MARRISS THEORY OF

MANAGERIAL ENTERPRISE
 Marriss Theory of
The Managerial Enterprise
In Corporate firms, there is structural division of
ownership and management which allows managers
to set goals which do not necessarily conform with
those of the owners
The shareholders are the owners
Their utility function includes variables such as:
a. profits
b. size of output
c. size of capital
 d. market share and
e. public image
The Managers have other ideas. Their utility function
includes variables such as:
a. Salaries
b. Job security
c. Power and status
 The owners want to maximize their utility while the
managers attempt maximization of their own utility
Both utilities do not necessarily clash, because the
most of the variables of both the utilities, have a
strong relationship with a single variable i.e., size of
the firm
It is reasonable to assume that maximizing the long-
run growth of any indicator is equivalent to
maximizing the long-run growth rate of the others
 Owners being interested in the growth of the firm
want maximization of the growth of the supply of
capital, which is assumed to maximize the owners
utility
Managers wanting to maximize rate of growth of the
firm rather than absolute size of the firm, believe that
growth of demand for the products is an appropriate
indicator of the growth of the firm
 CONSTRAINTS
1. The Managerial Team Constraint
Since Management is a teamwork, hiring new
managers does not expand managerial capacity
immediately. New managers take time to get
integrated in the team. Managerial tream constraint
sets limits to both the rate of growth of demand and
rate of growth of capital
2. The Job Security Constraint
Managers want job security
Job security attained by pursuing a prudent financial
policy which requires the three crucial financial ratios
to be maintained at optimum levels
 RATIOS
Liquidity Ratio: Current ratio ratio of liquid assets
to total assets. Low liquidity increases the risk of
insolvency. (risk=+ve)
Leverage/Debt or Debt-Equity ratio: ratio of debt
to total assets. High debt-equity ratio exposes the firm
to bankruptcy. (risk=+ve)
Profit retention ratio: High retention of profits, adds
to the reserves contributing to growth of capital(risk=
-ve)
Combining all the above into a single parameter
will
amount to financial constraint of the firm
 Policy variables in Marriss balanced
growth model
The firm has the freedom to choose its financial policy, as it
subjectively determines the three financial ratios, liquidity
ratio, leverage/debt ratio and retention ratio
The firm can decide its diversification rate, either by
expanding the range of its products, or by merely effecting a
change in the style of its existing range of products. OR it can
adopt the two policies simultaneously
Price is not a policy variable of the firm. It is a parameter.
Price is taken as given by the oligopolistic structure of the
market. Production costs are also taken as given
The firm has the freedom to decide the level of it Advertising
and R&D. Since Price and Production Costs are given,
increase in advt. & R&D, will imply lower profit margin and
vice-versa
 The rate of growth of demand for the products of
the firm: The firm is assumed to grow by
diversification and not by merger or acquisition. The
growth of demand for the products of the firm
depends on the rate of diversification and the
proportion of successful new products
The rate of growth of capital supply: The
shareholders who are the owners, wish to maximize
company's capital, which is the measure of the size of
the firm. The main source of finance for the growth of
the firm is profit but the management can retain only
part of it, for another part has to be distributed as
dividend
 The rate of growth of capital is determined by three
factors:
a. financial ratios determined by the managers
constituting the
b. financial security constraint, the average rate of
profit, and the
c. rate of diversification
 CRITICAL EVALUATION
R. Marriss theory suggests that although the
managers and the owners have different goals, it is
possible to find a solution which maximizes utility of
both
Nonetheless Marris shows that growth and profits are
competing goals. His model implies that both
managers and owners are conscious of the fact that
the firm cannot simultaneously achieve maximum
growth and maximum profits
 Marris seems to be correct in arguing that owners of
the corporate firms do prefer the maximization of the
rate of growth and for this they do not mind
sacrificing some profits
The main weakness of Marriss Theory is that he
assumes given production costs and a price structure.
He does not explain determination of either costs or
prices
 A. Koutsoyiannis writes Oligopolistic
interdependence is not satisfactorily dealt with in
Marriss model.
Marris brushes aside the mechanism by which prices
are determined. This is a serious shortcoming of the
model, in view of Marriss assumption that the
growth of the firm is achieved mainly via the
introduction of new products which will (sooner
rather than later) be imitated by competitors.
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