Theories of firm

Managerial theories:
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Berle & Means – Staff Maximization Baumol’s model – Sales Maximization Marris’s Theory – Growth Maximization Williamson’s theory – Managerial utility Maximization Simon’s Model - Satisfying Behaviour Simple model of Behaviourism Value Maximization

Behavioural theories:
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Behavioural Theories
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Behavioural theories combine industrial economics and organizational theory. The firm’s sub-optimal behaviour arises from uncertainty and conflicting goals of various groups within the firm. While managerial theories emphasize the role of mgmt.. The behavioural theories argue that groups within the firm other than managers influence the behaviour of the firm. The types of behavioural theories proposed are:
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Simon’s Satisfying Behaviour Model Cyert & March - Simple model of Behaviourism

Simon’s ‘Satisficing’ Model

Simon believed that the relevant information with the managers was far from complete. This model helps in explaining certain real-world situations. Simon’s model is consistent with the theory of motivation where human action is a function of drives and it terminates when drives are satisfied.

Flaws in ‘Satisficing’ behaviour

Knowledge available to the firm for its rational decision making is imperfect. There are screens & blockages in flow of information It is not easy to determine a “satisfactory level” Information about condition is different than the information about the changes in the conditions, which is more apt.

Simple Model of Behaviourism
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U = f (S, DI, M) Where,
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U = Managerial utility S = Expenditure on staff DI = Discretionary investment, and M = Managerial slack

Simple Model of Behaviourism
The behavioural theory developed by Cyert & March in their book “A Behavioural Theory of the Firm” can be studied in the following sequence:
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The firm as a coalition of groups with conflicting goals The process of goal formation – the aspiration level Goals of the firm Means for resolution of conflict The Decision Making Process Uncertainty & the environment of the firm

Cyert and March based their theory on four actual case studies and two experimental studies conducted with hypothetical firms.

A simple model for illustration of theory
The model refers to the case of duopoly. The decision process involves determination of output which is homogeneous, so that single price will ultimately prevail in the market. No inventories are allowed in this model. The steps may be outlined as follows:
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Forecast of competitors’ reactions. Forecast of firm’s demand. Estimation of costs. Specification of goals of the firm. Evaluation of results by comparing them to the goals. Re-examine the estimate of the cost. Adapt new solution, else move on. Re-exam its estimation of demand. Evaluation of new solution If goals are not met the firm readjusts downwards its aspiration level.

Top Management Ways for smooth functioning

Budget-share and its use by various groups Firm is an adaptive organization; it sets present goals, behaviour & decisions based on past experience Delegation function limits the discretion of various groups of coalition, thus reducing source of conflict Money payments are source of satisfying the various groups conflict Side payments means of satisfying some demands Slack payments are over & above the demand of efficient groups Urgency of some demand puts priority over others, thus gets satisfied earlier Decentralization of decision making

Value Maximization
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Modern theory ST profits are sidelined by most firms as their objective Firms often sacrifice their ST profits for future LT profit This theory states objective of the firm is to maximize the wealth or value of the firm