MAN 22804

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MAN 2280-4

• Managerial Theories (2)
• Griffiths Wall and Sloman

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What will we cover?

• Marris Model of growth Maximisation
• Internal expansion and mergers
• Cyert and March behavioural models
• Satisifising model using coalition agreements
• Role of Bargaining

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Marris and Growth Maximisation (1)

• Managers are motivated by changes in size
• Growing a company is more desirable than joining
  a bigger company
• Long run as against short run approach
• Continued diversification is the key method
• Managerial Utility has 2 factors
• Growth of the firm
• A desire for security

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Marris and Growth Maximisation (2)

• Growth realises a number of managerial goals
• Power
• prestige
• higher salaries
• Security on the other hand
• Conserves the managers role
• Keeps the managers job description
• Most serious threat is a change of ownership such
  as a merger or takeover.

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Marris and Growth Maximisation (3)

• How do managers prevent a takeover or merger?
• Maintain shares at a high level so takeover is
  too expensive
• Pay sufficient dividends to keep shareholders
  happy
• Two values are crucial for managers
• v the valuation ratio ( ratio of the market
  value of the shares of the company to its book
  value)
• g the growth rate of the firm
• Managers seek to maximise utility. MaxUU(v,g)

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Growth Profit Rate and Valuation
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Managerial Utility Constraints
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Optimum Managerial Utility

• At point A, utility is lower and the growth rate
  is not as high though v is above the minimum
  constraint.
• At B, utility and growth are higher than at A but
  v is below the minimum constraint.
• At C utility is as high as it can be given the
  security minimum valuation ratio constraint
• Profit is important but growth more so
• The need to keep v high limits trading off
  profits for a higher growth rate.

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Growth by internal expansion

• Increasing sales
• To increase productive capacity requires funds
• Ploughing back profits
• Borrowing
• The takeover constraint
• Too much borrowing small dividends
• Too much profit retained small dividends
• Firms must distribute sufficient to keep
  shareholders happy

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Growth by merger

• Managers can go for merger if it means they take
  over another company.
• Horizontal merger (e.g. two cycle plants)
• Vertical merger (e.g. cycle plant with chain
  manufacture)
• Conglomerate merger (Car firm acquires bike firm)
• Mergers for growth
• Quicker than internal expansion
• Acquire increased capacity and more customers
• Danger of being taken over

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Cyert and March - A Behaviourist Approach

• If a firm is satisficing who benefits and how do
  benefits accrue
• Idea of a coalition
• Any group which at a specific time shares a
  consensus of the goals to be pursued.
• Workers wanting high wages, job security and good
  conditions
• Managers wanting prestige, power, salaries
• Shareholders wanting higher profits
• Potential for conflict amongst groups

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Resolving Conflict - Making Coalitions

• Goals are the outcome of the coalition bargaining
  process.
• Managers aim to set goals which resolve the
  potential conflict between opposing groups
• Compromise prevents maximisation
• Satisficing
• No coalition wholly alienated or satisfied
• Viz. Conflict between sufficient inventory stocks
  and finance departments desire for economy

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Techniques to Avoid Conflict

• Agreed limits the argument is about cutting the
  cake not how big it is.
• Putting time constraints on bargaining
• Structure of the firm to limit discretion for
  groups.
• Money payments and organisational slack
• Sequential problem solving

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Other Factors in Goal Formation

• Sort out goals
• Set satisfactory performance targets
• Set targets
• e.g. set a sales target based on rules of thumb
• Revise targets in line with sales

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Behavioural Models- Summary

• Concerned with the process of decision making
• An organisation is
• Not synonymous with its owners
• Doesnt coincide with one individual or group
• Is an organisational structure of many, often
  conflicting groups
• Interests or coalitions of interest change over
  time
• Goals change
• More than one goal
• Fluid over time
• Goals conflict between groups
• Satisficing not maximising