Coordination as an economic problem is only necessary because of change (Hayek, 1945). In a static environment, a short period of “set up” would be required to organize economic activity; but absent change in consumer tastes or technology, economic agents (both traders and managers) would sort out the optimal flows of goods and services (together with methods of production). There- after, there would be no need for their services.
Now introduce change. If there were a complete set of for- ward and contingent claims markets, adjustments would occur automatically; absent a complete set of futures and contingent claims markets, there is the need for economic agents to engage in trading activities, and for managers/entrepreneurs to “inte- grate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al., 1997). That is why what Adner and Helfat (2003) termed “dynamic managerial capabilities”4 hold particular importance.
1. Dynamic Managerial Capabilities Include Asset Orchestration
Coordinating and adapting effectively to changing environments (Cyert and March, 1963) is an important managerial function that is an element of a firm’s dynamic capabilities. Barnard (1938) and Richardson (1960) developed this theme early. Chester Barnard viewed the firm fundamentally as a structure to achieve coordin- ation and adaptation. But as Williamson (1995) observes, Barnard did not compare the firm with markets in terms of their coordina- tive or adaptive capabilities. As noted above, one key difference is that the firm, by employing astute managers and good incentive design, can achieve coordination and adaptation with respect to nontraded or thinly traded assets; the market on the other hand enables rapid adaptation with respect to assets that are actively traded in thick markets.
However, the strategic management function involves much more than “coordination” and “adaptation”. The functions of the (strategic) executive go well beyond what Barnard and Williamson identified. In particular, “coordination” and “adaptation” as man- agement functions do not fully capture the essence of critical managerial activity in dynamic markets. Such managerial activ- ity involves, inter alia, orchestrating complementary and cospe- cialized assets, inventing and implementing new business mod- els, and making astute investment choices (including with regard to R&D and M&A) in situations of uncertainty and ambiguity.5 Nor do traditional perspectives convey the importance of asset alignment, opportunity identification, and accessing critical cospe- cialized assets. These are all important managerial functions that create value.
Put another way, the importance of strategic management stems in a fundamental sense from what can be thought of as “market failures”.6 The “market failures” arise not just from high transac- tion costs and contractual incompleteness.7 Rather, they have to do with the thinness of asset markets, and the need to identify, “build”, align, adapt, and coordinate activities and assets, espe- cially complementary/cospecialized assets. Managers perform these important functions in the economic system.
G.B. Richardson (1960) has remarked on the information problems associated with achieving coordination and investment decisions. However, he focused on industry-level coordination of investment. He identified situations where limited informa- tion about competitors’ investment decisions may impede efficient investment. In contrast, the essential coordination task identified here involves assembling and reassembling other idiosyncratic firm assets (including through strategic alliances with other firms).
2. Asset orchestration
Needless to say, the proficient achievement of the necessary coor- dination by no means occurs automatically. Decision-makers need information about changing consumer needs and technology. Such information is not always available; or if it is available, decision- makers must collect information, analyze it, synthesize it, and act on it inside the firm. Situations are dealt with in many ways, sometimes by creating rules which specify how the organization will respond to the observations made (March and Simon, 1958). If this path is chosen, then rules may become codified and rou- tinely applied (Casson, 2000: 129) whenever certain changes are detected.8 However, such rules need to be periodically revised, which entails dynamic capabilities.
The coordinating and resource-allocating activities performed by managers shape markets9 as much as markets shape the business. Put simply, the business enterprise and markets coevolve. Man- agers shape this coevolution. The need for asset coordination and orchestration and associated investment choices is a fundamental economic problem that the firm’s managers help address. In this regard, the evolutionary fitness of a business enterprise may be endogenous to its technical fitness. By using technically proficient asset orchestrations capabilities, managers may be able to shape the external environment to the firm’s advantage, leading to evo- lutionary fitness.
Fig. 2.2. Coevolution of markets and the business enterprise
The emergence/development of competitive markets is thus important for strategic management. As markets become devel- oped and highly efficient, managers have less room to build com- petitive advantage (Barney, 1986). The emergence of competitive intermediate product markets in petroleum and chemicals, for example, has been identified as a major leveler in global compe- tition (Teece, 2000). Competitive advantage is illusory when all markets are highly competitive. However, changes in markets and technologies create new market opportunities. As long as idiosyn- cratic assets abound, this will create thin market situations and provide opportunities for competitive advantage.
Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.