Managerial Theory of Firms

Question: Evaluating the usefulness of the theory as a tool for understanding the process of decision-making and target setting in the modern corporations? Answer: Introduction The theory of firm is generally defined as the accumulation of resources which are altered into various products that are demanded by the consumers. The organization also coordinates and buys the services and the production factors like labor, capital and land. The firm also manages the production and marketing of its goods. The decision makers of the firm often ask questions like: What should be produced? Where the production will take place? What should be the quantity of production? Etc (Richardson, 1972). Theories are basically the conceptualizing of the firm. It answers the questions like why the firm exists along with what is a firm. These are the fundamental things which are required for understanding the corporate governance. The different theories of firm also help in understanding why firms have organized businesses and how it impacts on the firm and the society. The theories of firm might be classified into two divisions, incomplete contracting model and principal agent model (Williamson, 1981). The managerial theory of firms has a great impact on the decision making process and the marketing area of the organization. The managerial theories decide the growth and development of the modern organizations. Managerial theory of firms The managerial theory of any organization is the economic theories which discusses about the way the modern management has impact on the various economic system of the firm. There are various different theories which has been researched thoroughly in management literature and also applied in different businesses. The managerial theories are categories into three groups. They are as follows: Discretionary Literature: In this theory the managers are assumed to take decisions mainly based on the cost and price and are not under strict supervision of the owners and direct stake of the firm. Growth oriented theories: This theory is similar to the previous theory but here long term goal is assumed and the managers dedicate themselves in developing the firm and its growth. Bureaucratic theories: This theory includes the owners of the firms who control the enterprise and also seek various strategies to reduce the risk. All the above mentioned types of theories have significant role in decision making of the firm and also help in setting the target of the organization. Managerial theories have both theoretical and empirical usefulness in various organizations. Management theory supplies basic knowledge for management process which includes organizing, controlling, leading and planning of the various regions of an enterprise. According to Taylor if management theory and process was approached scientifically then it would lead the firm towards development and success. His principles on scientific management started a revolution among the leaders of various organizations and changed their view on both position and process of a manger (Koontz, 1962). Many behavioral scientists have suggested involving many community organizations which would assist in making different strategies and also planning. Management theory also discusses about the importance of emergency management where the organization can use quality management and make proper use of the resources even during a disaster. However there exists a body of opinions which discusses the evolution of management after and during the Second World War. The management theory was the main topic of research after the industrial revolution which brought in specialization and mass production around the world (Turnbull, 1997). Management Theory has a significant role in decision making skills and techniques. According to management theory the decision makers of an organization must follow certain simple steps before making a decision or forming a strategy. The steps which are to be followed are given bellow: Identifying the purposes of the decision: The mangers must identify the reasons for taking the decision. What is the problem that needs solving? Why should it be solved? These are the few questions that one should ask. Gathering Information: The leaders and decision makers must collect all the relevant data and information before taking or implementing a decision. Identifying the principles for judging the alternatives: The mangers must search for the standards and also the judgment criteria that must meet the solution. Other possible choices: The decision makers and mangers must also take other possible choices into consideration before implementing their decision. Evaluating each of the choices and its consequences: Each of the choices made by the mangers must be evaluated thoroughly and changed according to their consequences. Determining the best alternate option: The decision makers must always go for the best alternate option. Putting the decisions into action: The decision must be converted into action steps and implemented on the right time. Evaluating the result of the decision: The mangers must thoroughly evaluate the consequences of the taken decision. Thus management theory has a deep impact on the decision making process of an organization. Management theory provides extensive details to understand the decision making process. However according to management theory decision making is difficult as it deals with both satisfaction and dissatisfaction of certain people. For example Sko-Die is a manufacturing company for 50 years. All the managers were leading the organization till some of them decided to leave. However the organization recruited new mangers for running the organization rather than promoting the old employees who were the team members of the organization. Since the new mangers are new to the organization they are less loyal and there is constant clash among the ideas of the employee. Due to this decision many employees are leaving Sko-Die at an alarming rate. Management theory also has detailed explanation of the importance and process of setting target in an organization. The importances of setting goals as discussed according to management theory are as follows: Motivating the workforce Goals and targets always motivate the workers in the organization. Firm goals encourage the team members in devoting extra energy for the firm. Help Stakeholders The shareholders, lenders and investors are the major part of an organization. The long term and short term goals of the firm has a great financial impact on the stakeholders. Thus setting targets assists them in taking better decisions for the company. Attracting new clients Certain goals and targets attract various partners and vendors. These will build a confidence among the stakeholders that the organization is progressing towards growth and development. Meet the financial targets Sales are the intrinsic part of an organization. It determines the revenue generated by the organization. Well structured targets and goals help the firm in accomplishing the sales target. According to management theory there are five characteristics that should be maintained while setting a goal. They are as follows: Specific: The targets must be specific and must not be vague. It must be properly interpreted and understood. Measurable: The goals must be measurable. The firm must have goals which can be measured. Attainable: The leaders of must set such goals which can be achieved by the organization. Thus only attainable targets must be set. Relevant: The goals and targets must be related to the firms mission and vision. Timely: The targets must be time bounded and thus helping the organization in focusing on the deadline of the target. Thus managerial theory provides a detailed importance and process in setting goals and targets of an organization. For example Unitech is an American organization which specializes in manufacturing telecommunication devices like phones, mobiles, wireless radios etc. The organization decided to expand its market and thus it opened up a branch in China and Australia. Both the branches manufacture telecommunication devices (Lewin Regine, 2000). As a result the market of the organization expanded in China and Australia. Similarly many western organizations started building branches in the east in order to expand their market. In the year 2009 LOreal targeted to be the number one leading brand in cosmetics in the world. Thus with proper utilization of resources and implementation of strategies the organization became the leading cosmetic brand in the year 2013 with an annual profit of $ 14.6 billion. Modern organizations take the help of management theory in developing their business. The various methods that the organizations use for their success are based on the management theory. Conclusion Thus from the above detailed study about management theory and its both theoretical and empirical application on setting target and decision making we have learnt the importance of it the success of an organization. Management theory basically deals with the economic condition of a firm. It discusses about the strategies that an organization should undertake in order to make the economic condition of the firm good. It helps the firm in facing challenges that it faces during its growth and expansion. However Henry Ford had a different view on management theory and thus he changed many marketing and managing strategies in his organization. In the beginning of 1920, Sloan resisted the strategies used by Ford and started following the management theory. After that many automobile companies like Cadillac, Buick, Pontiac and Oldsmobile started following the methods of Sloan (FEMA, 2000). Thus management theory has proved its importance and significance over the years in various organizations. Reference Koontz Harold (1962) Making Sense of Management Theory, in Harvard Business Review, July-August. Koontz Harold and Weihrich Heinz (1990) Essentials of Management, Fifth Edition, McGraw-Hill. Fleet David D. Van and Peterson Tim O. (1994) Contemporary Management (Houghton Mifflin Company), Third Edition. Williamson, Oliver E. (1981), The Modern Corporation: Origins, Evolution, Attributes, 19 Journal of Economic Literature, 1537-1568. 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