The managerial capacity problem argues that a firm's ability to grow is directly related to its ability to add managerial capacity to administer the growth. Firms differ in a number of key areas with regard to the management techniques that they employ to lessen the impact of the managerial capacity problem and enhance firm growth. It does little good for a firm to recognize new market, product, or service opportunities, if it does not have the managerial capacity to act on those opportunities.
The managerial capacity problem, first articulated by Penrose (1959)1, argues that a firm's ability to grow effectively is directly related to its ability to add managerial capacity to administer and accommodate its growth. Rapidly growing firms reduce the impact of the managerial capacity problem through strategic alliances, use of cash incentives and employee empowerment practices. Participating in alliances provides firms with access to their partner's resources and managerial talents, which, in effect, allows them to outsource a portion of their own resource requirements. Whereas incentives and empowerment practices are designed to elicit discretionary effort from employees and reduce the possibility where employees might avoid work.
Penrose (1959) argued that firms are collections of productive resources that are organized in an administrative framework. As a firm goes about its routine activities, the management team becomes better acquainted with the resources of the firm. This knowledge leads to the expansion of a firm's "productive opportunity set," as managers identify opportunities beyond the current activities of the firm that allow a firm to grow. However, according to Penrose, there is a problem with the execution of this simple logic. The administrative framework of a firm consists of two kinds of services that are important to a firm's growth-entrepreneurial services and managerial services. Entrepreneurial services generate new markets, product and service ideas, whereas managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities. The problem is that the introduction of new product and service ideas require substantial managerial services or "managerial capacity" to be properly implemented and supervised.
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