A Summary of Cyert & March’s Behavioural Theory of the Firm Essay
A Summary of Cyert & March’s Behavioural Theory of the Firm
Cyert and March are concerned with the business firm and the way the business firm makes economic decisions. The authors make detailed observations of the processes and procedures by which firms make decisions, using these observations as a basis for a theory of decision making in business organizations. They argue that one way to understand modern organizational decision making is to supplement the microeconomic study of strategic factor markets with an examination of the internal operation of the business firm-to study the effects of organizational structure and conventional practices on the development of goals, the formation of expectations, and the implementation of choices.
At the very outsetset, the authors make four major research commitments:
To focus on the small number of key economic decisions made by the firm
To develop process-oriented models of the firm
To link models of the firm as closely as possible to empirical observations
To develop a theory with generality beyond the specific firms studied
Cyert and March develop an empirically relevant, process-oriented general theory of economic decision making by a business firm. They present the rudiments of a behavioral theory of the firm that have proven to be relevant both to economic theory and to the theory of complex organizations.
The authors then go on to lay out the antecedents to the behavioral theory of the firm. They discuss the theory of the firm, organization theory and certain questions in a revised theory of firm decision making regarding:
Decision making within strategies
To build the behavioral theory of the firm, Cyert and March develop four major subtheories concerning the following:
A theory of organizational goals considers how goals arise in an organization, how goals change over time, and how the organization attends to these goals. The organization is described as a coalition of stakeholders, with some of these stakeholders organized into subcoalitions. In a business organization the coalition members also include managers, workers, stockholders, suppliers, customers, lawyers, tax collectors, regulatory agencies, and so on. Clearly then, organizational goals must deal successfully with the potential for internal goal conflicts inherent in a coalition of diverse individuals and groups.
Since the existence of unresolved conflicts among organizational stakeholders is a key feature of organizations, it is difficult to construct a useful descriptively accurate theory of the organizational decision-making process if we insist on internal goal consistency. Such a decision-making process need not necessarily produce consistent organizational goals.
An important mechanism for dealing with stakeholder conflicts is the sequential attention to conflicting goals. A consequence of this mechanism is that organizations ignore many conditions that outside observers see as direct contradictions. Decentralization of decision making (and goal attention), the sequential attention to goals, and the adjustment in organizational slack that acts as a cushion in down times permit the business firm to make decisions with inconsistent goals under many (and perhaps most) conditions.
A theory of organizational expectations considers how and when an organization searches for information or new alternatives and how information is processed through the organization. Expectations are by no means independent of hopes, wishes, and the internal bargaining needs of subunits in the organization. Information about the consequences of specific courses of action in a business organization is frequently hard to obtain and of uncertain reliability. As a result, both conscious and unconscious biases in expectations are introduced. Thus, local priorities and perceptions obtain. In addition, there is some evidence of more conscious manipulation of expectations.
Communication in a complex organization includes considerable biasing and influence activities-and considerable bias correction as well. In addition, organizations often protect themselves from the worst effects of influence activities by focusing on verified data in lieu of uncertain estimates and using easily checked feedback information.
A theory of organizational choice needs to characterize the process by which the alternatives available to the organization are ordered and selected. Organizational decisions depend on information estimates and expectations that ordinarily differ appreciably from reality. These organizational perceptions are influenced by some characteristics of the organization and its procedures. Second, organizations consider only a limited number of decision alternatives. Finally, organizations vary with respect to the amount of resources that such organizations devote to their organizational goals on the one hand and suborganizational and individual goals on the other hand. The firm is considered to be an adaptively rational system in which the firm learns from experience. General choice procedures are summarized in terms of three basic principles:
Avoid uncertainty: The firm looks for procedures that minimize the need for predicting uncertain future events. One method uses short-run feedback as a trigger to achieve action; another accepts (and enforces) standardized decision rules.
Maintain the rules: Once the firm has determined a feasible set of decision procedures, the organization abandons them only under duress.
Simplify the rules: The firm relies on individual judgment to provide flexibility around simple rules.
A theory of organizational control specifies the difference between executive choice in an organization and the decisions actually implemented. Organizational control within an organization depends on the elaboration of standard operating procedures. It is hard to see how a theory of the firm can ignore the effect of such organizational procedures on decision-making behavior within the organization. The effects fall into at least four major categories:
effects on individual goals within the organization,
effects on individual perceptions of the environment
effects on the range of alternatives considered
effects on the managerial decision rules used.
Cyert and March’s basic theory of organizational control assumes the following:
Multiple, changing, acceptable-level goals
An approximate sequential consideration of alternatives
Cyert and March propose two major organizing devices: a set of variable concepts and a set of relational concepts. The variable concepts discussed previously are organizational goals, organizational expectations, organizational choice, and organizational control. There are also four major relational concepts:
Quasi-Resolution of Conflict
In keeping with numerous theories of organizations, Cyert and March assume that the coalition in an organization is a coalition of members having different personal goals. Members require some procedure for resolving conflicts, such as acceptable-level decision rules, sequential attention to goals, or both.
The authors submit that organizations typically try to avoid uncertainty. First, organizations avoid the requirement that they correctly anticipate events in the distant future by using decision rules emphasizing short-run reactions to short-run feedback, rather than anticipation of long-run uncertain events. Second, organizations avoid the requirement that they anticipate future reactions of other parts of their environment by arranging a negotiated environment. Organizations impose plans, standard operating procedures, industry tradition, and uncertainty-absorbing contracts on that environment.
Cyert and March’s behavioral models assume that search, like decision making, is problem directed. Problemistic search means search that is stimulated by a problem (usually a rather specific one) and is directed toward finding a solution to that problem. Such organizational search is assumed to be motivated, simple-minded, and biased. This bias may reflect training or experience of various parts of the organization. This bias may reflect the interaction of hopes and expectations, and communication biases are expected to reflect unresolved conflicts within the organization.
To assume that organizations go through exactly the same processes as individuals go through seems unnecessarily naive, but organizations exhibit (as do other social institutions) adaptive behavior over time. Cyert and March focus on adaptation with respect to three different phases of the decision process: adaptation of goals, adaptation in attention rules, and adaptation in search rules. They submit that organizations change their goals, shift their attention, and revise their procedures for search as a function of their experience.
In this book the authors adopt a problem driven way of analysis. For example, when there are conflicts, the authors let the firm to set these conflicts as constraints and solve out a possible solution. In the modern context, this could make organizations weak. Organizations must be dynamic in anticipating problems and mitigating them or adapt to them and benefit accordingly.
Cyert and March have shown how to construct behavioral models of firm-level decision making and indicate the basic theoretical framework within which such models are embedded. Cyert and March’s behavioral theory of the firm can be applied to price and output decisions, internal resource allocations, innovations, competitive dynamics, and predictions of other organizations’ behavior. However, an underlying assumption of rationality has been made. Behavioral theory must also study the possibility of non-rational decisions or unpredictable outcomes of rational decisions.
Cyert, R. M., & March, J. G. (1992). A Behavioral Theory of the Firm.