Entry conditions, relative role of owners and management, strategic conduct and performance: a study of large firms of major Indian industries

Abstract

The major criticisms of neoclassical theory of the firm are concerned with its assumptions of ‘profit maximization’, ‘perfect information’ and ‘consensual and unitary decision making process’. Alternative theories -- managerial, behavioural and game theories -- posit their respective analyses by relaxing either all or some of the above mentioned assumptions. The managerial theories have evolved in response to the awareness of the existence of asymmetrical return—risk preferences of shareholder and management groups, which in turn lead to goal conflict However, the fruitfulness of these ‘managerial’ theories of the firm continue to be a matter of dispute primarily because many of their predictions are qualitative and similar to those derived from profit maximization models, making it difficult to devise convincing tests of the alternative theories. The ‘stakeholder's approach’, on the other hand advocates viewing organization as comprising of multiple constituencies with which it has transactional relationships, accepts the existence of multiple objectives 'of firm and suggests evolving criteria for assessing effectiveness from the preferences of multiple constituencies for the outcomes of organizational performance. However, this approach also does not lend itself to hypothesis testing as one is confronted with issues like : Whose preferences should be satisfied through the distribution of the outcomes of performances? How are Judgements of overall organizational effectiveness reached, given the divergent constituent preferences for performance? Whose preferences should he weighed most heavily in reaching a Judgment of organizational effectiveness? and so on. Against such a backdrop, the present study attempts at napping motivations of two dominant stakeholders of contemporary organizations -- shareholder and management groups —— within a framework of variable—bargaining power model due to Svejnar and Kalai. Besides incorporating the bargaining power of the two important stakeholders, the model explicitly considers pertinent variables reflecting the market structure, entry conditions and financial structure of the fire. The equilibrium and comparative static implications of the- model are explored and empirically verifiable propositions are generated along two dimensions, namely, entry conditions of the industry (high barriers to entry and low barriers to entry) and controlling—interests of firm (owner-controlled and management controlled). The variations in policy variables ( firm size and dividend rate ) are sought to be explained by variables like average industry dividend rate, number of firms in the industry and cost of capital. “ The -empirical validation process comprised of the following phases I The major Indian industries are classified into two regimes high barriers and low barriers to entry —— by employing a switching regression method. A sample of 133 large industrial manufacturing firms operating in these two regimes are further classified according to the controlling—interests into owner—controlled, management—controlled and multinational subsidiaries. The concepts of strategic group and conduct are utilized to discern the dominant strategies adopted by the sample firm. The performance of firms is evaluated along the dimensions of growth, profitability, risk' and overall market performance by entry conditions, control and strategic conduct. Finally, tests are devised and implemented to empirically validate the propositions generated from the formulated model. ’ The study revealed that : The owner-controlled firms operating in low barriers to entry industries outperform others on growth measures. However, these firms are also exposed to high risk conditions. The multinational subsidiaries are found to outperform others in return and overall market performance measures. The management—controlled firms have experienced the least risk. However, contrary to the expectations they ranked low in growth, return as well as overall performance measures. Related Diversification appears to be the most preferred strategy in Indian corporate sector. Related Diversifiers have in general outperformed other strategic groups. The unrelated diversification provide greater scope for risk reduction, whereas high performers (Related Diversifiers) are also vulnerable to higher risk. Ordinary least squares method was employed to estimate functional relationship between the policy variables and the explanatory variables. The hypothesized direction of causal relationships are validated.