The Resource-Based Theory of the Firm

Penrose defined the internal resources of the firm as “the pro- ductive services available to a firm from its own resources, par- ticularly the productive services available from management with experience within the firm” (p. 5). She presents the firm as an “autonomous administrative planning unit, the activities of which are interrelated and are coordinated” by management (pp. 15 ff.). “A firm is more than an administrative unit; it is a collection of productive resources the disposal of which between uses and over time is determined by administrative decision—the physical resources of the firm consist of tangible things—there are also human resources available in a firm—strictly speaking, it is never resources themselves that are the ‘inputs’ in the productive process, but only the services that they render” (pp. 24 ff.).

Put succinctly, Edith Penrose saw the firm as a “pool of resources the utilization of which is organized in an administrative framework. In a sense, the final products being produced by a firm at any given time merely represent one of several ways in which the firm could be using its resources” (pp. 149 ff.).

As with the dynamic capabilities approach (which we shall dis- cuss again later), Penrose was enlightened enough to see a role in economic theory not only for managers but for entrepreneurs. “A theory of the growth of firms is essentially an examination of the changing productive opportunities of firms . . .” (pp. 31 ff.). Penrose furthermore saw the business environment as an “image” in the entrepreneur’s mind. This is an important insight about entrepre- neurship as well as leadership (and the importance of having an entrepreneurial element in leadership). Innovation is very much about the ability of the entrepreneur to look at markets, tech- nologies and business models and to interpret them “differently”. Being able to see market and technological opportunities through different lenses (and in new ways) is an important entrepreneurial capability. It enables one to see opportunities that others might miss.

Penrose also recognized that as managers embrace growth, they are forced to decentralize, thereby shifting responsibility down the hierarchy. “New men are brought in and the existing personnel of the firm all gain further experience” (p. 52).3 Critically, “many of the productive services created through an increase in knowledge that occurs as a result of experience gained in the operation of the firm as time passes will remain unused if the firm fails to expand” (p. 54). These unused resources aren’t manifested in the form of idleness, but “in the concealed form of unused abilities” (p. 54). Penrose therefore saw the capacities of management—not exhaustion of technologically based economies of scale—as setting the limit to which a firm could grow. In her view, there was always a limit to the amount of expansion any firm, no matter how large, could undertake in a given period.4

It was the unused capacities of management, coupled with the tangibility of certain resources, which also enabled diversification in the Penrosian firm. Industrial R&D could  assist  by  drawing firms into entirely new areas, particularly if the firm focused  on more generic R&D activities. Sales and marketing relationships could also be leveraged to support the roll out of new products (pp. 116 ff.).

Edith Penrose’s ideas influenced the work of the author (Teece, 1980a, 1982) on diversification. In particular, the author (Teece, 1982) built on Penrose’s observation that “[o]f all outstanding characteristics of business firms, perhaps the most inadequately treated in economic analysis is the diversification of their activities” (Penrose, [1959], 1995: 104) in outlining a theory of the multi- product firm. This in turn alerted the strategy field to her work on resources, impacting Wernerfelt (1984) and others. But it wasn’t so much her claim that managers learn and develop unused capacities that has received the most attention  in  recent  years.5  Rather,  it was her representation  of  the  firm  as  a  pool  of  resources  that has caught the imagination of scholars in the field of business strategy.

However, what Penrose precisely meant by resources remains rather vague.6 Moreover, the Penrosian view that growth  is fueled primarily by underutilized managerial capabilities can be challenged.7 In particular, enterprise growth can be attributed to market and technological factors as well as to the strong financial rewards that both managers and shareholders receive as the busi- ness enterprise grows. Growth also flows from investment in R&D, as pointed out by several business historians and economists.8

From the perspective of modern (strategic) management, a miss- ing dimension in Penrose is an understanding of the basis for competitive advantage. Penrose implicitly adopts a profit-seeking framework; but other than a very general discussion of the com- petitive strength of small and large firms, she does not address the question of how firms develop competitive advantage. While she does recognize the importance of managerial skills, she underplays the role of intangible assets, though they are mentioned.9 In this sense, she is not “modern”; but she was ahead of her time in many ways, not least of which is that she did recognize the importance of the entrepreneurial activities of management. However, this was only mentioned in passing, along with the importance of man- agerial action in sensing and seizing emerging opportunities and managing threats.

The importance of knowledge assets is also underplayed. This ought not be surprising since the world Penrose was observing was one in which there were still significant barriers to trade and investment, and in such environments know-how is less critical as a factor in determining competitive advantage (Teece, 2000, chapter 1). Outsourcing and offshoring debates were not center stage in the early postwar economy which was her laboratory.

Nevertheless, the Penrosian conceptualization of the firm remains relevant. Her insights remain good starting points for developing a theory of the firm, and for understanding the role of the manager. Her perspective is compatible with the recent emphasis on the importance of routines and processes. Routines and processes can be thought of as providing underutilized capacity that management can leverage for growth.

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

Leave a Reply

Your email address will not be published. Required fields are marked *