Satisfying Behavioral Theory | Herbert Simon, Cyert - March | Objectives of Business

    Alternative Objectives of Business: Satisfying Behavioral Theory

    Unlike managerial theories, behavioral theories view the company as engaged in non-maximizing behavior. A firm is made up of associations of different groups of people who form the stockholders, managers, employees, and others. 

    According to these theories, sub-optimal behavior arises due to uncertainty and conflicting goals of various groups of the company, like managers, supervisors, worker's shareholders, etc. The firm attempts to keep all of them happy by following a satisfying behavior. The stockholders are given satisfactory profits, the managers are provided a satisfactory remuneration, and the employees are provided a satisfactory salary and a good working environment. 

    Thus, while management theories emphasize the role of the management, behavioral theories believe that groups within the company influence the company's behavior. The objective of profit maximization does not seem to conflict with the satisfying behavior of the firm.

    Behavioral theories of objectives propose that firms aim at satisficing behavior, rather than maximization. 

    Here we would discuss two of the most important of such models, namely:
    1. Simon’s satisficing model 
    2. Cyert's and March's model

    Satisfying Behavioral Theory | Objectives of Business
    Satisfying Behavioral Theory | Objectives of Business

    Simon's 'Satisfying' Model

    Herbert Simon, a noble prize winner, had proposed an alternate theory of firm behavior. Herbert Simon’s research focused on decision-making in organizations, and his contribution to behavioral theories is renowned as “bounded rationality.” 

    According to his theory (Simon, 1956), firms do not aim at maximizing anything (profits, sales, etc.) due to imperfections in data and the incompatibility of interests of the various constituent of an organization. 

    According to his Satisficing Model, the biggest challenge before modern businesses is the lack of full information and uncertainty about the future. Because of this, firms have to incur costs in acquiring information in the present. In the face of both these aspects, the objective of maximizing either profit, or sales, or growth is not possible. Actually, they act as constraints to rational decision-making by any firm, because of which the firm has to function under “bounded rationality” and can only aim at attaining a satisfactory level of profit, sales, and growth. Instead, they set up for themselves some minimum standards of achievement, which they hope will assure the firm’s viability over a long period of time. 

    Simon has suggested that managers would set an aspiration level and then aim to achieve it. If their behavior or performance exceeds the aspiration level, the target is increased; if it fails to meet the aspired level, the target is brought down, and search behavior is adopted simultaneously to find the deviation in the behavior pattern from the aspiration level. The satisfying objective, in fact, is a multiple-goal, and it is very difficult to practice and achieve.

    This theory believes that the relevant information with the managers (decision-maker) is far from complete. The managers, due to the complexity of calculations, uncertainties of future, and imperfection of the data to be used for determining 'optimal' decisions, can not make really optimal decisions, but he is satisfied with something less. Thus this model is termed as 'satisfying' model.

    According to the satisficing model, the firm has to work under “bounded rationality” and can only aim at attaining a satisfactory level of profit, sales, and growth.


    Cyert and March Model

    The model developed by Cyert and March is a step ahead of Simon’s theory. It added that businesses also have to satisfy a variety of stakeholders who have different and conflicting goals apart from dealing with inadequate information and uncertainty.

    This theory considers the company as a multigoal, multi decision organizational coalition. Cyert and March suggested that a firm is an organizational coalition of different stakeholders. Such stakeholders would include shareholders, managers, workers, shareholders, supplies, customers, bankers, etc. employees, customers, financiers, government, and other social interest groups. 

    However, managers, workers, and shareholders are the main groups who influence the decision-making maximum. All of these groups have their own goals, so there is a need for political compromise in establishing the goals of the firm. Each group must settle for less than it would ideally want to have. Shareholders must settle for less than maximum profits, managers for less than maximum utility, and so on. 
    ...measure companies progress towards...all stakeholders... customers, clients...teammates...shareholders...society- Bank of America, CEO

    A firm cannot have a single objective and has to aim at a multi-dimensional goal. In other words, firms need to have multi goals and multi decision-making orientation. However, in order to achieve such a multiplicity of goals and decisions, firms have to face many conflicts and have to develop means to resolve them. 

    Thus, according to Cyert and March, a firm’s behavior is ‘satisficing behavior,’ i.e., it aims to satisfy all stakeholders. To meet this objective, managers form an aspiration level on the basis of their past experience, past performance of the firm, as well as of other similar firms, and future expectations. These aspiration levels are revised and modified on the basis of achievements and changes in the business environment. 

    Cyert and March further suggest that the excess profit that firms accumulate during an industrial boom is used to resolve conflicting demands monetarily by the following means:

    1. Making cash payments in the form of bonuses, dividends, etc.
    2. Side payments in the form of general expenditure to improve the overall work atmosphere.
    3. Slack payments bring in a sense of happiness and satisfaction to the stakeholders.

    The goals of various groups continuously change with the passage of time, depending upon past achievements, changes in the environment. The managers form an aspiration level of the firm by combining the below-cited goals to reconcile the stakeholders' conflicting goals.

    The main goals of the company are:
    1. Production goal, 
    2. Sales goal, 
    3. Profit goal, 
    4. Market share goal
    5. Inventory goal. 

    But as the company's number of goals increases, the decision-making process becomes increasingly complex, and therefore, the quality of the decisions decreases. These goals and 'aspiration level ' are set on the basis of the past experiences of the managers and the assessment of future market conditions. The aspiration levels are modified and revised based on achievements and changing business environment.

    Comparison between Simon and Cyert - March Satisfying Behavior

    1. The Cyert March hypothesis has been criticized on the same lines as Simon’s model, that it lacks objectivity and cannot be used to predict a firm’s future direction. It fails to recognize the interdependence of firms, and it may not even work under dynamic business environments.
    2. Cyert- March Hypothesis is an extension of Simon's hypothesis of firms 'satisfying behavior' or satisficing behavior. 
    3. Simon had argued that the business world is full of uncertainty; accurate and adequate data are not easily and readily available; where data are available, managers have little time and ability to process them; managers work under several constraints. Under such conditions, the firms can't act in terms of rationality proposed under the profit maximization hypothesis and also that the firms do not seek to maximize sales, growth, or profit. Instead, they try to achieve a 'satisfactory profit' or 'satisfactory growth,' and so on. This behavior of firms is termed as ' satisfaction behavior.'
    4. Cyert and march added further that apart from dealing with an uncertain business world, managers have to satisfy a variety of groups of people- managerial staff, labor, shareholders, customers, financiers, input suppliers, accountants, lawyers, authorities, bankers, etc. All these groups have their own interest in the firms - often conflicting. The manager's responsibility is to 'satisfy' them all. Thus, according to the Cyert- march, a firm's behavior is satisfying behavior. The 'satisfying behavior' implies satisfying various interest groups by sacrificing the firm's interest or objective. The underlying assumption of 'satisfying behavior' is that a firm is an association of different groups connected together with various activities of the firms, e.g., shareholders, managers, workers, input suppliers, customers, bankers, tax authorities, and so on. All these groups have some kind of experience - high and low - from the firm, and the firm tries to satisfy all of them in one way or another by sacrificing some of its interest.

    Criticisms of Behavioral Theory

    The behavioral theory has been criticized for the following reasons:

    1. Though the behavioral theory deals realistically with the firm's activity, it fails to explain the behavior of firms under dynamic conditions in the long run. 
    2. It cannot be used to predict precisely the future course of firm's activities, 
    3. The behavioral theory does not deal with the equilibrium of the industry.
    4. Like other alternative hypotheses, this theory also fails to deal with the firms' interdependence and its on firm's behavior.

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