BY:

MISS DISHA THANAI

BY : PRIYANKA SINGH st P.G.D.M. 1 (M.E.)

 Understand

the wide spectrum of objectives pursued by the business firms State clearly the assumptions under which the theory of firm, the managerial and the behavioural theories of firm operate Point out the contributions and limitations of the behavioral, managerial and economic theories of the firm.

Every firm acts according to its goal. It generally believed that the primary aim of the firm is to maximise its profits. But a keen observation, will reveal that the firm can and do pursue any other goals relating to sales revenue maximisation,managerial utility maximisation, increasing market share, goodwill etc.

SURVIVAL

GROWTH

PROFIT MAXIMISATION

BUSINESS OBJECTIVES OF FIRMS

Objective of survival:
Survival objective is essential for any business in that no survival means no today and no future

Profit-maximizing theories,popularly known as the THEORY OF FIRM Managerial Theories of the firm, : Baumols Sales Revenue Maximization Model :Managerial Utility models ; berle means galbraith model of corporate power structure; : O.Williamsons model of Managerial Discretion Growth Maximization models consistings of baumols model of growth maximization :- Marris model of managerial enterprise

These can be classified into two broad groups: optimizing and non-optimizing models OPTIMIZATION MODELS INCLUDE:-

Simons model of Satisfying Cyert and Marchs Behavioural Theory Of The Firm

 Main

proposition of model :

The theory of firm is developed on the basis of the assumption that rational firms persue

the objective of profit maximisation, subject

to the technical and market constraints.

 Firm is a producing unit and it converts various inputs into

outputs of higher value under a given technique of

production The basic objective of each firm is to earn maximum profit

Firm adopts courses of action helping to maximize

consistent profits Firm makes attempt to change its prices, input and output

quantity to maximize its profit

1. 2. 3.

The firm has a single goal, i.e. to maximize profit The firm acts rationally to pursue its goal The firm is a single-ownership one, i.e. run by its owner called the enterpreneur

1.

2.

Thus,in the short run there are certain constraints[physical or financial or both]on expansion where as all the constraints are overcome,the long run is reached

SHORT RUN:- It is defined as a period where adjustments to changed conditions are only partial Long Run:- It is defined as a period where adjustments to changed circumstances is complete

The profit can be determined in two ways:

Total Revenue(TR) and Total Cost(TC) approach Marginal Revenue(MR) and Marginal Cost (MC) approach

 Profit

are estimated by comparing TR and TC Profit is the difference between TR and TC Excess of revenue over cost is the profit {Profit= TR TC} If TR=TC , there will be breakeven point If TR<TC, a firm will be incurring losses If TR>TC, a firm will be incurring profit

 Profit are on account of Marginal Revenue &

Marginal Cost A firm will be maximizing its profits when MR =

MC and MC curve cuts MR curve from below

Two conditions are necessary for profit maximization:

MR = MC
MC curve cut MR curve from below

Basic theory

objective

of

traditional

economic

Firm is not a charitable institution

Necessary for survival

To achieve other objectives

Profit is a ambiguous term It may not be possible always Separation of ownership and management

Conflict in interdepartmental goals

Changes in business environment

Annual salaries & other perks might be more closely correlated with total sales revenue rather than profits Total revenue is maximized when MR = 0 Firms may be prepared to accept a lower price and produce above profit maximizing output in order to increase its market share

Firms maximize the volume of sales not sales revenue by increasing output to the breakeven level of output, i.e. where total revenue equals total cost

Maximize sales revenue subject to minimum profit constraint Why sales revenue and not profits?? Sales are good general indicator of organizational performance Executive power, influence, status tend to be linked to the sales performance Lenders tend to rely on sales data

Sales revenue depends on current sales revenue, annual rate of growth on sales revenue and discount rate Figure shows that short run profit maximization implies that sales revenue is lower

Managerial theory of the firms behavior

In theory, sales means total revenue earned by sale

Once profits reach managerial acceptable efforts are level to shareholders, sales directed

towards maximizing revenue through promoting Basic premise is to maximize sales rather profit Thus, also referred as Revenue Maximization Model

PP is minimum acceptable profit level to shareholders To maximize revenue, firms shall produce OQ, TR < Max [TR] For Profit Maximization, firm will produce AQ, MR = MC When MR = 0, sales is maximum Sales maximization firms shall produce more than profit maximization firms, :. MR<MC

Institutions consider sales as an index of performance Unlike profit, sales figures are available frequently and easily. Thus, useful for MBO(MANAGEMENT BY OBJECTIVE) Salary and slack of earnings of managers more lies on sales than profit Routine personnel problems are easily handled with growing sales Higher sales leads to the higher profits

Sales growth indicate growing market share & a greater

competitive strength

Profit Constraint
In long run, sales and profit maximization are identical

Unrealistic Assumption
Considering price as constant is unrealistic

No explanation of industry equilibrium

What if the industry reaches a saturation level?

Unrealistic theory and Limited scope

Fails for oligopolistic market structure

Increasing
competitors

sales

is

limited,

also

up-to

the

discretion

of

Theory was given by Robin Morris Objective was to maximize growth rate or expansion of the firm

Growth rate = demand of firms product

Expansion = growth of capital supply

Strategy of maximum Growth of firm: maximum Growth at the expense of firms future profit streams Managers strive for growth rather than profit max May be harmful due to: Managerial constraint on growth Financial constraint on growth

 As the rate of growth of demand is increased, profitability is increased as well until a certain point. Then managerial constraints on growth tend to take place. The maximum growth of capital function shows the relationship between the firms rate of profit and the maximum ate at which the firm is able to increase its capital This model suggests several testable hypothesis one of which is: owner controlled firms achieve lower growth and higher profits.

Theory was given by Oliver E. Williamson

managers seek to maximize their own utility function,

subject to a minimum level of profit. A minimum level of profit is necessary to satisfy the shareholders or to keep the manager unchanged. Thus, utility depends on:
Expansion of Staff Increase in Managerial Emoluments

Power of Discretionary Investment

Behavioral economists believe that modern corporations/businesses comprises of various groups: employees, managers, shareholders, customers, the government That each of these groups have different goals/objectives The dominant group at any one moment can give greater emphasis to their own objectives

Cyert and March (1964) Defines the firm in terms of its organizational structure and decision making processes Boundaries of the firm are loosely defined Bounded rationality (Simon (1959)) Satisficing behavior Due to observance of actual behavior within organizations

Given by R.M. Cyert and J.G. March

Explains inter-group conflicts & their multiple

objectives in a multi-goal & multi-decision making coalition business

Goals of each group are multiple, conflicting &

opposite in nature Precisely, the usual and normal behavior of

different groups of people in an organization

having mutually opposite goals

According to Cyert and March, firms several

objectives have five main goals:

PRODUCTION GOAL INVENTORY GOAL SALES GOAL MARKET SHARES GOAL PROFIT GOAL

Fails to analyze the behavior of the firm but it simply

predicts the future expected behavior of different

groups

Theory doesnt deal with equilibrium of the industry

Fails to analyze the impact of the potential entry of new

firms in to the industry Highlights only short run goals rather long run

objectives of an organization