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)
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MANAGERIAL - Constrained maximisation approach
- Baumol
- Marris
- Williamson
• AGENCY - Firm represents contracts as between
principal and agents
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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 takeover 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
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Managerial Goals
Salary
Security
Dominance
Professional Excellence
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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
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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
SHAREHOLDERS
WORKERS
SUPPLIERS
CUSTOMERS
GOVERNMENT
SUB GOALS
PRODUCTION
INVENTORY
SALES
MARKET SHARE
PROFIT
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
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QUASI RESOLUTION OF CONFLICT
UNCERTAINTY AVOIDANCE
PROBLEMISTIC SEARCH
ORGANISATIONAL LEARNING
Problems
• Too short term
• Views firms too passively
• Lack predictive value