Searching for the General Theory of the Firm

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Organization and Change > Forum > Searching for the General Theory of the Firm

Searching for the General Theory of the Firm
In Ho Kim, Professor, Korea (South), Member
Is it not possible to set up the general theory of the firm?
The reason why I raise this question is that there are so many methods, models and theories in dealing with business management, both theoretically and practically.
As we all know, a firm is a social institution to earn profit in a dynamical environment through value creation in which a firm should contribute positively to the society it belongs.
If we recognize the profit-seeking formula in addition to the things mentioned above in terms of the indicators of expected revenue and cost, then we are able to set up the general theory that will be applicable to any firm in any industry at anytime. .

General Theory of the Firm?
Jaap de Jonge, Editor, Netherlands
I'm afraid firms are quite complex social phenomena, so it may never be possible to capture them in a single theory or model.
Your definition of the (purpose) of the firm is far from universally agreed, there is considerable difference in what people people believe should be the purpose of firms. See shareholder value perspective, stakeholder value perspective, Porter's Shared Value and Mourkogianni's Moral Purpose for the most important views on this.

About the Very Purpose of the Firm
In Ho Kim, Professor, Korea (South), Member
The very purpose of the firm must be to earn profit, taking into account so many aspects that will affect on profit-seeking. It does mean that the first thing we have to have is profit-seeking formula.
And then we also need a value creation dynamic model to deal with a firm's behaviors to adapt to needs evolution/industry evolution with the standpoints of holism, synthesis, dynamism based on a stronger rationale. Because profit just depends on the output of what and how a firm would do during a given period of time based on a firm's core competence at a given starting point in time.

Value Based Management
Jaap de Jonge, Editor, Netherlands
IF we accept your idea that profit or better: "long term value creation" is or at least should be the first aim/purpose of any firm, then the value based management-philosophy comes to mind as a potential general theory of the firm.

Profit-seeker Rather Than Value Creator
In Ho Kim, Professor, Korea (South), Member
If we accept that profit can be earned through value creation, before taking into account value creation, how about setting up the equaton, expected profit=expected revenue-expected cost.
What we have to make sure is the very source of expected revenue and causes of occuring expected cost, and also the indicator of expected revenue and that of expected cost, and then we have to find out what will impact on both indicators.
In my view, we should focus on profit-seeking rather than value creation as the ultimate purpose of the firm.

Profit versus Value
Jaap de Jonge, Editor, Netherlands
In my view,
- Profit is an accounting word, short-term and only includes financial value.
- Value is a strategic word, long term and more inclusive for multiple types of value.
If there is one thing we should have learned from the last couple of crises it is that an accounting, short term and financial view is disastrous for the wellbeing not only of firms but of the entire world economy.

Profit is More Important than Creating Value
In Ho Kim, Professor, Korea (South), Member
Value can be created/added by transforming something into somethng else more valuable through manufacturing/operations, and can be allocated to the stakeholders according to what each one has contributed to value creation, and the left belongs to the firm as profit.
In fact, value embraces profit only with which a firm survives and thrives. That's why profit is mostly important, to the extent that we say a firm must be a profit-seeker. When we focus on earning profit, and find out the ways how to gain it as maximally as possible in a right manner, it must be the kind of general theory of the firm. In theorizing profit-seeking, we have to focus mainly on profit rather than on value itself.
And let's keep in mind that an accounting, short-term and financial view is not the cause of disaster. What matters is lack of innovation adapting to needs evolution: ex, the failure of Nokia in adapting to needs evolution from the needs of feature phone to that of smartphone is the very cause of disaster.

Understanding the Concepts of Value & Profit
In Ho Kim, Professor, Korea (South), Member
Precisely speaking, value covers revenue and consumer surplus and producer surplus, and for revenue -cost = profit, revenue = cost + profit. Therefore, Value = Cost + Profit + Consumer Surplus + Producer Surplus.
Accordingly, Value is greater than Cost plus Profit. This is the relationship between value and profit. I'd like us to make no more confusion in understanding the concepts of value and profit.

Understanding the Concepts of Value and Profit
Robert Gerth, Project Manager, Sweden, Member
In Ho Kim, I think you have a point considering that organization can earn profit through value creation. But in practice an exclusive focus on profit seems to limit the perception of time (long term thinking) on the expense on investments in innovation and development.

Earning Profit Through Value Creation
In Ho Kim, Professor, Korea (South), Member
Mr. Robert
I'd like you to think what the real purpose of the firm is?
Basically, a firm can earn a profit by creating value, while it does do the business in a positive sum-industry, not zero-sum or negative-sum one.
In fact, a firm can earn profit through value creation.

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