Feb 142013

I just read the following article and was smiling wryly while experiencing a BFO (blinding flash of the obvious).

The Death of Core Competence Thinking

This article talks about the slow… the FAR too slow… death of “Core Competence” thinking.  This is the concept that organizations should only focus on the 1-2 things that they are best at, e.g. marketing, and everything else should be “outsourced.”  This idea was pushed with a passion after the release of The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel of Harvard Business School.  I guess as an HBS graduate myself I have to now bear the sins of my forefathers?  Actually, these concepts go back further to the work of the famous 18th century British economist, David Ricardo, who perfected the idea of “Comparative Advantage.”

Comparative Advantage Competence Hiller Associates


Comparative Advantage says that there is a difference between absolute advantage in making something and relative advantage.  For example, in the graph to the right, we see that Country A has an absolute advantage in BOTH manufacturing guns and wheat, but the gap (Comparative Advantage) between Country A and Country B is bigger in guns than wheat.  Therefore, Ricardo would say that Country A should use ALL its resources to make guns until diminishing returns lowers its Comparative Advantage below Country B’s in producting wheat.

If the chart isn’t clear, here’s a great video teaching explanation of Comparative Advantage to a background soundtrack of AC/DC; I bet your micro economics class was never this fun.

You can see how closely Ricardo’s Comparative advantage is to Core Competence theory.  In fact, Core Competence builds on Ricardo’s work as a foundation.

The opposite of core competence thinking is the “Conglomerate” (a company that makes many products in many different industries) and/or “Vertical Integration” (owning the whole supply chain for a given product).  Core Competence theory rails against these strategies, and American business bought it hook, line, and sinker.  Why?  Because, Wall Street bought it hook, line, and sinker?  Why?

  1. When Conglomerates are split up into individual companies, they must report their financials individually, so Wall Street gets better information.
  2. When Vertical Integration is stopped and companies begin outsourcing, they will often see and immediate (though often short term) improvements in Cost of Goods Sold.  And, even if they don’t see this product cost improvement, Wall Street will give the company kudos by raising the company’s stock price, anyway.

Case closed, right?


Until the last ten years, companies have been terrible at calculating, realizing, and internalizing the Total Cost of Ownership of outsourcing.  I.e. product cost is not only about the price paid for the part, but additionally, shipping, logistics, quality/inventory risk when you have 6 weeks of parts on the ocean, inventory costs, the friction of dealing with foreign cultures with different languages in vastly different time zones, etc.  Even when firms began to calculate these costs, TCO started a cultural conflict with the proponents of outsourcing and core competence.

Enter the low key and industrious Japanese.  Actually, the Japanese were a force on the scene since the 1980’s, but people did not really internalize the Japanese concept of “Lean” (click for video explanation) manufacturing until the mid-1990’s.  Lean has many useful concepts, but two striking features of the Lean manufacturing are (1) to have one’s suppliers geographically as close as possible to the upstream plant and (2) to often own part or all of the suppliers.

In other words Lean ~= Vertical Integration.

But how does Vertical Integration = better Product Cost Management?  Check back next week!

(or, you can subscribe by email, facebook, twitter, RSS, or linked-in to the right, and we’ll check back for you!)


Feb 112013
Today's Product Cost Killing Tip -- Control the Evil Robot Overtolerancer!

There were a lot of comments last week to the article we posted with the title: Only 17% Percent of Companies Meet Product Cost Target Many people complained about the dearth of knowledge of the design engineer in Design for Manufacturability.  In the discussion, we also started to propose some solutions to overcome this problem.  However, Read More!

Feb 042013
Only 17% Percent of Companies Meet Product Cost Target

People complain about the profitability of products, especially early in production, but how often do products actually miss their profitability at launch? According to the latest research by Hiller Associates, most companies miss product cost targets.  We asked almost forty  people from a variety of corporate functions “How often do you meet or beat product Read More!

Jan 312013
The Middle Term Enigma by Shipulski On Design

One of my fellows in the world of product cost and design, Mike Shipulski, just posted the following: The Middle Term Enigma     The general synopsis of it is: Firms focus more and more on the short term The “short term” is shorter and shorter. Short term leads to minimization and typically damages long term Read More!

Jan 292013
Buying the shake weight as the solution to your bad product cost eating habits

Hiller Associates recently was the keynote speaker at aPriori’s first customer conference.  It was a great opportunity to both teach and learn from experts that came from a wide range of industries and geographies. Hiller Associates’ President, Eric Hiller, discussed several topics, of which we’ll mention two here.  The entire presentation can downloaded for FREE. Read More!

Jan 292013

  If you would like to download the presentation (Best Practices for Starting Your Product Cost Management Journey or Improvement)  for FREE, please fill out the form below and click the button. A link to the .pdf of the presentation will then appear below that you can click on.   AFTER you fill out the Read More!

Jan 162013
Where is "The DARPA Study"?!

It’s one of the most famous studies in the world of product development and probably the most famous study in the history of Product Cost Management.  It was done in the 1960’s (reportedly) by DARPA (The US Defense Advanced Research Projects Agency of the United States Government).  It’s so famous that it is typically referred Read More!

Jan 022013
Cost of Quality:  Defined by Equation, But Not By Graph?

I was just reading a really interesting article by Matthew Littlefield called Cost of Quality Definition.  I applaud the article for several reasons.  It is straightforward, clear, and short.  I especially like that Matthew acknowledged that Cost of Quality is not only in negative things that are avoided (warranties, recalls, scrap, etc.), but also that Read More!

Dec 182012
New!   Product Cost Management Survey – Participate now!!!

  Hiller Associates has teamed up with CIMdata , a global leader in Product Lifecycle Management consulting and PLM industry analyst coverage to bring you the first annual Product Cost Management Survey. It takes less than 10 minutes and you will be rewarded by receiving a free copy of the results and report of the Read More!

Dec 102012
Design-to-Value versus Design-to-Cost versus Minimum Viable Product

I just read an article on the site “Strategy + Business” called Building Cars by Design.  It caught my eye for two reasons.  First, the fact that a strategy site would deign to talk about engineering concepts was a pleasant surprise.  Second, the article discussed Design-to-Cost and Design-to-Value. If we strip off the automotive context, Read More!

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