RATIONALE FOR PROFIT MAXIMISATION

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

ass. Simple maximisation approach (profits)

MANAGERIAL

ass. Constrained maximisation approach

Baumol

Marris

Williamson

AGENCY

ass. Firm represents contracts as between principal and agents

BEHAVIOURAL

ass. 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.

MARRIS MODEL

Assumption: to maximise growth in capital assets subject to a security constraint

Security constraint represents the fear of possible take-over 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

WILLIAMSON MODEL

Assumption: to maximise managerial utility function subject to a profits constraint

Managerial Goals

Salary
Security
Dominance
Professional Excellence

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

Stakeholders:

Shareholders

Management

Workers

Bankers

Customers

State

Suppliers

Satisficing Behaviour

- examples of compromise

BEHAVIOURAL THEORY

Organisation seen as coalition of differing interest groups

MANAGERS SUPPLIERS

SHAREHOLDERS CUSTOMERS

WORKERS GOVERNMENT

SUB GOALS

PRODUCTION MARKET SHARE

INVENTORY PROFIT

SALES

MAIN CONCEPTS

SIDE PAYMENTS

SEQUENTIAL V SIMULTANEOUS ACTIVITY

ORGANISATIONAL SLACK

ASPIRATIONS AND NON OPERATIONAL GOALS

SATISFICING BEHAVIOUR

SEARCH ACTIVITY

STANDARD OPERATING PROCEDURES

SUMMARY

QUASI RESOLUTION OF CONFLICT

UNCERTAINTY AVOIDANCE

PROBLEMISTIC SEARCH

ORGANISATIONAL LEARNING

CRITICISMS

TOO SHORT TERM

VIEWS FIRM TOO PASSIVELY

LACKS PREDICTIVE VALUE