BOOK REVIEW / Science lesson for managers: Foundations of Corporate success

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John Kay - Oxford University Press, pounds 19.95

What makes a successful business? Many people want to know the answer: directors and top managers trying to make, or keep, their business prosperous; politicians wanting to know whether they can help; investors; investment analysts; financial journalists; business school academics; and even members of the public, curious to know why companies seem suddenly to flourish or go under.

John Kay's book is the latest to try to satisfy this interest. A spectacular earlier success was Peters and Waterman's In Search of Excellence, which appeared in 1982 and stressed corporate culture as a key ingredient of success. A by-product of management consulting, that book appealed to managers for its vivid stories and pithy prescriptions.

Kay's approach is very different, as his title and his publisher suggest. His aim is to help move management towards a more scientific status. The book has had a long gestation. In 1986, he tells us, he was offered the opportunity - and substantial resources - to answer the question: what are the origins of industrial success? Kay came to the conclusion that what was needed was not new data, but a framework for what was already known. He dismisses much strategic writing and advice as consisting of lists or platitudes and likens it to the early practice of medicine. Instead, he offers models and frameworks for analysis.

One of these is the well-known prisoner's dilemma. Two prisoners, who are isolated from each other, are given a choice of confessing to the crime, with different outcomes depending on whether one, both or neither confess. What it will pay one of them to do depends upon what the other does. Kay uses the prisoner's dilemma to illustrate the problem of sharing information in a joint venture. The best outcome is by free and frank exchange of information, but there are usually gains from withholding some information. Building a long-term relationship is also essential to achieve the best outcome.

The solution to the prisoner's dilemma is part of Kay's answer to what makes for business success. He calls it 'architecture', by which he means 'the network of relational contracts within, or around, the firm'. He sees building successful relationships as a key to much business success. He cites Marks & Spencer as an example of a company with a strong architecture that depends very little on any individual or group of individuals.

Kay identifies three other vital ingredients for success. There is reputation, which is the customers' guide to aspects of product quality that they cannot easily monitor for themselves. A reputation is only of value in a continuing market and is hard to transfer to different products: hence Kay's doubts about the wisdom of Marks & Spencer using its reputation to back the launch of its financial services.

Innovation is also important in establishing competitive advantage, but often hard to retain as competitors may imitate.

Strategic assets are the final ingredient. A successful drug patent that gives a firm a dominant position is one example. Such assets are most often found in industries where government regulation is important, such as the airline industry.

Kay sees the task of developing a strategy as identifying the firm's distinctive capabilities from among the four ingredients and relating them to the environment. The overall measure of business success is added value.

One of the book's pleasures is a collection of figures that compare the added value of different firms in the same industry. Another is the fascinating variety of examples and comparisons illustrated in diagrams or pictures.

We learn, for example, that if there are two ice-cream sellers on a beach, the best position for both of them is side by side in the middle of the beach, so that each serves half of the beach, but that with three ice-cream sellers there is no stable position that will suit all three.

We learn, too, why some airline departures are so close together, such as Air France and BA flights from London to Paris, at least in early 1992 - because they have chosen not to confront each other.

Foundations of Corporate Success is an important book. It does not offer easy answers but contains much well illustrated advice. Kay warns especially against the dangers of 'wish strategies': too often, he says, top managers believe that strategies can be achieved by an act of will. He loves posing questions, such as 'What should Eurotunnel charge?', 'Why do mergers perform poorly?', 'Does Kwik Save have a competitive advantage over Sainsbury's?' and then teasing out the answers.

The book is important also because it provides an original analysis of business strategy and one that is European rather than, as is usual, American. It deserves to be influential.

Whether it will prove as popular as In Search of Excellence is more questionable. A sure sign will be if 'architecture' is given a further meaning in modern dictionaries. Then we can be certain that Kay's ideas have entered the mainstream of management.

The reviewer is director of the Oxford Health Care Management Institute, Templeton College, Oxford.