
- quality control
- pollution.

All of this only to lose money; begin to develop a new innovation; and then start all over again.

Well it seems for a lot of manufacturers this is the case. This dysfunction can be traced to the 1980's when fears were rising in America about the seemingly unstoppable rise of Japanese companies.

Well meaning business gurus offered a long list of possible solutions. Organizational transformation emphasizing things like resources, capabilities, innovation, technology, and operational effectiveness was preached from the highest heights as the way to beat back the Japanese threat.

This new thinking was called Core Competence Theory.

C.K. Prahaldad and Gary Hamel explained the theory which requires a company to be built around a core of shared competencies (READ: those parts of the business that bring value to customers and the corporation). Taken to its logical conclusion, those business activities and functions which don't bring value should be outsourced. For example, why have an in-house payroll department or an exclusive dealer network if, instead, we can outsource those tasks, so we can dedicate more attention to innovating new products and services?

Over the next twenty years Core Competence Theory became a mainstay. And to quote Yogi Berra: "In theory, there is no difference between practice and theory; in practice, there is a BIG difference."

This is where Sam Walton comes in. He and a raft of imitators stepped up to fill the power vacuum that the strategy gurus helped to create. The result was the evolution of massive distributors, which ultimately drove the sales and distribution of innovative products and services and turned innovations into commodities almost overnight.

As we look at thousands, literally tens of thousands of innovative companies, we see that they are stuck having little or no control over the distribution and sale of their products and services. They do not even have control over the prices that they can charge for those innovations. It is all outsourced.

Is anyone noticing what is happening?

Is it too late?

About the Author

Andrew R. Thomas Blog | Associate Professor of Marketing and International Business

Andrew R. Thomas, Ph.D., is associate professor of marketing and international business at the University of Akron; and, a member of the core faculty at the International School of Management in Paris, France.

He is a bestselling business author/editor, whose 23 books include, most recently, American Shale Energy and the Global Economy: Business and Geopolitical Implications of the Fracking Revolution, The Customer Trap: How to Avoid the Biggest Mistake in Business, Global Supply Chain Security, The Final Journey of the Saturn V, and Soft Landing: Airline Industry Strategy, Service and Safety.

His book The Distribution Trap was awarded the Berry-American Marketing Association Prize for the Best Marketing Book of 2010. Another work, Direct Marketing in Action, was a finalist for the same award in 2008.

Andrew is founding editor-in-chief of the Journal of Transportation Security and a regularly featured analyst for media outlets around the world.

He has traveled to and conducted business in 120 countries on all seven continents.