Understanding how companies emerge and develop is crucial to the effective management of organisations and the creation of environments where these companies can prosper. However, the analysis of an organisation’s perspectives and the identification of the pathways for its successful development are unimaginable without an appropriate theory to support decision-making. Herein lies the role of the theory of a firm (Kumssa et al., 2019). Throughout the history of business and economics as a branch of science, various theories emerged, offering models of the economic change that organisations underwent in their selected market. However, of all theoretical frameworks that have been designed to explain the nature of an organisation’s economic performance, the theories of Coase and Penrose are particularly noticeable. Although the theories in question offer two entirely different perspectives on how companies shape and grow, the frameworks created by Coase and Penrose are quite similar in their understanding of interactions within the selected economic setting and the role of transactions in the economic growth of a firm.
The goal of this paper is to compare the perspectives that Coase and Penrose offer on the development of organisations and change in their size, including both the theoretical stance and the practical outcomes. The application of the theories under analysis will require considering several examples of companies developing throughout a particular time period. To avoid inaccuracies in the comparison that may emerge once companies from different markets and different economic environments are compared, organisations from the same industries developing in the global economy will be considered. It is believed that slight differences in the theoretical premises and the application of the theories will be located, yet the general idea of the organisational development will remain the same for Coase and Penrose’s models.
The theoretical perspective that Penrose’s approach toward organisations and their development offers is quite different from the one of Coase’s in terms of the stance that it takes on the importance of the size of a firm. While Coase does not focus on the specified aspect of a company significantly, the size of an organisation constitutes a major part of Penrose’s theory. Specifically, her view on companies implies that the growth of a firm is the goal that any business pursues and that needs to be supported with the help of a system of organisational decisions. The specified approach toward managing organisations implies viewing organisations as entities and, thus, shifts the focus to the allocation of resources within a company (Burvill et al., 2019). Therefore, the framework suggested by Penrose can be seen as a crucial addition in the theoretical hierarchy of theories explaining the concept of entrepreneurship and the existence of organisations.
Thus, unlike the approach used by Coase, Penrose’s theory is inherently tied to the size of an organisation. By connecting the management of an organisation to the use of resources that it possesses, Penrose suggests that the size of a company and, therefore, the range of assets that a firm possesses, defines its position in the market of its choice.
When considering the differences between the integration of Coase’s theoretical model and that one of Penrose into the contemporary economic setting, one will need to mention the fact that Coase’s framework is admittedly much more focused on the management of economic and especially financial resources. While the theory deigned by Penrose helps to examine the relationships between a company and its employees, Coase’s framework helps to consider the significance of financial and economic transactions. The descried change becomes especially evident during the implementation of the strategies built based on the theories under analysis.
The practical implications of Penrose’s theory become visible when considering the idea of corporate expansion from a local market into the global one. For example, when viewing the change that global companies experience, one will realise that the theory in question contributes to the assessment of the team diversity and, therefore, can be particularly useful when promoting cross-cultural communication in the organisational environment (Chen, Kang and Butler 2018). Moreover, in the example above, one will notice that the implementation of Penrose’s theory becomes bound by additional requirements similarly to the theoretical approach suggested by Coase. Since the latter posits that the efficacy of an organisation depends in the price mechanism implanted into it, it becomes linked to the idea of effective transactions, which Penrose’s theory supports and views as a crucial aspect of managing relationships within the selected market (Kor et al., 2018). Therefore, the incorporation of both frameworks into the understanding of how companies evolve and function in the global market is essential.
The attempt at introducing the multifaceted perspective of the market economy into the theory of a company development that both Coase and Penrose make can also be seen as an endeavour at examining the variety of influences that affect decision-making within an organisation. Specifically, Coase’s idea of markets without transactional costs can be viewed through the lens of Porter’s Five Forces analysis, which encompasses different factors influencing the changes in the levels of market competition. For instance, a Five Forces analysis of a global company such as Microsoft will show that Coase’s concept of functioning within a competitive environment with limited resources still allows for negotiations, compromise, and peaceful coexistence of several organisations (Magee, 2018).
Table 1. Porter’s Five Forces: Microsoft
|Bargaining power of suppliers||Moderate/Low: in the IT market, Microsoft’s suppliers are of moderate size and population, with generally mediocre supply rates.|
|Bargaining power of buyers||Moderate/Low: substitutes are nearly inexistent, which reduces buyers’ ability to bargain.|
|Threat of new entrants||Low: Microsoft currently holds a monopoly over the operational system software in the IT market (except for several les popular options such as OpenOffice).|
|Threat of substitutes||Moderate: Microsoft is a powerful entity that has established very high standards. Given the expenses, few organisations are capable of competing.|
|Competition||Strong: High standards for quality and the intense demand within the market make competition rates extraordinarily high.|
The assessment of the competitive environment in which Microsoft operates is very clear n its results, which show that the target setting is characterised by an unmatched level of rivalry. The high competition levels are primarily justified by the presence of a strong demand for the products that Microsoft supplies, as well as the fact that the company practically holds a monopoly in the specified industry (Jusoh & Ahman, 2019). The observed situation confirms the statement made by Coase, namely, the necessity to minimise the extent of transactions within the target market in order to retain competitiveness.
Moreover, the case of IBM proves that the perspective offered by Coase can be developed even further, suggesting the idea of collaboration and possible partnership between the said competitors. As the example of IBM’s purchase of Red Hat shows, instead of igniting rivalry in the selected market, both organisations decided to cooperate in order to reduce the extent of expenses in the highly demanding IT market and, thus, offer each other a chance at increasing their profit margins (Carey, 2018).
Vertical integration and diversification also supports the frameworks that Penrose and Coase have introduced in their works. Specifically, the theorem implies that the process of vertical integration should be seen as the next logical step in the growth of a firm. Since the notion of vertical integration suggests a less centralised approach to managing organisations and offers much more leeway in organising workplace processes, the proposed solution seems quite sensible in addressing the issues of corporate growth. Indeed, from Coase’s perspective, the issue of property rights distribution and division should not affect the transactions, production processes, and a company’s ability to compete in the target environment (Allen et al., 2020). In turn, vertical integration does not limit an organisation in terms of how property rights can be divided and how the decision-making should be managed based on the allocation of these property rights (McIntyre & Murphy, 2016). Instead implying that the management of several processes typically deemed as separate occurs within the confinement of a single organisation, the use of vertical integration allows for a closer analysis and supervision of the key production processes, while also suggesting a looser control of decision-making (Shastitko & Ménard, 2017). Thus, the choices associated with a particular stage of production can be made based on the specific circumstances that affect the production process in question, which will lead to fewer costs and greater revenues (Holcombe, 2018). Thus, the incorporation of vertical integration principles into the corporate setting aligns with and is fully supportive of Coase’s theory.
The case of Coca-Cola can be seen as the prime example of the corporate growth occurring in accordance with Coase’s and Penrose’s theories through the implementation of vertical integration. Having introduced the specified concept comparatively recently into its organisational setting, Coca-Cola has been utilising vertical integration as the method of updating its supply chain and minimising the costs taken for the transportation and the related aspects of the inbound and outbound logistics (Ji & Sun, 2017). The case of Coca-Cola shows that the growth of a firm inevitably leads to its expansion and the further complication of the procedures associated with financial transactions and supply chain management (SCM). Thus, the incorporation of vertical integration tools as the only reasonable response toward the observed change allows containing the expansion and keeping the key resources within the reach of the organisation (Fan et al., 2017). Thus, homogenous standards for production are established to maintain control over product quality and overall performance, whereas the process of decision-making becomes rather loose. Furthermore, the principles of vertical integration also align with the theory offered by Penrose.
The Agency Theory and the principles of diversification also align with the stances of both Coase’s and Penrose’s approaches. Indeed, the Agency Theory, which posits that the relationships between agents and principals should be based on a flexible system of business transactions, in the course of which agents act on behalf of organisations and not in their personal interest (Azan and Sarif, 2017). While the Agency Theory represents a somewhat idealised version of the economic setting, where the decision-making of all parties involved is justified by the needs of an organisation, it still applies to the frameworks that Penrose and Coase provide. Specifically, the Agency Theory offers an insight into how the transactions as they are viewed through the lens of Coase’s theory can be improved. Similarly, the Agency Theory supports the framework created by Penrose since it offers an understanding of how external and internal processes within a company occur (Slaev, 2017). Thus, the concept of productive opportunity as it is defined by Penrose gains additional meaning.
The observed trend in the organisational performance within the modern global environment can also be seen by applying the Adverse Selection Theory. Designed to explore the incongruences in customers’ demand and the products provided by companies, the Adverse Selection framework implies that the goods of higher quality are ousted from the market by those of lower quality due to the unavailability of certain crucial information to either sellers or buyers (Meador & Skerratt, 2017). On The Adverse Selection Theory supports the concept of the ideal market conditions as they are described in Coase’s theory since it represent the reverse situation to that one described in Coase’s Theorem. Specifically, whereas in Coase’s framework, the ideal market is viewed as the environment where all parties, including buyers and producers, are aware of the factors that define product value, the Adverse Selection Theory represents the exact opposite situation. By emphasising the adverse impact that the lack of information has on the economic relationships, the Adverse Selection approach supports Coase’s framework.
To explore the application of Coase’s Theorem and the Adverse Selection concept, one may need to consider the example of a recent economic disaster of the Taiwan credit card market (Chang, Chang and Tien, 2017). The case described by Chang et al. (2017) exemplifies the instance of misinformation quite well. According to the results of the case study, the misunderstanding of what was deemed to be the average quality of the product led the owners of products in the specified market, namely, the people possessing cars, to overestimate their goods and, therefore, set unreasonably high prices for them (Maestri, 2017). As a result, the instances of used cars with faulty mechanisms being sold e masse became proverbial in the Taiwanese market: “However, except the owner himself, the buyer was not clear about the real quality of each car, therefore, information asymmetry was formed” (Chang et al., 2017, p. 430). As a result, the symmetry in demand and product quality was disrupted, which led to the deterioration of the used car market and the subsequent challenges for the industry (Fakir & Tkiouat, 2016). Using Coase’s theorem to analyse the problem of the used car market in Taiwan, one will realise that the problem could have been averted by introducing methods for keeping customers informed about the pricing issue and the quality standards.
However, when considering practical implications of using Coase’s and Penrose’s theories, one will also have to mention the fact that both theoretical frameworks emerged at the time when globalisation had not even started to emerge. Therefore, in order to be applied to the context of the modern global market, both theoretical approaches have to be updated substantially. While the current research shows that both Penrose’s and Coase’s theories work perfectly in the global setting, extra measures will be needed to ensure that the chosen strategy applies to a particular setting.
Overall, the application of Coase’s and Penrose’s frameworks to the current economic setting shows that both approaches have rather profound ideas to offer when integrated into the organisational environment. Each of the theoretical approaches provides a unique view on the development and growth of an organisation, with Coase’s framework being focused on finances, whereas Penrose’s theorem concerning the HRM aspect of company management. However, both approaches provide the means for analysing the efficacy of a company’s performance and its further growth perspectives.
Both Coase’s and Penrose’s theories serve as the means of expanding companies’ supply chains and advancing their communication with key stakeholders, which is why the theories remain relevant especially in the modern context of the globalised economy. With the necessity to expand supply chains and encourage communication with stakeholders, including not only customers but also investor’s, suppliers, retailers, and many others, organisations need Coase’s and Penrose’s framework. Guiding firms in their management of transactions and relationships with their partners, the specified approaches are critical in addressing some of the issues linked to contemporary business environment.
In fact, the recent transfer of key business processes and activities into the context of the digital market does not negate the necessity to apply Coase’s and Penrose’s theories to the assessment of corporate growth and the evaluation of opportunities for developing a firm. On the contrary, the digital setting, which, in essence, represents a condensed form of the traditional market relationships, is perfect for applying the theories of Coase and Penrose to coordinate the relationships between the participants. Helping organisations to guide their decision-making and manage their resources appropriately, the theories in question offer an insight into the nature of business and the pathways in which it can develop in the selected economic environment.
Therefore, while representing quite different ideas and giving different perspectives on the ideas of organisational growth, both theories are quite similar in nature. Introducing companies to the necessity to evolve and improve their communication with stakeholders, as well as enhance their transaction techniques, the theories in question prompt the development of innovative solutions to key obstacles that organisations face in the global market. For example, in regard to transactions, risk management can be seen as a crucial area that organisations need to explore. In accordance with Coase’s theory. In turn, Penrose’s approach incites organisations to study the relationships with their stakeholders closer, thus improving their communication channels as well. Similarly, other areas of organisational performance can also be addressed when considering both Coase’s and Penrose’s approaches toward firms’ emergence and development The impact that the specified frameworks have on the development of supply chains is especially powerful. Therefore, Penrose’s and Coase’s theories are unique in their perspectives, yet the premise that they offer and the results that thy entail are quite similar, leading to successful management of organisational issues.
Despite giving different perspectives on the concept of organisational growth and the role that the size of a company plays in an economic setting, both Coase and Penrose provided the theories that viewed companies quit similarly as business entities that required active economic transactions and negotiations with minimised transactional costs. Therefore, both the theoretical premises on which Penrose’s and Coase’s models were developed were quite similar. Likewise the application of these theories seems to have similar results, yet the observed outcome can be attributed not only to the similarities between the nature of the theories but also to the fact that both frameworks seem to have become significantly outdated.
Overall, the application of the theories developed by Coase and Penrose has indicated that the specified perspectives can explain a vast range of contemporary processes occurring in the confinement of the organisational environment, as well as the changes that take place in organisations in the global market. In fact, despite representing some of the more outdated ideas, the frameworks developed by Penrose and Coase could still explain the development and functioning of organisations in the global context.
Representing two sides of a company’s growth, namely, its financial and organisational progress, the two theories have proven to be moderately effective forecasting the evolution and efficiency of a company in the global market. While several obvious differences have been spotted in the application of the provided models, each of them has allowed selecting critical factors that determined organisational progress. Specifically, the opportunity to embrace HRM-related issues with the help of Penrose’s theory and the chance at analysing the problems related to resource allocation that Coase’s theory offered deserve to be mentioned. Complementing each other and offering a substantial foundation for analysing organisational and economic performance of a firm, both theories assist in locating critical factors, isolating their influence, and outlining possible methods of managing adverse impacts.
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