The goals of the firm are set ultimately by the top management. ‘There are five main goals of the firm: (a) production goal (b) Inventory goal (c) sales goal (d) share of the market goal (e) profit goal.
The production goal originates from the production department. The main goal of this department is the smooth running of the production process. Production should be distributed over time, irrespective of possible seasonal fluctuations of demand, so as to avoid excess capacity and layoff workers at some periods and overworking the plant and resorting to rush recruitment of worker in another.
The inventory goal originates from the inventory department which wants an adequate stock of output for the customers, while the production department requires adequate stocks of raw materials etc. for c smooth flow of the output process.
The sales goal and share of the market goal originate from the sales department. This department set the ‘sales strategy’ such as advertising campaigns, the market research programmes and other sales promoting activities.
The profit goal is set by the top management so as to satisfy the demands of share holder’s and the expectations of bankers and other finance institutions and also to create funds with which they can accomplish their own goals and projects.
What we discuss earlier about the goals; they are dynamic and can change overtime depending on the past history of the firm, as well as on the conditions of the external environment and on the changes of aspiration of groups within the organization. The goals of the firm, take the form of aspiration levels rather than strict maximizing constraints. The firm in the behavioral theories seeks to satisfice, which is, to attain a ‘satisfactory’ overall performance, as defined by the set aspiration goals, rather than maximize profits, sales or other magnitudes. The firm is a satisficing organization rather than a maximizing entrepreneur.
The top management is responsible for the coordination of the activities of the various members of the firm, wishes to attain a ‘satisfactory’ level of production, to attain a ‘satisfactory’ share of the market, to earn a ‘satisfactory’ level of profit, to divert a ‘satisfactory’ percentage of their total receipts to research and development or to advertising, to acquire a ‘satisfactory’ public image, and so on. However, it is not clear in the behavioral theories what is a satisfactory and what an unsatisfactory attainment is.
Means for the Resolution of the Conflict
The top management can use various means to resolve the conflict within the firm. The most important means for resolution for the conflict are money payments (workers and employees are getting their wages and salaries, shareholder’s get their dividends, and so on.), side payments policy commitments by top management, slack payments. Origanizational slack consists in payment to members of the coalition in excess of what is required to maintain the organization for e.g. Manager’s may be paid higher salaries and other prerequisites, shareholder’s may be paid higher dividends than the minimum required to satisfy their demands, customers may be given discounts etc. The existence of slack has a stabilizing effect of the performance of the firm. According to Cyert and March stabilizing effect of the slack can be tested empirically by observing the behavior of costs in bad and good business periods. Top management also uses sequential attention to demand depending on the urgency of the different demand and decentralization of decision making for the resolution of the conflict.
The Process of Decision Making
The goals of the firm, as set by the top management and approved by the board of directors, have to be implemented by decisions. Decisions are taken at various levels of administration. We will examine two levels of decision making:
a. Decision at the top level management and
b. Decisions at lower levels of administration
The decision-making process at the level of top management: Given the goals of the firm and the resources available, the allocation of there resources to the various departments is decided by the top management and it is implemented by the tool like budget. The heads of sections present demand (projects) to the top management and by bargaining they attempt to secure as large as possible share from the firm’s total budget. Two crude criteria are set by top management for the evaluation of any particular proposal. The first is a budgetary criterion: are there funds available for the realization of the proposed project? The second is an ‘improvement criterion’ does the project being proposed improve the existing situation beyond doubt? If these two criterions are satisfied the top management may approve the project without further consideration. In the decision process, a search is made whenever problems are is identified and directed to the particular area in which some problems are is identified and directed to the particular area in which some problems appear. Four points are stressed by the behavioral theories regarding the search activity: search is problem oriented, it is not costless, it may be biased due to ‘position bias’, and it flow within the organization is not always smooth.
Decisions at lower level of management (administration): The decision process at lower levels of administration involves various degrees of freedom of action. Once the budget-share is allocated, each manager has considerable discretion in spending the budget allocated to his department. Generally, all the routine, day-to-day decisions are simplified by delegation of authority within each section and by simple rules which form the ‘blue print’ of the organization. The staffs learn by the mistakes ad success of the past. The top management uses controlling devices for the lower levels to various activities like employment of supervisors etc.
Uncertainty and the Environment of the Firm
Cyert and March distinguishes two types of uncertainties like market uncertainty and Uncertainty of competitor’s reactions. Market uncertainty (inherent characteristics of market) means possible changes in customer’s preferences or changes in the techniques of production. This form of uncertainty can partly be avoided by search activity and information gathering. The behavioral theory postulates the view that firm considers only short run ignores the long-run consequences.
Another uncertainty arises from competitor’s actions and reactions due to oligopolistic interdependence. According to Cyert and March such ‘negotiated environment’ can be solved by assuming collusive action of the firms.
Critical Evaluation of Behavioural Theory
The behavioral theory has contributed a lot for the further development of the theory of the firm. The main contributions of the theory are: Firstly, the insight into the process of goal formation and the internal resource allocation, and Secondly, the systematic analysis of the stabilizing role of ‘slack’ on the activity of the firm which enables the firm to maintain its aspiration levels during fluctuating environment. The behavioral theory has however been criticized on the following grounds firstly though the behavioral theory deals realistically with the search activity of the firm, it cannot explain the firm’s behavior under dynamic conditions in the long run. Secondly, it cannot be used to predict exactly the future course of firm’s activities. Thirdly, this theory does not deal with equilibrium of industry. Fourthly, no exact predictions can be derived from the postulations of the behavioral theory. Fifthly, like other alternative theories, this theory also fails to deal with interdependence and interaction of the firms, especially when new entry takes place in industry.
This theory is based on only four actual case studies and two experimental studies. We cannot ignore its apparition to a theory of the firm for decision-making process and the allocation of resources in large complex organizations.
Conclusion
There exist wide differences of opinion regarding goals and objectives of the firm. It is indeed true that profit maximizing or value maximizing are not the only objectives firms seek to pursue. It is observed that firms do not pursue just s single objective, but most of them, big or small pursue multiple objectives. The economists have postulated a numbers of alternative objectives or goals. These objectives include both short-run and long-run objectives. Fair return of capital, long-run survival, obtaining large market share, building an industrial empire, profit maximization, wealth maximization, sales maximization, managerial discretion and soon. Different firms may pursue different objectives at different times. More or less, a wide range of business decisions are, however, made on the basis of the goals of profit maximization because profit maximization hypothesis is a time-honored and easier to handle. The empirical evidence against this hypothesis is not unambiguous and strong enough to replace this hypothesis. More importantly, profit maximization hypothesis has a greater explanatory and predictive power than any of the alternative hypotheses. Therefore, it still forms the basis of firm’s behavior.
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