| A Behavioural Theory of the Firm | |
|---|---|
Cover of the second edition |
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| Author(s) | Richard Cyert and James March |
| Publication date | 1963 |
| ISBN | 0631174516 |
The behavioural theory of the firm first appeared in the book A Behavioural Theory of the Firm in 1963 by Richard M Cyert and James G March. The work on the behavioural theory started in 1952 when James March, a political scientist, joined Carnegie-Mellon University, where Cyert was the President.[1]
Before this model was formed, the existing theory of the firm had two main assumptions:
Cyert and March first questioned these two critical assumptions.[2]
Contents |
"A behavioural model of rational choice" by Herbert Simon paved the way for the behavioiral model.[3] The neo-classicals assumed that the firm enjoyed perfect information and was certain about the environmental problems. In addition the firm maximized profits and did not suffer from dysfunctional internal resource allocation problems.[4]
The advocates of the behavioural approach challenge not only the perfect knowledge and profit maximization assumption but also the omission of element of uncertainty from the conventional theory of the firm. The behavioural model, like the managerial models of Williamson and Marris, considers a large corporate business firm in which the ownership is separate from the management.[5]
In the modern day world, large scale corporate bodies can no longer be considered as a single major decision maker, i.e. the entrepreneur. Instead, an organization is a complex coalition of various individuals or groups, which may include managers, stock holders, workers, suppliers and so on. [8]
According to Cyert and March, all these varied groups participate in setting the goals of the organization. Each group has its own set of goals and demands, which are conflicting. Cyert and March have mentioned five goals which real world firms generally posses:
According to the behavioural theory, all the goals must be satisfied, but there is an implicit order of priority among them. [9]
Cyert and March proposed that the firm aims at satisficing rather than maximizing. This came from a concept known as bounded rationality, which was developed by Herbert Simon. [10] Bounded rationality means prudent behaviour under the given circumstances. Satisficing is viewed as the realization of goals, which are set by the top management.[11] It has to be mentioned that goals are not set up with maximization of relevant magnitudes such as profits,sales and market share as the aim. Rather it is the attainment of the aspiration levels of the goals set.[12]
In the model, the top management sets the goals of the organization. But these goals are implemented through decision making at two levels, one at the top management itself and the second at the lower management levels. During approval of proposals of various departments, two simple criteria are generally followed:
According to the Cyert and March, in the process of decision-making, information is required to take the most appropriate decisions. However, information gathering is not cost less and requires budgetary resources.[13]
To keep the various groups of coalition in the organization, payments had to be made which are in excess of what is required for the efficient working of the firm. The difference between the total resources and the total necessary payments is called the organizational slack. In conventional economic theory the organizational slack is zero, at least at equilibrium. Cyert and March claim that organizational slack plays a stabilizing and adaptive role.[14]
Cyert and March have given many examples of organizational slack such as high dividends paid to shareholders, prices set lower than necessary, wages in excess of those required.
The behavioural model has made a great impact on the theory of the firm. It has given an insight in the process of goal formation and fixation of aspiration levels and also the allocation of the resources of the firm. Its critics though claim that the theory is unnecessarily complicated. The virtual assembly of the firm, with decision making process as the unit, for the purpose of predicting their behaviour is highly questioned by critics. There has also been staunch support for the profit maximization rather than satisficing behaviour, which is one of the core elements of the model. [15]