Behavioural

Theories of Firm
MAY ENGALLA &
EUNICE FLORES
 Theories of firm
• Managerial theories:
• Berle & Means – Staff Maximization
• Baumol’s model – Sales Maximization
• Marris’s Theory – Growth Maximization
• Williamson’s theory – Managerial utility
Maximization
• Behavioural theories:
• Simon’s Model - Satisfying Behaviour
• Simple model of Behaviourism
• Value Maximization
 Behavioural Theories
• Behavioural theories combine industrial economics and
organizational theory.
• The behavioural theories argue that groups within the
firm other than managers influence the behaviour of the
firm. While managerial theories emphasize the role of
mgmt.
• The types of behavioural theories proposed are:
• Simon’s Satisfying Behaviour Model
• Cyert & March - Simple model of Behaviourism
 Simon’s ‘Satisficing’ Model

• Simon believed that the relevant information with

the managers was far from complete.
• This model helps in explaining certain real-world
situations.
• Simon’s model is consistent with the theory of
motivation where human action is a function of
drives, and it terminates when drives are
satisfied.
Flaws in ‘Satisficing’ behaviour

• Knowledge available to the firm for its rational

decision making is imperfect. There are screens
& blockages in flow of information
• It is not easy to determine a “satisfactory level”
• Information about condition is different than
the information about the changes in the
conditions, which is more appropriate.
Examples of Simon’s satisficing
strategy
 Key takeaways

• Simon’s satisficing strategy is a form of decision making that advocates

satisfactory and not optimal solutions.
• Simon’s satisficing strategy avoids cognitive overload in the often-fruitless
search for optimal outcomes. These outcomes result in needless expenditure of
time, energy, or money.
• Simon’s satisficing strategy has applications in consumer psychology and
user design. Consumers who adopt the strategy tend to be happier and have
higher self-esteem than those who opt to maximize the outcomes of decision
making.
 Q&A

A combine industrial economics and organizational

theory?

Behavioural Theories
Simple Model of Behaviourism
The behavioural theory developed by Cyert & March in their
book “A Behavioural Theory of the Firm” can be studied in
the following sequence:
• The firm as a coalition of groups with conflicting goals
• The process of goal formation – the aspiration level
• Goals of the firm
• Means for resolution of conflict
• The Decision Making Process
• Uncertainty & the environment of the firm
Cyert and March based their theory on four actual case studies
and two experimental studies conducted with hypothetical firms.
A simple model for illustration of theory
The model refers to the case of duopoly. The decision process
involves determination of output which is homogeneous, so that
single price will ultimately prevail in the market. No inventories
are allowed in this model. The steps may be outlined as follows:
• Forecast of competitors’ reactions.
• Forecast of firm’s demand.
• Estimation of costs.
• Specification of goals of the firm.
• Evaluation of results by comparing them to the goals.
• Re-examine the estimate of the cost.
• Adapt new solution, else move on.
• Re-exam its estimation of demand.
• Evaluation of new solution
• If goals are not met the firm readjusts downwards its aspiration level.
 Top Management Ways for
smooth functioning
• Budget-share and its use by various groups

• Firm is an adaptive organization; it sets present goals, behaviour & decisions

based on past experience

• Delegation function limits the discretion of various groups of coalition, thus

reducing source of conflict

• Money payments are source of satisfying the various groups conflict

• Side payments means of satisfying some demands
• Slack payments are over & above the demand of efficient groups
• Urgency of some demand puts priority over others, thus gets satisfied earlier
• Decentralization of decision making
 Value Maximization

• Modern theory
• ST profits are sidelined by most firms as
their objective
• Firms often sacrifice their ST profits for
future LT profit
• This theory states objective of the firm is to
maximize the wealth or value of the firm