MANAGERIAL THEORIES OF FIRM

Three theories of Managerialism

• 1. Baumol’s Model of Sales Revenue maximisation.

• 2. Marris’s Theory of Managerial Enterprise• 3. Williamson’s Theory of Managerial

Discretion

Baumol’s Model ofSales Revenue Maximisation

W.J.Baumol suggested Sales Revenue maximisation as an

alternative goal to profit maximisation. Managers only ensure acceptable level of

profit, pursuing a goal which enhances their own utility.

Baumol’s Model : (contd.)Rationale of the Hypothesis:1. Management has been separated from

ownership in modern times.2. This has given powers to Managers who

pursue their own goals rather than the goal of the owners.

3. Managers ensure a minimum acceptable level of profit to satisfy the shareholders, but would pursue a goal which enhances their own utility.

Baumol’s Model : (contd.)

Why Managers attempt to maximise sales rather than profits:-

1. Incomes of top executives are closely related to sales rather than profits.

2. Banks and financial institutions are impressed by the amount of sales and treat this as a good indicator of the performance of the firm.

3. Large and continuing sales enhance prestige of the Managers, who ensure regular distribution of dividends.

Baumol’s Model : (contd.)

4 A steady performance with satisfactory amount of profits is preferably to irregular spectacular profits in some one or two years. Having shown high profits, if the level is not maintained, it will lead to discontent of shareholders.

5. Large sales strengthens the competitive power of the firm vis-avis competitors, while low or declining sales diminishes this power of bargaining.

Separation of ownership and management combined with the desire for steady performance which ensures satisfactory profits, tend to make the managers risk avoiders. Top Managers in the modern firm are generally reluctant to adopt highly promising but risk-prone projects. But this approach stabilises the economic performance of the firm and leads to development of orderly markets.

Basic assumptions in Baumol’s Static Models:

1. A firm’s decision making is limited to a single period. During this period, the firm attempts to maximise total revenue rather than physical volume of sales.

2. Sales revenue maximisation is subject to provision of minimum required profit to ensure a fair dividend to shareholders, thus ensuring stability of his job.

3. Conventional Cost and Revenue functions are assumed – Cost curves are U-shaped, Demand curve is downward sloping.

Baumol’s Model : (contd.)

Baumol’s Model : (contd.)

Baumol’s Model : (contd.)