Behavioral Theory of the Firm Flashcards
Coalitions vs. Routines
1) Coalitions & Routines
▪ View of organizations as a coalition of individuals some of which are organized into subcoalitions (e.g. managers, workers, stockholders, suppliers, customers)
▪ Individuals pursue different interests leading to goal conflicts
▪ Room for negotiation and other means of organizational politics
Standardized Operating Procedures (Routines)
▪ Rule-based behaviour (stable, recurring pattern of activities), e.g. investment decision routines, market research routines, etc.
▪ Exploits the wisdom of experience and gives stability to the organization
▪ Reduces the need for foresight and perceived uncertainty
▪ Increases the efficiency of decision making processes
▪ Economizes on decision makers’ time and attention
Basic Idea by March & Cyert:
• theory of decision-making
o basis: observations of the procedures by which firms make decisions
• supplementing the study of market factors with an examination of the internal operations of the firm
• studying the effects of organizational structure and conventional practice on the development of goals, expectations and choices
Contrast to NIE
• the Behavioral Theory says we need to look at on particular institution in greater detail and that one institution we want to explore in greater detail is the firm
• draws not on law, but on the field of psycology
→ EFFORT TO UNDERSTAND THE ACTUAL PROCESS OF DECISION-MAKING WITHIN A FIRM
Satisficing
Organizations do not seek to maximize → seek to
“satisfice”, i.e. to achieve outcome that are not optimal
but judged acceptable by decision makers
Response to complexity/uncertainty and need to balance multiple, conflicting goals emerging from complex negotiations among different parties within coalition (production, inventory, sales, market-share, profit goals)
Quasi-Resolution of Conflict
1) Quasi-Resolution of Conflict
A simple resolution of goal conflicts (profit/sales/market share/inventory/production goal) is difficult given the important trade-offs among goals:
▪ Specialization means allocating conflicting goals to different subunits, which then only focus on reaching these specific goals
→ success dependent on consistency of the generated decisions with each other and demands of external environment. Consistency thereby is facilitated by acceptable-level decision rules (organizations use acceptable-level goals and select the first alternative they see, that meets the goals) and sequential attention to goals
▪ Sequential attention to conflicting goals, i.e. focusing on different goals at different points in time
Organizational search & Search types -> Figure by Henry Greve
• Describes the distinguish between 3 key processes:
o performance evaluation, organizational search and decision making
• Performance Evaluation: Comparing of performance and aspiration level
o If an organization doesn’t manage to achieve the aspiration level, then there is a performance gap. The greater the distance from the aspired level the higher is the willingness to take risks
o The more an organization is away from their performance target from the aspiration level, the more they will invest in problematic search
o When the actual performance exceeds the aspiration level then an organization will be able to accumulate resources known as slack. Slack search would be motivated by the ambition to find the best possible use for these uncommitted resources (e. g. staff members)
• the higher the tendency for problemistic search/slack search, the higher/greater the tendency/willingness to invest in research and development
o increasing the solution stock, the set of options, the set of new products, product features, services etc.
▪ the solution stock is generated by the organization’s own solutions and by the environment
▪ the solution stock will inform the final decision making (e.g. launch a new product to solve a problem)
• decision making is influenced by the solution stock and the level of risk tolerance
Search Types
➢ Proposition 1: Problemistic Search
Organizations intensify their innovative search efforts, when their performance
relative to aspirations decreases.
➢ Proposition 2: Slack Search
Organizations intensify their innovative search efforts, when levels of slack (excess
resources) increase.
➢ Proposition 3: Threat-Rigidity Hypothesis
Organizations engage in (risky) innovative search in response to performance
shortfalls, only when their immediate survival is not threatened.
Aspirations
2) Aspirations
1. Step: Identifying meaningful goal variables (e.g. profit, market share)
→ Goals are affected by the composition of the organizational coalition, by organizational division of labor in decision making, problems facing the organization (& goals change as new participants enter or old ones leave the coalition)
2. Step: Defining aspiration level with regards to goal variable, i.e. lowest level of goal attainment deemed satisfactory by decision makers (e.g. min. 10 percent return on assets)
→ aspiration level is the weighted function of an organization’s past goals, past performance and past performance of comparable organizations
Aspiration Types
▪ Historical aspirations: set based on past outcomes achieved by organization
▪ Social aspirations: set based on past outcomes achieved by other comparable organizations
→ Satisficing: requires achieving the aspiration level for all goal variables
(Organizational) Search
3) Search
“Alternatives to the current set of activities do not suddenly appear on the decisionmaker’s desk, they have to be generated through a process of searching.”
→ Failure to meet performance objectives triggers a process of search (for new products and processes, for new organizational structures, for better CEOs or optimal alliance partners)
Search Activities can be Performed by Multiple Actors
➢ Top management legitimates, finances and coordinates search activities
➢ Departments, committees or external service providers then conduct search activities
→ Organizational Search: yields information about alternatives and triggers organizational adaptation
→ Intensity and success of search activity is affected by the extent of goal achievement and the amount of organizational slack
Uncertainty Avoidance
2) Uncertainty Avoidance
Decision makers prefer to avoid uncertainty and thus mechanisms are needed to create that sense of certainty:
▪ Feedback-react decision procedures: Reliance on short-run feedback (firefighting approach) rather than long-run foresight to reduce the sense of uncertainty, i.e. they solve pressing problems as they arise rather than developing long-run strategies
→“fire department” organization
▪ Negotiated environment: Reliance on established industry-wide best practices and internal planning, i.e. they avoid the requirement to anticipate future reactions of their environment by arranging a negotiated environment
Problemistic Search
3) Problemistic Search
▪ Search is motivated: stimulated by a problem (failure to satisfy goals) and directed towards finding a solution
▪ Search is simple-minded: search occurs in the immediate neighbourhood of the problem symptom (e.g. department of the failure) → when local search failed to deliver, the search is broadened and continued in organizationally vulnerable areas (myopia of organizational search): Then the current alternative either absorbing slack (i.e. uncommitted resources) or renegotiating the basic coalition agreement to the
disadvantage of the weaker members of the coalition
▪ Search is biased: shaped by prior experience and training of members, unresolved internal conflicts and power differentials and certain options are thus ignored
Organizational Learning
4) Organizational Learning
Learning as adaptation over time: organizations change their goals, shift their attention and revise their procedures for search as a function of their experience
▪ Adaptation of goals: triggered by own past goals, own past experience with goals, and experience of comparable others with goals
→ goals/aspiration level will be modified over time
▪ Adaptation of attention rules: long-run shift towards goal variables and reference groups which show satisfactory results
→ attention focus changes over time
▪ Adaptation of search rules: when proximal search fails to yield satisfactory solutions to the performance problem, we broaden our search
→ when an organization discovers (fails to find) a solution to a problem by searching in a particular way, it will be more (less) likely to search in that way in future problems of the same type
