Penrose Vs Coase Essay

The primary distinguishing factor between Penrose’s and Coase’s theories is the idea of fluidity – Coase believes the firm to be a static body with an optimum size, whereas Penrose views the firm as a dynamic entity that has no size limit, unless it fails to exploit its resources, at which point the firm becomes stagnant. Whilst Penrose defines the firm as an "autonomous administrative planning unit”, which is bounded by its “area of authoritative communication”, Coase perceives the firm as a response to the inflated costs of using the market, as it is often cheaper or more economical to complete tasks internally rather than negotiate and contract externally due to “transaction costs”. “Transaction costs” in standardised goods markets tend …show more content…
Penrose argues against the traditional theory that firm growth is determined by the market environment, as she postulates that the key to expansion is continuous strategic planning, prompted by real knowledge and research. The act of expansion produces and releases new resources as “all personnel in the firm will gain additional experience as time passes”, thus employees gain new knowledge and insight, which alters the productive opportunity of the firm (unrelated to changes in the market and the external environment) further contributing to their competitive advantage. Penrose maintains that talent and experience are the keys to growth, however as much as they act as driving forces, they also act as limiting factors as “internal personnel” are scarce. Moreover, there must be an actual desire to grow as it will prompt imagination and vision – two factors that affect the expansion of a firm. Penrose further considers how the actual size of the firm affects growth as both elements work in tandem. As a firm grows, it becomes more autonomous and less like a firm as certain areas become more self-governing, however, growth will be restricted unless managers acknowledge that some areas become independent entities, thus a firm’s growth is dependent on the quality of the HR employed as such will affect the speed of growth and consequently, the size. Coase uses a similar ideology, believing that as the firm increases in size, control becomes more difficult, thus having a negative effect on returns and output as they are likely to diminish. As a result, the size of the firm will eventually reach an optimum point or limit, which is when the market becomes a cheaper option for the firm to