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Core Competencies vs. Key Inputs: Manage your risk….

October 19th, 2009

            Last week I had the opportunity to attend a panel discussion on growth strategies in the current economy. The panel was comprised of key executives from US Bank, Mission Hospital, Apria Healthcare, and Toyota. All on the panel discussed what they had done over the last 12-18 months to reduce operating expenses, improve working capital positions, or in the case of Mission Hospital, revise their M&A strategy in the acquisition of a local hospital. One interesting point that was tabled by a few on the panel was the general point of reducing expenses or portions of their operations that were not a “core competency”. However, I’m not so sure companies really give the appropriate consideration to assessing “core competencies” and the contributions that certain portions of the operation contribute if not viewed as a core competency.

 

            One specific example I have in mind was part of a preliminary restructuring effort that was put into play when I was working with MGE. There was a very heavy initiative by our global management team to further improve our EBIT results. This was in preparation for a final valuation tied to the purchase of the last outstanding portion of our company. We were being tasked with reducing our operating expenses and eliminating those that were not part of our core competency, which was viewed as the manufacture and service of UPS systems. For all intensive purposes, we primarily handled final assembly and testing of those systems.  At the time, our company owned & operated a transformer manufacturing facility only a few miles away.  It was determined that this was something that was not part of our core competency, was product that could be outsourced, and should be sold. If you are familiar with a UPS system, you then know how critical a component a transformer is.  Regardless, after identifying the buyer and going through all the valuation and due diligence steps, the operation was sold.

 

            Fast forward 2 years.  As part of a North America EBIT development plan, there were 5-key areas that we decided to focus on to not only improve an already admirable EBIT result, but to identify areas of risk to our EBIT. One of those was the sourcing and purchasing of transformers. It was confirmed by outside consultants, and in agreement with earlier objections to sell the operation, that there was significant single source risk with transformers, and if our one supplier source were to have any type of disruption in delivery, would immediately impact our results. If this one small company had a fire, decided to engage a new larger customer, or perhaps drop our company, that it would significantly affect our ability to deliver on orders that we already had in place. Further, it was determined that the window to bring a new manufacturer online could be as much as 6-12 months.

 

            Ultimately, the debate is not about simply identifying your core competency and focusing on just that. It’s about appropriately identifying the key / critical input and making sure that in your decision-making you are not eliminating a portion of your operation that will put the company at risk. While it might seem that the concept of core competency is pretty black & white, you can’t overlook the necessary considerations to key inputs and their effect on executing your core competency. Do you have the appropriate contingencies in place to ensure your mitigating any revenue risk? More importantly, have you taken the time to really identify what your critical inputs are and that you have supplier contingencies?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

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