1. Asset Orchestration (in the Face of Thin Markets)
In early management scholarship, Chester Barnard and others stressed the role of management in limiting conﬂict and effec- tuating cooperation inside the ﬁrm. Barnard saw formal orga-nization and the business ﬁrm as a system of consciously coordinated activities of two or more persons. In Barnard’s view, achieving successful cooperation should by no means be taken for granted, as it is by no means the norm. As he notes, “most cooperation fails in the attempt, or dies in infancy, or is short lived” (Barnard, 1938: 5). The particular functions of manage- ment that Barnard recognizes include control, supervision, and administration (Barnard, 1938: 6), which are operational activities that relate to the business of keeping an organization function- ing. Although these (managerial) functions must be performed, they ignore the importance of the strategic functions that man- agers perform in dynamic environments.2 Today, many of the ﬁrm’s assets are intangibles, and ﬂexibility, entrepreneurship, and adjustment and adaptation to competition and changing consumer needs are paramount. We address these functions in more detail below.
2. General Considerations Regarding Asset Orchestration
One of the most touted virtues of a private enterprise economy is its ability to achieve the coordination of disparate actors external to the enterprise itself—both consumers and producers—without central planners (Hayek, 1945). The price system of course serves as the mechanism that supposedly facilitates coordination. Prices act as signals of scarcity or abundance. Consumers adjust to price increases by reducing consumption; producers react to the same signal by increasing production, and the market clears. This sim- ple mechanism means that a good deal of resource allocation can take place via market mechanisms—quickly and efﬁciently. Prices rise and resources will move to the higher valued activ- ity; ditto when prices fall. Commodity markets usually behave in this fashion; and if all markets were commodity like, then the role and importance of (strategic) management would be limited.
A very large proportion of goods, assets, and services, how- ever, are not exchanged in open, organized, and well-developed markets. For many transactions—forward, contingent, term, and spot—markets do not exist or are occasional at best. In these circumstances, markets are “thin”, offering limited liquidity for asset holders. Assets are not automatically allocated to their ﬁrst best use. As we discuss below, this creates the opportunity for managers to use the ﬁrm’s ﬁnancial and other resources and to build value inside ﬁrms. These functions are also socially desirable in most instances because they assist in aligning certain types of complementary assets—alignment which is necessary for systemic innovation and enhanced competition. If the economic system fails in these functions, ﬁrm performance and the economy at large will suffer.
Thin markets are exposed to transactional complexity and con- tractual hazards; or even if not exposed to hazards, may experience liquidity discounts—the difference between “bid” and “ask” prices is likely to be large. Frequently, transactions in these markets don’t occur at all because the services that an idiosyncratic asset provides may be difﬁcult to describe, to deﬁne, and to access. If the asset is a competence, the valuation may be difﬁcult to assess if the value of the competence depends on complementary and/or cospecialized assets owned by the seller, the buyer, or third parties. All of this is to say that certain assets tend to be built rather than bought (because there may not be a market) and to be deployed and rede- ployed inside the ﬁrm rather than sold (because sale in a market is not a good way to extract value). Because assets are bundled together and often tightly linked inside incumbent ﬁrms, it may be difﬁcult to obtain assets in the desired conﬁgurations through asset purchase or sale in mergers and acquisitions. This is not to say that mergers and acquisitions (M&A) are not an important component of asset reconﬁguration. Indeed, Capron, Dussauge, and Mitchell (1998) argue that market failures that constrain the exchange of discrete resources create incentives to use mergers and acquisitions in order to accomplish asset reconﬁguration. Put differ- ently, asset purchases/sales are often infeasible, absent purchasing or selling corporate entities in which many such assets are bundled together.
A striking example of thin or nonexistent markets is the mar- ket for know-how and for intangible assets more generally. As the author (Teece, 1981b) noted more than two decades ago, “unassisted markets are seriously faulted as institutional devices for facilitating trading in many kinds of technological and managerial know-how. The imperfections in the market for know-how for the most part can be traced to the nature of the commodity in question.” The same is true with respect to intellectual property and other intangibles. Mutually beneﬁcial trades frequently don’t happen because the property rights may be poorly deﬁned (fuzzy),3 the asset difﬁcult to transfer, or its use difﬁcult to meter. When arm’s-length market trading is impaired, internal resource alloca- tion and asset transfer within the ﬁrm achieves greater signiﬁcance. This is of course a managerially directed activity.
Accordingly, resource allocation inside the ﬁrm substitutes and complements resource allocation by markets when markets for particular assets are thin or nonexistent. Relatedly, because of cospecialization, or because of differing perceptions about future demand and technological innovation, or because of differing asset positions of buyer and seller, there may be wide disparities between how the existing owner of an asset values it and the manner in which another agent or potential owner might value it.
Because many intangible assets are idiosyncratic, they may be more valuable when they can coevolve in a coordinated way with other assets. The ability to assemble unique conﬁg- urations of cospecialized assets therefore can enhance value. In short, managers often create great value by assembling particular constellations of assets inside an enterprise, because by employ- ing such assets, they frequently can produce highly differenti- ated and innovative goods and services that consumers want. This process of assembling and orchestrating particular constel- lations of assets for economic gain is a fundamental function of management.
Effectuating systemic innovation (Teece, 2000) provides a good example of asset orchestration. Systemic innovation occurs when deep cospecialization exists between parts of a system requiring in turn the tight coordination across subsystems for innovation to occur. Systemic innovation contrasts with autonomous innovation, in which technological development can occur without immediate and direct coordination with other elements of a system.
Consider the automobile. New types of tires (such as tubeless tires, and later radial tires) have over time been developed with- out immediate regard for other developments in the automobile. Notwithstanding that some “components” can be developed inde- pendently of other parts of the system, it is frequently the case that innovation in one component will facilitate innovation elsewhere. For example, radial tires permitted cars to be designed for higher speeds, without compromising safety.
Fig. 2.1. Thin markets and strategic managers
Systemic innovation, on the other hand, almost always requires common managerial control of the parts for success, since inno- vation activity must be highly coordinated across subsystems. Contractual mechanisms will rarely sufﬁce to achieve the neces- sary coordination between or amongst ﬁrms (Teece, 1988). For instance, the Lockheed L1011 wide-bodied aircraft’s late entry into the market was caused by the inability of Rolls-Royce to develop the RB211 engine on time—and the aircraft design was cospecial- ized to the new, still undeveloped, engine. Indeed, the failure of Rolls-Royce to develop the RB211 on time was a major contribut- ing factor not only to the slow launch of the L1011, but also to the bankruptcy of the Lockheed Corporation.
In short, fuzzy property rights (as with intangibles), appropriabil- ity issues, and cospecialization are among the reasons why asset markets can be thin. This renders market transactions difﬁcult. Whenever this occurs, managers have a distinctive role that differs from the role of traders and arbitrageurs. (See Figure 2.1.)
Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.