Overview And Analysis Of The Theories Of Firm
In today’s world, firms have got its own significance and essence. It can be understood through the theories of firm. Theories of the firm helps to understand the various aspects, concepts, importance along with the drawbacks of the firm.
These theories also state why and how the business are organised. What is a firm and where does it exist? Any entity, which operates in small scale, which converts the raw materials to desirable output and which is economically justified, through a process with the help of the technology and labour is defined as a firm. Firms can have multiple locations as well as a single location depending upon certain factors like regional demand of the production done by the firm, investment and the ownership of the firm. But, how is it different from industries?
- Firms are a sole part of its operations while, industries are consisted of several different firms which are the similar products.
- Firms compete with each other even if it is a part of same industry while, industries usually do not compete with the other industries.
- The operations of firms are affected by the market conditions of the industry while. the operations of the industries are affected by the demand of the market. Examples of firms are Toyota, Maruti, Nissan, Tata and example of the industry in the above examples of firms is automobile and transportation.
Firms are Capital-Intensive & Labour-Intensive. A capital-intensive firm is one whose revenue results from investments in equipment, machinery, land or other expensive capital assets. Whereas, a labour-intensive firm is one who produces the outputs from the raw materials by using more labour rather than more capital.
Now, a question arises why a firm exists if it is a smaller part of an industry. It is because there are certain critical benefits of firms and not industries because a firm being a small-scale operation helps the firms to closely and directly connect to the consumers in the market. And being connected to the consumers means more understanding about their needs and preferences which helps the firms to adapt a dynamic nature and survive in the market.
On the other hand, industry being operated in the large scale is not able to connect to the consumers in the market which makes it not possible to adapt a dynamic nature until there is a major requirement to change its operations. And, firms being an integral part of the industry, it is necessary for the firms to exist and run the operations smoothly or else the related industry will see a downfall or may not be able to survive in the economy. If it is important for the firms to exist, then what are its objectives? Some key objectives of the firms are:
- Maximisation of profit – It is assumed the key objective of the firms is profit maximisation and profit maximisation means higher profits which is very essential to survive in the economical market.
- Maximisation of sales – Another objective of the firms is to maximize the sales of its products and services. Even if in less profit conditions, the firms must make sure that their sales are increasing and not seeing a downfall as increase in sales means more consumers are still preferring their products and services.
- Maximisation of growth – once the firm is successfully able to survive in the profit then its objective is the expansion of its operations which is very importantly required for any business. Growth of firms means growth of industries as well as firm is an integral part of the industries. Initially, firms are smaller but tend to expand its operations. There are certain motives behind that.
Some of them are:
- Growth in operations means more profits and more sales which makes a positive impact on the consumers as well as the investors.
- If the firm grows bigger it also has the opportunity to make its goods and services available in more sections of the community.
- If it grows its operations, then it will result in less cost in the production as more units are produced which result in more profits.
- If the firms grow, then the employees also feel motivated which further increases the efficiency of the employees.
Mainly, the firm decides to grow because initially it is small scaled, so it gives a great opportunity to grow in the market quite easily as compared to others. The firms also tend to follow the practice called outsourcing. Outsourcing is a formal practice of entering into an agreement with another firm in which the delegation of work is done by giving the work that the firm was responsible to complete in a specified duration.
As the firms grow bigger the demand of outsourcing is increasing immensely. The bigger size of the firm, more likely it is going to outsource its work. Today, outsourcing has become very popular and is widely followed by the firms. There are because of certain benefits of outsourcing which are mentioned below:
- To maximize the use of external resources.
- To share risk with the partner companies.
- To save time
- To acquire more customer as the delegation of work is done hence, large number of consumers can be handled. * Alibaba. com outsourced its web development to a U. S. firm because at that time the development talent in China was short in supply, while the developers in the U. S. had the skills Alibaba was looking for. Profit is something which is very unstable and very hard to sustain positively. Some of the factors that affects the profitability of the firms are:
- Cost of production – More the cost of production, lesser will be the profit of the firm and if the cost of production decreases, it will lead to increase in profit margin.
- Competition – If the market is very competitive then the profit will be low because consumers will buy from the firms that providing at the lower price. Hence, the sales decreases and so does the profit.
- Brand image – The brand image of the firm also affects the profitability of the firm as consumers tend to buy the products from those companies who has created a goodwill and a superior brand image.
- State of economy – If the present market economy is not that good then it will result in less sales which will further result in less profits.
- Demand – if the present demand of the product and services and not good then it will result in less sales and then eventually in less profits also. Profit is something that every business looks for their survival and expansion in the market. They take certain aggressive steps also to increase the profits, if needed.