Marris’s model of managerial enterprise is based on the goal of the manager to increase the balanced growth of the firm . This balance is achieved by offsetting two opposite goals; Maximisation of the growth of demand for goods/services of the firm and maximisation of growth of capital. Both of these goals require opposite treatment of retained profit. To maximise growth in capital the management must distribute as much profit as possible back to the shareholders. This keeps the shareholders content with their investment and they will not sell shares or remove the directors. It can result in rising share values and reduce the risk of the firm being taken over. This therefore appeals to the management’s main aims, job security by not being taken over or removed. The flip side of the coin is to increase the demand customers have for the firm’s goods or services. This is achieved by using as much of the firms profits for investment and increase the firms growth. This would increase the management’s utility at the sacrifice of shareholder utility.
Marris’s model requires that these to aims be balanced to achieve the maximum use of retained profit use for investment and still keeping the shareholders content. To achieve this balance it is necessary to employ two constraints; Managerial constraint and Job security constraint. The managerial constraint is set by the skills of the current management team or by the limit by which the management team can be increase to increase those skills. Therefore, this limit is the maximum growth achievable. R & D would also limit the growth of the firm. If new products or new designs of existing products can’t be produced, the product will only have a certain life cycle. Job security constraint is set by the amount the manager has to do to reduce the chances of dismissal. The manager may have to distribute a certain amount of profits to share holders to keep them happy with the manager’s performance.
Position Essay is also necessary to keep share prices at a high enough level to reduce the chance of take over. Reducing risky investments will have similar effects. The effects of these constraints can be seen from figure 1 (see below) and it can be seen that a balanced growth point is where management feel the trade off between job security and maximisation of growth is most desirable. The y-axis on the graph shows the profit distributed to shareholders and the x-axis depicts the growth achievable from investment. The growth curve symbolises the managerial constraint. This is curved because the most profitable investments are undertaken first. Management can undertake a policy which would maximise growth (point B) but at the sacrifice of distributed profit which would risk job security. A more appropriate trade off may be point A where distributed profits are much higher and growth is reduced by a smaller amount. Baumol’s Theory states that the goal of management is not profit maximisation (shareholder goal) but revenues maximisation (increased sales). Baumol gives several reasons for this belief . This article has been done with the help of Essay Freelance Writers!
The reasons to focus on are to do with remuneration of management, job security and prestige (which undoubtedly can lead to increased or decreased remuneration). Baumol feels there is evidence that directors’ salaries and slacks are more closely correlated with sales of the firm than profit. So it would follow from this that managers would maximise sales for self interest. Job security in Baumol’s theory is shown from the desire of management to have satisfactory profits, apposed to maximised profits. Maximised profit in one year may look bad for management when in subsequent years profits are not at the same maximised level. Prestige can come from high sales. This prestige can increase remuneration (from head hunting or shareholder retaining their services) or if bad, increase the threat of management being replaced or reduce remuneration. To achieve sales maximisation managers have to calculate the conditions which will achieve the maximum revenue.