Penrose and the growth of the firm

Perhaps an equally important, and in very many ways complementary, pioneering work, is that of Edith Penrose (1995). Penrose's work is concerned with the dynamics of firms. What external and internal factors are responsible for the way in which firms develop over time, the activities they undertake (or contract with others to undertake), the techniques they adopt, the products they choose to produce and so on? 10 The firm is viewed as a specialized "pool of resources" (cf. capabilities)11 whose nature (productive potential) changes over time in response to events internal and external to the firm. Penrose has a compelling bona fide theory of endogenous change.

With the passage of time, the knowledge possessed by the employees in any firm changes. This knowledge, which includes productive and organizational skills related to the firm's particular experience, is a productive resource specific, in some degree, to the firm. Thus, with time and experience, the firm accumulates productive capabilities that provide it with an important source of "excess capacity." For example, in the earlier stages of the production and introduction of a new product, employees are in the process of trial and error learning about the product. As they accumulate expertise, much of which is of an informal, noncommunicable nature, they will find that they need less effort to achieve the results. The accumulated skills will present the firm with a form of increasing returns and indivisibilities that cry out to be used and provide an irresistible internal impetus to expansion. Much of what was novel becomes "routine," leaving capacity for the development of new endeavors. This expansion occurs naturally into the production of new products and services that use similar skills (a point emphasized also by Richardson (1972)). Skills, however, are continually changing. Since experience generates new knowledge, "the productive opportunity of a firm will change even in the absence of any change in external circumstances or in fundamental knowledge" (Penrose 1995:56; see also Loasby 1991:62).

Expansion may occur through merger and acquisition, which is a way to acquire specialized human capital, or through internal expansion. But, however it occurs, in a competitive, technologically progressive industry, a firm specializing in the production of given products can hope to maintain its position with respect to those products "only if it is able to develop an expertise in technology and marketing sufficient to enable it to keep up with and participate in the introduction of innovations affecting its products" (Penrose 1995:132).

Expansion is also often necessary in a growing market because a firm's share in the market is sometimes itself an important competitive consideration. In some industries, for example in the production of certain types of durable consumer goods, consumer acceptance of the product is influenced by whether the producer can reasonably claim to be one of the "leading" producers. It is under these conditions that growth is often said and with good reason, to be a necessary condition of survival.

(Penrose 1995:133)

This insight may be described as a "grow or die" hypothesis.

In common with Richardson, Penrose notes the importance of complementarities in consumption in sometimes influencing the nature of firm expansion, especially when similar skills are called for in production, marketing, or distribution. The same firms that make washers tend to make dryers. In the final analysis, however, it is the ability of the firm to maintain the productive value of its basic abilities, its human and physical resources, that determines its ability to survive. Capital investment takes place within a perceived decision-making structure, only part of which consists of the technical intertemporal imperatives of production. In a very real sense, prospective demand has to be "manufactured" through internal organization, market agreements, distribution arrangements, and marketing efforts and these will have to be continually adapted.

In the long run the profitability, survival, and growth of a firm does not depend so much on the efficiency with which it is able to organize the production of even a widely diversified range of products as it does on the ability of the firm to establish one or more wide and relatively impregnable "bases" from which it can adapt and extend its operation in an uncertain, changing, and competitive world.

(Penrose 1995:137)

Each business is thus a kind of "research program" (Loasby 1991) in which products, processes, and methods of production and organization are continually being tried out.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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