Why Firms Succeed

Despite all of the discussion about corporate success, there is a paradox: lack of fundamental agreement about how to define it. Some have emphasized size and market share; profitability and returns to shareholders; technical efficiency and innovation; or reputation. John Kay’s conclusion in WHY FIRMS SUCCEED was that all of these criteria can be reduced to the company’s ability to add value—to create an output worth more than the cost of its inputs.

Success or failure come from the match between the capabilities of the organization and the challenges it faces. Kay sees the firm as a set of relationships among its various stakeholders—employees, customers, managers, and shareholders. Successful firms create a distinctive character in these relationships and operate in an environment maximizing the value of this distinctiveness.

This unique set of relationships gives the successful firm a distinctive capability, something it can do that its potential competitors cannot. Distinctive capabilities become competitive advantages only when applied to appropriate markets. Finally, distinctive capabilities become true competitive advantages only when they can be sustained over time and appropriated for the benefit of the company and its stakeholders.

Kay’s analysis of corporate success is remarkably straight-forward, but not simplistic. The bad news is that success comes out of a complex interaction of factors, which no competitor could easily reproduce. The good news is that business planners and public policy makers can use Kay’s analysis to form an approach based on maximizing the value of distinctive capabilities.