More Behavioural Theory of The Firm

More Behavioural Theory of The Firm

Behavioural Theory of the Firm

Perhaps the most significant contribution so far to the development of a Behavioural theory of the firm is the volume A Behavioural Theory of the Firm by Richard Cyert and James March. The focus of their analysis is on the organizational decision-making process. They develop four sub theories :

A theory of organizational goals that shows how they are formed and altered, and how they influence organizational Behaviour.

2 A theory of expectations that explains how organizations search for information and gather it.

3 A theory of choice that shows how organizations select alternatives and choose among them.

4 A theory of control to explain the implementation of decisions.

After the firm is conceived as an organization, the next logical step is to analyze its relations with the social environment. Papandreou, in a comprehensive survey of the theory of the firm, called attention to the fact that, "Both the goals toward which the firm strive and the manner in which they are attained are subject to powerful and all-pervasive influences from outside the firm." These influences go beyond competition. They include "the unconscious influence provided by the mores, folklore, customs, institutions, social ideas, and myths of a society which lay the foundation for formal organizations.

Neither the economic theory of the firm nor organization theory has much to say about the influence on corporate Behaviour of noneconomic forces in the environment of business. The company is conceived solely in economic terms in the economic theory of the firm, and therefore only its overt economic activities are of significance. We have seen, however, that the large company has a social and cultural role which can be analyzed quite apart from its economic role. The firm performs various social functions beyond producing goods and services, and it is subject to the constraints of environmental forces other than market competition. Organization theory does allow for noneconomic goals and functions of the company by conceiving of the company as an entity that adapts to its external environment. But it focuses on the internal environment of the enterprise and has little to say explicitly about how processes and conditions within the enterprise are influenced by external variables. What is needed, then, for a more comprehensive theory of the firm is a way to theoretically treat the external forces that impinge upon it and influence its Behaviour.

The focus of such an approach will be on the total enterprise rather than on particular parts of it or the relations of parts to each other. A Behavioural theory of the firm which focuses on environmental forces will take as given the market relations that are the chief concern of the economic theory of the firm and the integrative and coordinative activities within the firm that are dealt with in organization theory. It assumes that the firm has the kind of internal structure and leadership that are necessary for it to function effectively as a unit in the market and in society at large.

This assumption makes it possible to isolate the factors that determine the nature of the relationship of the firm with its external environment. It is reasonable to treat the firm in this way-as a collective unit-because it performs the function of all organizations of acting as an intermediary between external forces and the actions and Behavioural patterns of individuals, groups, and departments within it. From the environmental view-point, the chief function of the firm as an organizational entity is to perceive, organize, and implement the directions provided by these environmental forces so that it can perform its functions in accordance with the needs of society.

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