GOALS OF FIRMS

• Profit maximisation - short and long term • Stable dividend payouts • Growth in capital value

• Sales revenue maximisation • Maximisation of capital assets • Maximisation of market share

• Ethical goals • Price stability • Multiple goals

• Satisficing objectives

THEORIES OF THE FIRM

• CLASSICAL - Simple maximisation approach (profits)

• MANAGERIAL - Constrained maximisation approach

- Baumol - Marris - Williamson    

• AGENCY - Firm represents contracts as between principal and agents

•   BEHAVIOURAL - Satisfying approach  

BAUMOL MODEL

• Assumption: to maximise sales subject to a profits constraint

• Leads to a higher level of output than in the simple maximisation approach

• Can approximate to profit maximisation approach in certain circumstances

• if profits constraint is very high in recession where marginal cost is very low

• Different reactions to cost increases, taxation etc.

Peter Collins

MARRIS MODEL

•Assumption: to maximise growth in capital assets subject to a security constraint  

• Security constraint represents the fear of possible take-over and is measured by the valuation ratio  

• Valuation ratio is measured by the ratio of the stock market valuation of company assets relative to book asset value

If ratio < 1, then company is in danger of take-over

• Ability to sustain growth without risk of take-over depends on the quality of management

Peter Collins

WILLIAMSON MODEL• Assumption: to maximise managerial utility function

subject to a profits constraint  

• Managerial Goals • Salary • Security • Dominance • Professional Excellence

 • Expense Preferences• Staff • Emoluments • Discretionary Profit

    • U-form and M-form of organisation

OTHER GROWTH MODELS

• Galbraith       - technostructure

  • Downie

   - technology restraint        - transfer and innovation mechanisms

  • Penrose

      - managerial restraint       - resources and services

        - role of diversification       - internal and external obstacles       - internal and external opportunities  

BEHAVIOURAL THEORY OF THE FIRM

• Based on coalition of different interest groups  

• Stakeholders:

• Shareholders

• Management

• Workers

• Bankers

• Customers

• State

• Suppliers

• Satisficing Behaviour

- examples of compromise

 

BEHAVIOURAL THEORY (Con)

• Organisation seen as coalition of differing interest groups

MANAGERS                                                SUPPLIERS SHAREHOLDERS                                      CUSTOMERS WORKERS                                                  GOVERNMENT

SUB GOALS

PRODUCTION                                       MARKET SHARE INVENTORY                                           PROFIT SALES

MAIN CONCEPTS

• SIDE PAYMENTS   • SEQUENTIAL V SIMULTANEOUS ACTIVITY

• ORGANISATIONAL SLACK

• ASPIRATIONS AND NON OPERATIONAL GOALS

• SATISFICING BEHAVIOUR

• SEARCH ACTIVITY

• STANDARD OPERATING PROCEDURES

BEHAVIOURAL THEORY (con)

Summary

• QUASI RESOLUTION OF CONFLICT 

• UNCERTAINTY AVOIDANCE

• PROBLEMISTIC SEARCH

• ORGANISATIONAL LEARNING  

Problems

• Too short term

• Views firms too passively

• Lack predictive value