Why do firms exist Essay Example | Topics and Well Written Essays - 3000 words

Why do firms exist - Essay Example A simple, yet, complete definition of firms may help in starting the debate about why they actually exist. Fisher, Prentice & Waschik (2010), define firm as â€Å"a group of workers and managers, collectively called labor, and a group of physical assets, like machinery in a manufacturing operation or computers in a service sector firm, collectively called capital, which produce goods and/or services (p. 14). This definition provides three major areas where people are involved with the firms. People, firstly, work for or manage the firms as labor, secondly they invest in businesses and firms to earn profits and giving firms the strength of progress in the form of capital, and lastly people use the products or services offered by the firms. Hence, our life is, in one way or the other, dependent on firms. It is a way of earning for one group and a way of gathering necessities of life for the other like food stuff, clothing, and professional services like legal, educational or healthcar e services and so on. Owing to the importance of firms in our regular activities and modern life, this paper aims to answer the question: why do firms exist? In doing so, this paper will provide perspectives of different researchers and their theories to justify the claims made. Theory of Firm Theory of firm necessitates by trying to predict how the business would carry out their prescribed strategies to achieve their ultimate goal and that is profit maximization. The theory of firm helps predict and explain other alternatives and decision made by the company. Traditionally it was based on having sole goal of profit maximization. But most recent analysis, theories and researches suggest that sales maximization or market share that is satisfying the needs of the customers along with satisfying its legitimate stake holders, combined with satisfactory profits may be the main purpose of businesses in short term as well as in long term to survive. Traditionally companies’ were fol lowing stock holder theory that is managers had one objective of maximizing share holder value. For example a company would not mind shutting down a branch in a region or country and resulting in thousands of people being unemployed and affecting the whole economy of that region or country. Despite these factors, the managers would have let the factory moved to another region or country because labor is cheap and plentiful there. Traditional theory suggested companies to disregard safety practices or other practices to preserve social responsibilities, according to theory, as they would have to spend money over it which reduces profit. However, if such avoidance of such actions charges the companies with substantial penalty or case file or dereputation resulting in more expenses (fines) than the companies were encouraged to provide equipment and running the safety policy. The risks of fewer sales by customer boycotting the company’s products are also avoided by adopting such practices in the modern business arena and companies would fall into instrumental form of skate holder theory (Schroeder, Clark, and Cathey 2010, pp. 124-128). Stake holder theory is referred as 21st century theory where the organizations are so large that they can affect the whole society significantly. This broader impact of organizational procedures and processes suggest that they cannot just be responsible to share holders i.e. obeying stock holder t