Traditional and Modern Theories of Decision Making

The original objective of profit maximization is achieved and growth, as well as sustainability, assured when firms adapt to these theories.Firms make business decisions based on strategies. Strategy begins with planning, with objectives at the other end of the spectrum. It is the function of management to make strategies therefore Strategic Management is the process of the management that gives direction to the company about its objectives and the details of how these are intended to be achieved. There are four characteristics of Strategic Management.However traditionally, from Adam Smith onwards the strategy has revolved around production or input cost and profits. All decisions are therefore aimed at the twin objective of cost reduction and profit maximization.Traditional or neoclassical theories believe that business firms try to reduce the cost of production. Costs are determined by the quantities of inputs multiplied by their price. As production increases, the costs reduce and profit margins increase. But this is demand-based. As demand decreases so does output and costs increase resulting in lower profits or even losses. This then is the most simplistic formula that was the driver of a business strategy that accounts for a pure demand and supply situation.However, there are many shortcomings to this approach. This does not take into account the behavioral factors that affect decisions. This also ignores that there are hierarchies in business. that there are superiors and subordinates. Management is scarce and not easily obtained and that it is often more economical and fruitful to hire managers rather than manage by oneself.This brought about the Agency theory that considered stakeholders (Jensen and Mechling, 1976). This showed that aside from owners, there are other groups that are interested in the performance of the firm or company and due to their interest the company requires a strategy.