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A Behavioral Resource-Based View of the Firm: The

Synergy of Cyert and March (1963) and Penrose (1959)
Christos N. Pitelis,

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A Behavioral Resource-Based View of the Firm: The

Synergy of Cyert and March (1963) and Penrose (1959)
Christos N. Pitelis

Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG United Kingdom,
c.pitelis@jbs.cam.ac.uk

yert and Marchs (1963) seminal behavioral theory is one of the two major economics-based theories of the rm that
goes inside the black box (the rm)the other being the contribution of Edith Penrose. The two theories have
differences, but also similarities, and substantial scope for cross-fertilization that has gone unnoticed in the literature. In this
paper, we try to integrate important ideas from both books, paying particular attention to the issue of excess resources,
slack, and (intrarm) conict. We then build on the integrated framework by delving into the nature of intrarm conict
and its relationship to the degree of intrarm rivalry, as they may impact the possible use of slack by rms. We derive
propositions common to the two theories and new ones of importance to our understanding of organizational growth and
change.
Key words: behavioral theory of the rm; resource-based view; excess resources; slack; conict; innovation

1.

Introduction

focus on the issue of internal environment of the rm

and its link with the external one (BTFs imperfect
environmental matching (p. 215) and Penroses productive opportunity(p. 31)), and the issue of organizational slack (p. 189). We then discuss ways in which
cross fertilization can serve both views, and the theory
of the rm more widely, paying attention to the interaction between learning, slack, conict, and innovation.
Drawing on Selznick (1957), Simon (1995), Gavetti and
Levinthal (2004), and others, we propose that the concept of authority or hierarchy may help bridge some
apparent differences between the two views. Finally, we
extend the integrated framework and provide some rm
case examples in line with it.
The main arguments of this paper are
1. Both BTF and TGF share the idea that rms are
proactive organizations, that any examination of the rm
requires looking at (and indeed starting from) inside the
rm, that rms read the external environment through
an organizational lter, and that as a result there exists
imperfect environmental matching. In TGF, the productive opportunity of rms refers to the dynamic interaction between the perceived by management internal
and external environments. Both theories rely on uncertainty, limited rationality, and learning. In TGF, intrarm
learning explains the generation of excess resources and
slack.
2. In BTF, intrarm conict is paramount; in TGF, it
does not exist.
3. In BTF, intrarm conict and bounded rationality
imply satiscing. In TGF, the existence of uncertainty,
limits to rationality, and multiple managerial objectives
imply that rms do not maximize short-term prots, but

In the second edition of their 1963 seminal book, A Behavioral Theory of the Firm (BTF), Cyert and March
(1992) review developments in economic theories of
the rm (p. 216) since the books rst edition. They
focus on team theories, control theories, transaction
costs, and agency and evolutionary theories. There is no
mention of Edith Penroses (1959) classic The Theory
of the Growth of the Firm (TGF), or subsequent developments in the resource-based view (RBV) and its now
numerous extensions (dynamic capabilities, knowledge
based).1
In the years post-1992, Penroses contribution and the
RBV have acquired signicant recognition, arguably
challenging transaction costs as the leading economicsbased theory of the rm (see, for example, Kor and
Mahoney 2000; Mahoney 2005; Rugman and Verbeke
2002; Pitelis 2002, 2005; and Meyer 2006).2 While
updating Cyert and Marchs account could itself motivate this paper, our claim here is that, despite important
differences (and in part because of them), Penroses theory of the growth of the rm can be fruitfully integrated
with Cyert and Marchs contribution, serving to bridge
behavioral and (other) economic theories of the rm. In
particular, we focus on some issues, crucial in our view,
that concern differences, similarities, and scope for integration that have gone unnoticed in the literature. We
then build on the outcome to provide propositions common to the integrated framework, as well as new ones
of importance to our understanding of organizational
growth and change. Starting with the differences, we
focus on the issue of intrarm conict, and the related
issue of the objective of the rm. On similarities, we
478

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Organization Science 18(3), pp. 478490, 2007 INFORMS

they pursue the maximum feasible long-term prot. The

weak version of the prot motive is of essence in motivating management to use excess resources thus engendering endogenous growth and innovation.
4. Given intrarm conict, BTF predicts problemistic
search (p. 188). Lacking evidence in favor of the last
mentioned, BTF suggests slack-enabled innovation.
5. In TGF, excess resources and slack do not simply
enable endogenous growth and innovation; they motivate
it, given the pursuit by management of maximum possible prot and the claim that excess resource can be put
to protable use at near-zero marginal cost.
6. Agency-type theories fail to account for noneconomic means of intrarm conict alleviation. Organizational and psychological approaches, notably the work of
Herbert Simon, go further in explaining how management can alleviate intrarm conict. Growth-induced
slack (for TGF) can be the outcome or, for BTF, a mechanism that facilitates intrarm conict alleviation. However, alleviation need not always imply elimination.
7. The TGF concepts of intrarm learning, resulting
in excess resources that motivate endogenous growth and
innovation, are perfectly compatible with, and can
be incorporated into, BTF. Similarly, the concept of
intrarm conict is perfectly compatible with and of importance to the TGF because it can serve as an additional
source of intrarm learning. The concept of productive
opportunity puts together BTFs concepts of imperfect
environmental matching, the organizational lter, and the
idea that rms are proactive. The emergent integration
makes for a stronger theory.
8. The integrated theory predicts excess resources/
slack-motivated and problemistic search-induced innovation, depending, however, on moderating factors such
as the immediacy of the problem faced, the degree of
maturity of the line of business, and the rms productive opportunity.
9. The integrated behavioral RBV of the rm requires
renement and elaboration of its concepts and ideas,
notably, concerning the nature of intrarm conict and
its relationship to the degree of interrm rivalry, as they
impact on the use of slack by rms.
10. In deciding what to do with excess resources/
slack, it is important for rms to determine whether the
type of intrarm conict they face is antagonistic or
nonantagonistic (see below). Indicatively nonantagonistic intrarm relations alongside intense interrm rivalry
would point to slack-induced innovation, while antagonistic intrarm relationships alongside low interrm
rivalry would point to the use of slack to alleviate
intrarm conict. Firm case examples exist in line
with the integrated theory and our extensions. However,
operationalization remains a limitation of a theory that
employs complex concepts such as excess resources,
intrarm conict, and productive opportunity.

In the next section, we briey summarize the main

arguments in the BTF and TGF.3 In 3, we discuss differences and similarities. Section 4 explores grounds for
cross fertilization and integration. Section 5 renes and
extends ideas from the integrated theory, derives propositions, and discusses limitations and implications. Section 6 summarizes and concludes.

2.

BTFs Behavioral and TGFs

Resource-Based Views4

BTF and TGF are arguably the two most prominent

economic-based attempts to enter the black box (the
rm). Coases (1937) transaction-cost explanation of the
nature of the rm is, arguably, more an explanation
of why the black box exists, rather than a focus on
its internal attributes, and what Coase has subsequently
called the essence of the rm, running a business (Coase
1993a). When it comes to the rms internal attributes,
Coase goes barely beyond the recognition of two major
(in his view, cooperating) resources within the rm,
entrepreneurs and workers (see below). In contrast, both
BTF and TGF focus explicitly inside the rm. For Cyert
and March (1963):
in order to understand contemporary economic decision
making, we need to supplement the study of market factors with an explanation of the internal operation of the
rm. (p. 1, emphasis added)

For Penrose (1959), moreover, one cannot even start to

analyze the external environment of the rm (to include
the market) without a prior understanding of the nature
of the rm, which is its human and nonhuman resources
and their interaction. In TGF, the emphasis is on the
internal resources of the rm (p. 5) and it is at the
organization as a whole that we must look to discover
the reasons for its growth (p. 7).
Cyert and March summarize the three core ideas of
BTFs contribution to be those of bounded rationality,
imperfect environmental matching, and unresolved conict. Bounded rationality refers to limitations of information and calculation (p. 214). It implies the need to
set targets and try to satisfy these, as opposed to optimizing the best imaginable solution. Firms attend to goals
sequentially, and follow rules of thumb and standard
operating procedures. Imperfect environmental matching
suggests that human agency is not uniquely determined
by an exogenously given structure, or environment.
Accordingly, history matters, pointing to the importance of organizational adaptation. Unresolved conict
is based on the assumption that in organizations, multiple actors, with potentially conicting interests exist that
are not entirely alleviated by contracts. Instead, individual and subgroup interests are continuously renegotiated,
and consistency is hard to obtain and sustain.

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Important insights in BTF, among many, concern

organizational slack, learning, and innovation. Organizational slack refers to the difference between the resources required to maintain an organization and the
resources received by a coalition within the organization.
Importantly,
success tends to breed slack. One of the main consequences of slack is a muting of problems of scarcity
(BTF, p. 189) slack provides a source of funds for innovations that would not be approved in the case of scarcity
but that have strong subgroup support.

Concerning learning and innovation, BTF attaches signicance to the concept of problemistic search. Search
can be induced by problems, and lead to the nding of
solutions, inviting the prediction that relatively unsuccessful rms would be more likely to innovate than relatively successful rms (BTF, p. 188).
This prediction, Cyert and March observed, was not
supported by available evidence at the time. A possible
solution to this problem of the theory was to reconsider
slack. By providing a source of funds, slack could enable
innovation. Because slack is normally present in successful rms, the latter would also be expected to innovate.
Both problem-oriented innovation and slack innovation
may therefore exist, the former is most justiable in the
short run and is linked directly to a problem, while the
latter is more justiable in the longer run and is related
to major organizational problems.
While Cyert and Marchs claim explains why slack
may enable innovation, it does not provide a general
cause for why slack may also induce innovation. For
example, particular subgroup demands may not necessarily be for innovation, but rather for discretionary
expenditures. Such a general cause is provided by Penrose. Penroses focus is on the analysis of the expansion of the innovating multiproduct, esh and blood
organizations that businessmen call rms (p. 13),
not on optimal price-output equilibrium of neoclassical theory. Such rms consist of human and nonhuman
resources, under administrative authoritative coordination and communication (p. 20). Human, and especially
managerial, resources are most important. Resources
can provide multiple services. Firms use their resources
to perform activities that result in products for sale
in the market for a prot. Firms differ from markets,
their boundaries dened by the reach of coordination
and authoritative communication (p. 20). For reasons
related to resource indivisibility and the balance of processes, rms always have excess resources. Importantly, moreover, the very performance of activities
within rms creates new knowledge through specialization, division of labor, resource combination, teamwork, and learning. This reduces the time required for
implementing current activities, thus generating (further)
excess recourses, which are not fully utilized at any
given point in time. In her words:

Pitelis: Behavioral Resource-Based View of the Firm

Organization Science 18(3), pp. 478490, 2007 INFORMS

Internal inducements to expansion arise largely from the

existence of a pool of unused productive services, resources, and special knowledge, all of which will always
be found within any rm. (p. 66)

The cohesive shell of the organization is of the essence

in facilitating learning. Because excess resources can
provide services at (near-) zero marginal cost (in that
they have already been hired to provide services for
a specied amount of time), they motivate managers
to apply them to new activities, engendering endogenous innovation and growth. The protable marketization of innovations requires entrepreneurial thinking,
which includes the identication, and also creation,
of new markets. The external environment, markets
and demand, are perceptions (images) in the managers mind. Supply and demand are inextricably linked,
because planned supply responds to perceived demand.
There is a dynamic interaction between the perceived
internal and external environments that denes a rms
productive opportunity (p. 31). The direction of expansion is motivated and shaped by the productive opportunity. There are limits to the growth of the rm, but not
to its size, per se (other than those that arise from limits to authoritative communication). The conception and
implementation of expansion requires managers whose
rm-specic knowledge is a prerequisite for the successful planning and implementation of expansion, and who
therefore are not available in the open market. This limits the rate of growth and explains the preeminence that
Penrose attributes to management.5
Important for our purposes in this article is Penroses
endogenous incentive to make protable use of excess
resources. This is more subtle (and arguably more powerful) than the exogenous prot-maximization motive of
traditional theory. While the two are relatedthe latter in part motivating the formermaking productive
and protable use of employed resources is a challenge because it can help upgrade the resource, because
of the personal opportunity cost of (in)ability to delegate, and because of the sociopsychological reasons not
accounted for by an exogenously imposed prot motive
(Penrose herself favored a broader explanation for the
motive of rms, one that considers power and noneconomic factors, to include the mere love of the game)
(p. 30). This prot motive and, through it, endogenous
growth, also complements and strengthens BTFs claim
that slack may facilitate innovation. In TGF, excess
resources and slack both enable and motivate endogenous expansion and innovation.
BTF and TGF both proved to be seminal. Cyert and
Marchs deviant concepts (BTF 1992, p. 216) have
been adopted by subsequent economic and organizational theories of the rm; see, for example, Cyert
and March (1992, Ch. 9), Simon (1995), Gavetti and
Levinthal (2004), and Mahoney (2005). The TGF has
been of importance to the RBV, dynamic capabilities,

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Organization Science 18(3), pp. 478490, 2007 INFORMS

and knowledge-based theories of the rm; see, for example, Foss (1996), Teece et al. (1997), Kor and Mahoney
(2000, 2004), Zollo and Winter (2002), Pitelis (2004),
Mahoney (2005), Augier and Teece (2007), and Teece
(2006). Despite obvious differences (and in part because
of them), the two books and theories, and behavioral
and resource-based ideas more generally, also provide
substantial scope for cross fertilization. This is further
pursued below.

3.

BTF and TGF: Some Differences and

Similarities

Considering that we are dealing with two theories written more or less at the same time, and that they have
simultaneously been very inuential since, the differences between Cyert and March and Penrose appear
to be striking. In particular, while Cyert and March
focus on intraorganizational conict, there is none of that
whatsoever in TGF. In addition, in the BTF, intrarm
decision making is crucial, with rules of thumb and
standard operating procedures serving as carriers of
knowledge. Given bounded rationality and conict, the
objective of the rm is the outcome of a negotiated process and is more about satiscing than optimizing. In
contrast, TGF pays little attention to internal decisionmaking processes, and maintains a weak version of
prot maximization. For Penrose, rms do not maximize
short-term prots, but instead seek maximum possible
long-term prots, even in the context of limited rationality, uncertainty, and multiple objectives (pp. 2730).
This focus and need for prot is of the essence to
Penrose because it motivates the application of excess
resources to (endogenous) growth, without which the
whole Penrosean dynamic would break down.
Despite such striking differences, there are important
similarities between the two works, as well as a significant scope for integration. We start by exploring what
appears to be the main difference, intrarm conict and
(the employment) contract. We explore this in the context of debates in the extant theory, with an eye to identifying scope for integration and theory development,
starting with Coases (1937) classic paper.
In his 1937 article, Coase dened the rm as a
multiperson hierarchy, the nature of which was to be
found in the employment contract between employers
and employees. Coase focused on the capitalist rm, as
opposed to either noncapitalist rms or other rmlike
forms of early capitalist production, such as the puttingout system (see Marglin 1974 and Williamson 1975).
He went on to explain the employment contract in
terms of transaction costs-related market failures. In
simple terms, high market transaction costs precipitated
intrarm organization of activities, replacing markets
and saving costs. Coase regarded efciency/productivity
benets that arise from savings in transaction costs by

481

rms as the reason why laborers agreed to work under

the authority and direction of the capitalist entrepreneur.
Later, Coase (1993a) regretted his emphasis on the
employment relationship. He claimed that this limited
his focus on the issue of the nature of rms, while
one should also look at the issue of their essencein
his view, running a business. This involves not just an
employment contract between capital and labor, but also
the use of other resources, ones own time and abilities,
and more.
In TGF, Penrose paid attention to some aspects of
Coases essence, having taken the nature for granted.
Penrose also focused on the capitalist rm, which she
saw as a multiple-person hierarchy involving the authority of some human resources or both human and nonhuman resources for production for sale for prot in the
market. In this sense, there is more in her denition than
there is in Coases, minus, however, the employment
relation, which is Coases nature of the rm. It is possible, however, to also explain Coases nature of the rm,
in Penrosean terms, as a result of efciency gains
however, from the production costs sidenamely, as the
result of productivity enhancement through endogenous
innovation, knowledge, and growth (see Pitelis and Wahl
1998). To the extent that intertemporal (given Penroses
focus on change) transaction costs can also be relevant,
it will be the overall transaction-costs reductions alongside knowledge-induced productivity benets that could
explain Coases nature of the capitalist rm, the employment contract.6
The Penrose-inspired input on the nature of the rm
(namely, that rms exist because of knowledge- and
productivity-related advantages from intrarm activities)
is a production efciency-based complement to the
Coasean insight. However, this still fails to fully explain
the employment contract. Efciency benets per se are
not sufcient to explain why one should agree to work
under the authority of another person voluntarily
namely, whether the relationship is contractual or predatory.7 In addition, as pointed out by Cyert and March,
the employment relation per se does not sufce to
eliminate conict between intrarm human resources.
On the other hand, and perhaps more importantly,
Coase and Penroses focus on efciency benets fail
to address the issue of whether and why employees
may identify with organizational objectives and do not
just exert the minimum possible effort when working
for someone else (Simon 1995). This issue is addressed by agency theory, notable contributions being
Alchian and Demsetz (1972) and Jensen and Meckling
(1976). According to this view, whenever there exists
a principalagent relationshipfor example, employer
employee, or shareholdermanagerand when the interests of the two parties are not ex ante fully aligned,
agents may have discretion to pursue their own interests. When this is the case, it becomes important for

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482

principals to devise means for aligning the incentives of

agents to their own. Alchian and Demsetz applied this
to the very issue of the need to obtain the productivity
benets of the employment relationship and used it for a
conceptual justication of the need for private ownership
and control of rms.8
Alchian and Demsetzs focus was on one of the most
important issues in political economy, that of extracting
labor from labor power, or, more generally, that of transforming work potential to work (see Simon 1995). This
is part and parcel of a broader category of issues that
relate to potentially differing objectives and interests of
groups of people. The archetypical form is the Marxian
notion of class struggle. In the context of the factory
system, this takes the form of the capitalist employer
increasing the rate of surplus value by intensifying work
and/or by introducing labor-saving technical progress
(see Marglin 1974). Divergent interests within rms are
also recognized in managerial theories of the rm (see,
for example, Marris 1996), where the concept of different objectives by managers and owners is coupled
with the idea of managerial control, to lead to nonprotmaximizing objectivesfor example, the maximization
of sales revenue, growth, etc.9
Our discussion of (the employment) contract and conict in economic theory highlights the range of different
views on the existence of conict and means of conict resolution. Concerning the last, mentioned, Simon
(1995) observes that the focus of agency theory on nancial incentives and monitoring misses a very signicant
part of the answer to the question of why employees
often exert signicant effort to promote organizational
and not just personal objectives. Indeed, it is only the
BTF that questions any notion of optimization and the
possibility that (the employment) contract can fully alleviate intrarm conict. In reviewing post-1963 developments in the theory of the rm, Cyert and March
(1992) welcomed the inuence that their ideas had on
subsequent theories, but also pointed to some of their
remaining limitations. In particular, agency theory gives
a much smaller weight to limited rationality, as opposed
to conict (p. 221), and indeed, agency theory has
become a branch of game theory, while retaining a traditional orientation to the asymmetry between principal
and agent (p. 222).10
In all, Cyert and March conclude, correctly in our
view, that despite the inuence of their work on subsequent theory, such theory has failed to address the problems they posed concerning intrarm conict. The last
mentioned is not alleviated fully, either through (the
employment) contract, or through incentive alignment,
as described by agency theory.
None of the above could be further from Penrose,
where intrarm conict is simply assumed away. Penrose attempts to avoid the apparent circularity of her
argument that success leads to growth, and growth to

Organization Science 18(3), pp. 478490, 2007 INFORMS

success, by focusing on rms that successfully grow

(p. 77). Presumably, rms that have grown successfully
have somehow been able to alleviate conict and/or to
leverage it productively. If so, this still begs the question
of whether and how this can be effected. While Penroses focus on successful rms may avoid the problem
of the need to analyze this issue further for her own
purposes, the issue is crucial and arguably needs to be
addressed by any theory that claims to focus on the
rms internal environment. We pursue this challenge in
the next section.
Despite the apparently dramatic difference between
TGF and BTF, there are also important similarities.
These include the intended focus on the rms internal environment, the conceptualization of the rm as a
dynamic actor that aims to shape the external environment, the concept of the external environment being an
image or perceived through an organizational lter, and
the idea and role of imperfect environmental matching
and productive opportunity. For example, for Cyert and
March (1992), the modern rm has control of the market; it has discretion within the market; it sees the market through an organizational lter (p. 1). Moreover,
the issue of rm discretion motivates, in part, one of
the three core concepts of BTFthat of imperfect environmental matching. Discretion over the market implies
an interaction between external and internal environments. The organization lter is reminiscent of Penroses
image. Together, the three amount to Penroses productive opportunity. Productive opportunity can be a factor
that helps shape rms aspiration levels, another important concept in BTF. However, by far the most obvious, relevant, and useful similarity between TGF and
BTF concerns the issue of slack and excess resources
and their role of rm growth and innovation. Excess
resources and slack are fundamental concepts in both
theories, an idea that has gone unnoticed in the literature.
BTF and TGF also share the focus on learning. Learning is paramount in TGF for the generation of excess
resources (thus) slack, and conict resolution and/or
innovation. We feel this provides important potential for
cross fertilization between the two theories, pursued in
the next section. The above discussion is summarized in
Table 1 below.

4.

Toward an Integration of BTFs

Behavioral and TGFs Resource-Based
Views

The absence of intrarm conict in TGF is almost paradoxical, given, in particular, Penroses implication to the
managerialist literature (see, for example, Slater 1980).
While TGF has little to do with the managerialists
claim that utility-maximizing managers strive for growth
(Pitelis 2004), one might, nevertheless, have expected
that the issue of potentially divergent objectives could

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483

Organization Science 18(3), pp. 478490, 2007 INFORMS

Table 1

Key Similarities and Differences Between BTF and TGF

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Key similarities

Key differences

Major assumptions/implications:
Firms are proactive learning organizations, operating
under conditions of uncertainty and bounded rationality
(BTF) or imperfect knowledge (TGF).
The intrarm environment, notably intrarm decision
making (TGF) and resources (TGF), are of critical
importance.
Firms read the external environment through an
organizational lter (BTF) or see it as an image (TGF).
Imperfect environmental matching exists between internal
and external environments (BTF) and a dynamic
interaction between the two (rms productive opportunity)
(TGF).
Multiple objectives exist within rms due to different groups
(TGF) and/or multiple management objectives (TGF).
Organizational slack (BTF) and excess resources (TGF)
are important determinants of organizational structure,
growth, and performance.

Major assumptions/implications:
No conict in TGF, unresolved conict in BTF.
Weak prot maximization in TGF, despite imperfect
knowledge, uncertainty, and multiple objectives, that
motivates use of excess resources for growth. Satiscing,
not optimizing of any type in BTF, as an implication from
bounded rationality, multiple objectives, and intrarm
conict.
Standard operating procedures and rules of thumb in BTF,
no focus on intrarm decision making in TGF.
Learning engenders excess resources that lead to
endogenous growth and innovation in TGF, no focus on
endogenous growth in BTF.

Predictions:
Slack can lead to problemistic search (BTF), enable
opportunity-led innovations (BTF), and indeed motivate
and induce innovation (TGF).

Predictions:
In growing rms, excess resources will always lead to
innovation and growth (TGF). Slack can also be used to
eliminate conict (BTF).
Perennial problemistic and slack-induced innovation
(TGF). Problemistic search in case of immediate problems
and slack-enabled innovation in other cases (BTF).

Causal drivers:
Slack and excess resources can enable and/or motivate
innovation.

Causal drivers:
Bounded rationality, uncertainty, and intrarm conict lead
to satiscing behavior, while conict motivates the use of
slack to alleviate it. Slack can also engender innovation.
Intrarm learning engenders excess resources, which
motivate prot-seeking managers to use them for
(endogenous) growth.

have been given some attention. While Penrose might

have needed to avoid intrarm conict (which could well
be a separate book), we feel that her analysis could be
enhanced by allowing for intrarm conict.
Penroses approach was to look at the outside environment through an organizational lens. She went on
to posit a dynamic interaction between the internal and
external environments. The latter includes other rms,
and Penrose discussed the importance of oligopolistic interaction and interrm competition, especially in
Chapter XI of her book (Penrose 1959/1995). In this
sense, it is clearly in line with her own focus to look at
intrarm competition too. As already discussed, this can
take many forms and apply to many groups. Recognizing this can help Penrose in various ways. First, it may
provide an extra reason for thinking, by entrepreneurs
and management, of how to address this problemthis,
of course, is innovation and knowledge generation. Second, it can help to explain and predict, at least partially,
the direction and results of such thinking. An example is the idea that labor-saving technological progress
may be a result of entrepreneurial attempts to alleviate intrarm conict by reducing the size and power of
labor. Last, but not least, intrarm conict may breed

diversity of opinion, which in turn may lead to creative

tension and thus be a source of new information and
knowledge and productivity advantages (Pitelis 2005).
Clearly, intrarm conict could also have the opposite
result; it may lead to noncompliant behavior that could
threaten a rms performance, if not its survival. In this
context, the question of whether and how conict resolution is effected, and/or whether and how conict can
be leveraged to enable success, is of the essence.
Interestingly, the problemistic search type of learning in BTF was the very reason used by Penrose to
explain why there will be no limit to rm size, due
to managerial diseconomies of scale. The existence of
such diseconomies was questioned by Penrose because
she believed that managerial problemistic search will
engender organizational solutions that would help rms
keep long-term unit costs constant (see Penrose 1959
and Pitelis 2002).
Crucial in the above context is the issue of organizational slack and of excess resources. Excess resources
in TGF tend to be used for expansion automatically
and fully. However, they could also be used to alleviate
conict. This is a type of problemistic search-related
innovation. It lends support for the problemistic search

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484

cum organizational slack hypothesis of innovation in

BTF. Indeed, as noted, both variants of innovation are
also present in Penroses work. However, issues remain
that need to be resolved. Conict alleviation requires
informed, nurtured, and effective agency, not just structure (existing slack). What motivates the use of slack
for conict alleviation and innovation? In addition, under which circumstances will slack tend to lead to
attempts for conict resolution (problemistic search) and
under which circumstances to opportunity-led innovation? For BTF, problemistic search-induced innovation
is more likely to be the outcome of short-term problems,
while slack-induced innovation might be more prevalent for longer-term decisions. Is this the only relevant
distinction?
In addition to the above, both BTF, and especially
TGF, tend to downplay noneconomic ways of conict
alleviation. For example, the recognition of intrarm
conict questions efciency only-based explanations of
organizational change, including that of TGF. As argued
by Hymer (1970) and Marglin (1974), for example, conict may lead to a choice of technology that favors
sectional interests, not necessarily societal ones. For
example, labor-saving technology may serve as a laborcontrol device, alongside other labor-control devices.
Such choices by management may in turn help intensify
conict. This may render crucial the role of noneconomic factors that help establish shared morals and
vision through, for example, leadership, ideology, legitimization, shared views, culture, and enablement (see
Simon 1995, Boddewyn 2003).
There is little of that in either BTF or TGF. In TGF,
interest alignment appears to be, in part, always present,
perhaps effected through managerial leadership and its
ability to implant its vision to other groups within the
organization. While this may well be possible, it is neither self-evident nor cost free. For example, BTF asserts
the oppositethat conict is simply always there. This
points to the need to discuss in more detail leadership,
ideology, legitimization and the effecting of shared values, and beliefs and common moralities in organizations.
Concerning the use of slack for conict alleviation,
TGF can be of further importance to BTF. While organizational slack can be used in principle by management to alleviate conict, this requires knowledge. In
TGF, this is endogenously generated within rms. It
also requires motivation and effectiveness. In TGF, motivation is established through the possibility of putting
excess resources to use at zero marginal cost. While
this is problematic in that it ignores the cost of managerial time itself, which can be high; and while the
belief in TGF of the ability of management to implement change can be questioned (because it requires a
degree of power asymmetry between intrarm groups,
and also a degree of managerial competence), both
hypotheses are arguably plausible (as well as being

Pitelis: Behavioral Resource-Based View of the Firm

Organization Science 18(3), pp. 478490, 2007 INFORMS

in line with, for example, Chandlers 1962 views). In

this context, we feel that the importation of the above
TGF concepts/assumptions to BFT can help bridge the
two. In particular, it could be suggested that through
the relentless pursuit of (endogenous) innovation and
growth, productivity, and efciency, emergent organizational slack can be used by management to alleviate conict and drive innovation, as well as helping to establish
shared vision, values, and moralities.
This positive-sum approach to problem-conict solution goes beyond economic theories (see, for example,
Tirole 1998 and Prendergast 1999) and is closer to
management theories such as the stakeholder and institutional approaches. It points to enabling employees
(as opposed to control-based incentives) as a managerial strategy for long-term performance (Perrow 1986,
Granovetter 1985, Powell and DiMaggio 1991, Clarkson
1998, Boddewyn 2003, Mahoney 2006). It looks at
contract and conict not as opposites but, rather, as
related, both being shaped, and both in turn shaping, the
relentless pursuit of productivity and innovation, which
is itself driven by objective factors (excess resources
and organizational slack through knowledge generation)
and subjective factors or agency (the pursuit of maximum feasible prot, power, recognition, and the love of
the game) by the rms management. Importantly, the
very process of generating intrarm knowledge can help
management to enhance its problem-solving capabilities.
Managerial knowledge may serve as a means of a dialectical synthesis between contract and conict.
The above possibilities are supported by scholars such
as Selznick (1957) and Simon (1995), as well as by work
on the psychology of obedience, e.g., Milgram (1963).
For Simon, agency and transaction costs-based theories
ignore key organizational mechanisms such as authority,
identication, and coordination. Those are crucial in
explaining why employees so often exert themselves
to satisfy organizational objectives, rather than what
appears to be their own self-interest. In his sociological
interpretation of leadership and organization, Selznick
observes that this process of becoming infused with
value is part of what is meant by institutionalization. As
this occurs, organization management becomes institutionalized leadership (1957, p. 138, original emphasis). In IO economics, Holmstrom (1999) also points to
the variety of methods used by authority to inuence
employee behavior. For Loasby (1999), authority provides not only such inducements, but also a framework
for problem identication and attempted solution. Kogut
and Zander (1993) see the provision of identity as a
major function of rms. A substantial literature on trust
and social capital, both in economics and management,
stresses the role of trust in the building of social capital
as a means of affecting common beliefs, norms, and attitudes. See the Organization Science special issue (2003)

Pitelis: Behavioral Resource-Based View of the Firm

485

and also Dunning and Lundan (2007) for recent extensive discussions. In addition, the groundbreaking work
of Milgram (1963) and subsequent literature has emphasized the unexpected frequency of behavior obedient to
perceived legitimate authority, even when this behavior contradicts deeply held beliefs such as not inicting harm on others; also see Gross (1990) for critical
analysis.
Crafting organizational, sociological, cognitive, and
psychological elements into our integration of TGF and
BTF may help explain why and how management, when
seen as a legitimate authority, can affect conict alleviation and leverage human resources to enhance rm
performance. This in turn will tend to engender excess
resources and slack, which can be used partly to alleviate conict, partly to motivate and enable their protable
use through endogenous innovation and growth.
To summarize, an integration of behavioral and
Penrose-inspired RBV would suggest that intrarm
knowledge generation can engender endogenous innovation and growth through the generation and leverage of excess resources and slack. Slack may serve as
a means of conict alleviation alongside monitoring,
incentives, and rewards, but also motivational and psychological reasons for obedient behavior. Besides motivating endogenous growth and innovation, slack may
also enable them, given resource availability. Firms
will tend to undertake both problemistic search and
slack-induced innovations. Intrarm knowledge generation will inform management as to why, whether, and
how to leverage excess resources so as to alleviate conict, breed success, and engender a virtuous cycle of
endogenous growth and innovation.

5.

Extension, Propositions, and

Implications

Despite differences in emphasis, BTF and TGF agree

that slack can enable and motivate both problemistic
search and slack-enabled and induced innovation. Penroses discussion of the Hercules Powder Company
(Penrose 1960) supports this common prediction. Penrose discusses how Hercules strategy of diversication
away from explosives was motivated by, on one hand,
declining demand for explosives post-World War II, and
on the other, the development of capabilities in organic
chemistry by the company, with important applications
in other lines of business. Moreover, work on decision making (e.g., Buchanan and OConnell 2006) supports the claim that managerial competence improves
with experience and learning by deciding. Hymer (1970)
explains how large rms discover how to discover
(Dunning and Pitelis 2007). Even on the issue of
planning and implementing takeovers, The Economist
(2006a) maintains that, practice makes less imperfect. Through learning by taking-over, companies

Figure 1

Intrarm and Interrm Competition, Slack, and

Innovation

Interfirm competition/rivalry

Intrafirm conflict

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Organization Science 18(3), pp. 478490, 2007 INFORMS

Low

High

Nonantagonistic

Slack enables
defensive innovations
to preempt potential
competitors
(1)

Slack enables
opportunity-related
innovation
(2)

Antagonistic

Slack enables focus on

intrafirm conflict
alleviation
(3)

Slack enables attempts to

deal with both types of
competition, which is hard
and may lead to exit
(4)

such as Cisco and General Electric


have demonstrated

that it is possible to learn how to take over others.11
Work on excess resources and growth supports the idea
that excess resources engender growth and improve
performance (Beamish and Goerzen 2007). The work
of Simon, Selznick, and others shows how and why
employees identify with corporate objectives. Psychological studies show that authority engenders obedience.
Less clear is whether and when intrarm conict motivates the use of excess resources for innovation, and if
so, of which type. We submit that some answers to these
important questions can be provided in part by focusing on the relationship between the nature of intrarm
conict and the degree of interrm competition. Starting
with intrarm conict, this may be antagonistic (like, for
example, of the traditional Marxist class-struggle type)
when two or more groups clearly perceive that they
have irreconcilable interests, or nonantagonistic where
the two parties may feel they have differences, but within
the context of an overall shared objective (like, for example, top management and large shareowners). Clearly, in
most real-life cases, the difference will be a matter of
degree. However, our proposition is in line with Simons
(1995) claim that employees will tend to share the overall corporate objective more the nearer they are to the
top. On the other hand, the degree of interrm competition can be high or low, depending, for example, on the
strength of the ve forces of competition (Porter 1980).
Using these as two dimensions, Figure 1 shows the following matrix.
The unit of analysis here is a rm with excess resources/slack that faces different types of intrarm conict and different degrees of interrm rivalry. In brief,
if intrarm conict is antagonistic and interrm rivalry
is low, the rm is likely to focus the use of its slack
resources to alleviate intrarm conict (Proposition 1)
because this seems to be its major immediate problem. If
intrarm conict is nonantagonistic and interrm rivalry
is high, the rm is more likely to use its excess resources
to produce innovations that keep it abreast of rivals, paying less attention to intrarm relations (Proposition 2).

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486

This is akin to exploration-type learning (March 1991).

Nonantagonistic intrarm relations alongside low competitive pressures point to defensive innovations aimed to
protect the current situation and preempt potential rivalry
(Proposition 3). This is related to exploitation-type learning (March 1991). Finally, antagonistic intrarm relations combined with intense interrm rivalry point to the
rms need to deal simultaneously with both types of
competition. This is likely to be difcult; it requires high
managerial competence and resources and may lead to
failure or exit (Proposition 4).
Our integration of BTF and TGF and their implications appear to be in line with the experiences of rms.
For example, in the case of Hercules Powder Company,
examined by Penrose (1960), problem-related innovation and slack-induced innovation coexist, but in different types of activities. On one hand, declining demand
for explosives in the mature postwar explosive sector induced problemistic search that involved the use
of existing competencies in related activities. On the
other hand, and simultaneously, the invention of the
new chemical CMC led to the search for new markets
where the new chemical can be put into use. This search
involved, among others, a most innovative market identication technique, namely, the placement by Hercules
of an advertisement in the national press that described
the potentially useful properties of the new substance,
which asked the question what do you see in CMC?!
Similar considerations apply in the case of EMI,
discussed, for example, by Teece (1986) and Bartlett
(2005). At the same time that EMI was considering
diversifying from a maturing business to other activities
within the United Kingdom and abroad, the invention
of the CT scanner, with its possible applications to the
medical equipment sector, led EMI to undertake foreign
direct investment in the United States. Here, the pursuit of risk diversication motivates the use of a special
R&D department that works on technologies that could
hopefully lead EMI out of a market sector (problemistic
search), while its use of excess resources for this purpose results in an invention with applications in a potentially highly lucrative activity. While problemistic search
underlies the original motivation, productive opportunity
engendered by the use of excess resources leads to slackinduced innovation.
Examples from rm cases seem to bode well with
our propositions derived from Figure 1. While few rms
could be privileged enough to be in a situation like that
in Quadrant 1, Microsoft may be a case in point. It is
often accused of behavior consistent with our Proposition 1, not least in high-prole court cases. Firms
like Toyota that face nonantagonistic intrarm conict
but intense interrm rivalry are well known for their
opportunity and exploration-driven innovation record.
National utilities, protected from international competition but facing strong trade unions, would be the case in

Pitelis: Behavioral Resource-Based View of the Firm

Organization Science 18(3), pp. 478490, 2007 INFORMS

Quadrant 3. The usual response here is for them to focus

on intrarm conict alleviation. When such efforts fail,
these companies become targets for privatization with an
eye to reducing the power of trade unions.
The difculties encountered by rms facing intense
interrm rivalry alongside antagonistic intrarm relations (Quadrant 4) are probably best exemplied through
the experiences of various European state-owned airline companies, for example, Alitalia, Olympic Airlines.
Invariably, the proposed solution here is to privatize,
restructure, focus, or exit from unprotable routes or
altogether. An important consideration in such cases is
that slack takes the form of excess labor, not excess
cash. The intensication of rivalry, for example, from
low-cost carriers, is combined here with a lack of experience of diversication and a managerial culture, sometimes shaped by noneconomic considerations (for example, the political desirability for a national carrier). This
reduces such rms productive opportunity. Combined
with the lack of cash, excess labor does not motivate
expansioninstead, the focus is on shedding resources,
often through privatization.
Similar considerations apply for the case of Airbus and of the U.S. car sector. The new Ford CEO,
Mulally, for example, appreciates that bringing cohesion in a company notorious for inghting (Financial
Times 2006, p. 15) should be his major focus. He is
adamant that Ford will not get to safer ground unless
everybody in the company pulls in the same direction.
Unless we change the plan, the plan is the plan (ibid).
Unlike cash-starved European airlines, companies like
GM instead face a situation where slack also involves
cash. GM perhaps best exemplies the situation of a
rm with high excess resources/slack in the form of cash
trying to deal with antagonistic intrarm relations and
intensifying interrm rivalry. As The Economist (2006b)
observes, the least of GMs current problems is to design
and sell cars. Instead, the rm has to deal with a tough
trade union, the United Auto Workers (UAW), and a
now-bankrupt parts supplier (Delphi), whose workers
know that GM is sitting on a vastthough shrinking
mountain of cash (p. 69). In this context, GMs main
interest is to wresting concessions from the trade unions,
or going bust, while the trade unions want GM to dip
into its cash, but not to le for bankruptcy. Here, the
eventual community of interest lies in GM not going
bust. However, the existence of excess cash in this case
makes conict alleviation more, not less, difcult. In
such circumstances, slack/excess resources may turn into
a problem, not a solution. The focus of GM is now on
intrarm conict alleviation through carrots (attractive
compensation package for employees agreeing to retire),
or sticks (threat to le for bankruptcy). With simultaneously intensifying interrm rivalry, fears grow that
General Motors will go bust, while management and
unions are locked in a mournful embrace (p. 69).

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Organization Science 18(3), pp. 478490, 2007 INFORMS

The above situations imply that the type of available

slack and strength of a rms productive opportunity
may be important moderating factors to consider. For
example, rms in mature sectors with high market share
and slack in the form of both cash and excess labor (like
EMI) are likely to embark on Penrosean growth when
they possess a strong productive opportunity. In contrast,
such rms may pursue a cash cow, restructuring and/or
divestments strategies, when faced with a weak productive opportunity. Various traditional manufacturers with
limited experience in diversication like Ford would be
cases in point.12
Our discussion is in line with the following lessons
for managerial practice. First, managers should aim at
alleviating intrarm conict, especially of the antagonistic type, using excess cash available as well as,
of course, the panoply of economic and noneconomic
devices available to them for this purpose. Second, managers approach to innovation should be a function of the
different types of competition their rms face.
A limitation of our analysis relates to operationalization. Concepts used in both theories, as well as
the integration and our extension, like slack, excess
resources, antagonistic conicts, and productive opportunity are hard to operationalize (Williamson 1999).
However, progress has been made (see, for example,
Mahoney 2005, Beamish and Goerzen 2007). Moreover,
such problems are not specic to the TGF and BTF. For
example, for Cyert and March (1992), also: The exibility of the denition of transaction costs tends to make
the concept a more powerful tool for interpreting historical outcomes than for predicting future ones (p. 221).
Such views may apply for BTF- and TGF-type concepts and arguments, yet this should not hinder their
development and attempts to operationalization, even
when this may serve more as a post hoc explanation than
for predictive purposes. On the other hand, operationalization can also help test some of the more predictive
insights outlined above.

6.

Summary, Conclusions, and Future

Research

The seminal contributions by Cyert and Marchs behavioral and Penroses resource-based theories can help us
identify and try to address critical issues concerning
organizational change, growth, and performance. The
apparently drastic differences between the two theories
make the case for integration tempting and exciting.
Examples include introducing conict in TGF and productive opportunity in BTF; integrating the concept of
excess resources and organizational slack of the two
theories; using excess resources and slack to explain
innovation and conict alleviation; and using intrarm
knowledge generation to explain enhanced managerial
competence for conict alleviation and the pursuit of

a more singular rm objective, like that of maximum

long-term feasible prots, where feasibility also depends
on the use of organizational slack for coalition maintenance (i.e., organizational sustainability). The integrated
outcome fails to address a number of important issues,
notably, the nature and interrelationships between different types of conict and their impact on the use of slack
and innovation. We claim that by distinguishing between
the nature of intrarm conict and its relationship to
the degree of interrm rivalry, we can derive interesting
insights into the issues that build on and extend the two
theories and their integration. Despite limitations (especially concerning operationalization), but also because of
them, our integration and extension appear to add useful
insight concerning organizational stability, growth, and
change.
Our propositions will tend to be moderated by various
other factors, so that they cannot be universally true. For
example, we mentioned the importance of the type of
slack (for example, cash versus labor) and the strength
of productive opportunity. Additional moderating factors
can include the type of interrm rivalry (for example,
with innovation as in traditional game theory or for innovation; see Kay 2000), and the type of intrarm competition (see, for example, Birkinshaw and Lingblad 2005).
In addition, linking Cyert and Marchs concept of aspiration levels to that of productive opportunity could be
an interesting research avenue.
Trying to operationalize the key concepts, rene
them further, extend them to incorporate additional concepts and ideas discussed here (and others), and test
their predictions with both case studies and statisticaleconometric analysis represents an exciting research
agenda with more nuanced insights into organizational
structure, strategy, and performance. This is even more
true, if one goes beyond our static presentation in Figure 1 to adopt a learning-based approach that involves
rms acting not just on the basis of extant circumstances,
but rather on the basis of anticipated change, combined
with the requisite steps to shape their productive opportunity so as to realize their anticipations (see Pitelis
2007). We intend to pursue this research agenda and
hope to motivate others to do so. We feel strongly that
the integration and extension of behavioral, resourcebased, and other views are both feasible and importantly essential steps for the development of a crossdisciplinary theory of the rm that bridges economics,
organizational, psychological, and other approaches. We
believe that in such an integrative theory, the seminal
contributions of Cyert and March and Penrose would,
and indeed should, be a core part.
Acknowledgments

The author is grateful to Senior Editor Mie Augier, two anonymous referees of this journal, Neil Kay, James March, and
participants at the conference on the A Behavioral Theory of

Pitelis: Behavioral Resource-Based View of the Firm

488
the Firm for very useful comments and suggestions on an earlier draft. Remaining errors are the authors.

Endnotes

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Some RBV-related ideas appear in the discussion on Nelson

and Winters (1982) evolutionary theory (notably the concept
of routine, see below), and also in a reference to Chandlers
(1962) classic book, whose similarities to TGF have been
noted by Penrose (1959) herself.
2
See, for example, Foss (1996) and other articles in the
1996 special issue of Organization Science (Vol. 7 #5) on
knowledge-based theories. For major contributions in the RBV,
see Wernerfelt (1984), Barney (1991), Peteraf (1993). On
dynamic capabilities, see Teece et al. (1997) and Teece (2006).
Zollo and Winter (2002) discuss learning and dynamic capabilities.
3
We are particularly brief in the case of BTF to avoid overlapping and repetitions with other contributions in this issue.
4
For more comprehensive analyses of BTF and TGF, respectively, see Kor and Mahoney (2000, 2004), Pitelis (2002,
2005), and Mahoney (2005).
5
Penrose applied her insights to mergers, vertical integration,
industry concentration, small rms, and industry organization
more generally, as well as to business strategy and government competition policy (see Pitelis 2002 for an extensive
discussion). Her views, moreover, have served as a basis
for Richardsons (1972) seminal attempt to explain interrm
cooperation.
6
Importantly, in this synthesis, the very perception of when
and how to reduce transaction costs can be afforded through
intrarm knowledge generation (see, among others, Fransman
1994). To assume that rms know this beforehand is unrealistic (and in contrast to, for example, Williamsons 1975 own
focus on bounded rationality). How, for example, can one be
boundedly rational and still always get it right in internalizing
markets, and only if in so doing one reduces market transaction costs by more than one increases intrarm transaction
(managerial, administration) costs? Coase (1993b) considered
bounded rationality (or any concept of rationality at all) as little more than nonsense! We submit that the Penrosean insight
helps address this problem and Coases own dislike of the
rationality concept. In Penrose, rationality too is endogenously
generated through intrarm learning.
7
Among those who originally dealt with this issuenotably
Karl Marx, Frank Knight (1921), and Ronald Coasethe
question was why independent producers agreed to work
under dependent employment for an employer capitalist. Marx
stressed capitalist coercion that created the proletariat through
the barrel of a gun, with the helpful hand of the Crown
through, for example, the farm enclosures. Accounts are in
Hymer (1979) and Heilbroner (1991). For Knight (1921), the
reason is different attitudes toward risk. The risk takers ensure
the timid and risk averse by providing them with a relatively
secure income wage rate; it is, in effect, a preference-based
division of labor. North (1981, 1991), for example, has sided
with Marx and Hymer in adopting the predatory (not contractual or cooperative) perspective. Pitelis (1991) and Olson
(2000) point to cases where coercion could go hand in hand
with efciency. It appears to us that Marx, Knight, and Coase
might all be correct! In deciding whether and why to be

Organization Science 18(3), pp. 478490, 2007 INFORMS

an employee, coercion (thus restricted choice), potential benets (from transaction costs and/or production efciencies),
and attitudes toward risk are relevant and useful. One factor
could be the superior ability and/or knowledge by one party in
exploiting the benets from specialization, division of labor,
and teamwork (see Marglin 1974).
8
Alchian and Demsetz observed that in any team effort, shirking is likely to occur because of difculties with measuring individual outputs. To ensure that productivity is not thus
prejudiced, a monitor of team workers is needed. However,
the monitor also needs to be monitored. To avoid an innite
regress situation, it is best if the monitor is self-monitored by
becoming a residual claimant of any surplus left after expenses
to other members of the team, etc., are paid.
9
For development and applications of such ideas to wider economic issues, see Coase (1960), Olson (1965, 2000), North
(1981, 1990, 1991), Mueller (1989), and Pitelis (1991).
10
Cyert and March also welcome what they see as a link
between the idea of information limitations, and the idea of
conict of interests in transaction cost economics and those
of routine, search, and selection in the evolutionary theory
of Nelson and Winter (1982), considering these as instances
where their original deviant concepts have been incorporated
within more mainstream modes of thinking (p. 216).
11
Similar considerations apply in the case of other rm strategies, including contracting; see Mayer and Argyres (2004).
Dunbar and Starbuck (2006) discuss learning to design and
from designing organizations. Jacobides and Billinger (2006)
discuss learning to dene a rms boundaries.
12
At the time of writing this, GM is in the throes of shedding
one-third of its U.S. workforce through early retirement and
severance packages (Financial Times 2006, p. 2). In addition, The two Detroit companies face other hurdles. Their
labor contracts with the United Auto Workers union expire
next September, setting the stage for one of the toughest negotiations in recent memory. Unlike Toyota and other Asian carmakers, they are burdened with huge legacy costs in pensions
and healthcare.

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