A Summary of Cyert & March's Behavioural Theory of the Firm

Topics: Decision making, Decision theory, Economics Pages: 7 (1385 words) Published: August 26, 2013


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:

Organizational Objectives

Decision strategies

Decision making within strategies

To build the behavioral theory of the firm, Cyert and March develop four major subtheories concerning the following:

Organizational goals

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.

Organizational expectations

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...
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