MANAGERIAL THEORIES OF FIRM

1. Marriss Theory of Managerial Enterprise 2. Williamsons Theory of Managerial Discretion

Marriss Theory of The Managerial Enterprise In Corporate firms, there is structural division of ownership and management which allows managers to set goals which do not necessarily conform with those of the owners. The shareholders are the owners. Their utility function includes variables such as profits, size of output, size of capital, market share and public image. The Managers have other ideas. Their utility function includes variables such as Salaries, Job security,Power and status.

 The owners want to maximise their utility while the managers attempt maximisation of their own utility. Both utilities do not necessarily clash, because the most of the variables of both the utilities, have a strong relationship with a single variable i.e., size of the firm. It is reasonable to assume that maximising the long-run growth of any indicator is equivalent to maximising the long-run growth rate of the others.

 Owners being interested in the growth of the firm want maximisation of the growth of the supply of capital, which is assumed to maximise the owners utility. Managers wanting to maximise rate of growth of the firm rather than absolute size of the firm, believe that growth of demand for the products is an appropriate indicator of the growth of the firm.

 There are two constrains in the Marriss Model: 1. The Managerial Team Constraint. Since Management is a teamwork, hiring new managers does not expand managerial capaqcity immediately. New managers take time to get integrated in the team. Managerial tream constraint sets limits to both the rate of growth of demand and rate of growth of capital. 2. The Job Security Constraint. Managers want job security. Job security attained by pursuing a prudent financial policy which requires the growth of sales, firm output level maintained at optimum levels.

Marriss Model: The rate of growth of demand for the products of the firm:
The firm is assumed to grow by diversification and not by merger or acquisition. The growth of demand for the products of the firm depends on the rate of diversification and the proportion of successful new products. The rate of growth of capital supply: The shareholders who are the owners, wish to maximise company's capital, which is the measure of the size of the firm. The main source of finance for the growth of the firm is profit but the management can retain only part of it, for another part has to be distributed as dividend. The rate of growth of capital is determined by three factors: the three financial ratios determined by the managers constituting the financial security constraint, the average rate of profit, and the rate of diversification.

Critically examine Marriss Theory:

R. Marris has made a significant contribution in the form of incorporation of the financial policies into the decision making process of the corporate firm. His theory suggests that although the managers and the owners have different goals, it is possible to find a solution which maximises utility of both. Nonetheless Marris shows that growth and profits are competing goals. His model implies that both managers and owners are conscious of the fact that the firm cannot simultaneously achieve maximum growth and maximum profits. Marris seems to be correct in arguing that owners of the corporate firms do prefer the maximisation of the rate of growth and for this they do not mind sacrificing some profits. The main weakness of Marriss Theory is that he assumes given production costs and a price structure. He does not explain determination of either costs or prices.

WILLIAMSONS THEORY OF MANAGERIAL DISCRETION

Williamson is of the opinion that the managers of a modern business firm organised as a corporate unit do not maximise the profits which result in the maximisation of the utility of the owners. Onstead they maximise their own utility using their discretion. However, for their job security, managers attempt to ensure a certain minimum of profit to shareholders in the form of dividends. Thus profit is a constraint to the managers discretion.

 Managers utility depends on such variables as salary, job security, power, prestige, status, job satisfaction and professional excellence. Of these variables only salary can be quantified. Therefore, Williamson uses measurable variables like staff expenditures, managerial emoluments and discretionary investment in the utility function of managers on the assumption that these are the source of the job security and reflect power, prestige, status and professional achievements of managers.

Basic Concepts:
The demand for the firm. The firms demand curve is assumed to be downward sloping and is defined by the function X = f1 (P, S, e) P = f2 (X, S, e) Where X = output, P = price, S = staff expenditure e = a demand shift parameter reflecting autonomous changes in demand. The demand is negatively related to price and is assumed to be positively related to staff expenditure and to the shift factor.

Basic concepts:
Various concepts of Profit: The actual profit: Sales Revenue minus production costs and less staff expenditure. =RCS The reported Profit : is the profit that the firm reports to the tax authorities. It is the actual profit less tax deductible managerial emoluments .(M) = -M =RCS-M

Various concepts of profit:

Minimum Profit: o is required to satisfy the shareholders. If this profit is not earned, the shareholders will either sell their shares or change the top management, adversely affecting the job security of managers. o < R T (T= Tax) The Discretionary Profit: D is the amount of profit left after subtracting the minimum profit and the tax from the actual profit. D = - o - T Discretionary Investment: ID - Discretionary investment is the amount that is left from the reported profit after subtracting the minimum profit and the tax from the reported profit. ID = R - o - T