25 Organisational Goals- Overview, Cyert and March’s Behavioural model

Dr. Smita Sharma

 

Learning Outcome:

 

After completing this module the students will be able to:

  • Understand the behavioural theory of the firm
  • Understand about the firm as a coalition.
  • Understand how different groups form the goals.
  • Understand how conflicting goals are resolved by alternate management levels

 

ORGANISATIONAL GOALS- OVERVIEW, CYERT AND MARCH’S BEHAVIOURAL MODEL

  1. INTRODUCTION

The traditional Microeconomic theory of firm behavior considers profit maximization to be the sole goal of a firm. It is considered that though a firm can face alternate markets viz., perfect competition, monopolistic competition, oligopoly or monopoly, but in every case the owners will seek to maximize the profits only.

 

In contrast the managerial theories of the firm (or organization) consider the firm to be a coalition. Firm is not owned by a single owner, rather by multiple stockholders. The interests of these stockholders, managers, workers, consumers and suppliers may clash. The focus of behavioural model of Cyert and March is to explain the methods of clash resolution.

  1. FIRM AS A COALITION

 

The firm which is being considered in this model is mainly a large multiproduct firm owned by a number of stockholders. Owners of firm and managers of firm are two different groups. Firm is generally considered to operate in imperfectly competitive market. As information is not complete, uncertainty prevails. This type of assumption about a firm is more realistic.

 

Each group within a firm, be it owners, managers, workers, consumers and suppliers, will have different utility functions. Owners will seek to maximize profits, managers will seek better salaries and power, workers will seek higher wages and better conditions to work, consumers will seek low price but more variety and quality and so on.

 

But out of all these groups, the most important group is considered to be ‘managers’, followed by shareholders and workers.

 

III. HOW DIFFERENT GROUPS FORM THE GOALS?

 

The most important feature of the behavioural theory is that it does not focus directly on the goals of a multiproduct large firm rather tries to explain the process i.e., ‘How these goals originate?’

 

According to Cyert and March, the goals of firms originate mainly because of demands of alternate groups. These demands further depend on availability of information, expectations, aspirations and achievements of other groups in same or other firms. The basic dichotomy in the structure of firm is accepted in the behavioural model. In this dichotomy, on one hand there is the organization (as a whole) called as ‘firm’ and on other hand, there are the individual groups and sub-groups within the firm. The individual groups and sub-groups within the firm will have different objectives than ‘firm’ as a whole.

 

Further, it is considered that demands and past achievements are highly correlated. Demands of each group do not remain static and as keep on changing according to past achievements (of group and that of other groups, in getting their demands met) and other changes in the firm and its environment. Here changes in firm are very significant because if firm performance remains static or stagnant, demands may also remain static.

  1. ROLE OF TIME-LAG

 

By time lag we mean the lag between past achievements and future aspirations. According to Cyert and March, this time lag can be used by the firm to generate and accumulate surplus which eventually can be used for conflict resolution (conflict between different groups as the demands of various groups and sub-groups may be in continuous conflict with each other and the groups may be continuously bargaining with each other).

  1. ROLE OF TOP MANAGEMENT

The role of top management is extremely significant in Cyert and March model. Not only the top management sets the goals of the firm, as the goals may be in conflict with various groups within the firm, top management works towards reconciliation of goals too.

 

According to Cyert and March, a firm has mainly five goals:

 

How much to produce ( Production goal) Inventory goal

 

Sales goal

 

Market share goal Profit goal

 

1) Production Goal

 

Mainly it is the production department which takes care of production goal. Smooth production process also implies that production is evenly distributed over time and seasonal as well as cyclical variations in demand are taken care of. If demand is too high, it may require overworking by workers and other factors of production. Similarly, if demand dips, it may lead to over-production and lay-off of workers.

 

2) Inventory Goal

This goal either may come from production department or from sales department. In some instances the firm may have a separate inventory department too. Production department will always seek sufficient stock of raw materials while the sales department will seeksufficient stock of finished product.

 

3) Sales Goal

 

The strategy for sales will be a part of sales goal.

 

4) Market Share Goal

 

It may further involve market research, analyzing the competitors and deciding the advertisement strategy.

 

5) Profit Goal

 

Top management sets the profit goal to satisfy the shareholders. Furthermore, as the firm may have relied on banks and other financial institutions for its financing, profit goal also acts as a benchmark to satisfy them.

 

According to Cyert and March, law of diminishing returns operates even in case on top managers’ abilities to take decisions. Therefore as the goals increase, the efficiency of decision making may decrease. Therefore, the firms mainly focus on satisfying behaviour. The concept of ‘Satisfying behaviour’ was originally given by Simon (1955). He writes, “ Among the common constraints- which are not themselves the objects of rational calculation-are (1) the set of alternatives open to choice, (2) the relationships that determine the pay-offs(“satisfactions” “goal attainment”) as a function of the alternative that is chosen, and (3)the preference ordering among pay-offs. The selection of particular constraints and the rejection of others for incorporation in the model of rational behaviour involves implicit assumptions as to what variables the rational organism “controls”-and hence can “optimize” as means to rational adaptation-and what variables it must take as fixed.1

  1. MEANS FOR CONFLICT RESOLUTION

 

As various groups compete with each other for their individual group-specific goals, there is continuous struggle and bargaining within the firm. Interestingly, this does not lead to chaos within the firm and firm keeps on performing in stable manner as before. The reasons for stability can be listed as:

 

The groups have limited bargaining time and may not be aware/examine all the alternatives open to them.

The budget share allotted to each department also acts as a constraint. There may be penalty involved with underutilization or over-utilization of the budget.

 

Past history of goal setting and achieving/not achieving the goals. Clear delegation of authority also minimizes conflicts.

 

The main means or channels used for conflict resolution are:

  • Cash payments: The managers and workers receive cash salary, owners receive dividends etc.
  • Incentives: In behavioural theory incentives imply side payments (like funding a research project, if a scientist within the firm needs to be incentivized).
  • Slack payments: Organizational slack consists in payments to the members of the coalition in excess of what is required to maintain the organization. According to behavioural theory, this slack may be earned by every group. The managers may receive it in form of fancy offices and cars, workers may receive in in form of wages higher than market wages, customers may receive it in terms of discounts and shareholders may receive it in terms of higher dividends. All this is possible only if business period is favourable (so that sufficient surplus is generated), and there is sufficient time lag available between aspirations.
  • Sequential attention to demand: The most important aspect of conflict resolution is sequential attention to demand i.e., demands of various groups be met priority wise. In peek production period, production department will get priority; but if focus is on sale/market share, the priority may change accordingly.
  • Decentralized decision-making
  1. DECISION-MAKING AT TOP MANAGEMENT LEVEL

 

Budget allocation according to bargaining skills

 

Three things are taken into consideration while allotting the budget

  • Goals of the firm
  • Availability of resources
  • Bargaining skills of head of each department

 

Though, top management does keep some funds aside. These funds can be used at its own discretion at any stage as per requirement.

 

The decisions by top management are based on bounded rationality. Complete information may not be sought (as information is not free). Collecting information about all the alternatives can be uneconomical time-wise too. As no detailed cost-benefit analysis is undertaken, one can conclude that top management acts in ‘limited’ rational way. Information is generally searched only if some problem is there.

 

Here, the concept of position bias comes in the fore. The desire of various managers for security and power in the organization leads to this bias. Just to show importance of their demand, they may overstate the requirements and this may eventually lead to an upward bias in the cost structure of the firm. Furthermore, information may be distorted or under-reported.

  1. DECISION-MAKING AT LOWER MANAGEMENT LEVEL

The day to day routine decisions are taken in a simplified manner by the established norms and rules within the firm. The administrative staff follows the principle of ‘learning-by-doing’ and learns from past successes and mistakes. Failed methods are not repeated.

 

VII. UNCERTAINITIES FACED BY FIRM

 

Cyert and March explain two types of uncertainties faced by a firm, (1) The market uncertainty and (2) the uncertainty about competitors’ reaction.

 

The market uncertainty can be partly avoided by collecting information. Because of market uncertainty, firm mainly depends on short term decisions and avoids long term decisions.Interestingly, in terms of uncertainty arising because of oligopolistic interdependence, the behavioural theory chooses to be quiet by assuming ‘tacit collusion’ among existing firms.

 

VIII. CRITICISM OF BEHAVIOURAL THEORY

 

  • The behavioral theory is an entirely different concept and differs from Traditional microeconomic theory of firm behavior in a number of respects.
Traditional Theory Behavioural theory
Assumes firm to be managed by owners only.This means that owner and entrepreneur is same. There is no gap between ownership and management. Firm is considered to be a coalition of groups with  conflicting interests.
The firm has only one objective and that is maximization of profits. The objectives of firm are many and are decoded by top management.
Maximizing behaviour: firm tries to maximize profits. Satisfycing behaviour: The interests of these stockholders, managers, workers, consumers and suppliers may clash. The focus of behavioural model of Cyert and March is to
explain the methods of clash resolution; therefore the objective is to satisfy each and every group.
Complete information is assumed. The entrepreneur will have perfect knowledge of all possible alternatives and the outcomes.Therefore global rationality prevails. Behavioural theory accepts asymmetric information. Rather concludes that The decisions by top management are based on bounded rationality. Complete information
may not be sought (as information is not free). Collecting information about all the alternatives can be uneconomical time-wise too. As no detailed cost-benefit analysis is
undertaken, one can conclude that top management acts in ‘limited’ rational way. Information is generally searched only if some problem is there.
It is assumed that there is no conflict of goals between individual and organization. The interests of stockholders,managers,workers, consumers and suppliers may clash.
Traditional theory assumes firm’s rationality since very beginning Firm is adaptive organization. Firm learns from its successes and mistakes.
Short run and Long run theory Mainly a theory for short run.
  • The concept of industry equilibrium is not explained in the behavioural theories. It does talk about origin of conflict between different sub-groups and their resolution but does not provide any explanation on how conflict resolution and equilibrium can be achieved at industry level.
  • The behavioral theories fail to explain the determination of equilibrium output and price while this explanation is very convincingly given by traditional microeconomic theory of firm.
  • As we cannot predict how industry equilibrium is achieved, one cannot comment on stability or instability of equilibrium.
  • The threat of new entrants in market and resultant change in behaviour not explained.
  • There is no doubt in the fact that the behavioural theory of firm chooses different approach as compared to other managerial theories too. The basic focus of all these theories (managerial as well as behavioural) is on divorce between ownership and management. While Baumol theory focuses on Sales revenue maximization under a given profit constraint, Marris model talks about managerial enterprise while the Williamson model explains the role of managerial discretion. In all managerial theories focus is solely on utility maximization and discretion of managers. In contrast, the behavioural theory is more comprehensive as the Firm is considered to be a coalition of groups (stockholders, managers, workers, consumers and suppliers ) with conflicting interests.

 

VIII. SUMMARY

 

The traditional Microeconomic theory of firm behavior considers profit maximization to be the sole goal of a firm. In contrast the managerial theories of the firm (or organization) consider the firm to be a coalition. Firm is not owned by a single owner, rather by multiple stockholders. The interests of these stockholders, managers, workers, consumers and suppliers may clash. Each group within a firm, be it owners, managers, workers, consumers and suppliers, will have different utility functions. Owners will seek to maximize profits, managers will seek better salaries and power, workers will seek higher wages and better conditions to work, consumers will seek low price but more variety and quality and so on. But out of all these groups, the most important group is considered to be ‘managers’, followed by shareholders and workers. According to Cyert and March, the goals of firms originate mainly because of demands of alternate groups. These demands further depend on availability of information, expectations, aspirations and achievements of other groups in same or other firms. The basic dichotomy in the structure of firm is accepted in the behavioural model. In this dichotomy, on one hand there is the organization (as a whole) called as ‘firm’ and on other hand, there are the individual groups and sub-groups within the firm. The individual groups and sub-groups within the firm will have different objectives than ‘firm’ as a whole. Further, it is considered that demands and past achievements are highly correlated. Demands of each group do not remain static and as keep on changing according to past achievements (of group and that of other groups, in getting their demands met) and other changes in the firm and its environment. Here changes in firm are very significant because if firm performance remains static or stagnant, demands may also remain static. The role of top management is extremely significant in Cyert and March model. Not only the top management sets the goals of the firm, as the goals may be in conflict with various groups within the firm, top management works towards reconciliation of goals too. According to Cyert and March, a firm has mainly five goals viz., Production goal, Inventory goal, Sales goal, Market share goal and Profit goal. According to Cyert and March, law of diminishing returns operates even in case on top managers’ abilities to take decisions. Therefore as the goals increase, the efficiency of decision making may decrease. Therefore, the firms mainly focus on satisfying behaviour. As various groups compete with each other for their individual group-specific goals, there is continuous struggle and bargaining within the firm. Interestingly, this does not lead to chaos within the firm and firm keeps on performing in stable manner as before. The main means or channels used for conflict resolution are: Cash payments, Incentives, Slack payments, Sequential attention to demand and Decentralized decision-making. The decisions by top management are based on bonded rationality. Complete information may not be sought (as information is not free). Collecting information about all the alternatives can be uneconomical time-wise too. As no detailed cost-benefit analysis is undertaken, one can conclude that top management acts in ‘limited’ rational way. Information is generally searched only if some problem is there. The day to day routine decisions are taken in a simplified manner by the established norms and rules within the firm. The administrative staff follows the principle of ‘learning-by-doing’ and learns from past successes and mistakes. Failed methods are not repeated. Cyert and March explain two types of uncertainties faced by a firm, market uncertainty and the uncertainty about competitors’ reaction. The market uncertainty can be partly avoided by collecting information. Interestingly, in terms of uncertainty arising because of oligopolistic interdependence, the behavioural theory chooses to be quiet by assuming ‘tacit collusion’ among existing firms.. The behavioural theory of firm chooses different approach as compared to other managerial theories. Baumol theory focuses on Sales revenue maximization under a given profit constraint, Marris model talks about managerial enterprise while the Williamson model explains the role of managerial discretion. In all managerial theories focus is solely on utility maximization and discretion of managers. In contrast, the behavioural theory is more comprehensive as the Firm is considered to be a coalition of groups (stockholders, managers, workers, consumers and suppliers) with conflicting interests. It further convincingly elaborates on the process of conflict resolution.Still, for being considered as part of microeconomic theory, this theory needs further elaboration. The determination of equilibrium output and price and concept of industry equilibrium is not explained in the behavioural theory.

 

Few important sources to learn more about Organisational Goals- Overview, Cyert and

March’s Behavioural model are as follows:

  • .Koutsoyiannis A. (2003), Modern Microeconomics, 2nd Revised edition edition, Palgrave Macmillan U.K
  • Pindyck Robert S., Rubinfeld Daniel and Mehta Prem L. (2009), Microeconomics, Pearson Education.
  • Cyert, Richard; March, James G. (1963). A Behavioral Theory of the Firm, Wiley-Blackwell
  • Simon Herbert A. (1955), A Behavioral Model of Rational Choice, The Quarterly Journal of Economics, Vol. 69, No. 1 , pp. 99-118.)