In order to determine similarities in the theories, agency theory, transaction cost perspective, Chicago school perspective have been described. The Chicago school perspective determines the effect of market forces and prices on the future corporate and industrial success. Theorists in this perspective encourage and want to understand competition in the market. They suggest that competition on price is healthier for organizations as well as for industries. This perspective is similar to theory of firms. Competition on prices enforces organizations to improve their efficiency so that they can offer low prices to their customers. In this way firms can enhance efficiency in production and distribution. It can be commonly observed that some firms are more efficient as compared to others. This is because some firms have modified their operations in a systematic way so that the cost efficiency can be achieved.
A very famous theory of economics is agency theory. This theory is concerned with resolving two important problems faced by organizations. First, principal and agent in the organization have different concerns. Second, principal and agent have different attitude of risk sharing. The theory provides a unique, realistic and empirically testable solution of problems of organizations. If concerns of agents (managers) and principal (shareholders) do not align, very high cost can incur in the organizations. Usually, it is observed that managers make efforts to improve short term performance of organizations whereas shareholders want to maximize their wealth for a long time period. This dissimilarity in their concerns can cause agency costs. The heavier the cost, the lower will be performance of the organization. In term of the organizational performance, the theory is related with the Chicago school perspective. Agency theory suggests that organizations can improve their returns and satisfy both parties i.e. managers and shareholders by minimizing the differences in the concerns of both parties. Transaction cost perspective has some similarities with the agency theory. Williamson (1975) developed transaction cost perspective in order to guide managers in their work. He suggested that two means can be adopted for dealing with the market failures. Managers can choose between internal organizing features of bureaucracy and marketing features while controlling important economic transactions. Geroski (1997) says that transaction cost incurs as a cost of operating economic systems or the cost of consumption over the above cost of purchase of product or services. Transaction cost incurs when it becomes difficult for organizations to produce the products in order to meet demand of customers. The theory suggests that if a problem persists in the organization and makes transaction cost higher, changes in the organizational structure can be made to resolve the problem. Important contribution made by economic theorists is that solution of problems can be found through game theory that refers to the study of strategic decision making process. Game theory suggests many solutions or scenarios of a particular economic situation faced by the organizations. One or two solutions are chosen and strategies are made for implementing these solutions in order to resolve problems. Transaction cost theory also looks for searching ways in order to resolve problems of organizations. In the last, stakeholder theory is presented that discusses the concerns and importance of stakeholders of the organization. Stakeholders are the individuals or parties that have direct or indirect stake in the organization. Stakeholder theory can be related with the agency theory because both theories discuss the interests of stakeholders in the organization.
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Theories refer to the models and conceptualization of businesses. Economists have high interest in the behavior of for the profit organizations. The first comparison is made between organizational theories and functional theories. The functional theories of the firm represent the behaviors of organizations in the real world. Conor (2004) has given five reasons that differentiate organizational theories with functional theories. The first reason is in the organizational theories; the objective of the analysis is an organization not just a business enterprise. Second, in the organizational theories, performance of organizations is not restricted to externally imposed market forces. Third, organizations are not single decision makers. Fourth, firms are recognized as organizations that have many individuals joined together for accomplishing a specific objective. Finally, in the organizational theories, the theorists address the structure of internal organizations and find relationship between different organizations and departments.
The next theory described here is radical humanist and structuralist perspective which is a common discipline of sociology. This theory suggests that organizations make efforts from free organizational members through sources of domination, exploitation, alienation, and repressions by criticizing the social structure in order to change the organizational structure. Radical change in organizations can be brought by observing the intent of change in the organizations. The theory refers that the change in organizations can take place effectively by educating members regarding distortion due to the organizational change and by uncovering the communicative distortions. This perspective is a functional approach of organizational theory that suggests ways of overcoming problems in the organizations.
The next theory described here is Neo-classical economist perspective. This perspective focuses on the resources of the organizations acquired for meeting the needs of consumers. The theory suggests that if the needs of customers are fulfilled, they are satisfied. In order to fulfill the needs of customers, organizations require sources of production (Demsetz, 1983). Neo-classical perspective works on certain assumptions, which are: 1) managerial contribution can satisfy the customer needs effectively, 2) all resources of production are mobile, 3) supply is always equal to demand, 4) all parties of organization are involved for satisfying the customer needs, 5) industrial participants are equal because they have equal access to information and resources. This perspective is different from radical humanist and structuralist perspective as it talks about satisfying needs of customers with existing structure and resources. This perspective does not consider organizational changes and their implications.
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Then Bain Mason perspective of organizational theory comes. This perspective deals with how the productive activities are harmonized with the demands of society. This perspective deals with how variations in the free markets affect the degree of success achieved by producers while satisfying the wants of society. A major feature of the theory is that industries with high barriers to entry, for small firms, with high product differentiation and low elasticity of demand have higher returns than the firms that do not have such attributes. This perspective suggests that organizations can get high returns by adopting structural modifications of industry. The main difference of this perspective with Neo-classical perspective is that it incorporates structural changes as well as organizational resources for satisfying the customer needs. On the other hand, Neo-classical approach has ignored changes in the organizational structure.
To summarize, the organizational theories have very important implications for the organizations. In reality organizations face different situations such as scarce resources and increasing demands of customers, discrepancy in concerns of management, shareholders and managing employees. In order to deal with all such situations, organizational theories provide important implications.
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