[Reading Log -98] The Theory of the Growth of the Firm
I feel like the time has finally come to read this.
I think I've had this book sitting on my shelf for about two years...
The author of this book, "The Theory of the Growth of the Firm," Edith Penrose, was a female economist who was active in the US and the UK. She elucidated the internal mechanisms of corporate growth and is known as themother of the Resource-Based View (RBV). She proposed a management strategy theory stating that "the maturation within the firm holds the key to growth, rather than the external market environment."
Penrose's Perspective
The 1950s, when Penrose wrote this book, was known as the "Golden Age of Capitalism." This was because explosive technological innovation was occurring in many developed countries due to the conversion of military technology for civilian use. Therefore, the more machines one added, the more profit could be generated, but the perspective of "people" and "organization" was missing from that equation.
However, Penrose redefined the essence of a firm as agroup of people sharing knowledge and experience. In other words, she viewed the firm as acollection of resources.
Resources and Services
The foundation of Penrose's theory is the concept ofresources and the "services" generated from them.
Resources: Money, machines, offices, employees, etc.
Services: What can be done using the acquired resources.
Penrose argued that "while resources themselves can be bought in the market, the 'ability (services)' to master them can only be born from 'experience' cultivated within the organization over time." In other words, a strength that other companies cannot easily imitate (with money) lies in this "experience-based use of resources."
The Penrose Effect
The Penrose Effect is the law that "the growth speed of a company cannot exceed the speed at which its internal managers grow."
If you try to expand the scale of a company, you must hire a large number of new people. In many cases, this means creating new departments, which in turn requires managers to lead those departments. And often, the human resources already possessed by the company are not enough to cover these management positions, so talented veterans are hired from the outside.
No matter how talented that person may be, a newcomer from the outside does not know the "tacit understanding" or the "vibe" of the workplace unique to that company. It always takes physical time for them tofunction as 'one team' with existing members.
If you step on the gas too hard while ignoring the time it takes to build trust within the team, the company will fall into chaos, the quality of decision-making will drop, and as a result, the company's growth will stop... This is the "organizational wall" that rapidly growing companies fall into.
Proficiency as a team cannot be bought with money.
For healthy growth, you need "time to solidify the organization," even if it means intentionally slowing down.
Unused Productive Services
Penrose explains the "mechanism by which companies continue to grow" from a unique perspective.
When a new employee joins, they are initially overwhelmed just by handling one task, but as they gain experience, they gain some breathing room. Penrose calls this surplus capacity "unused productive services".
As employees (and management) gain more time, they begin to direct that surplus energy toward "new businesses" or "developing new markets." That becomes the gasoline that fuels the company's growth.
Therefore, indiscriminately cutting costs and eliminating time buffers is equivalent to nipping the buds of your company's future growth. For example, shifting your mindset to use IT to streamline operations and free up employees' time, then reinvesting those "future resources" into creative work, is what leads to sustained corporate growth.
M&A is a strategy to buy time
M&A (mergers and acquisitions) is a strategy to "buy time."
When entering a new market, it takes time to accumulate know-how through trial and error on your own. However, if you acquire a company that has already gained experience in that field, you can significantly shorten that time.
However, the "Penrose effect" persists here as well.
Trying to integrate an acquired company with your own organization requires consuming a massive amount of energy from your management team. In other words, if you proceed with an acquisition without having sufficient "slack (unused resources)" on your side, there is a risk that even your core business will collapse together with it.
The success or failure of an M&A depends less on the "price" of the acquisition and more on how much "surplus capacity (unused resources)" the acquiring side possesses.
What managers should be conscious of
Penrose's theory can be summarized in the following three points.
Value experience: The "original ways of working" that employees accumulate within the organization become a strength that other companies cannot imitate. Managers must not forget that this takes time.
Do not ignore growing pains: If you feel the organization is rattling, it may be the organization's "growing pains" and a signal to hit the brakes. Consider pausing to invest in internal communication and training.
Strategically create surplus capacity: Managers must consciously create "surplus capacity to challenge new things" within the organization. This is because the next growth can only be born from those "unused resources."
What is important is human experience
Penrose argues that "a firm is not merely a collection of numbers, but a group of people who grow together and accumulate wisdom."
What determines the speed of a company's growth is the quality and quantity of the "human wisdom" accumulated within the company. Nothing other than "human experience" can turn resources (money, machines, offices, employees, etc.) into "value."
Managing the growth of the organization, not just short-term numbers. That is likely the royal road to creating a 100-year company.
Reference links
Amazon "The Theory of the Growth of the Firm" Book introduction page