a behavioral theory of the firm (cyert and march, 1963)
DESCRIPTION
This is one of the most cited books in the space of management sciences. Published in 1963, the book has shaped the study of modern day firms and has introduced the concepts such as 'problemistic search', 'organizational slack', 'standard operating procedures' and 'quasi-resolution of conflicts', amongst other very important models of organizational study.TRANSCRIPT
The Behavioral Theory of The
Firm (1963)
Richard M. Cyert and James G March
Carnegie Institute of Technology
Citations: 14,451
Richard Michael Cyert (1921- 1998)
• Education
• B.S. from the University of Minnesota
• Ph. D in economics from Columbia
University
• Career
• Taught statistics, accounting and
industrial administration at Carnegie
Institute of Technology (1948- 1962)
• Sixth president of Carnegie Mellon
University (1972- 1990)
About Carnegie School (1950s, 60s)
• Influenced by setting up of Graduate
School of Industrial Administration (GSIA)
at CMU promoting inter-disciplinary
research
• Freshwater school proposing that
macroeconomics has to be dynamic,
quantitative, and based on how
individuals and institutions make
decisions under uncertainty.
• Research on organizational behavior,
decision sciences and management
sciences, with application of psychology
• Key proponents being Herbert Simon,
James March and Richard Cyert
• Later influenced the work of Williamson
James Gardner March (1928)
• Education
• B.A. from the University of Wisconsin
• M.A. and Ph.D. from Yale University
• Career
• Carnegie Institute of Technology
(1953- 1970)
• Stanford University (1970 onwards)
• Written seven books of poetry and
made a film (called “Don Quixote’s
Lessons for Leadership”).
• Notable academic collaboration with
• Herbert Simon, Organizational (1958)
• Richard Cyert, Behavioral Theory
(1963)
• Olsen and Cohen, Garbage Can
model (1972)
A polymath whose career has encompassed numerous disciplines … he has
taught courses on subjects as diverse as organizational psychology, behavioral
economics, leadership, rules for killing people, friendship, decision-making,
models in social science, revolutions, computer simulation and statistics
- Harvard Business Review
Theory of the Firm and research
commitments • Must offers answers to
• Existence – why do firms emerge, why are not all transactions in the economy
mediated over the market?
• Boundaries – why is the boundary between firms and the market located exactly
there as to size and output variety? Which transactions are performed internally and
which are negotiated on the market?
• Organization – why are firms structured in such a specific way, for example as to
hierarchy or decentralization? What is the interplay of formal and informal
relationships?
• Heterogeneity of firm actions/performances – what drives different actions and
performances of firms?
• Major research commitments of this work
• Focus on small number of key economic decisions made by the firm
• Develop process oriented model of the firm
• Link models of the firm as closely as possible to empirical observations
• Develop a theory with generality beyond the specific firm studies
Key ideas
• Challenged the central tenets of the
existing theory of the firm:
• Profit maximization
• Perfect knowledge (equilibrium position)
• Ignores the decision making process of
internal resource allocation
• Modern firms have some influence over
market because of the way they are
internally organized
• Organizations are coalitions of people
with independent goals
• Organizational goals are never fully
resolved
• Organization slack
• Problemistic search
• Boundedness of managerial behavior
(satisficing)
• Firm as an adaptive system
• Need for standard operating procedures,
with both generic and specific rules
• Quasi-resolution of conflicts
• Uncertainty avoidance
• Problemistic search
• Organizational learning
Organizational goals
• Organizational goals could be defined
either by the goals of an entrepreneur, or
as consensual goals.
• Ways of determining objectives in a
coalition
• Formulation through bargaining
• Stabilization and elaboration through mutual
control systems
• Adjustment to experience
• Organizational slack
• Difference between total resources and
necessary payment, due to information
asymmetry and slow adaptation
• Plays a stabilizing and adaptive role
• Goals are a series of more of less
independent constraints imposed on
organization through a process of
bargaining among potential coalition
members and elaborated over time in
response to short-run pressures.
• Firm as a coalition of people
• Comprises of managers, workers, suppliers,
and investors, among others, not a peak
coordinator
• Participating in goal setting and decision
making
• Key goals are: production; inventory; market
share; sales and profits
• Difference in priorities leads to goal conflict
• Conflicts are never fully resolved in an
organization
• All goals must be satisfied, and hence need
for priority
Organizational expectations
• Expectations aren’t independent of
hopes, wishes and internal bargaining
needs of subunits
• Coalition doesn’t require completeness or
consistency in information on
consequences of decisions
• Biases have both unconscious and
unconscious biases
• Problemistic search
• Gets triggered at specific instances
• Search is much more intensive when
organizational slack is small than when it
is large
• Not only organizations look for
alternatives, but alternatives also look for
organizations
• Organizations use simple decision criteria
• Communication includes considerable biasing,
but also considerable bias correction
Organizational choice
• Partial model of organizational choices
• Forecast competitor's behavior
• Forecast demand
• Estimate costs
• Simplify objectives
• Evaluate plan
• Re-examine cost
• Re-examine demand
• Re-examine objectives
• Select alternatives
• Firm in an adaptive system
• Each combination of external shocks and
internal decision variables changes the
state of the firm
• Better decision rules are retained, and
others are filtered out
• Standard operating procedure (SOPs) as
learned set of behavioral rules . Results
of long-run adaptive process through
which firms learn
• General choice procedure:
• Avoid uncertainty (rather than forecasting
the environment)
• Maintain the rules and
• Use simple rules;
• Specific SOPs types
• Task performance rules
• Continuing records and reports
• Information- handling rules
• Plans
• In short-run SOPs dominate decision
making
Major relational concepts
• Quasi-resolution of conflicts
• Goals are independent aspiration- level
constraints
• Local rationality
• Weaker rules of consistency
• Sequential attention to goals
• Uncertainty avoidance
• Adoption of decision rules
• Solve pressing problems, than develop long
range strategies (avoid planning)
• Rearranging a negotiated environment
(internal and external)
• Feedback- react decision procedure
• Problemistic search
• Akin to decision making, search is problem-
directed
• Motivated (identified when firm fails to
satisfy one or more of its goals)
• Simple minded (search in neighborhood of
problem symptom, and in neighborhood of
current alternatives)
• Biased (reflecting special training,
interaction of hopes and expectations, and
communication bias)
• Organizational learning
• Adaptation of goal
• Adaptation of attention rules
• Adaptation of search rules