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, , 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.