Theory of the firm: types and features
It was not for nothing that several centuries ago, with the birth of economic theory as a science, the concepts of the firm’s behavior were developed. The time has passed, but they are still relevant, because the goal of doing business is always the same - making a profit.
A little about the company
If you make a brief excursion into history, then originally the word "firm" implied the distinctive name of the owner of a store. But progress did not stand still; manufactories developed.Today it is already a business entity that performs certain functions and receives profit for it, as any traditional theory of the company says. Economic theory identifies the following signs of commercial enterprises:
- independent and separate unit, conducts certain activities;
- has legal registration according to the current legislation;
- is completely self-sufficient, and the owner has the right to solve absolutely any issues related to its activities;
- has a certain staff;
- seeks to obtain and maximize profits;
- optimizes the promotion of its products in a competitive market.
Therefore, we can conclude that today it is not just the distinguishing name of the owner, but a completely independent economic unit that carries out certain activities as a legal entity.
The theory of the firm as such
There are both modern and traditional teachings on entrepreneurship. And the first, surprisingly, to a greater extent rely on the historically established understanding of the business, in which a lot of attention is paid to the imperfect interaction of the capital and commodity markets, so managers often have not only the typical goals of doing business.
At the same time, the theory of the firm in its traditional sense is more aimed at improving ways of maximizing profits in the competitive conditions of one or another market segment.
Each of the presented we will consider separately in the context of their types and features.
Institutional Theory of the Firm
I would like to return to those times when microeconomics was born as a science as a whole, which is actively used to this day.It was then that the neoclassical theory of the firm, which is one of the institutional components, took its origin. Why has it been several centuries, the progress has outgrown itself several times, and this direction still has its adherents?
The fact is that the neoclassical theory of the company, like no other, has a mathematical background, supported by a mass of formulas and calculations. It contains quite a lot of information on how to analyze changes in external factors that directly affect the activity of a business entity. And finally, imperfect competition is now a fairly common phenomenon, and neoclassicism deals with such business conditions in the most detailed way.
The theory of the firm in the traditional aspect is aimed at directly maximizing profits, as already noted above. As each owner strives for this, this area is still actively used in business activities. The most traditional theory is useful in its teaching under the following conditions:
- if the company is large enough, it has branches or subsidiaries, so separate performance results are poorly controlled;
- the competition is very intense, sometimes too much;
- high price dynamics for raw materials, and subsequently for finished products;
- if the entrepreneur is looking at ways to implement the activity, and not at the end result.
But if none of the above conditions are met, then it is advisable to focus on the final results, since with proper management the company is not in danger.
Another interesting theory of the company, which I would like to dwell upon, is the management one. She, as you already understood from the title, explains the quality and effective management, which entails good results.This concept is based on the following prerequisites:
- operational activities are led by highly skilled managers of a narrow focus, who are much more oriented in this than the owners;
- as a rule, such management is aimed at increasing sales, which will subsequently lead to the maximization of net profit.
Prerequisites really deserve the right to exist. Since, in connection with the current trend aimed at increasing the number of corporations,you should not rely on the owners, because in fact they are just holders of authorized funds and not always good managers.
Since we are talking about corporate associations, we should not forget about the diversity of goals that each theory of firm behavior includes.It is necessary to take into account: each commercial organization is, first of all, a team that strives for a single goal, which, in its totality, gives rise to a number of principles:
- the working class is always interested in increasing wages of their own labor;
- junior-level office staff, besides a good salary, also strives for professional development and career growth;
- managers want more power, increased status and their relevance to the company;
- shareholders are interested in high dividends;
- the owner is concerned about the financial stability of the company.
In order for a company to exist without conflict, the holder of the authorized capital, as a strategic manager, must take into account the private interests of employees, which, in turn, must coincide with the interests of the firm.