Management Principles and Organizational Economics

Fayol’s General Principles of Management

The general principles of management, as defined by Henri Fayol, include the following fourteen elements:

• Division of labor: Specialization to increase efficiency.
• Authority and responsibility: The right to give orders and the obligation to perform.
• Discipline: Respect for rules and agreements.
• Unity of command: Employees should receive orders from only one supervisor.
• Unity of direction: One plan and one head for a group of activities with the same objective.
• Subordination of particular interest to the general interest: The interests of the organization come first.
• Personal remuneration: Fair pay for services rendered.
• Centralization: The degree to which subordinates are involved in decision-making.
• Hierarchy: The scalar chain of command from top management to the lowest ranks.
• Order: People and materials should be in the right place at the right time.
• Equity: Managers should be kind and fair to their subordinates.
• Stability of personnel: Management should provide orderly personnel planning.
• Initiative: Employees should be allowed to originate and carry out plans.
• Union staff (Esprit de corps): Promoting team spirit and unity.

Transaction Cost Economics

The purpose of Transaction Cost Economics is to justify the existence of the company within a market economy. A transaction is defined as the transfer of the right to use certain assets from some agents to others. This process occurs in two main stages: contractual and enforceable.

Factors Influencing Transactions

Environmental factors that range across transactions include:

• Uncertainty
• Frequency of exchange
• Asset specificity

Aspects that characterize human behavior in this context include bounded rationality and opportunism.

Understanding Transaction Costs

Transaction costs are those associated with the coordination of trade. These costs vary depending on whether the transaction is organized within the company or through the market. They include costs:

• Associated with obtaining information.
• Associated with the negotiation and drafting of contract clauses.
• Associated with ensuring compliance with the agreement.

Agency Theory and Contractual Relations

Agency Theory views a business as a system of contractual relations (agency relations). There are transaction costs involved in developing an agency relationship, known as agency costs. These are designed to prevent opportunistic behavior and are supported by both the agent and the principal. These costs include:

• Costs of formalization of the contract.
• Monitoring costs.
• Warranty costs.
• Residual loss.

An agency relationship is a contract in which the agent undertakes to perform a service for the principal. Common cases include trade-related, employment-related, and business-political relations.

Goal Setting Theory in Leadership

According to Goal Setting Theory, objectives should be challenging but met with commitment and capacity by the individual. Those aspiring to leadership must assume a diagnosis of personnel conditions, technology, and organization-employee awareness to emphasize the specific attributes of the targets.

Adams’ Equity Theory and Motivation

Equity Theory, developed by Adams, examines the proportion between an individual's labor inputs and the rewards they receive. People are motivated when they experience satisfaction with the reward received for their effort.

Actions to Restore Equity

When inequity is perceived, individuals may take the following actions:

• Mental actions: Restoring equity through mental adjustments and cognitive re-evaluation.
• Actual actions: Restoring the desired situation through physical actions and behavioral changes.