Three Management Decision Classes

In an effort to enrich the theoretical conception of the firm we shall use the following verbal model. The firm is viewed as a purposive, goal-seeking organization. It seeks its goals through two distinctive but closely coupled processes shown in Figure 1.

The logistic process, represented by the lower box, is concerned with conversion and transfer of resources obtained from the firm's environments (men, materials, money, information) into products and/or services offered back to the environment.

The logistic process is designed and guided by the management process represented by the upper box. The management process handles information. The inputs to the process are the perceived needs for modification of the logistic process; the outputs are action instructions for changing or redirecting the logistic process.

Using Figure 1 together with equation 1 of the preceding section, we can describe management in terms of three distinctive action and decision areas: strategic, administrative, and operation.

The strategic decision area is concerned with establishing the relationship between the firm and its environment. This is represented by the input and output arrows of the logistic process and by the index i in equation 1.

The administrative decision area is concerned with establishing the structure and the shape of the firm - the particular configuration of the boxes in Figure 1 and structure of the function f in equation 1.

Finally, operating decisions are concerned with selecting the operating levels for the firm - the values of x_ic; in equation 1.

A theory of the firm, which will ultimately provide a useful theoretical foundation for analysis of behavior of real world firms, will, of course, have to integrate and interrelate the three major decision areas. However, to reduce the theory-building task to manageable proportions, it is useful to study each class of decisions separately without, at the same time, losing sight of their relationship and interdependence. This approach will be followed in this paper. In the next section we shall derive some propositions about the relationship of the strategic decision area to the other two. In succeeding sections we shall focus attention on strategic behavior of firms.'