Customer Reviews

Behavioral Theory of the Firm

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Richard M. Cyert is Professor of Economics and Management at Carnegie Mellon University. James G. March is Professor of Management and Professor of Political Science and Sociology at Stanford University. This book was originally published in 1963 and consists of 9 chapters with a short introduction and preface. This 2nd edition published in 1992 adds an epilogue.

The authors start clearly in the Introduction: "This book is about the business firm and the way it makes economic decisions. We propose to make detailed observations and to use these observations as a basis for a theory of decision making within business organizations." In the second chapter Cyert and March introduce some of the problems with the original theory of the firm and organization theory and introduce their approach to explain the behaviour of business firms with respect to economic decisions.

The authors provide some partial answers in the 3 following chapters in which they consider organizational goals (chapter 3), organizational expectations (chapter 4), organizational choice and (to a limited extent) organizational control (chapter 5). This section is concluded with a skeleton of their basic theory of organizational choice and control upon which one can develop an explicit model of organizational decision making. The first model of price and output is already given in chapter 5 and in chapter 6 Cyert and March introduce a model of price setting in a department store.

Chapter 7 introduces a summary of the basic concepts in the behavioural theory of the firm which is based on 2 major organizing devices. First, a set of exhaustive variable categories (goals, expectations, choice) and, second, a set of relational concepts (quasi resolution of conflict, uncertainty avoidance, problemistic search and organizational learning). "We think that these concepts will prove useful in dealing with organizational decision making as it is reflectd in business firms."

Chapter 8 serves as a concluding chapter and explains that the theory of the firm serves four major purposes within the framework of economic theory: (1) a method for decision making; (2) a prescription for decision making; (3) a description of behaviour of certain aggregates of firms; and (4) a tool for deciding among some alternative economic policies. Each of these purposes are discussed in detail.

In the final chapter Cyert and March attempt to place the preceding chapters into a contract of developments subsequent to the original publication. "In the first section, we describe the main ideas on which the book was built, key themes in behavioural studies of the firm. In the second section, we discuss developments in the economic analysis of the firm since 1963 ... In the third section, we discuss developments in the behavioural study of decision making in organizations."

This was a monumental piece of research in the early 1960s and, yes, the authors admit "that they may not have it all quite right. Yet.", but is still pretty much up to date especially with the adjustments made for the 1992-edition. It provides great insights into decision making within business firms. I have read this book with great interest and enjoyment. I can recommend this book all managers and people interested in decision making and organizational behaviour.

We start with the simple conception that an organizational decision is the execution of a choice made in terms of objectives from among a set of alternatives on the basis of available information. This leads to the examination of how orgnizational objectives are formed, how strategies are evolved, and how decisions are reached within those strategies." (Pg 19)

Major subtheories for a behavioral theory of the firm: theories of organizational goals, org expectations, org choice and org. control.

Conception of organization: "It is a coalition of individuals, some of them organized into subcoalitions."... " any theory of organizational goals must deal succesfully with the obvious potential for internal goal conflict inherent in a colalition of diverse individuals and groups" (Pg 27)

The goal formation process for a coalition:
1.- bargaining process by which the composition and general terms of the coalition are fixed
2.- the internal organizational proceses of control by which objectives are stabilized and elaborated
3.- the proecess of adjustement to esperience by which coalition agreements are altered in responseto environmental changes.

" We have argued that the goals of a business firm are a series of more or less independent constraints imposed on the organization through a process of bargaining among potential coalition members and elaborated over time in response to short time pressures. Goals arise in such a form because the firm is, in fact, a coalition of participants with disparate demands, changing foci of attention, and limited ability to attend to all organization problems simultaneously" (pg 43)