Managerial Theories of the Firm

2710 Words Dec 5th, 2008 11 Pages
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.

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.
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Personnel problems can also be handled more easily as a result of better employee remuneration and more favourable contracts (Griffiths and Wall 2001). The manager also tends to prefer satisfactory levels of profit to exceptional levels that might be difficult to sustain in the future.

Sales revenue maximising will normally make the business produce and sell a higher level of output at a lower price than a business seeking to maximise its profits. Though lower prices are normally good for the consumer, a company that maximises its sales revenue will need to advertise in order to drive sales growth, and the cost of advertising will normally fall on the customer.

Even though the management will want to maximise its sales revenue, it still has to take into account the wants and needs of the shareholders. The introduction of a profit constraint is the shareholders' way of controlling the management. Low profits may cause the share price to fall and therefore open for the possibility of a takeover bid. If the shareholders are not content with the amount of profits earned they might vote for a new board of directors. This means that the management is motivated to keep profits above a certain level to avoid a takeover bid and jeopardise their jobs (Douglas 1992). But the management will still seek to maximise profits subject to the profit constraint, and can therefore bee seen as profit satisficers.

With a profit constraint the firm will…