The Evolving Firm: Strategy and Structure in Industrial Organization

186 Pages·1982·15.752 MB·English

by  Neil M. Kay (auth.)

Also by Neil M. Kay
THE INNOVATING FIRM: A Behavioural Theory of Corporate
R&D
THE EVOLVING FIRM
Traditionally, economics has been concerned with single firms and
consumers. The firm, the industry and the economy are interpreted as
the sum of their respective parts. In this approach the basic building
blocks must be treated as individual elements and highly unrealistic
assumptions made to create a rigorous theory.
However, this approach has encountered severe problems in dealing
with the behaviour of the modern corporation. Why has the post-war
period been characterize~ by the growth of large, diversified
corporations in most developed countries? Why are some industries
characterized by highly specialized corporate strategies while others
are occupied by giant conglomerates? What are the reasons behind the
post-war merger wave, takeovers and the move towards increased
overall concentration? Traditional analysis has encountered profound
difficulties in dealing with these questions.
Instead of taking the single product-market as the basis for analysis
The Evolving Firm considers these questions by looking at the
concepts of links and relationships between product-markets, an
approach not possible in traditional analysis. Techniques for mapping
the strategy of the corporation are developed and related to questions
of hierarchy. This novel theory builds from a simple model to analyze
problems of diversification merger, takeover, aggregate concentration
and internal organization.
While Neil M. Kay looks at problems of industrial organization, he
also offers a framework which will prove useful in the business policy
area.
Neil M. Kay is a graduate of Stirling University and was a Lecturer at
Nottingham and Strathclyde Universities before taking up his present
position of Lecturer in Industrial Economics at Heriot -Watt
University, Edinburgh. He was visiting Associate Professor at the
University of California, Irvine, in the Economics Department,
1980-1, and in the Graduate School of Management, 1981-2.
THE EVOLVING FIRM
Strategy and Structure in Industrial
Organization
Neil M. Kay
© Neil M. Kay 1982
Softcover reprint of the hardcover 1st edition 1982978-0-333-32003-7
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission
First published 1982 by
THE MACMILLAN PRESS LTD
London and Basingstoke
Companies and representatives
throughout the world
ISBN 978-1-349-06114-3 ISBN 978-1-349-06112-9 (eBook)
DOI 10.1007/978-1-349-06112-9
To Betty, Jack and Gret
Contents
Preface IX
Acknowledgements xii
1 INTRODUCTION 1
The Theory of the Firm 2
Plan of the Book 7
2 SYSTEMS AND STRUCTURE 11
Aggregation 14
Analytic Structuralism 17
Global Structuralism 20
The Structuralist Approach 23
The Act of Invention 26
Conclusion 28
3 THE NATURE OF THE FIRM 30
The Existence of Firms 33
The Evolution of Hierarchy 36
Synergy and Transaction Costs 39
Synergy Maps 46
Theories of Strategy and Tactics 51
Conclusion 56
4 TECHNOLOGICAL CHANGE AND
INTERNAL ORGANISATION 57
The Innovating Firm 58
Internal Organisation and Synergy Maps 61
Catastrophe and Strategy 71
Catastrophe and Synergy 74
The Synergy Bond 76
Conclusion 77
5 CHOICE OF STRATEGY 79
vii
viii Contents
Environment and Strategy 80
Life Cycle and Catastrophe 84
Corporate Strategy 88
Conclusion 95
6 DIVERSIFICATION STRATEGY 96
Patterns of Diversification 96
Other Studies of Diversification and Inventive Activity 105
Portfolio Theory of Diversification 109
Conclusion 112
7 AGGREGATE CONCENTRATION AND THE
DIRECTION OF MERGER 114
Changes in Corporate Strategy 114
Changes in Aggregate Concentration 119
Industry Concentration and Merger Activity 125
Summary 131
8 STRATEGY AND STRUCTURE 133
Dimensions of Internal Organisation 133
Strategy and Structure 139
Control Loss and Internal Transaction Costs 141
Conclusion 142
9 CONCLUDING REMARKS 143
Generality of the Approach 144
The Theoretical Framework 146
Context 148
Conclusions 152
Notes and References 154
Bibliography 165
Index 171
Preface
This work is concerned with the economic behaviour of the large
modern corporation. It is intended as a contribution both to the
theory of the firm and to the field of industrial organisation. This
broad area has been the subject of intense activity on both theoretical
and empirical fronts in recent years, but in general results have not
been encouraging. Despite a proliferation of theories of the firm too
many major issues and problems in industrial organisation have not
been satisfactorily dealt with for economic analysis to be judged
successful up to this point.
The starting-point for this work is the suggestion that the basic
reason for this unsatisfactory state of affairs is fundamental weakness
in the central assumptions of the theory of the firm. If the arguments
of this book are correct, it is ironic that the problem was correctly
specified and an alternative approach suggested as long ago as the
1930s by R. H. Coase. Coase argued that firms existed because of
transaction costs of market exchange. Coase's paper became generally
recognised as providing a rationale for the corporation, but until
recently its influence was limited. Textbooks in the area would
frequently base their first chapter on Coase's explanation of the
nature of the firm, and then proceed effectively to ignore information
problems in subsequent chapters by reducing the problem of the
behaviour of firms to exercises in neoclassical price-setting.
What was generally overlooked with respect to Coase's analysis was
that it not only explained why firms existed in the first place, but also
provided a basis for analysing the determinants of the boundaries of
the firm - firm co-ordination supplanted market exchange when
management costs were less than transaction costs. If transaction cost
analysis can explain the boundaries of the firm, it should be able to
deal with such problems as vertical integration, diversification,
merger, takeover and size of firm, all of which involve the extent or
the extension of the boundaries of the firm.
In the 1970s the potential relevance of transaction cost analysis to
the problem of vertical integration was recognised by O. E.
ix
x Preface
Williamson and applied by him in a number of papers and his book
Markets and Hierarchies (1975). I suggest here that this approach can
be extended to cover other important problems of resource allocation
in the area of industrial organisation.
In addition to transaction cost analysis there is a second major
theoretical perspective underlying this work: structuralism.
Structuralism is a paradigm which has been subjected to a variety of
interpretations in the social sciences, though I select a limited and, I
hope, consistent view of it here.
The two approaches, transaction cost analysis and structuralism,
are presented here as complementary perspectives which can be
usefully combined within one theoretical framework. Since most works
are generally content with one theoretical approach, I might be
reasonably expected to justify the complication of adding a second. If
the approach works, this is sufficient justification. If the reader does
not feel that the approach works then I would be tempted to adopt a
more ignoble defence and blame my colleague Geoff Wyatt for asking
a central question at a departmental seminar given by me at Heriot
Watt University. I had used the concept of synergy in some earlier
versions of this work, and Geoff Wyatt raised the issue of whether or
not synergy could be traded. This encouraged me to reappraise the
approach in the light of transaction cost analysis.
Since the final draft of this book was prepared, I have discovered
what I believe may be interpreted as an independent development of
the principle of trading synergy gains. D. J. Teece (1980) argues that
Williamson's transaction cost analysis can be applied to the issue of
economies of scope. Since at a formal level I argue here that
economies of scope and synergy are equivalent, Teece's article
effectively represents a separate development of the concept of
synergy trading in the context of transaction cost analysis. However,
Teece argues that economies of scope cannot provide a satisfactory
basis for a theory of diversification. I argue here that it can, once it is
married with the concept of environmental threat.
I am, of course, grateful to Geoff Wyatt for his help and also to my
colleagues Peter Clarke, Philip Welham and Les Simpson for their
advice and encouragement. John Scouller at Strathclyde University
drew my attention to related works by Buckley and Casson on
multinational enterprise; while it was too late to develop the link in
this work, it is a promising area for future study. I have also benefited
from discussion at other seminar presentations Lhave made at the
Universities of Strathclyde, Stirling, Nottingham and California. It is