User:Msrasnw/Behavioural Theory of the Firm

The Behavioural Theory of the Firm 196

Intro

Section 1
For Cyert and March the firm is best viewed as a coalition of individuals or groups of individuals. Individuals, or groups of individuals, are seen as being likely to have goals whereas organisations do not. There is the likelihood that there may be competing goals conflict between the individuals or groups the make up the coalition. A simple resolution of this potential conflict by assuming that there is a supreme authority that is willing and able to force conformity in the behaviour of these individuals or groups to some higher level goal, or by simply assuming a happy coincidence of consensus is rejected from the outset. Rather Cyert and March argue that organisational goals are formed through a bargaining process involving the members of the coalition. The form this bargaining takes is normally over the distribution of of what are refered to as 'side payments'. Side payments are inducements in the form of policy commitments or simply payments. The distinction between these two forms of 'side payment' might not be important.This is because commitments to pay money can be reduced to policy commitments.

The pattern of policy commitments the results from the bargaining process can be seen to be a specification of the goals of the organisation.

but it is likely that because of the way in which agreement is reached the organisational objectives that emerge are imperfectly rationalised and expressed either in the form of 'aspiration levels' or in non-operational form. These organisational goals change in two ways as the bargaining process, which i~ continuous, proceeds: aspiration levels with respect to existing goals, i.e. the levels of achievement regarded as acceptable by the coalition members, will be modified in the light of the levels actually achieved; and new goals will be introduced as the attention focus of coalition members alters. The organisation is able to survive with unrationalised conflicting goals partly because some of the objectives are expressed in non-operational form, partly because at anyone time some of the objectives will be assuming a non-active form, but mainly because objectives are cQnsidered sequentially and not simultaneously. Sequential rather than simultaneous consideration is one of the central characteristics of the theory and is discussed further below. Closely allied to the hypothesised ability of the organisation to survive in the face of conflicting goals is the concept of 'organisational slack', i.e. the notion that, due to ignorance and market imperfections, the payment made to coalition members wilt hormalty be in excess of that needed to keep them within the coalition. The existence of organisational slack enables the organisation to survive adverse changes in the external environment without disintegrating.

Section 1
Decisions taken within the organisation are explicitly made dependent on the information available to and the expectations formed by the decision takers within the organisation. Emphasis is placed upon the fact that the expectations formed on the basis of any given information, and indeed the type of information gathered, will not be independent of the subjective situation and interests of the individuals or groups involved. The theory argues that change is typically only considered when a problem arises, although it is recognised that, if a solution comes to hand, a search for an appropriate problem may be induced. Once a problem has arisen, usually in relation to the non:.achievement of one of the organisational goals or subgoals. 'search activity' is triggered off to discover possible solutions; that is, information is sought. It is here that the concept of sequential as opposed to simultaneous consideration becomes again relevant. The alternatives thrown up by search activity are considered in turn as they arise, and the first alternative that enables the aspiration level with respect to the goal in question to be achieved is accepted. Hence, the procedure of decision making has been described as 'satisficing' rather than maximising; it is designed to satisfy multiple, changing, acceptable-level goals, not to maxi mise a consistently specified objective function. This is not to say that the firm's behaviour is 'irrational'. Given the problems of information gatheri..g and processing and the desire to reduce uncertainty, some sort of satisficing procedure may be the best possible in practice, and for this reason the approach outlined here has been designated 'qualified' or 'bounded' rationality. 19'7

Section 1
The result of this analysis is that the firm is seen as an adaptive organisation. Changes in the environment raise problems, and the organisation reacts to these problems according to certain established routines, known as 'standard operating procedures', which have been evolved In the course of a long-run adaptive process. The theory has been developed deliberately for the analysis of short-run behaviour, and consequently little attention has been paid to the exploration of the long-run adaptive process.

The significance of the behavioural approach
The significance of the behavioural approach is difficult to assess. 198 There is no doubt that it provides useful insights into some aspects of business behaviour. Cyert and March have claimed considerable short-run predictive success with their theory and have suggested that this is due to the realism of their assump- tions about the internal workings of the firms in question. 199 However. several problems'remain. tn order to predict any specific firm's behaviour a rather detailed knowledge of the goals and standard operating procedures of that specific firm is required, and the latter, especially, are by their nature highly particularised, providing little scope for generalisation. Changes in goals and standard operating procedures occur in response to fairly immediate problems, within an essentially short-run framework. Of course, the changes are made in accordance with higher level rules, but these somehow just emerge from a long-run adaptive process that is not explored,2°o and they are presumably still very firm specific. Although not explored, it is clear that the long-run adaptive process is not to be regarded as tending towards long-run 'rationality', since in an uncertain and unstable environment, it has been argued. short run adaptation is the key.201 There may, nevertheless, be interest in the relationship between the short-run and the long run, and it has yet to be

demonstrated that the behavioural approach can be adapted in this direction. Associated with the short-run orientation of the behavioural approach is its concept of the firm as essentially passive. The stress is overwhelmingly on the process of short-run response to environmental stimuli, with longer-run considerations of survival conditions and strategic planning explicitly excluded. Yct, as is argued carlicr in this chapter, the characteristics ofthc large dominant firm suggest the need for a concept of the firm as an active entity, consciously seeking to influence its environment in ways that are favqurable to the achievement of its objectives. By focusing 0& the way in which stimuli from an exogenous environment call forth responses from an isolated individual firm, attention is firmly directed away from the properties of the system as a whole. in particular from the characteristics that arise from the competitive interaction of active oligopolistic rivals. The environment exists somehow 'out there', 3;nd its properties are placed beyond the scope of the inquiry.

Section 1
It is, of course, possible to recognise the force of the observation that large firms are complex organisations and yet to avoid recourse to behaviouri£m. If a firm's organisational characteristics have no implications for its behaviour, or more probably have implications that can be taken into account without adopting a behaviourist approach, a holistic concept of the firm can be retained. Thus, although organisational characteristics such as the relationship between shareholders and managers may need to be ana lysed in order to determine what the firm's objective is, once this has been done the firm can be viewed as a unit acting consistently in pursuit of a clearly specified objective. Similarly, internal administrative processes can be regarded as a separate area of study, in the same way that technical processes of production or marketing are regarded as separate areas of study, and can be abstracted from in the development of a theory of the firm.2°2 Of course, the study of internal administration may lead to conclusions with relevance for a theory of the firm, such as that there exists an absolute size or a rate of growth above which the administrative efficiency of the firm declines, but once established these conclusions can be regarded as part of the initial set of assumptions required for the construction of any theory.

Summary
The main contribution of the behavioural approach for the development of an understanding of business behaviour is to highlight the role played by uncertainty (not risk), the view that the behaviour of the firm can best be understood as viewing it as a continuing process and the rejection of microequilibrium.