Managerial theory of a firm is mainly focused on the contribution of management (entrepreneurship) into the economy (read transactions). Williamson researched different governance types or management approaches to different complex situations, and explores how they can affect the transaction cost and their efficiency. Originated by Oliver Williamson these research directions are still very popular now and continue developing by major economic schools. In his works Oliver identified different managerial approaches along with the major transaction’s features, and combined these elements into a coherent system of interaction. The model of a firm includes the assets, management and market conditions (at the beginning there were three basic conditions: monopoly, oligopoly and imperfect competition). The main element is management because it can affect the situation on the market under certain circumstances by means of marketing, expansion or reduction of production volumes, price variation etc. The main question of managerial approach is how to make the optimal decision with the means of two variables – price and expenses

There are lots of principal differences between neo-classical and managerial firm theories. The first one is concerned with the primary presuppositions about the economy: transaction cost theory claims that market agents have complete information about the market conditions and prices, whereas managerial approach includes the following clause: the information can not be perfect, it can not be complete and thus all contracts on the marker are incomplete because of uncertainty of economic environment, human factor (mistakes, misunderstandings and communication errors) and so on. Due to incomplete information and contracts the concerned theory infers that the next basic presupposition of neo-classical theory is not true also – under the above described conditions market agents (subjects) can not make absolutely rational decisions or simply behave in the most rational way maximizing their profit. So this difference is very important because it is related to the foundations of the theories and, in summary, managerial approach implies that individuals and companies do not always act rationally due to the lack of information or its distortion, and incomplete contracts. From this point, economists have developed a new concept of opportunism or opportunistic behavior. It means that when some terms are missed in the contract, for example, the one or another contract party will surely try to benefit from this. For instances, when the contract does not specifies the terms of delivery or installation (assembling) of some commodity it will benefit the supplier, because he could reasonably fleece another party of all its money (and most probably it will be so). Opportunism is related to the desire of people to get as much as it possible (meanness and covetousness). Subsistence of opportunism increases business risks and uncertainty of market environment for all market players. Internalizing the transaction is the chance to cope with opportunism in case when the same external transaction is frequently repeated.

The second major difference is that transaction cost theory leaves no place for entrepreneurship. Neo-classical school considers that a firm is a production function – the ‘black box’ – which has some inputs and outputs, and the efforts of entrepreneurship were not taken into consideration. All the decisions within a firm (concerned with resources allocation and make or buy decision) are come to mathematics and, of course, are optimized.

In the opposite, managerial theory refutes such approach and assigns the most important roles in the firm to the management and entrepreneurship. But if there is a clear understanding of firms’ objects (to grow, increase profit etc) unfortunately there is no consensus in the question of diverse objects of managers and owners of a firm. The concerned firm theory states that managers have different vision from the same of owners: managers are interested in their own benefits (or salary) and they know how to deal with it because their salary depends directly on the sales volume. In order to get more money managers focus the sales and make their best to increase sales volume to the maximum, and basically it is not bad for the firm’s interests, isn’t it? The owners’ objective is aimed to maximize profit. At the beginning profits increase along with increasing sales but there is a certain limit. There is a point when with the increase of sales volume profit start to decrease. Therefore managers have a certain control over the profit of the owners and it is directly depends on the managers’ decision or discretion. That is why managerial firm theory is also called discretion theory.

The third important difference is concerned with ‘produce or buy’ decision, or transactions. Managerial approach connects it with the specificity of firm’s assets. Specific assets influence the decision of firms to buy or produce something, depending on the transaction cost and the choice available. For instance, company has the choice to buy spares and particular, or to produce them. ‘Buy decision’ is concerned with uncertainty, risk and opportunism due to the same nature of potential partners (suppliers). ‘Produce decision’ is concerned with the transaction costs, costs for resources, technology acquirement etc. In addition due to the physical assets specificity the costs of production can increase significantly if the equipment or machinery depends on each other and would not work with other equipment (incompatibility). There is also human resource specificity – employees may refuse to work with each other for many reasons, including psychological and multinational barriers. Thus the company has the third option – to buy the producer of spares and particular, and make it a part of larger enterprise. Such approach is called vertical integration. Of course company has to find optimal decision and maximize (or satisfy in managerial approach) profit. The specificity of firm’s assets defines its limits or boundaries along with the ability of staff grow and efficient transfer of authority. Obviously, managerial approach gives an important role to firm’s assets: “Assets are said to be highly specific when their value in the present (best) use is much greater than their value in the second-best use. Investment in such assets exposes agents to a potential hazard: once investments are made and contracts are signed, unanticipated changes in circumstances can give rise to costly renegotiation” (Nicolai Foss, Peter Klein, 2004).

The fourth important difference is the question of firm growth. Both theories have different opinions on this account. According to neo-classical theory the firm will grow until the internal transaction costs will come up with the same external (other firms’ costs). After internal transactions will exceed external there will be no sense to grow for the firm. Managerial approach claims the growth of the firm depends on the specificity of its assets, frequency of repeat transactions and uncertainty. Later managerial scholars introduced new fact that the growth of the firm is also limited by the human factor or firm’s ability to increase the staff team without detriment to efficient management. Another growth requirement is demand increase if there is no demand increase – there is no reason for firm growth also (in accordance to growth-oriented theory).

Of course there are many other differences in two different theories of a firm and the exploration of all of them (even if it is possible) can take many years and thousands pages. It is also not the goal of this paper which purpose is to shed some light on the main differences of the concerned theories.