Behavioural model
Behavioural theories of the firm, while based on the divorce between ownership and control, also postulate that the internal structures of a firm and how various groups interact could influence a firm’s objectives. Behavioural theories set out to analyse the process by which firms decide on their objectives, which are assumed to be multiple rather than singular in nature. The complexity of large modern enterprises means that the firm is made up of a number of separate groups, each responsible for a particular aspect of the firm’s activities and each with its own objectives: for example, the marketing director and the finance director may have different priorities in terms of using the firm’s resources. The overall strategy of the firm is based on the conflicting objectives of these groups and the processes used to achieve an agreed position. To achieve this, conflicts have to be resolved and compromises have to be made. Consequently, the firm tends to have a multiplicity of objectives rather than a single one and to have a hierarchy of goals, so that some are achieved sooner than others.
Simon (1959), a Nobel Prize winner for economics, argued that:
1.The firm is not a well-defined ‘‘individual entity’’ with its own set of goals.
2. Decisions are arrived at through interaction between the various interest groups or managerial departments of the firm.
3.Studying these interactions in terms of agreement/conflicts will indicate whether the firm will have any clearly articulated long-run objective.
He argues that the overriding objective of the firm is survival rather than the maximization of profit or sales. Survival is achieved if the performance of the firm is satisfactory and satisfies the various interest groups in the firm, including the owners. Galbraith (1974, p. 175) argued that ‘‘for any organisation, as for any organism, the goal or objective that has a natural assumption of pre-eminence is the organisation’s own survival.’’ Simon argued that a ¢rm’s goal is unlikely to be profit-maximizing and more likely to be about achieving a satisfactory rate of profit.
Simon termed such behaviour as satisficing, implying that the firm aims at Out comes that are satisfactory or acceptable, rather than optimal. He also articulated a process by which the firm arrives at a set of objectives through an iterative process of learning, as a result of either achieving or failing to achieve its set targets. In the long run this may lead to a performance that is close to the profitt-maximizing position, but this is only achieved through revision of achieved targets rather than as the prime objective of the firm. In Figure the process by which limited initial goals may lead to higher levels of achievement is illustrated:
1.Initially, managers set an objective and, then, the firm or part of the firm tries to achieve it
2. The next stage is an evaluation of performance against the goals
3. If the objective has not been achieved and the managers accept that it was set at too
high a level, then they might lower their expectations or aspirations and set a revised lower objective in the next period
4. If the objective has been achieved, then the managerial team will raise their expectations or aspirations and, as a consequence, raise the objective set in the next Period
Cyert and March model
Although satisficing generates a realistic learning process, the objectives associated with outcomes are rather vague compared with the precise objectives of profit and sales maximization. This would appear to make the construction of a predictive behavioural theory rather difficult. Nevertheless, Cyert and March (1963) developed such a model. They identify the various groups or coalitions which exist within the firm, defining a coalition as any group that shares a consensus on the goals to be pursued. The firm is seen as a collection of interest groups or stakeholders, each of which may be able to influence the set of objectives eventually agreed. The agreed goals for the ¢rm are the outcome of bargaining and, to some degree, satisfy everyone.
It is assumed that salaried managers have both personal objectives and others that derive from membership of a group within the firm. The varying personal motivation of individual managers and their desire to see their own section succeed creates conflicts with other managers and with other groups which have to be resolved. Cyert and March (1963) identify areas of activity within the firm where objectives have to be set. These might include specific goals to cover production, stocks, sales and market share. These specific objectives then guide decision making in the individual sections of the firm as follows
1.Production goal: the production division is largely concerned with decisions about output and employment. They want the latest equipment, to be able to utilize it fully and to have long production runs. If sales fall, the production division would tend to favour an increase in stocks rather than a reduction in output.
2.Stock goal: the warehouse division holds stocks of raw materials and finished products. Sufficient stocks are held to keep both production and sales divisions happy, but too many stocks cost money and will therefore be regarded by the finance department as unprofitable.
3.Sales goal: the marketing division will be interested in increasing sales that could be set in terms of revenue or in terms of output. Clearly, if sales were pushed too far this might lead to conflict with the finance department seeking to maximize profits.
4.Market share goal: the marketing division might prefer to see their goal set in terms of a market share goal rather than just a sales objective. Raising market share might be seen to raise managerial utility because the firm becomes more important. However, such a goal might conflict with the concerns of the finance department.
5. Profit goal: the objective is a satisfactory profit that enables the firm to keep its shareholders happy and to satisfy the needs of divisions for further funds. The goal is not set as a profit maximization goal because managers are always willing to trade of profits to fulfill other goals.
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