Dynamic capabilities and multinational enterprise: Penrosean insights and omissions.
| Verfasser | Augier, Mie |
Abstract and Key Results
* Penrose's legacy is a curious one. Much cited, but little read, her work is recognized as one of the main intellectual foundations for modern resource based theories of business strategy and theories of organizational routines and capabilities.
* However, Penrose did not aim to contribute to the field of strategy; her goal was to advance understanding of the nature of the firm and its growth. Nevertheless, there are important insights in Penrose's work that have implications for international business and for strategy.
* We discuss some of the implications of Penrose's work as well as its limitations. We also briefly discuss the usefulness of adopting a "Penrosean" capability perspective in multinational enterprise (MNE) strategy analysis.
* The dynamic capabilities framework puts entrepreneurial management into the theory of multinational enterprise, a task Penrose left untouched.
Key Words
Penrose, Multinational Enterprise, Strategy Analysis, Strategic Management, Entrepreneurship, Dynamic Capabilities
Introduction
Edith Penrose's many and varied contributions to business studies deserve recognition. In her later years, she focused on the oil industry and on multinational enterprises (MNEs). (1) In this paper, we note some of her earlier contributions which helped initiate important streams of research, including the resource based theory of the firm. Her influence has also extended to new streams of research on dynamic capabilities and entrepreneurship. We discuss some implications for MNEs of the dynamic capabilities framework.
In her most important scholarly journey, Edith Penrose set out to develop a theory of the growth of the firm. Indeed, this was the title of her now well-known 1959 treatise. (2) Along the way she made several other astute observations about firms that turned out to be provocative to scholars interested in the theory of the firm and business strategy. It is these observations--particularly the notion that the firm is best thought of as a bundle of resources--which now constitute her better-known legacy.
The Resource Based Theory of the Firm
Penrose defined the internal resources of the firm as "the productive services available to a firm from its own resources, particularly 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 et seq.). "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 et seq.).
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 et seq.).
As with the dynamic capabilities approach (which we shall discuss 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 et seq.). Penrose furthermore saw the business environment as an <
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 et seq.).
Edith Penrose's ideas influenced the work of Teece (1980, 1982) on diversification. In particular, 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, p. 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 business 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 missing 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 competitive 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, and the importance of managerial 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 off shoring debates were not center stage in the early post war 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.
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 routines 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 1980, 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...
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