behavioural theory of the firm
behavioural theory of the firman alternative to the traditional, profit-maximizing THEORY OF THE FIRM, which stresses the nature of large companies as complex organizations beset by problems of goal conflict and communications. The behavioural theory examines the inherent conflict between the goals of individuals and subgroups within the organization and suggests that organizational objectives grow out of the interaction among these individuals and subgroups.
Cyert and March, who helped develop the behavioural theory, suggested five major goals that are relevant to companies’ sales, output and pricing strategies:
- production goal;
- inventory goal;
- sales goal;
- market-share goal;
- profit goal.
Each of these goals will be the primary concern of certain managers in the organization, and these managers will press their particular goals. The goals become the subject of bargaining’ among managers, and such overall goals as do emerge will be compromises, often stated as satisfactory-level targets (see SATISFACTORY THEORY). This intergroup conflict, however, rarely threatens the organization's survival because ORGANIZATIONAL SLACK provides a pool of emergency resources that permit managers to meet their goals when the economic environment becomes hostile.
In order to achieve rational decision-making, it would be necessary to eradicate inconsistencies between goals and resolve conflicts between objectives. Traditional economic theory suggests that rationality can be achieved, painting a picture of ‘ECONOMIC MAN’, able to specify his objectives and take actions consistent with their achievement. By contrast, the behavioural theory argues that goals are imperfectly rationalized so that new goals are not always consistent with existing policies; and that goals are stated in the form of aspiration-level targets rather than maximizing goals, targets being raised or lowered in the light of experience. Consequently, not all objectives will receive attention at the same time and objectives will change with experience.
The behavioural theory also focuses attention on internal communications problems in large organizations, pointing out that decision-making is distributed throughout the firm rather than concentrated at the apex of the organization pyramid. This happens because lower-level managers do not just execute the orders of those at the top; they exercise initiative:
- in detailed planning within broad limits set by a top management;
- in summarizing information to be passed upwards as a basis for decision-making by their superiors. These communications problems make it difficult for senior managers to impose their objectives upon the organization.
Although the behavioural theory of the firm is somewhat descriptive, lacking the determinism necessary to generate tes table predictions, it has offered many useful insights into the objectives of large companies. See also MANAGERIAL THEORIES OF THE FIRM, PROFIT MAXIMIZATION, FIRM OBJECTIVES, PRINCIPAL-AGENT THEORY.