Neil Kay: Pattern in Corporate Evolution

1997, Oxford: Oxford University Press. 319 pages.

This book is an ambitious book. As Kay states in his preface, it is about why firms exist, what determines their boundaries and why they adopt various forms of organization. This is the same territory as that firmly occupied by Oliver Williamson's transactions costs economics. Kay is an economist too, but an unconventional one. He sets out to tackle Williamson head-on, not with neologisms and equations, but with computer-aided graphics. To the established tree diagrams of organization studies, these graphics add new and suggestive ways of seeing a wide range of strategic and structural issues, from diversification and joint ventures to the problems of multinational organization.

Kay's complaint about conventional economics is its 'hub-and-spoke' accommodation of successive challenges to its core assumptions. In recent years, assumptions about optimal decision making have been challenged by the notion of bounded rationality; the primacy of markets has been displaced by an acceptance of hierarchies; concern has shifted from products to resources; and technological innovation has supplanted price as the key strategic variable. Nevertheless, revisionist theorists have contented themselves with knocking out one spoke at a time, leaving the other spokes and central hub essentially intact. Kay argues that understanding the why, what and how of firms means ditching the whole apparatus of neo-classical economics. The core obsession of optimal product-market price must be replaced by a concern for the firm, not as a black-box, but as a hierarchically organized collection of resources whose imperfect decision-making processes are centred upon innovation rather than price.

This critique of the incremental revisionism of conventional economics is well-done. It places Kay close to the new resource-based orthodoxy in strategic management, and provides an effective launching pad into a number of issues.

Kay's central issue is the problem of horizontal diversification into different markets and technologies. Williamson's analysis of the boundaries of the firm was focused on vertical integration, explained in terms of managing asset specificity. However, large firms today are typically more diversified than integrated and the notion of asset specificity by definition can tell us little about how firms generalize their activities. For Kay, it is the non-specificity of assets that explains diversification decisions, such as, for instance, Boeing's ability to move from military aircraft to civil airliners. Kay reverses Williamson's discussion of vertical integration by introducing the notion of asset replaceability. Here it is the ease with which firms can replace assets externally in the marketplace that determines their scope. On the other hand, firms typically integrate their R&D precisely because such accumulated skills and experience are hard to replace on the market. On the other hand, advertising is usually dis-integrated because it is easily contracted for between different agencies. This is a resource-based view in which the hierarchical co-ordination of synergistic links between nonspecific assets is central to firm success.

Now that links between non-specific assets or resources have been established as the raison d'etre of the firm, Kay can introduce his graphical devices for representing various kinds of strategic linkage between diversified businesses. This is ground well-trodden by Chandler and Rumelt, but these graphics give a much more easily assimilated characterization of various diversification strategies than the dry ratios of previous approaches. Kay's blobs and lines, shadings and arrows, provide a dynamic and holistic view of corporate strategy productive of new insights. For example, Kay is able to suggest that certain strategies - the classic conglomerate one, for example - are likely to be more robust over time than previously thought, while the more tightly-meshed 'related constrained' strategy is vulnerable to shocks and may be transitory.

Kay pushes this form of analysis to a wide range of issues, strategic and organizational. There are some counter-intuitive insights: firms do not cluster in alliances because they trust each other, but in order to trust each other; because of the simplifications necessary to cope with the non-routine nature of strategic decision-making, task complexity falls as we rise up the organizational hierarchy. All this is achieved in an easy style, liberally illustrated with examples. Busy academics and academically-minded business people would have little trouble with the material.

There are some limitations, however. First, the examples are almost exclusively British, and Kay is still enough of an economist to pass blithely over institutional influences upon the nature of the firm, its strategies and its organization. In the last few years, this journal; in particular, has gone a long way to show the influence of national institutions, and even Williamson (1991) has gestured to their importance. Second, Kay's conceptions of strategy and organization may seem somewhat desiccated to many readers familiar with the recent rhetorics of 'purpose, process and people' (Ghoshal and Bartlett 1998). Again, Williamson (1975) has gone further, at least experimenting with such mushy concepts as 'atmosphere'. Kay's straightforward preoccupation with diversification strategy and organizational structure does seem a little restrictive.