Foundations of Corporate Success: How Business Strategies Add Value

433 Pages·2003·42.49 MB·English

by  John Kay

Foundations of
Corporate Success
How business strategies add value
JOHN KAY
OXFORD UNIVERSITY PRESS
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ISBN 0-19-828781-X
PREFACE
In 1986 I was offered the opportunity, and substantial resources, to answer
the question, 'What are the origins of industrial success?' There are, perhaps,
more important questions, but not many, and that was certainly the most
important question I felt in any way equipped to try to answer. So I accepted
the challenge.
It was obvious that there was no shortage of data. Every corporation is
required to file detailed returns of its activities. In all Western economies
there are several journals which track the performance and activities of lead-
ing companies. Case studies, business histories, and business biographies
describe how decisions were made and problems overcome. I began to
understand that what was needed was not to collect new information, but to
establish a framework for understanding what was already known. The devel-
opment of such a framework became my primary goal, and the purpose of
this book is to describe that framework. I will have succeeded if the thoughtful
senior executive thinks less often, 'That is something new,' than, 'That makes
sense of my experience.'
There were those who told me that the task I had set myself could not be
done, or was not worth doing. Business problems were too complex to be sus-
ceptible to the use of analytic techniques. Every situation was unique and
there could be no valid generalizations. It had even been argued by some (as
in Abernathy and Hayes, 1980) that the attempt to apply analytic methods to
business issues is at the heart of Western economic decline.
It might be true that there can be no valid generalizations about business,
and that there can be no general theories of the origins of corporate success or
failure. But it does not seem very likely that it is true. It is not just that similar
observations were made ahead of much greater leaps in scientific knowledge.
How could we hope to understand something so complex, and so subject to
change, as the motion of the planets or the make-up of genetic material? The
issues considered in this book seem, on the face of it, to be ones that could
respond to analytic tools. I believe that the tools presented in this book do give
real help in handling these questions. If they fail to do so, it is more likely that
they are the wrong tools than that no tools will ever become available.
One paradox was immediately apparent. If I asked what was meant by cor-
porate success, many different answers were proposed. Some people empha-
sized size and market share, others stressed profitability and returns to
shareholders. Some people looked to technical efficiency and innovative
capability. Others stressed the reputation that companies enjoyed among
their customers and employees, and in the wider business community.
Yet this disagreement was hardly reflected at all in disagreement about
which companies were successful. Whatever their criteria of success, every-
one seemed to point to the same companies—to Matsushita and to Hewlett-
Packard, to Glaxo and to Benetton, to BMW and to Marks & Spencer. I formed
the view that the achievement of any company is measured by its ability to
add value—to create an output which is worth more than the cost of the
inputs which it uses. These different opinions on how success should be mea-
sured were partly the result of disagreement about how added value was cre-
ated, but rather more the product of different views as to how, once created,
added value should be used. Successful companies, and successful
economies, vary in the relative emphasis to be given to returns to sharehold-
ers, the maximization of profits, and the development of the business.
Different firms, and different business cultures, gave different weights to
these purposes. But the underlying objective of adding value was common to
all.
I began by asking the managers of successful companies to explain the
sources of their success. They told me that success depended on producing
the right product at the right price at the right time. It was essential to know
the market, to motivate employees, to demand high standards of suppliers
and distributors. I recognized that all these things were true, but those who
emphasized them were describing their success, not explaining it.
I found that much had been written on strategic management. But stripped
of rhetoric, most strategy texts offered checklists of issues that senior execu-
tives needed to address in considering the future of their business. That litera-
ture posed questions but yielded few answers.
Economists had studied the functioning of industry, but their concerns were
mostly with public policy, not business policy, and I was sure that industrial
success was founded on the behaviour of firms, not on the decisions of gov-
ernments. Sociologists had studied the functioning of organizations, but only a
few had matched the characteristics of the firm to the economic environment
that determined its competitive performance.
I came to see that it was that match between the capabilities of the organiz-
ation and the challenges it faced which was the most important issue in
understanding corporate success and corporate failure. That perception led
directly to the primary themes of this book. These begin from a recognition
that there are no recipes, and generic strategies, for corporate success. There
cannot be, because if there were their general adoption would eliminate any
competitive advantage which might be derived. The foundations of corporate
success are unique to each successful company.
VI PHIiFACE
The uniqueness is a product of the firm's contracts and relationships. I see
the firm as a set of relationships between its various stakeholders—em-
ployees, customers, investors, shareholders. The successful firm is one which
creates a distinctive character in these relationships and which operates in an
environment which maximizes the value of that distinctiveness. The rest of
this book is concerned with the nature of these relationships, the ways in
which they achieve distinctiveness, and how effective companies select and
manage their environment in the light of these capabilities. I am convinced
that description of that process illuminates the origins of success in firms, in
industries, and in national economies.
The book is divided into seven parts. Parts I and II establish building blocks
for the later analysis. Part I is concerned with what is meant by corporate suc-
cess and corporate failure, and presents a clear objective for the firm—adding
value. A firm adds value through the distinctive character of the relationships
it establishes with its stakeholders—its employees, customers, shareholders,
and suppliers. These relationships, and the variety of forms they take, are the
subject of Part II.
That unique set of relationships gives the successful firm a distinctive capa-
bility—something it can do which its potential competitors cannot. Part III is
concerned with the forms which such distinctive capabilities might take. But
a distinctive capability becomes a competitive advantage only when it is
applied in a relevant market. The matching of markets to capabilities is the
subject of Part IV. Parts III and IV define the central issues of corporate strat-
egy. They describe how the firm should answer the familiar question, 'What
business are we in?'.
Part V examines business and competitive strategy. It analyses relation-
ships with competitors in the chosen market. So Part V is concerned with
problems of pricing, positioning, advertising and branding, and with vertical
relationships—the firm's dealings with its suppliers and distributors. Firms
add value by creating a distinctive capability through a unique set of relation-
ships, establishing a competitive advantage based on that distinctive capabil-
ity in relevant markets, and maximizing the value of that advantage through
the firm's business strategy. Part VI—the strategic audit—pulls these strands
together at the levels of firm, industry, and nation. For many readers, the
book can finish there, but Part VII is designed for those who wish to under-
stand how this analysis relates to other approaches to the understanding of
business behaviour.
A book such as this is synthetic in objective. It seeks to draw ideas from a
wide range of sources, and any claims to originality rest on the way in which it
brings a variety of different approaches from business history, economics,
law, and sociology to bear on a specific group of issues rather than on the
novelty of these ideas themselves. Instead of attributing each of these strands
of thinking fully as they arise, I have been sparing with references in the text,
but have provided relatively full bibliographical notes which are designed to
serve the twin purposes of acknowledgement of sources and guide to further
PREFACE Vll
reading. Chapter 21, a brief history of the subject of business strategy, is
designed to relate the analysis here to the existing management literature,
and there a different and more conventional style is appropriate.
In writing Chapter 211 became very conscious that virtually all the refer-
ences were to articles or books written in English, at least of sorts, and that the
vast majority of them came from the United States. This would have been
almost as true, although I believe less true, if I had chosen to survey modern
physics or chemistry (and been competent to do so). But while the United
States contains a disproportionate fraction of the world's talent and resources
in physics and chemistry, it is less apparent that this is true of business strat-
egy. And while the laws of physics and chemistry know no national bound-
aries, there is much that is culturally specific in strategy and in approaches to
strategy. The perspective of this book is European and the examples and illus-
trations it uses are mostly European.1
A European perspective bears directly on the issue of how commercial rela-
tionships are established and managed. The business culture of the United
States is a strongly individualistic and opportunistic one, where hard bargains
are driven and expressed in concrete contractual form. It is an environment
in which firms have no hesitation in looking to legal process to enforce the
terms of these contracts—and may, indeed, do so without jeopardizing a con-
tinuing commercial association. The Japanese way of doing business is char-
acterized by complex but informal networks of relationships, where many of
the rules are implicit and may be evident only to the parties to the relation-
ship themselves. Europe lies somewhere in between. I believe that few
American management writers have understood the significance of these cul-
tural differences, or their relevance to the competitive advantages of firms
and of nations, and that if Europeans fail to do so there is a danger that we
will end up with a combination of the worst aspects of these two business
styles rather than with the best, as we have an opportunity to do. I return to
these themes in Chapters 20 and 22.
I should like to thank the many people who have helped with this book. In
particular, I am indebted to David Sainsbury, who set the challenge, and the
Gatsby Foundation, which provided financial support; to Evan Davis, who
contributed greatly to developing the ideas it contains; to Jonathan Star, who
acted as a highly effective research assistant throughout the preparation of
the manuscript; and to Barbara Lee, who managed endless versions and revi-
sions of a complex manuscript. The Economic and Social Research Council's
technology initiative provided additional research support which is particu-
larly reflected in chapters 5 and 7. Stefan Szymanski and David Thompson
were responsible for the preparation of substantial pieces of analysis con-
tained here, and Matthew Bishop, Michael Cronshaw, Stephanie Flanders,
Esther Perkins, and Laura Rovizzi all gave research assistance in particular
1 I have also taken the opportunity to overcome the problem of different monetary units by
expressing cash amounts in Ecus, except in some cases where it would be absurd to convert from
the original currency. A list of conversion factors is to be found on p. 369.
Vlll PREFACE
subject areas. I can identify ideas which derive from conversations with
Charles Baden Fuller, Richard Brealey, Romano Dyerson, Paul Geroski, Peter
Grindley, Michael Roper, and Paul Willman, and I am sure there are many
others. Comments on earlier versions of the manuscript were provided by
Andrew Dilnot, Simon Domberger, Leslie Hannah, Robert Laslett, Geoffrey
Owen, George Richardson, Nigel Savage, Bettina von Stamm, and John
Vickers. Hayley Bell prepared the first version of the manuscript. The editors,
Herb Addison, David Musson, and Andrew Schuller, provided helpful advice
and comments and necessary support and encouragement. The Coca-Cola
Company and Bells assisted with original artwork.

CONTENTS
List of Figures xiii
List of Tables xv
List of Illustrations xvii
Part I Corporate Success 1
1. The Structure of Strategy 3
2. Adding Value 19
Part II Business Relationships 31
3. Co-operation and Co-ordination 33
4. Relationships and Contracts 50
Part III Distinctive Capabilities 63
5. Architecture 66
6. Reputation 87
7. Innovation 101
8. Strategic Assets 113
Part IV From Distinctive Capabilities to Competitive
Advantage 125
9. Markets 127
10. Mergers 144
11. Sustainability 160
12. Appropriability 181
13. The Value of Competitive Advantage 192
Appendix: Added Value Statements 211
PartV Competitive Strategies 219
14. Pricing and Positioning, 1 221
15. Pricing and Positioning, 2 235
CONTENTS