Question

can you please explain to me in simplest way that i can understand the cyert and march behaviour theory. kindly give an example for it.

thank you so much.

Answer 1

Behavioural Theory of Cyert and March!

Cyert and March have put forth a systematic behavioural theory of the firm. In a modem large multiproduct firm, ownership is separate from management. Here the firm is not considered as a single entity with a single goal of profit maximisation by a single decision-maker, called the entrepreneur. Instead, Cyert and March regard the modem business firm as a group of individuals who are engaged in the decision-making process relating to its internal structure having multiple goals.

They deal not only with the internal organisation of the firm but also with the problem of uncertainty. They reject the assumption of certainty in the neo-classical theory of the firm. They emphasise that the modem busi­ness firm is so complex that individuals within it have limited information and imperfect foresight with respect to both internal and external developments. The following are the key elements of the model.

Organisational Goals:

Cyert and March regard the modem business firm as a complex organisation in which the deci­sion-making process should be analysed in variables that affect organisational goals, expectations, and choices. They look at the firm as an organisational coalition of managers, workers, shareholders, suppliers, customers, and so on.

Looked at from this angle, the firm can be supposed to have five different goals:

Production, inventory, sales, market share and profit goals.

1. Production Goal:

The production goal represents in large part the demand of those coalition members who are connected with production. It reflects pressures towards such things as stable employment, ease of scheduling, development of acceptable cost performance and growth. This goal is related to output decisions.

2. Inventory Goal:

The inventory goal represents the demands of coalition members who are connected with inventory. It is affected by pressures on the inventory from salesmen and customers. This goal is related to decisions in output and sales areas.

3. Sales Goal:

The sales goal aims at meeting the demand of coalition members connected with sales, who regard sales necessary for the stability of the organisation.

4. Market-Share Goal:

The market-share goal is an alternative to the sales goal. It is related to the demands of sales management of the coalition who are primarily interested in the comparative success of the organisation and its growth. Like the sales goal, the market-share goal is related to sales decisions.

5. Profit Goal:

The profit goal is in terms of an aspiration level with respect to the money amount of profit. It may also be in the form of profit share or return on investment. Thus the profit goal is related to pricing and resource allocation decisions.

Cyert and March limit the number of goals to five because, according to them, to expand the list rapidly meets the point of diminishing returns. According to them, all goals must be satisfied because they are relevant to price, output and sales strategy decisions of the organisation.

“Although all goals must be satisfied in any organisation, there is an implicit order of priority which is reflected in the way search activity takes place ” If one of the goals is not met and the individual responsible for that is not satisfied, a search will be made for a means to meet that goal. The search will be quite narrow and the organisation will use rules-of-thumb to set the problem right. The rules-of -thumb are based on the past experience of the firm and the people within it.

Conflicting Goals:

The aspiration levels of the individuals within the firm which determine these goals, change over time as a result of organisational learning. Thus these goals are regarded as the product of a bargaining- learning process in the organisational coalition. But it is not essential that the different goals may be resolved amicably. There may be conflicts among these goals. The organisational coalition is thus a coalition of conflicting interests.

The conflicting interests can be reconciled by the distribution of ‘side payments’ to members of the coalition. Side payments may be in cash or kind, the latter being mostly in the form of ‘policy side payments’ i.e., the right to take part in the policy decisions of the organisation. But the actual amount of total side payments is not fixed for the coalition but depends upon the demand of the members and on the form of the coalition. Demands of coalition members equal actual side payments only in the long run. But the behavioural theory focuses on the short-run relation between side payments and demands and on the imperfections in factor markets.

In the short run, new demands are being constantly made and the goals of the organisation are continually adapted, to a greater or lesser extent, to take account of these demands. The demands of the members of the organisational coalition need not be mutually consistent. But all demands are not made simultaneously, and the organisation can remain viable by attending to demands in sequence. A problem will arise when the organisation is not able to accommodate the demands of its members even sequentially, because it lacks the resources to do so.

Satisficing Behaviour:

Besides side payments, the conflicting goals of the organisation are resolved by subjecting them to a constant review. This is because ‘aspiration levels’ of coalition members change with experience. In fact, the aspiration levels change with the process of satisficing. Each person in the organisation has a satisficing level for each of his goals.

If these levels are reached, they will not seek for more. But if they are not achieved, the aspiration levels are revised downwards. If they are exceeded, the aspiration levels are raised upwards. In both situations, the satisfactory levels of performance are changed accordingly.

Organisational Slack:

A coalition is sound and workable if payments made to various members of the coalition are adequate. For this, enough resources are needed to meet all demands of members. This is ordinarily not possible because disparity arises between the total resources available to the organisation and the total payments required to maintain the coalition.

This difference between total available resources and total necessary payments is called organisational slack, by Cyert and March. Slack consists in payments to members of the coalition iii excess of what is required to maintain the organisation.

Many forms of slack exist when the organisation operates under market imperfections. The share­holders may be paid dividends in excess of what is required to keep them within the organisation. The customers may be charged lower prices so that they may stick to the products of the firm.

The workers may be paid wages in excess of what is needed to keep them in the firm. The executives may be provided with services and personal luxuries more than what is required to keep them. All such excess payments are slack expenditures for the firm which every member of the coalition obtains from time to time.

Thus “slack is typically not zero”, according to Cyert and March. Rather, it is positive. Some members of the coalition ordinarily obtain a greater share of the slack than do others. In general, those members of the coalition who are full-time, tend to get more slack than the other members.

Organisational slack plays a constructive role. It keeps the coalition in existence. It enables the firm in maintaining itself under ‘crisis’ type situation and to adjust itself to changes in external environ­ment. The organisational slack serves as a cushion to absorb the shocks. Slack payments are increased during periods of flourishing business and decreased during periods of bad business. Thus organisa­tional slack plays both a stabilising and an adaptive role.

Decision-making Process:

The decision-making process in the Cyert-March model rests with the top management and the lower levels of administration. The top management sets the organisational goals and allocates the given resources to the various departments based on their share of the total budget of the firm.

The share of the budget depends on the bargaining power and the skill of each manager. The bargaining power is determined by the past performance of each department. In this process of allocation, the top manage­ment retains some funds to be allocated at its discretion at any time to any department.

The decision process at the lower levels provides various degrees of freedom of action to the administration. Once the budget share is allocated to each department, each manager has considerable discretion in spending the funds at his disposal. Decisions taken by managers are implemented by the lower level staff based on their experiences and the “blue print” rules laid down earlier.

The decision-making process also depends upon information’s and expectations formed within the organisation. Information is required to facilitate the decision-maker. Information is not a costless activity. Search activity is started whenever a problem arises because search helps to locate and collect information.

Information determines the aspirations (i.e., demands) of each department which, in turn, helps the top management in setting goals. Organisational expectations are related to the hopes and wishes of the decision-maker.

Given the information and expectations, the top management examines and decides upon the projects presented by the managers. It evaluates the projects on the basis of two criteria. The first is the budgetary constraint which is the availability of funds for the project. The second is an improvement criterion: Is the project better than the existing one? In making decisions, the top management follows the rule that leads to a better state in the future than it was in the past. The Cyert-March model of behaviourism is thus an adaptive rational system.

Implications of the Cyert-March Model for Price Behaviour:

Cyert and March developed a simplified model to illustrate the key processes at work in an oligopolistic firm when it makes its decisions on price, output, costs, profits, etc. In this model, each firm is assumed to have three sets of goals: for profits, production and sales, and three basic decisions to make on price, output and sales effort in each time period.

It takes into consideration the firm’s environment at the beginning of each period which reflects its past experience. Its aspiration levels are modified in the light of this experience, and organisational slack is permitted. Using multiple regression analysis, it was found that price was sensitive to factors influencing increases and decreases in the amount of organisational slack, to feasible reductions in expenditure on sales promotion and to changes in profit goals. Each firm was assumed to estimate its demand and production costs and choose its output level.

If this output level does not yield the aspired level of profits, it searches for ways to reduce costs, re-estimate demand and, if required, to lower its profit goal. If the firm is prepared to lower its profit goal, it will readily reduce its price. Thus price was found to be sensitive to factors affecting costs due to the close relationship between prices, costs and profits.

Criticisms:

The Cyert and March theory of the firm has been severely criticised on the following grounds:

1. Hawkins points out that “criticism of the behavioural approach is along the lines that it uses a sledgehammer to crack a walnut. Do we really need to construct mirror images of companies, virtually assembling the decision-making process brick by brick, in order to predict their behaviour? Would not simpler models suffice for the limited purposes we have in mind?”

2. Economists have questioned: ‘Whether it is a theory at all?’ It deals with particular cases, whereas a theory is expected to be a general approximation of the behaviour of firms. Its empirical base is too limited to provide the details of theorising. Hence it fails as a theory of the firm.

3. The behavioural theory relates to a duopoly firm and fails as the theory of market structures. “It does not explain the interdependence and interaction of firms, nor the way in which the interrelationship of firms leads to equilibrium of output and price at the industry level. Thus the conditions for the attainment of a stable equilibrium in the industry are not determined.”

4. The theory does not consider either the conditions of entry or the effects on the behaviour of existing films of a threat of potential entry by firms.

5. The behavioural theory explains the short-run behaviour of firms and ignores their long-run behaviour. Thus “it cannot explain the dynamic aspects of inventions and innovations which are related to the long-run.”

6. According to Koutsoyiannis, “No exact predictions can be derived from the postulates of the behavioural theory. The acceptance of satisficing behaviour renders practically the theory into a tauto­logical structure: Whatever the firms are observed to do can be rationalised on the lines of satisficing”.

7. The behavioural theory is based on the simulation approach which is a predictive technique. It simply predicts the behaviour of the firm but does not explain it.

Despite these criticisms, Hawkins opines, “Few would doubt that behavioural theories are among the most dramatic of the new approaches to the theory of the firm. What is dramatic is that they dispense with the assumption that firms aim to maximise anything, even utility.”

Conclusion:

Despite these criticisms, the behavioural theory of Cyert and March is an important contribution to the theory of the firm which brings into focus ‘multiple, changing and acceptable goals’ in managerial decision-making.