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Management Faculty Publications Department of Management

2008

The Theory of the Growth of the Firm, by Edith T.

Penrose. Oxford: Blackwell, 1959 (Book Review)
Anil Nair
Old Dominion University, [email protected]

Joseph Trendowski
Old Dominion University

William Judge
Old Dominion University, [email protected]

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Repository Citation
Nair, Anil; Trendowski, Joseph; and Judge, William, "The Theory of the Growth of the Firm, by Edith T. Penrose. Oxford: Blackwell,
1959 (Book Review)" (2008). Management Faculty Publications. 8.
https://digitalcommons.odu.edu/management_fac_pubs/8

Original Publication Citation

Nair, A., Trendowski, J., & Judge, B. (2008). The Theory of the Growth of the Firm, by Edith T. Penrose. Oxford: Blackwell, 1959
[book review]. Academy of Management Review, 33(4), 1026-1028.

This Book Review is brought to you for free and open access by the Department of Management at ODU Digital Commons. It has been accepted for
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[email protected].
1026 Academy of Management Review October

REFERENCES ics, yet it remains debatable how much of an

Ewing, D. W. 1990. Inside the Harvard Business School: Strat-
influence its publication has had on this para-
egies and lessons of America's leading school of busi- digm (Loasby, 2002).
ness. New York: Times Books. Interestingly, the book's ideas had a particu-
Hayes, R. H., & Abernathy, W. J. 1980. Managing our way to larly significant influence among scholars in
economic decline. Harvard Business Review, 85(7): 67-77. the field of strategic management-a discipline
Marsden, G. M. 1994. The soul of the American university: still in an embryonic stage at the time of the
from Protestant establishment to established nonbelief. book's writing. Although Penrose's book ap-
New York: Oxford University Press. pears to have presaged Chandler's (1962) work,
Redlich, F. 1957. Academic education for business: Its devel- it is notable that neither he nor any of the other
opment and the contribution of Ignaz Jastrow (1856- early strategy scholars (e.g., Ansoff, 1965; Hofer
1937). Business History Review, 31: 35-91. & Schendel, 1978; Porter, 1980) cited her work. In
Sass, S. A. 1982. The pragmatic imagination: A history of the fact, it was left to David Teece (1982), Birger
Wharton School 1881-1981. Philadelphia: University of Wernerfelt (1984), and Mahoney's many papers
Pennsylvania Press.
and presentations to bring Penrose to the strat-
Spender, J.-C. 2007. Management as a regulated profession: egy audience. Penrose's research questions-"!
An essay. Journal of Management Inquiry, 16: 32-42.
am not asking what determines whether a par-
Starr, P. 1982. The social transformation of American medi- ticular firm can grow, but rather the very differ-
cine. New York: Basic Books.
ent question: assuming that some firms can
grow, what principles will then govern their
growth, and how fast and how long can they
The Theory of the Growth of the Firm, by grow?" (1959: 7)-eventually resonated with
Edith T. Penrose. Oxford: Blackwell, 1959. strategic management scholars.
Penrose laid out the foundations of the re-
Reviewed by Anil Nair, Joseph Trendowski. and Wil- source-based view in Chapter 2 and examined
liam Judge, Old Dominion University, Norfolk, VA. how inherited resources influence the direction
of expansion in Chapter 5. Penrose's definitions
A review (in the pages of this journal) of a of resources, the service(s) they provide, and
book published nearly fifty years ago may ap- how they create growth and heterogeneity
pear unusual-unless the book has become a within an industry are worth revisiting, espe-
"classic." 1 Indeed, many organizational schol- cially in view of the fact that there remains am-
ars (e.g., Pitelis, 2002) view it as a seminal text biguity about these constructs (Rugman & Ver-
for the resource-based view of the firm, arguably beke, 2004). According to Penrose:
one of the dominant theoretical perspectives in Resources ... include the physical things a firm
strategic management research today. buys, leases or produces for its own use and the
people hired on terms that make them effectively
part of the firm. Services on the other hand are the
CENTRAL CONCEPTS contribution these resources can make to the pro-
ductive operations of the firm (1959: 67).
Chapter 1 of the book lays out its ambitious
scope. In the first few pages it becomes clear Penrose's notion of services appears close to
that Penrose was frustrated by neoclassical Barney's (1991) conceptualization of capabilities.
economists' focus on price, output, and demand. She notes:
Penrose was interested in directing the field to It is never resources themselves that are the "in-
pay more attention to "the firm"-the metaphor- puts" in the production process, but only the ser-
ical "black box." Thus, the book was a bold vices that the resource can render.... exactly the
challenge to the dominant paradigm in econom- same resource when used for different purposes or
in different ways and in combination with different
types or amounts of other resources provides a dif-
ferent service or set of services (1959: 25).
We thank Professor Jay Barney for detailed comments on
an earlier version of this manuscript.
Penrose argued that heterogeneity among firms
1 A citation count on Google Scholar on February 16, 2008,
(within an industry) occurs because even firms
revealed that Penrose's book had received 5,616 citations for with similar resource endowments can config-
the 1995 edition plus several hundred for the 1959 edition. ure them in unique combinations that yield a

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2008 Book Reviews 1027

variety of services. Firm growth occurs because of CRITIQUE AND FUTURE RESEARCH
the availability of excess resources-such ex-
Penrose's book has been critiqued for its style
cesses develop because of the lumpiness and in-
(Lloyd, 1961) and substance (Pitelis, 2002). The de-
divisibilities of the resources that firms acquire. In bate between Priem and Butler (2001) and Barney
contrast, lack of capabilities causes internal ob- (2001) captures the essence of the critique (and
stacles to growth. rebuttal) of the Penrosian framework and the sub-
While the book has become a foundation for sequent resource-based literature that it spawned.
the "internal view of the firm" in strategy liter- While Penrose may not have foreseen the im-
ature (complementing the 1/0-based "external pact her work would have on strategic manage-
view of the firm"), Penrose's own views were not ment, a careful reading of the book reveals that
so compartmentalized. She realized that a firm's she did anticipate the critique it was likely to
resources are only meaningful in the context of generate. 2 For instance, we believe one poten-
its environment. However, she was clearly bi- tial criticism that could be leveled against the
ased in favor of internal factors in explaining book is its theoretical focus that prevents the
growth. As she says: "'Demand' is no more im- development of a richer, more complex, contin-
portant, and is perhaps less important, than the gency-based model of firm growth. Furthermore,
existing resources of the firm" (1959: 84). her work does not consider the professionaliza-
Although debates within the field of strategic tion of management, evolution of technology,
management research (Barney, 2001; Priem & and institutions that influence firms' growth.
Butler, 2001) have tended to focus on Penrose's Penrose preempts such criticisms by clearly em-
contribution at a business unit level of analysis phasizing the central focus of her work:
and the notion of competitive advantage, some I am not attempting to present a theory which will
have argued that this emphasis on competitive enable an analyst to examine a particular firm
advantage is a distortion of her true intent (Rug- and state in advance whether it will or will not
man & Verbeke, 2004). Such charges have been successfully grow .... I am not asking what deter-
mines whether a particular firm can grow, but
responded to vigorously by various scholars rather the very different question: assuming that
(Kor & Mahoney, 2004; Lockett & Thompson, some firms can grow, what principles will then
2004). Indeed, her intent can clearly be discerned govern their growth, and how fast and how long
from the preface to the second edition of the can they grow? (1959: 7).
book, where she emphasizes the preeminence of Another critique of the book is the testability
growth as an objective unto itself: of the theory that Penrose developed. Unlike the-
oretical work today, which emphasizes con-
I was not impressed by the reasoning behind, nor structs and relationships, Penrose mostly used
the evidence to support, the assumption that the
case histories to develop some theoretical prin-
managers or directors of large corporations in the
modern economy saw themselves in business ciples and logics, and she acknowledged that
largely for the benefit of shareholders .... Profits testing them remained problematic. She notes:
were treated as a necessary condition of expan- The factors determining the maximum rate of
sion-or growth-and growth, therefore, was a growth of firms-on the other hand, cannot, in its
chief reason for the interest of managers in present formulation at any rate, be tested against
profits (Penrose, 1995: xi, xii). the factors of the external world, partly because
of the difficulties in expressing some of the con-
Given her central focus on growth, subse- cepts in quantitative terms and partly because of
quent chapters in her book were devoted to cor- the impossibility of ever knowing for any given
firm what is, or would have been, its maximum
porate-level strategy issues, such as diversifica- rate of growth (1959: 4).
tion and merger decisions. As she notes, "There
may be an 'optimum' output for each of the firm's
product lines, but not an 'optimum' output for the 2 Professor Barney wrote to us that he had met Penrose when

firm as a whole" (1959: 98-99). she attended a Strategic Management Society meeting in San
Penrose saw acquisition and mergers as an Francisco. At the meeting he found out that Penrose was quite
surprised that strategy scholars were interested in her book. He
extension of firm's goodwill and market position
noted that she knew very little about what strategy scholars
and as also driven by tax considerations, infor- were studying, knew nothing of the literature. and was sur-
mation asymmetry, and opportunity costs. prised by the invitation to attend the SMS meeting!

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1028 Academy of Management Review October

Later. in the context of growth rates of firms of vantage. and while these phenomena may be
different sizes, she writes: difficult to measure directly, the implications of
The testing of the theory set forth here is difficult these phenomena for firms' operations and per-
indeed; all sorts of factors other than those con- formance could be tested. After reviewing the
trolling its "maximum" rate of growth will affect passionate and prolific research that has attrib-
the actual rate of growth of an individual firm in uted its intellectual roots to Penrose's book. it is
specific circumstances at a particular time and clear to us that her work was successful in ral-
the pitfalls of interpreting a "growth curve" when
the end is not in sight are well known (1959: 213). lying scholars who sought an alternative to the
standard structure-conduct-performance model
While the book was an attempt to break from within strategy. However, scholars should be
neoclassic economic tradition and shed light in- careful that Penrose's theory (and the book) does
side the black box as it grew and changed over not become a Rorschach blot on which they im-
time, it did so by relying on constructs (such as pose their own biases.
entrepreneurship and management) that were
conceived too broadly. According to her, entre-
preneurship "can be treated as a psychological REFERENCES
predisposition on the part of individuals to take Ansoff, H. I. 1965. Corporate strategy. New York: McGraw-Hill.
a chance in the hope of gain, and in particular, Barney, J.B. 1991. Firm resources and sustained competitive
to commit effort and resources to speculative advantage. Journal of Management, 17: 99-120.
activity" (1959: 33). In addition, she argued that Barney, J. B. 2001. Is the resource-based "view" a useful
management not only is the source of unique- perspective for strategic management research? Yes.
ness among firms but also constrains growth. Academy of Management Review, 26: 41-56.
Specifically, "existing management limit the Chandler, A. D. 1962. Strategy and structure. Cambridge, MA:
amount of new management that can be hired MIT Press.
. . . but the plans put into effect by past manage- Hofer, C. W., & Schendel. D. 1978. Strategy formulation: Analyt-
ment limit the rate at which newly hired person- ical concepts. St. Paul: West Educational Publishing.
nel can gain the requisite experience" (1959: 47). Kor, Y. Y., & Mahoney, J. T. 2004. Edith Penrose's (1959) contri-
Penrose's writings on the distinction between bution to the resource-based view of strategic manage-
entrepreneurial and managerial roles within ment. Journal of Management Studies, 41: 183-191.
firms could add to present research in this area. In Lloyd, L. E. 1961. Book review: The theory of the growth of the
particular, the entrepreneurship literature could firm. Journal of Marketing. 25(3): 105-106.
embrace her perspective more vigorously, given Loasby, B. J. 2002. The significance of Penrose's theory for the
the field's central focus on growth and innovation. development of economics. In C. Pitelis (Ed.), The growth
Her observation that the entrepreneurial mind is a of the firm: The legacy of Edith Penrose: 45-60. Oxford:
Oxford University Press.
mirror of opportunities in the environment and her
notion that "expectations and not objective facts Lockett, A., & Thompson, S. 2004. Edith Penrose's contribu-
are the immediate determinants of a firm's behav- tions to the resource-based view: An alternative per-
spective. Journal of Management Studies, 41: 193-203.
ior" (1959: 41) suggest the possibility of building
bridges between the resource-based view and Penrose, E. 1995. The theory of the growth of the firm. Oxford:
Oxford University Press.
other perspectives within strategy.
Finally. we believe Penrose's analysis of the Pitelis, C. 2002. The growth of the firm: The legacy of Edith
Penrose. Oxford: Oxford University Press.
role of uncertainty in the growth process, growth
spurts, and decline of niche-based firms has the Porter, M. E. 1980. Competitive strategy. New York: Free Press.
potential to enrich business strategy research. Priem, R. L., & Butler, J. E. 2001. Is the resource-based "view"
a useful perspective for strategic management re-
search? Academy of Management Review, 26: 22-40.
CONCLUSION
Rugman, A. M., & Verbeke, A. 2004. A final word on Edith
Many economists call the unexplained vari- Penrose. Journal of Management Studies, 41: 205-217.
ance in a regression equation the "Penrose ef- Teece, D. J. 1982. Towards an economic theory of the multi-
fect." According to Barney. it was left to strategy product firm. Journal of Economic Behavior and Organi-
scholars to propose that the Penrose effect com- zation, 3: 39-63.
prises the intangible resources and capabilities Wernerfelt, B. 1984. A resource-based view of the firm. Stra-
that are the source of sustained competitive ad- tegic Management Journal, 5: 171-180.

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