Last Updated: 31 Aug 2010

Foundations of Corporate Success.

By John Kay. Oxford University Press; 416pp; £19.95.

Searching for the secret of business success is understandably tempting, for if a formula, or even foundations, could be discovered, the lessons could be learnt and followed. However, the exercise is quixotic. Just a cursory reading of business history, or a glance through a newspaper's business pages for a week, reveals that corporate success is transitory and that there are innumerable routes to achieving it.

John Kay was brave to set forth on his quest. Many have preceded him, and all stumbled over the first hurdle: the selection of role models. In this respect, events have served the author especially ill. To support his thesis that 'competitive advantages are generally based on stability and continuity in relationships' he cites the 'successful' companies BMW, Glaxo, Honda, IBM, Benetton and Marks and Spencer. Indeed, at a time when IBM's shambles has made almost daily headlines, he includes the extraordinary remark, 'If there is one company in that list which is evidently faltering, it is Benetton.' Kay can be excused, given the long lead time in publishing, for missing the quite recent emergence of doubts over Glaxo, Honda and BMW. But IBM has been in evident and self-confessed crisis since the late '80s: its vision is clouded, its mission is unclear and its once formidable strengths are turning into fundamental weaknesses. It is amazing that Kay seems blind to the fact that IBM has ceased to top 'everyone's list of the world's most successful companies' (a roll call in which he also includes the now deeply troubled Volkswagen).

In selecting his models of success (balanced by those of failure), Kay used a narrow definition: his 'key measure' is financial - added value, the difference between inputs and outputs. While there is much to be said for added value as a management accounting tool, it is open to many objections that apply to any financial yardstick. For example, a high added value says nothing about management quality and nothing, either, about 'sustainability'.

Yet the latter is something on which Kay lays much stress, as in this blinding self-evident observation: 'Distinctive capabilities continue to add value only if both the capability and the distinctiveness are sustainable'. His gift for tautology is considerable: thus, 'A capability can only be distinctive if it is derived from a characteristic that other firms lack.' But then the whole study is tautological. Firm A is 'successful': ergo its strategies are successful strategies. When the value ceases to be added, the firm has failed to adapt its strategies to a changing environment. QED. In fact, nothing has been proved.

Equally, Kay learnt little from those 'successful managers' who told him that success 'depended on producing the right product at the right price at the right time'. Kay accepts this vast begging of questions, but rightly says that it describes rather than explains success. Alas, his book earns precisely the same criticism. His description is less succinct, however, because he covers a huge territory before concluding that 'the foundations of corporate success are built on the identification of distinctive capabilities'.

There are many highly intelligent diversions on the road to this unenlightening climax: minor ones, such as a recurring obsession with the strategic value of 'The Prisoner's Dilemma' (a familiar logical puzzle); major ones, such as the thoughts about stable, continuous relationships mentioned above. But the argument, as it progresses through the entire field of business economics, keeps on stumbling over self-erected obstacles. Is it really true that defining objectives 'is the subject of considerable operational difficulty'? Is it worth discussing the champagne industry's prognosis if the conclusion is that, 'Time, and market evolution, will provide the answer'? Is there truly 'no limit' to the number of brands based on reputation that can exist in a given market? The whole section on brands and advertising is based on quirky assumptions: 'brands based on distinctive recipes are not strictly brands'.

Kay's discussion of the 'issues involved in determining the cost of capital' is much more interesting and fundamental, but he blows it by confessing that the discussion is 'very incomplete'. Much of the book is well-argued and wise - not least the concluding observations. Economies of scale are not what they are cracked up to be. Mergers and acquisitions do not equate with strategy and are no substitute for it. The dominant chief executive is a drawback, not an asset. Short-termism is no way to achieve long-term success. Bringing forth this wisdom, which is well on the way to becoming conventional, did not require such great labours. Did anything? The author admits in his preface that 'there are no recipes, and generic strategies, for corporate success. There cannot be.' Which makes the whole enterprise more mysterious still.

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