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Strategy and Organisation Chapter 8 Summary: Behavioural Theory of the Firm
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A detailed summary of chapter 8 of the book: Strategy and Organisation of Utrecht University
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Chapter 8: Behavioural theory of the firmIn standard micro economics it is assumed that firms are holistic entities
seeking to maximize their profits. Decision making is done under full
information and rational choices are made.
By contrast, the behavioural theory of the firm postulates the firm as a
coalition of participants, each with their own objectives. Behavioural
theory of the firm uses the concept of "bounded rationality" which
emphasises cognitive and informational limits to rationality.
The firm as a coalition of participants
In behavioural theory of the firm there is asymmetric information,
participants make contributions to the organization and participants
receive inducements of the organization. Each participant will continue to
participate only as long as the inducements offered are as great as or
greater than the contributions he is asked to make. Participants in the firm
are employees, investors, suppliers, distributors, consumers, etc.
Contributions made by employees include labour hours, intelligence,
skills. Inducements offered to employees include monetary payments as
well as non-monetary benefits.
In behavioural theory we assume that each employee has an aspiration
level concerning the rate of pay. She will be content and not start looking
for another job so long as the pay received is greater than or equal to that
aspiration level. If after some time there is a large enough gap between
the employee's aspiration level and the pay received, she will start looking
for another job.
In behavioural theory the labour market is not a market of perfect
competition. Differences in level of pay and other working conditions can
exist for long periods of time because workers cannot compare the
inducements offered and the contributions demanded by other firms. They
simply lack that information. In behavioural theory we assume that
consumers do not know exactly what prices are quoted by other
producers. A consumer continuous to buy from the same producer as long
as the price is less than or equal to his aspiration level and the quality is
higher than or equal to his aspiration level.
The groups of participants are often referred to as stakeholders. According
to behavioural theory a firm can survive only if its managers take care of
the interests of all stakeholders, not just the shareholders. In behavioural
theory there is competition between firms in the labour market, the
market for final products, the capital market and so on. However,
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