Rickett’s contractual model determines the firms objectives would be determined by the terms of employment set by the contracting parties.
In common the behavioural model is a dynamic model which is not holistic, not deterministic and not optimizing. A behavioural approach is a more accurate description of what happens inside the firm BUT it tells us almost nothing about how the firm will respond to the changes in environment.
3.) Compare & contrast of behavioural models with the management models of Baumol, Marris and Williamson:-
As discussed earlier that the traditional neo classical theory which believed in profit maximization was challenged by alternatives such as managerial & behavioural theories, the three most credible of these managerial theories being Baumol's model of sales revenue maximisation, Williamson's model of the maximisation of managerial utility, and Marris's growth maximisation model, each of which have differing predictions from that of their profit maximising predecessor.
The modern firm differs in important respects to the traditional firm. The traditional firm was a proprietor-manager’s asset. The modern corporation is owned by a large group of stockholders, but managed by a group of professional managers. The modern firm operates in multiple markets, not one. Managerial theories of the firm attempt to take these modern aspects into account and the focus is on the firm - not markets.
The managerial theory contrasts with behavioural theory in the aspect of maximization. Where the managerial theories go well beyond the simple notion of traditional theories of profit maximization, they however still cling to the idea that management endeavours to maximize something whether it is sales revenue, utility or firm’s growth, the behavioural approach adopted by so called behaviouralists rejects the whole notion of maximization and favours a less strong goal of satisficing. The managerial models still cling to one or two objectives of the firm but the behavioural model believes that the firm has multiple objectives.
The behavioural theories emphasize the importance of attempting to understand the various factors that affect the human behaviour, the managerial theories explain the factors in which the shareholders and management behave and the factors due to which the management and owners interest differs. The managers have discretion to use firm’s resources in their own interests. Where the shareholders or owners are interested in maximizing the profit, the managers are more interested in maximising their utility which differs on behaviour of manager.
Baumol’s model of sales revenue maximization suggested that managers’ interests are best served by maximising sales after achieving a minimum level of profit which satisfies shareholders. Hence the model has the criteria of satisfying level of profit for shareholders which is similar to behavioural model approach of satisfaction. Managers may wish to do this as it brings with it the benefits of growth, market share and status. Various studies have shown that a manager's income, prestige and aspirations are more closely linked to sales revenue than profit.
In Cyert and March (1963), firms are adaptive organisms that cope with problems as they arise instead of maximizing any objective. The main criticism for Baumol’s theory was that they believe in conventional cost and revenue functions and they ignore the rival behaviour in making day to day decisions.
In this diagram the q4 level will be most optimum based on baumol’s model as it maximizes sales but with a constraint of achieving minimum profit.
Williamson's (1963) managerial utility maximisation model is similar to Baumol's model in the sense that it also assumes that once again, subject to minimum profit constraint, managers have both the discretion and desire to pursue objectives other than profit maximisation. The resulting model is essentially similar to, but more complex than the Baumol model. At heart there is a similar diagram, but the horizontal axis now represents expense, with a resulting profits-expense curve yielding similar predictions.
Management achieves their objectives directly by "spending any profits above the profit constraint on items that give rise to managerial satisfaction or utility." Williamson identified these items that gave rise to managerial utility and introduced the notion of 'expense preference' whereby managers have a preference for some types of expense. The three forms of expenses suggested where staff expenditure, managerial emoluments and the discretionary power of investment, all of which go some way to realising such managerial motives as power, prestige, salary, status and security.
Williamson model is more applicable to ‘U form’ of organization structure which means that the structure has strong management hierarchy. In mathematical term his model can be described as
U = F(S, Id, M)
U = Utility, S = expenditure on staff, Id = discretionary investment, M = emoluments which enhances management prestige and status. The main critique by the behavioural theorists was that the model doesn’t deal with rivalry and interdependence with oligopolies.
The main contrasts of managerial models with behavioural models are that managerial models believe firms to be holistic i.e. firm has purpose to take decisions and actions as a single entity where behavioural models assume firm to be non holistic and as a coalition of different groups which might have separate interests. It also differs from behavoural model in the sense it assumes firm is deterministic i.e. firm has full knowledge of market opportunities and costs.
In Marris’ theory the manager maximizes business growth and personal security. The manager wants the firm to be large, because managers of large firms enjoy higher salaries and higher status. Managers attempting to grow the firm encounter a peril: if the firm overextends itself it will be taken over by a rival. The manager will be redundant, and lose his job. He must maximize growth and avoid the takeover. The manager must pursue a course of sustainable growth while avoiding the prospects that another firm or group of investors will merge or acquire the business.
In the theory, takeovers are predictable by examination of the ratio of these two values, Market to Book value (M/B):
- IF M/B = 1, then market investors believe that the firm’s value is simply equal to the value of what has already been invested. The future prospects of the firm have no extra value.
- IF M/B > 1, then market investors believe that the firm’s future prospects are high. The firm is worth more in the future than what earlier investors paid. The stock price is high than a unit of book value. The firm will grow and current investors make money. If current investors sell stocks on the market, they earn money because the current stock price is higher.
- IF M/B < 1, then market investors believe that the future prospects of the firm are not good. They bid a stock price that is less than the book value. The capital invested in the firm is not as productive as it ought to be, or could be if invested elsewhere. This is a takeover situation. The firm can be bought at a price less than the worth of the assets it represents. The firm will be bought because, with a change in management, capital can be made to be productive. Profits can be increased. Stock price can be improved.
The directors have to secure their job by keeping enough money to grow and at the same time keeping enough money to give dividend to keep shareholders happy.
4.) Conclusion:-
Where the traditional neo classical theory of the firm was seriously challenged by alternatives such as managerial and behavioural theories, the managerial theories go well beyond the simple notion of traditional theories of profit maximization but they however still cling to the idea that management endeavours to maximize something whether it is sales revenue, utility or firm’s growth. The behavioural approach adopted by so called behaviouralists rejects the whole notion of maximization and favours a less strong goal of satisficing.
The behavioural approach is a useful complement to the traditional & managerial approaches but not a substitute for that. The behavioural theories are more generic and realistic than the managerial theories. Each managerial theory tends to maximize one or two goals of the managers whereas the behavioural theories tend to satisfy multiple goals and to prevent conflicts and problems between different coalition groups.
