Perceived managerial discretion and market competition Research Paper

Perceived managerial discretion and market competition (Principal-agent problem) - Research Paper Example According to the agency theory, the principal-agent problem arises from conditions of incomplete or asymmetric information when one party tries to motivate another party to act on its behalf. These conditions can be observed in any employer/employee relationship. This is because the employer, the shareholders, wants the employees, the managers, to invest in those projects which offer higher returns. However the projects which offer higher returns also have higher uncertainty. Therefore the managers may not want to take the risk. As a result there is a conflict of interest which affects organizational objectives. This is the principal-agent problem which is addressed in the agency theory. In order to maximize organizational performance, the owners of the organization have to introduce incentives which will motivate the managers/employees to act in the best interests of the shareholders. Therefore the motivations of the principal and its agent are aligned strategically. In the current business environment, change is the only constant. Therefore the organizational structure has to be flexible so that the organization can remain competitive in spite of the changes that are taking place in the external environment. A flexible organizational structure enables the principal and the agent to mobilize resources fast so that fast responses to market changes become possible. However if there is a conflict of interest between the two parties, then this objective cannot be attainable. The presence of the principal-agent problem also means that the shareholders are unable to monitor the decision-making process so that the managers are tempted to apply organizational resources to personal gains. This is a limiting factor for organizational performance. Therefore it is critical to address the principal-agent problem. Particularly in the present day business environment which is characterized by high competition, application of the agency theory becomes one of th e key success factors. By incorporating the agency theory, organizational stakeholders create an internal structure which is strategically aligned. Given the fast pace of change in the external environment, both the shareholders and the officers would want to create a sustainable competitive advantage. In order to meet this objective, the management of the company has to optimize the decision making process so that it addresses the interests of both parties. According to Michael Porter’s framework for strategy formulation, an organization can implement three strategies to build a competitive position: focus, differentiation and cost minimization (Hill & Jones, 2007, p. 18). However the effectiveness of strategy implementation is limited by the principal-agent problem. This underscores understanding of the agency theory. By applying the agency theory, the management can align the interests of both parties to synergistic effects. As a result, the organization can