The Invisible hand of Adam Smith

The invisible hand describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many years, and in

Property Rights Theory

The property rights approach to the theory of the firm based on the incomplete contracting paradigm that argue that in the real world, contracts are incomplete and hence it is impossible to contractually specify what decisions will have to be taken in any conceivable state of the world. There will be renegotiations in the

Resource dependence theory

Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behavior of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any company. The basic argument of resource dependence theory can be summarized as follows: Organizations depend on resources.

Institutional Theory

In sociology and organizational studies, institutional theory is a theory on the deeper and more resilient aspects of social structure. It considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior.[1] Different components of institutional theory explain how these elements are created, diffused, adopted, and adapted over space and time; and how

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Contingency Theory

A contingency theory is a theory of the firm that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent (dependent) upon the internal and external situation. Contingent leaders are flexible in choosing and adapting to succinct strategies

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Behavioral theory of the firm

The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M. Cyert and James G. March. The work on the behavioral theory started in 1952 when March, a political scientist, joined Carnegie Mellon University, where Cyert was an economist. A behavioral model of rational choice by Herbert A. Simon paved

Organizational Ecology Theory

Organizational ecology theory examines how organizational populations change and develop over time through stages of founding, growth, transformation, decline, and death (Hannan & Freeman, 1977, 1989). The theory addresses the forces of social, political, and economic systems that (1) increase organizational diversity, for example, creating new organizational forms, and (2) decrease organizational diversity, for

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Evolutionary Theory of the Firm

Nelson and Winter argue that an evolutionary theory of organization is a superior description of firm behavior than orthodox views around optimization and that routines act as the genes of the firms in their model. The evolutionary theory defines the firm as a set of essential skills, gained from its learning ability. The theoretical

Theory of Competitive Advantage

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is

Theory of the Visible Hand

The theory of the visible hand of Alfred D. Chandler determined that it was not the invisible hand of the market that determined corporate effectiveness but the visible hand of management. His book, “The Visible Hand: The Managerial Revolution in American Business,” which won both the Pulitzer and Bancroft prizes in 1978, rewrote the

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Agency Theory

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents. An agency, in broad terms, is any relationship between two parties in which one, the agent, represents

Decision Theory

Decision theory (or the theory of choice not to be confused with choice theory) is the study of an agent’s choices. Decision theory can be broken into two branches: normative one, which analyzes the outcomes of decisions or determines the optimal decisions given constraints and assumptions, and descriptive one, which analyzes how agents actually make the decisions they do. Normative decision theory

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Theory of Organizational Power

Max Weber (1947) in his classical organization theory exemplified power in an organization through the process of control. Weber related authority to legitimacy, implying that managers enjoy it by virtue of their position in the organizational hierarchy. Although legitimate authority itself is a power, an individual member of an organization without authority can also

Theory of Organizational structure

An organizational structure defines how activities such as task allocation, coordination, and supervision are directed toward the achievement of organizational aims. According to the Theory of Organizational structure, organizational structure affects organizational action and provides the foundation on which standard operating procedures and routines rest. It determines which individuals get to participate in which decision-making processes, and thus

Transaction Cost Economics

In transaction cost economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. A number of different kinds of transaction costs exist. Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price,

Resource-based theory

According to resource-based theory, organizations that own “strategic resources” have important competitive advantages over organizations that do not. Some resources, such as cash and trucks, are not considered to be strategic resources because an organization’s competitors can readily acquire them. Instead, a resource is strategic to the extent that it is valuable, rare, difficult

Hyper-competition theory

The hyper-competition theory analyzes the rapid and dynamic competition characterized by unsustainable advantage. It is the condition of rapid escalation of competition based on price-quality positioning, competition to protect or invade established product or geographic markets and competition based on deep pockets (financial capital) and the creation of even deeper pocketed alliances. Often a

Organizational learning theory

Organizational learning theory states that, in order to be competitive in a changing environment, organizations must change their goals and actions to reach those goals. In order for learning to occur, however, the firm must make a conscious decision to change actions in response to a change in circumstances, must consciously link action to

Systems Theory

Systems theory is the interdisciplinary study of systems. A system is a cohesive group of interrelated and interdependent parts which can be natural or human-made. Every system is bounded by space and time, influenced by its environment, defined by its structure and purpose, and expressed through its functioning. A system may be more than the sum of its parts if it

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Definition of Theory of the Firm

By definition, a theory of the firm is an analysis of the behavior of companies that examine inputs, production methods, output and prices. This is a microeconomic concept that states that a firm exists and make decisions to maximize profits by creating a gap between revenue and costs. The first elementary examination of companies was made