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The Theoryofthe Growth
The Theoryofthe Growth
The Theoryofthe Growth
The discipline of social science research has traditionally been male dominated. Whether it be
economics, sociology, or psychology- the three building blocks of modern day management
studies, there have been very few female researchers. One of the most celebrated women
economists was Edith Penrose (1914-1966), who inked the landmark book- Theory of the
Growth of the Firm in 1959, and which led to the genesis of the Resource Based View of the
legendary that one can't but talk about management, resources and strategy without borrowing
several of her ideas, and indeed she was ahead of her times, for it took almost 25 years before the
first paper on resource based view (Wernerfelt, 1984) came out, and ushered a whole new way of
Penrose and to put those in the context of the present day management thinking.
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Introduction
The purpose of the study was to identify the causes of growth of the firm, and the
factors that leads to limiting its rate of growth. The author studied for-profit corporate,
and those that had grown over the years, firms which are endowed with certain
and a limit to the rate of growth. From a knowledge perspective, a firm's rate of
growth is limited by the growth of knowledge within it, but a firm's size by the extent
A theory of the firm answers questions around price determination and resource
interrelated and are coordinated by policies which are framed in the light of their
effect on the enterprise as a whole' (pp.15-16). This model of the firm has a central
The firm is more than an administrative unit, and is 'a collection of productive
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resources the disposal of which between different users and over time is determined
Penrose identifies two types of resources- physical and human. These resources are
themselves a bundle of potential services. Hence the size of the firm is the present
value of the total of its resources used for own productive purposes. Such a firm is
interested in profits in order to pay out dividends to its owners, which means that the
financial and investment decisions of firms are controlled by a desire to increase total
long-run profit.
The productive activities of the firm are governed by the productive opportunities as
seen by the entrepreneur. The growth gets limited by the fact that the firm doesn't see
them (p.32). For a firm, the decision to search for opportunities is an enterprising
decision requiring entrepreneurial intuition and imagination, and must precede the
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The first of entrepreneurial services is entrepreneurial versatility, which comprises
creative managers. Another quality is fundraising ingenuity, which comes from the
ability of creating confidence, which often limit smaller firms. Yet another
judgement, which stems from information gathering and consulting facilities built
The subjective opportunities stems from expectations, and not objective facts; and this
The capacities of the existing managerial personnel of the firm necessarily set a limit
to the expansion of that firm at any given point in time, for it is evident that such
management cannot be hired in the market-place (p.46). The existing management not
only limits the amount of new management that can be hired, but also the rate at
which the new management can gain requisite experience; otherwise the efficiency of
Since the service from the inherited managerial resources control the amount of new
inescapable limit to the amount of expansion a firm can undertake at any time (pp.48).
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In small firms such a planning and execution function of expansion in sporadic, while
acquisition of new personnel and promotion and redistribution of the old. The
acquired and changes in ability to use knowledge. Hence, the firm expands to exploit
firm's expansion plans are restricted by increasing risk and uncertainty, for as long as
resources to gather more information, which in turn depends upon the competence
and temperament of the management. Risk and uncertainty can be reduced to the
extent that the firm can devote managerial resources, but can't be done away with
entirely. The managerial attitude towards risk limits growth of the firm, as the
resources have to be shared between operations, and planning (for containing risk and
resource acquisition).
internal and external. The external inducements include new markets, new
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competition, trade restrictions, monopolies, etc. Unless a firm's internal inducement
Internal inducements to expansion arise largely from the existence of pool of unused
productive services, resources, and special knowledge, all of which will always be
found within any firm (pp.66). So long as resources are not used fully in current
operations, there is an incentive for a firm to find a way of using them more fully.
However, an equilibrium state where a firm's all available services are fully used is
unlikely to reach, for many resources may be indivisible (least common multiple of a
resource set); can be put into new and different uses (specialization requires a
minimum scale); and new productive services are continually created (owing to
The interaction between knowledge possessed by the personnel and services rendered
by the material resources can take different and creative shapes. The possibility of
using a service changes with change in knowledge, for with more knowledge
available previously unused services can now be used. Any entrepreneur hence
believes that there is productive services inherent is that resource about which as yet
available with a resource, and the capabilities of men using those resources, who in
turn can create new services. Limits to growth of the firm is set by the perceived
demand by the entrepreneur, and as the firm grows in size its composition of product-
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The availability of unused productive services, for the enterprising firm, is a challenge
The direction of planned expansion is shaped by the inherited resources, and the
resources the firm must acquire to carry out its production and expansion programs.
Penrose argues that the expansion of firms is largely based on opportunities to use
their existing productive resources more efficiently than they are currently being used
economies is determined by the cost of technology, cost of capital and raw material,
and will affect the size of the plant. Managerial economies, on the other hand include
marketing, financial and research economies of the managers employed by the firm;
and results into specialization of human resources. Such economies, and resulting cost
provided by these resources may be quite unrelated to the size of the firm (pp.100).
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production in which a firm operates' (pp.109). Diversification can take place in a
firm's present area of specialization or outside of it. The opportunities to produce new
products arise from changes in the productive services and knowledge available in the
firm, and from external supply and market conditions perceived by the firm.
Some of the most important general sources of new opportunities for diversification
creating efforts of the large firm; and 3) technological competence. Often acquisition
can be a means of obtaining productive services and managerial knowledge, but the
limits of rate of growth is still set by the existing resources, apart from the problems
of regulating the new entity. Existing resources not only shape the limits to
acquisition, but also determine the direction of expansion. Hence, there is limit to
unrelated diversification that a firm can achieve through acquisition, for it need to
The competitive forces necessitates that a firm devotes it scarce resources to specific
fields and participate in product innovation in that field, instead of competing across
new investments in several different fields, and yet remain profitable. Even for a firm
investment may be more in a new area than in the existing area, another reason for
diversification. Most successful large firms have invested significant lot in securing
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Some of the benefits of diversification include ability to absorb temporary fluctuations
may be profitable and growing, but all that is required to induce diversification is that
they do not grow fast enough to use fully the productive services available for the
planning and controlling existing operations, but also of planning future investments.
Hence, necessity of maintaining a competitive position in its basic fields restricts the
whom rested a personal responsibility for their firm's operations, both the rate of
growth and the size of individual firms were severely restricted. For a firm there is
always a choice of recombining the old and building anew, and that's why M&A
one firm over-values certain resources another one possesses. The entrepreneurial
The distinction between entrepreneurial and managerial services is that the former is
whereas latter offers services to operate a concern and to draw up and execute plans.
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Expansion must be understood from the entrepreneurial drive spurred by the vision to
organizing and controlling the use of economic resources of a grand scale. The limits
to inorganic growth is set by the conflict between the speed of expansion and
A merger leaves a pool of unused resources, which may further lead to growth.
The problem with measuring the rate of growth of a firm is that the productive
services that entrepreneurs and managers of any given firm are capable of rendering to
that firm are not reducible to any common denominator, for they are heterogeneous.
The managerial service is available partly for managing current operations, and rest
for expansion programs. The possible rate of growth of a firm can be determined by
the ratio of managerial services available for expansion and the managerial services
required per dollar of expansion (pp.201). In general, as the firm grows, it continually
induction of new managers. Further, a larger firm may not require a commensurate
management, and growing levels of automation. But a diversified firm will have to
have very high administrative services required to maintain its spread, and hence
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required for an unrelated expansion is higher than a related one. As firms grow in
size, the managerial requirement per unit expansion will rise to manage the spread of
its operations.
Penrose concludes 'the rate of growth of the medium-sized and moderately large
firms to be higher than that of the very new and very small firms, and also higher than
Typically for small firms, environmental conditions (competitive powers) would limit
The environment is the one perceived by the entrepreneur, and not given. 'The relative
scarcity of the different kinds of resources in the economy as a whole affects the
individual firm through the prices at which resources and finance can be obtained on
the market; the expected profitability of expansion is controlled by the ability of the
firm to see opportunities for the use of its own resources, and is a function not only of
the cost of other resources with which they must be combined in production but also
One of the biggest problems for growth of small firms is access to capital and credit
rationing. Only smaller firms where the promoter entrepreneur has a capital-raising
ingenuity can grow favorably. Still small firms continue to exist, for there are certain
activities not suitable for large firms to get into, could exist as a matter of public
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relations and protection by the large firms, or the industry could be characterized by a
low entry-barrier, or lastly the large firms haven't yet mopped up the smaller ones.
Most small firms operate in the interstices in the economy, left by the large firms as
they grow and are unable to capture every single opportunity coming their way. The
productive opportunities of small firms are thus composed of those interstices left
open by the large firms which the small firms see and believe they can take advantage
smaller firms. The rate of growth of large firms is severely restricted by the continued
efforts and investment which are required for the maintenance of their competitive
Conclusions
and operations that a large firm does, and hence most large firms are larger than
3. No matter how large a firm grows, economies of growth are still available to it
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4. Growth economies exist for all sizes of the firms
5. The capacity of the existing management sets a limit to the rate of growth of
any firm
8. Large firms can not exploit all the opportunities that they create during their
growth
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