Why Firms Succeed

326 Pages·1996·16.172 MB·English

by  Kay, John

Why Firms Succeed
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WHY
FIRMS
SUCCEED
John Kay
New York Oxford
OXFORD UNIVERSITY PRESS
1995
Oxford University Press
Oxford New York
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and associated companies in
Berlin Ibadan
Copyright © 1995 by Oxford University Press, Inc.
Published by Oxford University Press, Inc.,
198 Madison Avenue, New York, New York 10016
Oxford is a registered trademark of Oxford University Press
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press.
Library of Congress Cataloging-in-Publication Data
Kay, J. A. (John Anderson)
Why firms succeed / John Kay.
p. cm.
An adaption of author's OUP/UK book Foundations of corporate success.
Includes bibliographical references and index.
ISBN 0-19-508767-4
1. Corporations. 2. Industrial management.
3. Competition. 4. Success in business.
I. Kay, J. A. (John Anderson).
Foundations of corporate success.
II. Title.
HD2731.K39 1995 658—dc20 94-29311
123456789
Printed in the United States of America
on acid-free paper
Preface
In 1986 I was offered the opportunity, and substantial resources, to an-
swer the question, What are the origins of industrial success? There are,
perhaps, more important questions, but not many, and this was certainly
the most important question that 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 econo-
mies there are several journals that track the performance and activities
of leading companies. Case studies, business histories, and business bi-
ographies describe how decisions were made and problems overcome. I
began to understand that what was needed was not to collect new infor-
mation but to establish a framework for understanding what was already
known. The development 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."
Some people 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 susceptible to the use of analytic techniques. Every situation was
unique, and so there could be no valid generalizations. Others (such as
Abernathy and Utterback 1978] even argued that the attempt to apply
analytic methods to business issues was at the heart of the Western eco-
nomic decline.
It might be true that there can be no valid generalizations about busi-
ness and that there can be no general theories of the origins of corporate
success or failure. But it does not seem likely that that 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
makeup of genetic material? The issues considered in this book seem, on
the face of it, to be ones that would respond to analytic tools. Indeed, I
believe that the tools presented in this book do offer real help in ban-
vi PREFACE
dling these questions. If they fail to do so, it is more likely that these are
the wrong tools than that no tools will ever become available.
One paradox was immediately apparent: If I asked what was meant
by corporate success, many different answers were proposed. Some peo-
ple emphasized size and market share, and 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 busi-
ness community.
Yet this disagreement was not translated into disagreement about
which companies were successful. Whatever their criteria of success,
everyone seemed to point to the same companies—to Matsushita and
Hewlett-Packard, to Merck and Procter & Gamble, to Wal-Mart and Coca-
Cola. I formed the view that the achievement of any company is mea-
sured by its ability to add value—to create an output that is worth more
than the cost of the inputs that it uses. These different opinions on how
success should be measured were partly the result of the disagreement
about how added value was created, but 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 shareholders, the maximization of profits, and the
development of the business. Different firms and different business cul-
tures gave different weights to these purposes. But the underlying objec-
tive 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 that 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 only checklists of issues
that senior executives needed to address in considering the future of their
business. Although this literature posed questions, it yielded few answers.
Economists had studied the functioning of industry, but their con-
cerns were mostly with public policy, not business policy, and I was
sure that industrial success was founded on the behavior of firms, not
on the decisions of governments. Even though sociologists had studied
the functioning of organizations, only a few had matched the characteris-
tics of the firm to the economic environment that determined its compet-
itive performance.
I came to see that it was this match between the capabilities of the
PREFACE vii
organization and the challenges it faced that was the most important
issue in understanding corporate success and corporate failure. Accord-
ingly, this perception led directly to the primary themes of this book. I
see the firm as a set of relationships among its various stakeholders—
employees, customers, managers, and shareholders. The successful firm
is one that creates a distinctive character in these relationships and that
operates in an environment maximizing the value of this distinctiveness.
The rest of this book is concerned with the nature of these relationships,
the ways in which they achieve distinctiveness, and the ways in which
effective companies select and manage their environment in the light of
these capabilities.
I am convinced that a description of that process can illuminate the
origins of success in firms, in industries, and in national economies.
The book is divided into five parts. Parts I and II establish building
blocks for the later analysis. Part I is concerned with what is meant by
corporate success and corporate failure, and it 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 em-
ployees, customers, shareholders, and suppliers. These relationships and
the variety of forms they take are the subject of Part II.
This unique set of relationships gives the successful firm a distinc-
tive capability, something it can do that its potential competitors cannot.
Part III is concerned with the forms that such distinctive capabilities
might take. A distinctive capability becomes a competitive advantage
only when it is applied to an appropriate market. The matching of mar-
kets to capabilities is the primary subject of Part IV. A distinctive capa-
bility becomes a true competitive advantage only when it can be sus-
tained over time and appropriated for the benefit of the company that
enjoys it and its principal stakeholders. In Part V, I sum up the lessons
for both business and public policy of an approach based on maximizing
the value of distinctive capabilities.
This book is based on Foundations of Corporate Success, published
in England in 1993. But it is more than a translation of that book. It
quickly became clear that it was not enough simply to convert £ to $ and
to Americanize the spelling. Indeed, the very difficulties of illustrating
some issues in an American context pointed to some important differ-
ences in the way that business is done internationally and itself pro-
vided some insights into the origins of corporate success. I return to that
question in my conclusions.
This book also takes advantage of the opportunity, rarely available
to an author, of writing the book that really should have been written in
the first place. It is shorter and reflects both what I hope is greater wis-
viii PREFACE
dom and also (particularly in Chapter 14) my experience of applying the
analysis. I have shortened this book also by focusing on the central is-
sues of corporate strategy, the fundamental question, What business are
we (should we be) in? In Foundations of Corporate Success, I described,
in addition, some of the implications of my approach for competitive
strategy: the relationships within the chosen markets—between the firm
and its competitors, customers, and suppliers—and readers who wish to
explore these questions further will find relevant material there.
A book such as this is synthetic in objective. That is, 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 busi-
ness 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 designed to serve the twin purposes of acknowl-
edging my sources and suggesting further reading. In the Appendix, I
describe the evolution of thinking in business strategy and relate my
analysis in this book to the existing management literature, and so here
a different and more conventional style is appropriate.
I should like to thank the many people who helped with this book. In
particular, I am grateful to David Sainsbury, who proposed the chal-
lenge, and the Gatsby Foundation, which provided financial support.
Evan Davis contributed greatly to developing the ideas that the book con-
tains. Mark Fischetti provided invaluable assistance in adapting my ap-
proach to an American audience. The advice of Herb Addison, the Amer-
ican editor, was extremely helpful in suggesting how this should be
done. Sharon Wu provided research support. I should also like to ex-
press my thanks to those who provided the information, ideas, or com-
ments that went into this book and its predecessor: Charles Baden Fuller,
Matthew Bishop, Richard Brealey, Michael Cronshaw, Andrew Dilnot,
Simon Domberger, Romano Dyerson, Stephanie Flanders, Paul Geroski,
Peter Grindley, Leslie Hannah, Robert Laslett, David Musson, Geoffrey
Owen, Esther Perkins, George Richardson, Michael Roper, Laura Rovizzi,
Nigel Savage, Andrew Schuller, Bettina von Stamm, Stefan Szymanski,
David Thompson, and John Vickers. Barbara Lee managed the process of
producing the manuscript for both this version and its European prede-
cessor.
London ]. K.
January 1995
Contents
Part I Corporate Success
1. Corporate Success and Corporate Failure, 3
2. Adding Value, 15
Part II Business Relationships
3. Cooperation and Coordination, 27
4. Relationships and Contracts, 46
Part III Distinctive Capabilities
5. Architecture, 63
6. Reputation, 81
7. Innovation, 96
8. Strategic Assets, 109
Part IV From Distinctive Capabilities
to Competitive Advantage
9. Markets, 125
10. Mergers, 142
11. Sustainability, 156
12. Appropriability, 174
13. The Value of Competitive Advantage, 190