Managerial Theories

Managerial Theories

There are three basic managerial theories.

- Baumol’s Model of Sales Revenue Maximization. - Marris’s Theory of Managerial Enterprise. - Williamson’s Theory of Managerial Discretion

Baumol’s Model of Sales Revenue Maximization

W.J.Baumol suggested

“Sale Revenue Maximization as an Alternative goal to profit maximization”

Rationale of the Hypothesis1.Managers are separated from the ownership in modern times.2.This has given power to managers who pursue their own goals rather than the goal of owners.3.Manager ensure a minimum acceptable level of profit to satisfy the shareholders.

But would pursue a goal which enhances their own utility.

Why Managers attempt to maximize 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.

4. A steady performance with satisfactory amount of profits is preferable 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 (competitors), while low or declining sales diminishes this power.

Basic Assumption

- A firm decision making is limited to a single period. During this period, the firm attempts to maximize total revenue.- Sales revenue maximization is subject to provision of minimum required profit to ensure a fair dividend to shareholders, thus ensuring stability of his job.

Marris’s Theory of Managerial Enterprise.

“In corporate firm, there is a structural division of ownership and management which allows managers to set goals which do not necessarily confirms with those of the owners.”

Owners

The shareholders are the owners of organizations. Their utility functions includes variables such as:-- Profits- Size of output- Size of Capital- Market Share- Public Image

Managers

The managers have other ideas. Their utility function include variables such as:-- Salaries- Job Securities- Power and Status

Important points

- The owner want to maximize their utility while the managers attempt maximization of their own utility.- Both the 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 maximizing the long run growth of any indicator is equivalent to maximizing the long run growth rate of the others.

Important points- Owners being interesting in the growth of the firm want maximization of the growth of the supply of capital, which is assumed to maximize the owners utility.- Managers want to maximize rate of growth of the

firm rather than the absolute size of the firm believing that growth of the demand for the products is an appropriate indicator of the growth of the firm.

Williamson’s Theory of Managerial Discretion

Leadership styles