Traditional theories of the firm broadly envisage a situation where the owner-manager (or entrepreneur), armed with perfect knowledge of the internal working of the firm and its competitive environment, pursues maximum profit by equating marginal cost to marginal revenue. The entrepreneur is assumed to have no objectives other than profit. All profit comes to the entrepreneur as the firm’s owner
This view cannot be seen as an accurate description of a typical modern enterprise. The question is, therefore, how do firms behave? New or alternative theories need to take into account current organisational structures and particularly the emergence of the public joint-stock company. The appearance of such companies and the separation of ownership from control has led to the development of alternative theories of the firm. Although profit plays an important role in such theories, it may no longer be seen as the sole or dominating goal of the firm
There are two generic types of alternative theory, namely:
1 managerial theories
2 behavioural theories