Penrose and the Theory of Dynamic Capabilities

As noted, and with the benefit of hindsight, Penrose appears to have underplayed growth driven by the entrepreneurial elements of management. She seems to recognize that know-how can be used to convert physical assets to different uses.10 The firm, she said, was “both an administrative organization and a collection of productive resources, both human and material” (p. 320). The services rendered by these resources are the primary inputs into a firm’s production processes and are firm specific in the sense that they are a function of the knowledge and experience that the firm has acquired over time. This is in essence a recognition of the path-dependent nature of organizational processes and rou- tines and their roles in carrying knowledge (later emphasized by Cyert and March, 1963, and Nelson and Winter, 1982).11

When services that are currently going unused  are  applied  to new lines of business, these services can also function as a growth engine for the firm through diversification (Teece, 1980a, 1982). Learning likewise enables the organization to use  its  resources more efficiently. As a result, even firms that have weak balance sheets may nevertheless be able to grow as managerial capacity is freed up for new uses as a result of managerial and organizational learning.12 Penrose appears to be articulating a weak form of what is now referred to as the dynamic capabilities approach.

The dynamic capabilities approach seeks to provide a coherent (and evolutionary) framework for how firms develop competitive advantage, and maintain it over time. In essence, dynamic capabil- ities are about identifying the foundations that undergird long-run enterprise growth and prosperity. First outlined in working papers by Teece, Pisano, and Shuen (1990a and 1990b), and then pub- lished in Teece and Pisano (1994) and in Teece, Pisano, and Shuen (1997),13 the dynamic capabilities approach builds upon the the- oretical foundations provided by Schumpeter (1934), Williamson (1975, 1985), Cyert and March (1963), Rumelt (1984), Nelson and Winter (1982), Teece (1982), and Teece and Pisano (1994). As discussed above, it is consistent with certain elements of Penrose’s framework too. If one can explain the foundations of long-run profitability, one is quite some distance down the road to a theory of the growth of the enterprise. This was of course Penrose’s ambition.

Dynamic capabilities refer to the (inimitable) capacity firms have to shape, reshape, configure, and reconfigure the firm’s asset base so as to respond to changing technologies and markets. Dynamic capabilities relate to the firm’s ability to proactively adapt in order to generate and exploit internal and external fïrm-specific compe- tences, and to address the firm’s changing environment (Teece et al., 1997). As Collis (1994) and Winter (2003) note, one element of dynamic capabilities is that they govern the rate of change of ordinary capabilities.14 If a firm possesses resources/competences but lacks dynamic capabilities, it has a chance to make a com- petitive return for a short period, but superior returns cannot be sustained. It may earn Ricardian (quasi-)rents, but such quasi-rents will be competed away, often rather quickly. It cannot earn Schum- peterian rents because it hasn’t built the capacity to be continually innovative. Nor is it likely to be able to earn monopoly (Porterian) rents since these require market power coupled with exclusive behavior or strategic manipulation (Teece et al., 1997). Dynamic capabilities thus not only include an organization’s (nonimitable) ability to sense changing customer needs, technological opportu- nities, and competitive developments, but also its ability to adapt to—and possibly even to shape—the business environment in a timely and efficient manner. A significant element of intentionality is involved.

The development and astute management of intangible assets/ intellectual capital is now central to sustained enterprise com- petitiveness, requiring new conceptual frameworks for business and economic analysis. As former US Federal Reserve Chairman Alan Greenspan remarked, “we must begin the important work of developing a framework capable of analyzing the growth of an economy increasingly dominated by conceptual products”.15 Dynamic capability theory is a framework that is well equipped to meet this challenge (Teece, 2006a).

Penrose’s framework is consistent with elements of the dynamic capabilities framework. Her emphasis on the fungible nature of resources obviously provides scope for the notion that a firm’s competencies can be reshaped. But as noted, her framework was bereft of considerations of competitive advantage.16 The whole inimitability story is missing.17 Nor did she emphasize the role of the changing environment and the constant need to improve and renew capabilities. She saw learning as an opportunity, not a necessity. She also underplayed the resource allocation role of management. She recognized the importance of entrepreneurship but did not develop this concept much nor did she show how entre- preneurship could be important to the erection of new markets.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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