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Behavioural Theories of the firm

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Introduction

Behavioural Theories of the firm Harmeet Singh, 0390309, ME/January 2005/1 1.) Introduction:- The purpose of this report is to evaluate and analyze the salient points of behavioural theories of the firm and to compare and contrast the behavioural models with the management models of Baumol, Marris and Williamson. The traditional neo classical theory of the firm was seriously challenged by alternatives such as managerial and behavioural theories. 2.) Salient features in the behavioural theories of the firm:- Where the managerial theories go well beyond the simple notion of traditional theories of profit maximization, they however still cling to the idea that management endeavours to maximize something whether it is sales revenue, utility or firm's growth, the behavioural approach adopted by so called behaviouralists rejects the whole notion of maximization and favours a less strong goal of 'satisficing'. Behavioural theories emphasize the importance of attempting to understand the various factors that affect human behaviour in organizations. E.g. the group of studies conducted at the Hawthorne plant of the western electric company during the late 1920's and early 1930's where researchers monitored the productivity of six women who assembled electrical relays for several years under different working conditions. Cyert and March argued that the firm cannot be regarded as a monolith, because different individuals and groups within it have their own aspirations and conflicting interests, and that firm behaviour is the weighted outcome of these conflicts. ...read more.

Middle

The managerial models still cling to one or two objectives of the firm but the behavioural model believes that the firm has multiple objectives. The behavioural theories emphasize the importance of attempting to understand the various factors that affect the human behaviour, the managerial theories explain the factors in which the shareholders and management behave and the factors due to which the management and owners interest differs. The managers have discretion to use firm's resources in their own interests. Where the shareholders or owners are interested in maximizing the profit, the managers are more interested in maximising their utility which differs on behaviour of manager. Baumol's model of sales revenue maximization suggested that managers' interests are best served by maximising sales after achieving a minimum level of profit which satisfies shareholders. Hence the model has the criteria of satisfying level of profit for shareholders which is similar to behavioural model approach of satisfaction. Managers may wish to do this as it brings with it the benefits of growth, market share and status. Various studies have shown that a manager's income, prestige and aspirations are more closely linked to sales revenue than profit. In Cyert and March (1963), firms are adaptive organisms that cope with problems as they arise instead of maximizing any objective. The main criticism for Baumol's theory was that they believe in conventional cost and revenue functions and they ignore the rival behaviour in making day to day decisions. ...read more.

Conclusion

They bid a stock price that is less than the book value. The capital invested in the firm is not as productive as it ought to be, or could be if invested elsewhere. This is a takeover situation. The firm can be bought at a price less than the worth of the assets it represents. The firm will be bought because, with a change in management, capital can be made to be productive. Profits can be increased. Stock price can be improved. The directors have to secure their job by keeping enough money to grow and at the same time keeping enough money to give dividend to keep shareholders happy. 4.) Conclusion:- Where the traditional neo classical theory of the firm was seriously challenged by alternatives such as managerial and behavioural theories, the managerial theories go well beyond the simple notion of traditional theories of profit maximization but they however still cling to the idea that management endeavours to maximize something whether it is sales revenue, utility or firm's growth. The behavioural approach adopted by so called behaviouralists rejects the whole notion of maximization and favours a less strong goal of satisficing. The behavioural approach is a useful complement to the traditional & managerial approaches but not a substitute for that. The behavioural theories are more generic and realistic than the managerial theories. Each managerial theory tends to maximize one or two goals of the managers whereas the behavioural theories tend to satisfy multiple goals and to prevent conflicts and problems between different coalition groups. ...read more.

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