Has Your Company Lost Its Core Competence?

The recession has inspired some companies to shed businesses and activities that are outside of their core competence. For example, Yahoo has refocused on selling display ads and being a portal for online content, forgoing search. This trend reflects the idea that companies' success comes from focusing on their core activities and outsourcing or avoiding engagement in anything else. But like many business concepts, this one is easier to describe than to make operational.

What led to the current attention to core competence? Diversification -- the opposite of focusing on core activities-was all the rage in the 1960s. Remember the conglomerates, companies such as Gulf and Western Industries, International Telephone and Telegraph (ITT), and others? Their idea was that operating in a range of industries protected them if any particular industry fell on hard times, ensuring a more stable and predictable earnings stream, thereby garnering a higher share price. Many companies, not just the so-called conglomerates, followed this strategy. General Motors, for instance, acquired EDS, the software services company, as well as Hughes Aerospace. Through its finance subsidiary whose original purpose was to help finance car loans, GM even entered the mortgage market. Cendant was in the real estate and travel industry business, among others. The 1980s and the era of the corporate raider put an end to a lot of this. It turned out that the stock market had difficulty evaluating the total value of a bunch of unrelated businesses, so there was money to be made by buying these large agglomerations of assets and splitting them up into smaller companies, each of which was more focused.

You could argue that in good times, companies use the extra cash flow and borrowing capacity to expand into unrelated areas, and that economic difficulty causes them to think hard about what businesses they should be in. The question of what businesses to be in and what to stay away from is one of the fundamental questions of business strategy, and it's important for both individuals and companies.

The problem comes in figuring out which activities are core, because that answer depends on how you define the economic terrain and your company's place in it. SAS Institute, the large privately owned software company, once operated its own daycare centers and cafeterias because it defined its core competence as "taking care of its employees," a strategy that enabled it to recruit and retain the best people. I was recently at a meeting where A. G. Laffley, the very well-regarded chairman and former CEO of Procter and Gamble, described the difficulties P&G had in actually implementing the seemingly simple idea of focusing on core competence. Was P&G's core competence making cleaning products sold through grocery stores, or was its core competence building strong consumer brands-a definition that would broaden its scope considerably? To take yet another subject of considerable current debate, is Google just a search firm that should get out of its many apparently unrelated businesses? Or is Google's strategy, to be ubiquitous on the Internet, a core competence? (By the way, not only do I think the latter is a winning strategy, I believe the Google executive who told me, "once we are omnipresent in every aspect of the Web, we will figure out how to make money from our position." )

And then there's the question of not what your core competence actually is, but what it needs to be. Many airlines have gotten out of the maintenance business -- they can save money by shipping planes out of the U.S. to subcontractors for service. But recently, four out of eight United Airline flights from Los Angeles to San Francisco experienced long delays because of maintenance issues, and airlines have gotten into trouble with the FAA over inadequate documentation and mistakes made in aircraft maintenance. If you think the job of an airline is to fly people on time and safely, maybe maintenance ought to be a core organizational competence, regardless of what some company's current reality is.

The idea of focusing on the core is sensible. The trick is in figuring out what is core and what isn't. That's a strategic skill that is critical for success. And it's something that often becomes clearer in hindsight than from listening to companies explain what they are doing and why.