Managerial theories of the firm

Financial Statement Analysis Duration:

Managerial theories of the firm

Graduate Study

Managerial Theories of the Firm By: According to traditional theories, the firm is controlled by its owners and thus wishes to maximise short run profits.

The more contemporary managerial theories of the firm examine the possibility that the firm is controlled not by its owners, but by its managers, and therefore does not aim to maximise profits. Although profit plays an important role in these theories as well, it is no longer seen as the sole or dominating goal of the firm.

The other possible aims might be sales revenue maximisation or growth. This theory assumes that the owner of the firm, who seeks to maximise personal wealth, controls the company.

In order to maximise personal wealth the owner will seek to maximise the profits of the company Griffiths and Wall Profits are maximised where marginal revenue equals marginal cost, that is where the distance between the total revenue curve and the total cost curve is greatest.

In order for the firm to achieve profit maximisation, they need to know the cost and revenue conditions in the market so that marginal revenue and marginal cost can be found. The firm is unlikely to know its demand curve, and it is therefore impossible to obtain a marginal revenue curve.

The main problem with maximising profits is therefore the lack of information Sloman According to the managerial theories there is therefore a separation between the ownership and the control of the firm Sloman Because mangers determine company strategy, future investments and promotions they are able to dominate the decision making Worthington The managerial theories are also maximising theories, but the firms are no longer considered to be profit maximisers.

Managers want to maximise their own utility while owners, or shareholders, want to maximise their own personal wealth. The conflicting aims of managers and owners might cause what is known as the principal-agent problem Griffiths and WallSloman In order to control the behaviour of the management the agentsand make sure that they act in the interest of the shareholders the principalsthe principals can monitor what the managers do by using incentives that encourages the agent to act in the best interests of the principal, i.

Ryanair solved the principal-agent problem by offering their pilots a share scheme in January This ensures that the pilots act in the best interest of the company because they will benefit from profit growth Ryanair Managers are driven by their personal need for higher salaries, prestige, security and power.

These needs can be satisfied in several different ways. The managerial theories of the firm emphasises the incentives used by shareholders when they explain the behaviour of the managers and the effect their behaviour have on their companies.

The theories are different from one another because they assume that managers have different objectives and that these objectives can be achieved in different ways.

Undergraduate Study

According to Williamson maximising sales revenue is the easiest way of getting the means necessary for staff expenditure, and that way building the managers empire.

Personnel problems can also be handled more easily as a result of better employee remuneration and more favourable contracts Griffiths and Wall The manager also tends to prefer satisfactory levels of profit to exceptional levels that might be difficult to sustain in the future.managerial theories of the firm Managerial theories of the firm place emphasis on various incentive mechanisms in explaining the behaviour of managers and the implications of this conduct for their companies and the wider economy.

The following points highlight the three main theories of firm.

Managerial theories of the firm

The theories are: 1. Profit-Maximizing Theories 2. Other Optimizing Theories 3. Non-Optimizing Theories. Theory # 1. Profit-Maximizing Theories: The traditional objective of the business firm is profit-maximization. The theories based on the ob­jective of profit maximization are derived from the neo-classical marginalist theory of the firm.

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm.

The theory of the firm is the microeconomic concept founded in neoclassical economics that states that firms exist and make decisions to maximize profits.

Enter your mobile number or email address below and we'll send you a link to download the free Kindle App. Then you can start reading Kindle books on your smartphone, tablet, or computer - . Managerial theories of the firm place emphasis on various incentive mechanisms in explaining the behaviour of managers and the implications of this conduct for their companies and the wider economy.

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. Managerial Theories Of Firm Marris And Williamson's Models Marris’ Managerial Thesis of Firm Marris has put forth a significant thesis of firm as per which the managers do not optimise profits but in its place as per him, they look for to optimise profits balanced rate of increase of the firm. The theory that the conduct of firms must be explained in terms of the motivation of managers. Such theories are alternatives to profit maximization as explanations of how firms are run. Profit maximization makes sense if there is full information and firms are run in the interests of their shareholders.

According to traditional theories, the firm is controlled by its owners and thus wishes to .

Managerial Theories Of Firm | Marris And Williamson's Models | TutorsOnNet