Theories of the firmAuthors: Manukyan Ani, Melkonyan Anna, Kuzmich Valeria, Petrosyan Felix Group 5202

Table of Contents I. Introduction II. Theories of the firm 1. The theory of transaction costs 2. Agency theory 3. Growth theory 4. Knowledge-based theory of the firm III. Conclusion IV. Bibliography V. Q&A section

IntroductionTheories of the firm are ways of conceptualising the firm. The answers to the questions why firms exist and what precisely a firm is are fundamental for the understanding of corporate governance.

The theory of transaction costs Transaction costs are costs

(e.g. in terms of money or time) incurred when making an economic exchange.

Transaction cost theory tries to explain why companies exist, and why companies expand

The transaction cost theory supposes that companies try to minimize the costs of exchanging resources with the environment, and that companies try to minimize the bureaucratic costs of exchanges within the company.

Bureaucratic costs are the internal transaction costs

Transaction costs arise every time a product or service is being transferred from one stage to another

Agency theory Agency theory is a concept that explains why behavior or decisions vary when exhibited by members of a group. It describes the relationship between one party, called the principal, that delegates work to another, called the agent.

“Agency Loss”Agency loss is the difference between the best possible outcome for the principal and the consequences of the acts of the agent.  

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The agency loss is minimized when : the principal and the agent share common interests

the principal is knowledgeable about the consequences of the agent’s activities

Growth theoryConflict of interests: managers and shareholders

Growth by internal expansion

Growth by mergerTypes of mergers:Horizontal integrationVertical integrationConglomerate integration

Knowledge-based theoryThe knowledge-based theory of the firm considers knowledge as the most strategically significant resource of a firm.

1. Knowledge transfers/conversions between individuals

Stand-up coffee bars or dialogue rooms" with a table and chairs help employees relax while solving problems or sharing knowledge

2. Knowledge transfers/conversions from individuals to external structure

Publishing information in different media spheres

3. Knowledge transfers/conversions from external structure to individuals

Organize customers' quality management teams in order to gain a better understanding of, and even anticipate, customer needs.

4. Knowledge transfers/conversions from individual competence into internal structure

AI systems as document handling systems, databases, etc.

5. Knowledge transfers/conversions from internal structure to individual competence

Designed a demonstration factory to manufacture a new product line.

6. Knowledge transfers/conversions within the external structure

Organize special meetings, excursions or seminars for customer.

7. Knowledge transfers/conversions from external to internal structure

Use sales force to collect data about their customers.

8. Knowledge transfers/conversions from internal to external structure

Create database, which allows its clients to tap into the data sources used also by its own consultants.

9. Knowledge Transfers/conversions within Internal Structure

IT system 10. Maximize Value Creation - See the

Whole

The knowledge-based theory of the firm considers a very special resource that does not depreciate, and can generate increasing returns – knowledge.

Organizational learning plays an important role in the sustainability of the competitive advantage considering the knowledge-based theory of the firm.

To share knowledge-based theory, it is necessary to create a strategy which concerns all parts of your organization.

Conclusion

Bibliography "Agency Theory." Investopedia. N.p., n.d. Web. 12 Feb. 2014.

<http://www.investopedia.com/terms/a/agencytheory.asp>. "Appalachian State University." Boone, North Carolina. N.p., n.d. Web. 11

Feb. 2014. <http://www.appstate.edu>. DeNisi, A., M. Hitt, and S. Jackson. The Knowledge-Based Approach to

Sustainable Competitive Advantage. In Jackson, Hitt and DeNisi (Eds.) Managing Knowledge for Sustained Competitive Advantage. San Francisco : Jossey-Bass, 2003. Print.

Garvin, D. A.. Building a learning organization. Harvard Business Review on Knowledge Management. Boston: MA: Harvard Business School Publishing, 1998. Print.

"Resource Dependency Theory." Resource Dependency Theory. N.p., n.d. Web. 12 Feb. 2014. <http://www.istheory.yorku.ca/resourcedependencytheory.htm>.

"shane3-AGENCY THEORY FRAMEWORK." shane3-AGENCY THEORY FRAMEWORK. N.p., n.d. Web. 12 Feb. 2014. <http://fusionmx.babson.edu/entrep/fer/papers96/shane/shane3.htm>.

Громыко В.В. Микроэкономика – 1:учебное пособие. –М.: МАКС Пресс, 2005.-236с. (на англ. яз.)

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The theory tries to explain why companies exist, and why companies expand

According to this theory, costs arise every time a product or service is being transferred from one stage to another

This theory supposes that companies try to minimize the costs of exchanging resources with the environment

The theory of transaction costs

The theory describes the relationship between one party – principal and another- the agent

According to this theory, the standard of “Agency Loss” uses to estimate the actions among 2 parties

This theory shows 2 principles for loss minimization

Agency theory

The theory tries to resolve a conflict of interests

This theory has an internal and an external aspect

The theory has grown to a whole new subject

Growth theory

This theory is based on resource, which is difficult to imitate.

A lot of companies use this theory inappropriate way.

This theory appeared as a part of another theory.

Knowledge-based theory of the firm

Thank you for your attention!