core competencies – The OM Blog by Heizer, Render, & Munson

OM in the News: Apple, Core Competencies, and Electric Cars

In a perfect example of what happens when successful firms decide to stretch beyond their core competencies (see Chapter 2), Apple has just put an end to its decadelong push to build its own electric vehicle. Once seen as an effort having the potential to transform the auto industry, the secret group inside the iPhone giant—known internally as Project Titan—has been shut down, reports The Wall Street Journal (Feb. 28, 2024).

That EV transformation, which has been under way for years without Apple, continuously increased the level of difficulty Apple faced as it spent billions on R&D for the project trying to catch or exceed the capabilities made available during a revolution led by Tesla. The car group inside Apple was the subject of several rounds of restructuring and shifting strategies over the years as Apple struggled to figure out a path forward. Some executives pitched deep partnerships with automakers or even outright buying an automaker, but none of that materialized.

Since the mid-2010s, the specter of Apple introducing a car had rattled auto executives. Cars were becoming computers on wheels, with updateable features and large touch screens—morphing into a sort of device that seemed to play right into Apple’s strengths. “There was a view that if they ever did put out a car, that would be tough to compete with. Still, an Apple vehicle was seen as a distant threat because everybody knew how hard it was to build cars.” ” said a former GM exec.

When the effort kicked off in 2014, Apple imagined a fully autonomous vehicle. Over time, it scaled back those ambitions to where the vehicle automates only some parts of the driving. With these strategic changes, leadership was also in near constant flux.

“Apple canceling this project is a sigh of relief for us,” said an investment manager. “When you looked at Apple’s future initiatives, the car project was always the most far-fetched for Apple. This just isn’t in their wheelhouse. Instead, it is better Apple will be redeploying engineers and investments into areas like artificial intelligence that could help its consumer electronics business.”

Classroom discussion questions:

What is Apple’s core competency?
Apple also tried to enter the TV business in 2014. ( See the Time article on June 1, 2015), What happened in that venture? Compare it to the EV project.

OM in the News: Battery Supply Chains

For the first time in more than a decade, the cost of an electric car battery is set to rise this year, reports The Financial Times (Oct. 10, 2022). Soaring prices for battery raw materials — such as lithium, cobalt and nickel — have led to the reversal of a long-held trend towards cheaper cells, which had seen costs come down from $1,220 per kilowatt-hour in 2010 to $132 per KWH last year. And a return to more expensive batteries, alongside a supply chain squeeze, calls into question how quickly electric vehicles can become affordable mass-market products — at a time when transport still accounts for a quarter of the carbon dioxide emissions that are a driver of global warming.

Some carmakers are going directly to lithium mining companies to source raw materials

This means that carmakers will experience prolonged production disruptions, akin to those caused by semiconductor shortages over the past two years. So, faced with constraints on their ability to acquire raw materials, some companies are planning to take over the buying of vital inputs themselves, rather than leaving it to a vast base of suppliers.

Tesla was the first carmaker to venture onto this path in 2020, saying the company would intervene directly, where necessary, to supplement the supply of battery materials. The EV maker has applied for tax breaks to build a potential lithium refinery in Texas or Louisiana. Such a move is seen as necessary to achieve Tesla’s ambition of 20 million electric car sales by 2030.

It comes with great risk, though. Lithium refining — complex chemical processing — is a far cry from the carmaker’s core expertise of designing vehicles (see Chapter 2’s discussion of core competence), and relies on the company being able to secure a type of lithium ore known as “spodumene”. (Prices of lithium hydroxide, the refined product, have skyrocketed to more than eight times the level of the start of 2021 at almost $70,000 per ton, close to record highs.) Ford, GM, and Stellantis are following Tesla’s path in investing in lithium mines.

Battery costs are forecast to be $138 per kilowatt-hour in 2024 — the same level as last year. A cost of $100 per KWH is viewed as the level that will make EVs affordable. Industry advancement rests on batteries getting more powerful and cheaper and cheaper every year.

Classroom discussion questions:

Should automakers go out and buy lithium mines? Why or why not?
Why is this an important OM issue?

OM in the News: Rethinking Outsourcing

“Outsourcing has transformed global business”, writes The Economist (July 30-Aug 5,2011), with $100 billion in new contracts signed every year. In Britain alone, 10% of all workers are in “outsourced jobs”, to the tune of $200 billion/year. Even war is being outsourced: the US now has more “contract employees” in Afghanistan than soldiers. This is not a new phenomenon, of course. When I was toiling away 40 years ago as a college student scrubbing floors as a janitor at Sears, I never really worked for the retailer. I was on the staff of the company that Sears hired to do all its cleaning. As we note in Supp.11, Outsourcing as a Supply Chain Strategy, tasks like cleaning, and many other back-office jobs, are peripheral to a company’s core business and can be done better/cheaper by specialists.

But The Economist goes on to point out that outsourcing may have reached maturity in economies such as the US and Britain. It suspects that much of what can be outsourced already has been. A recent quarterly index of outsourcing shows an 18% drop globally.

Why? Perhaps : (1) an uptick in legal disputes over outsourcing marking a well of discontent over badly written/handled contracts; (2) vendors who overpromise to get contracts, then fail to deliver; (3) companies undermining their overall customer service by contracting to foreign call centers, then wondering why their customers hate them; (4) a move towards shorter-term , smaller, and less-rigid deals (indeed “mega” outsourcing contracts, over $100 million, dropped by 62% this year).

The nightmare story of Boeing’s decision to outsource the bulk of the 787 some 8 years ago may also be a reason why companies are rethinking the strategy. If the Dreamliner rolls off the assembly line later this year, it will have been billions over budget and 3 years behind schedule. This is largely because of sub-contractors who failed to deliver on time or who made parts that did not fit together.

Discussion questions:

1.Will outsourcing continue to be a good strategy for most firms? Why?

2. Where, globally, does outsourcing continue to grow?