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Economic Foundations of Strategy Chapter 5: Dynamic Resource-Based Theory: Resources

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Economic Foundations of Strategy Chapter 5: Dynamic Resource-Based Theory: Resources Joe Mahoney University of Illinois at Urbana-Champaign Resource-Based Theory ... – PowerPoint PPT presentation

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Title: Economic Foundations of Strategy Chapter 5: Dynamic Resource-Based Theory: Resources


1
Economic Foundations of StrategyChapter
5Dynamic Resource-Based Theory Resources
  • Joe Mahoney
  • University of Illinois at Urbana-Champaign

2
Resource-Based Theory
Dynamic Capabilities
  • Penrose (1959)
    The Theory of
    the Growth of the Firm
  • Chandler (1990)
    Scale and Scope
    The Dynamics of Capitalism

3
Penrose (1959) The Theory of the Growth of
the Firm
  • Penrose (1959) is concerned with the growth of
    firms and only incidentally with their size.
  • The focus is on an internal process of
    development leading to cumulative movements of
    the firm in a particular direction.
  • The emphasis is on the internal resources of a
    firm --- on the productive services available to
    a firm from its own resources, particularly the
    productive services
    available from management with
    experience within the firm.

4
Penrose (1959) The Theory of the Growth of
the Firm
  • Experience of management will affect the
    productive services that all its other resources
    are capable of rendering.
  • As management tries to make the best use of the
    resources available, a truly dynamic
    interacting process occurs which encourages
    continuous growth but limits the rate of growth.
  • The environment is treated as an image
    in the entrepreneurs
    mind.

5
Penrose (1959) The Theory of the Growth of
the Firm
  • A firm is more than an administrative unit a
    firm is also a collection of productive resources
    where the choice of different resources uses is
    made by managerial decision.
  • Subjective productive opportunity set of the firm
    is determined by the resources and experiences of
    the management team and this perceived
    opportunity set is unique
    for each firm.

6
Penrose (1959) The Theory of the Growth of
the Firm
  • Strictly speaking, it is never resources
    themselves that are the inputs in the
    production process, but only the
    services that the resources can render.
  • The capacities of the existing managerial
    personnel of the firm necessarily set a limit to
    the expansion of that firm in any given period of
    time, for it is self-evident that such management
    cannot be hired in the marketplace.

7
Penrose (1959) The Theory of the Growth of
the Firm
  • An administrative group is something more than a
    collection of individuals it is a collection of
    individuals who have experience in working
    together, for only in this way can teamwork
    develop.
  • Experience that these managers gain from working
    within the firm and with each other enables them
    to provide services that are uniquely valuable
    for the operations of the particular group with
    which they are
    associated.

8
Penrose (1959) The Theory of the Growth of
the Firm
  • Existing management limit the amount of new
    management that can be hired (after all the
    services of existing management are
    required even to greet, let alone
    to install and instruct, the new personnel).
  • Individuals cannot be hired from outside the
    group, and it takes time to achieve the
    requisite experience.

9
Penrose (1959) The Theory of the Growth of
the Firm
  • If a firm deliberately or inadvertently expands
    its organization more rapidly than the
    individuals in the expanding organization can
    obtain the experience with each other and with
    the firm that is necessary for the effective
    operation of the group, the efficiency of the
    firm will suffer.
  • Since the services from the inherited
    managerial resources control the amount of
    new managerial resources that can be absorbed,
    they create a
    fundamental and inescapable limit to the
    amount of expansion a firm can
    undertake

    at any
    time.

10
Penrose (1959) The Theory of the Growth of
the Firm
  • The Penrose Effect
  • The amount of activity that can be planned at a
    given time limits the amount of new personnel
    that can be profitably absorbed in the next
    period.
  • Though learning, managerial services absorbed
    in the planning processes will be
    gradually released and become
    available for
    future projects.

11
Penrose (1959) The Theory of the Growth of
the Firm
  • Through experience comes excess capacity in
    firm-specific knowledge and resources that are
    subject to market frictions. Therefore, the firm
    seeks to expand in directions that will allow
    the utilization of these excess resources.
    Management is then confronted with a jig saw
    puzzle of how to utilize these resources.
  • The limits to the rate of the growth of the firm
    are due to the The Penrose Effect where the
    current supply of managers with
    firm-specific knowledge
    cannot be spread too thin otherwise
    inefficiencies will
    result (i.e., there are
    dynamic adjustment costs).

12
Penrose (1959) The Theory of the Growth of
the Firm
  • Unused productive services of resources shape the
    scope and direction of the search for knowledge.
  • If resources were completely non-specific, a firm
    could in principle produce anything.
  • The selection of the relevant product-markets is
    necessarily determined by the inherited
    resources of the firm --- the productive services
    it already has.
  • This search leads to new combinations
    of resources.

13
Penrose (1959) The Theory of the Growth of
the Firm
  • The concept of market imperfections is an
    important explanation for explaining firm-level
    diversification.
  • Diversification and expansion based on a high
    degree of competence and technical
    knowledge in specialized areas of manufacture are
    characteristic of many of the largest firms in
    the economy. This type of competence together
    with the market position it ensures is the
    strongest and most enduring position a firm can
    develop.

14
Penrose (1959) Key Ideas
  • Firm growth can be studied as a dynamic process
    of management interacting with resources.
  • Firms are institutions by people to serve the
    purposes of people.
  • Services of resources are drivers of firm-level
    heterogeneity.
  • Services that material resources will yield
    depend on the knowledge
    possessed by human
    resources. The two together create
    a subjective opportunity set that
    is unique for
    each firm.

15
Penrose (1959) Key Ideas
  • Firm-level growth is a function of firm-specific
    experiences in teams.
  • Managerial capability is the binding constraint
    that limits the rate
    of the growth of the firm
    --- the so-called Penrose Effect.
  • Excess capacity of productive services of
    resources is a driver of firm-level growth.
  • Unused productive services of resources can
    be a source of
    innovation.
  • An important component of the competitive
    process is experimentation.

16
Chandler (1990) Scale and Scope The Dynamics
of Capitalism
  • In the last half of the 19th century a new form
    of capitalism appeared in the
    United States and Europe.
  • The building of the rail and telegraph systems
    called for the creation of a new
    type of business enterprise. The massive
    investment required to construct those systems
    and the complexities of their operations
    brought the separation of ownership from
    management. The enlarged enterprises came to be
    operated by teams of salaried managers who
    had little or no equity in the firm.

17
Chandler (1990) Scale and Scope The Dynamics
of Capitalism
  • The new forms of transportation and
    communication, in turn, permitted the rise of
    modern mass marketing and mass production. The
    unprecedented increase in the volume of
    production and in the number of transactions led
    the entrepreneurs who established the new
    mass-producing and mass-distributing enterprises
    like the railroad personnel before them --- to
    recruit teams of salaried managers.
  • Once modern transportation and communication
    systems were in place, the new institution and
    the new type of managerial
    personnel provided a
    central dynamic for continuous economic
    growth and
    transformation.

18
Chandler (1990) Scale and Scope The Dynamics
of Capitalism
  • Examines the beginnings and growth of the modern
    industrial enterprise in the worlds three
    leading industrial nations United States, Great
    Britain and Germany.
  • Maintains that as a result of the regularity,
    increased volume, and greater speed of the flows
    of goods and materials made possible by the new
    transportation and communication systems, new and
    improved
    processes of production developed that for
    the first time in
    economic history achieved
    substantial economies of scale and scope.

19
Chandler (1990)
Scale and Scope The
Dynamics of Capitalism
  • In order to benefit from economies of scale and
    scope, entrepreneurs had to
    make three sets of
    inter-related investments for achieving
    organizational capabilities
  • Investment in production facilities large enough
    to utilize a technologys potential economies
  • Investment in national and international
    marketing and distribution networks and
  • Investment in managerial recruitment
    and training

20
Chandler (1990)
Scale and Scope The
Dynamics of Capitalism
  • Organizational capabilities, in turn, provided an
    internal dynamic for the continuing growth of the
    enterprise.
  • In particular, organizational capabilities
    stimulated its owners and managers to expand into
    more distant markets in their own country and
    then to become multinational by moving abroad.
    They also encouraged the firm to diversify by
    developing products competitive in markets other
    than the original one and so to become a
    multi-product enterprise.
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