Argote, L. & Greve. H.R. (2007) A Behavioral Theory of the Firm – 40 years and counting: Introduction and impact

Question 1

GOAL

Answer 1

Discuss the impact of the Cyert and March paper

A Behavioral Theory of the Firm (the book) has not generated a behavioral theory of the firm (a theory). However, It remains one of the most influential management books of all time. It pointed critique of the (economic) theory of the firm.

Question 2

Bounded rationality

Answer 2

the way that humans make decisions that departs from perfect economic rationality, because our rationality is limited by our thinking capacity, the information that is available to us, and time. Instead of making the ‘best’ choices, we often make choices that are satisfactory.

Question 3

A behavioural theory of the firm has four commitments:

Answer 3

1) Focus on a small number of key economic decisions
> Started with price and output, later included internal allocation and market strategy decisions
2) Develop process-oriented models of the firm
> Decisions of the firm are the result of a well-defined sequence of behaviours in that firm
3) Link models of the firm as closely to empirical observations
> Models are explicitly based on observations and subject to empirical testing against behaviours of identifiable firms
4) Develop a theory with generality beyond the specific firms studied
> A set of summary concepts and relations that could be used to understand the behaviour of a variety of organizations in different situations.

While 1 and 4 are alike for economic theories, 2 and 3 departed from the economic theories. But these became well known and respected rules and were before their time.
- Organizational theory should not oversimplify
o E.g. replacing a process model with a maximization assumption

Question 4

Its foundation for theory, defines a few major concepts:

Answer 4

• Bounded rationality was known from earlier work (Simon 1952, March and Simon 1958), but its implications for organizational decision making was developed more fully in A Behavioral Theory of the Firm.
• Problemistic search started from the model of individual motivation in March and Simon (1958) but became a model of organizational reactions to low performance.
• The theory of the dominant coalition explains how the organization can have goals despite the different interests of its participants.
• The theory of standard operating procedures and routine behavior providing organizational regularity made organizational routines a central concept of organizational theory.
• The theory of slack search and innovation is an account of why organizations sometimes develop new products, technologies, or practices even when they are not solving specific problems, which complements the theory of problemistic search.

Question 5

Used in concepts such as:

Answer 5

• Institutional theory, how the firm adapts to a symbolic environment of cognitions and expectations and a regulatory environment of rules and sanctions.
  > Diffusion of innovations, response to uncertainty is mimetic isomorphism (copying others)
• Population ecology, the effects of legitimacy and competition on the evolution of industries and the life chances of individual firms, and newer treatments also examine how attempts to change firms in response to competition affect firm survival and performance.
  > embraces concepts such as satisficing, competence traps, and myopic search
• Organizational economics, a growing subfield of economic theory that has a strong interest in explaining the boundaries of the firm (Coase 1937, Williamson 1975), but has also expanded into exploration of a number of related issues on organizational structure, coordination, decision rights, and internal behaviors such as influence activities and politics.

Question 6

Its traditions:

Answer 6

• Evolutionary economics, examines organizational and industrial evolution processes based on a model of firms as routine-based agents that change incrementally through search rather than as a result of optimization
  > Much attention is spent on the issue of how organizations come to develop heterogeneous sets of capabilities and sustain (or modify) them over time. The theory assumes bounded rationality in decision making and views routines as a stabilizing factor in firm behaviors and search processes as a source of changes
• Organizational learning theory:
  o Intraorganizational, learning by groups, departments, or units
  o Organizational, learning at the level of the total organization
  o Interorganizational, routes, mechanisms, and effects of learning from other organizations
  > To examine both the nature of the learning processes involved and their potential for producing outcomes that are unfavorable to the organization. And the extent to which the learning processes have biases that harm individual organizations or organizational populations

Question 7

Behavioral hypotheses:

Answer 7

• Routines, The role of routines in explaining the development of organizational capabilities can be seen through multiple routes.
• Theory of aspiration levels, performance feedback, and problemistic search, could not be proven due to methodological constraints however is now more active
• Slack search, proposes that organizational slack has an inverted U-shaped relation with organizational innovativeness because excess amounts of slack reduce the managerial discipline needed to convert innovation efforts into product launches