Setting business goals and understanding behaviour

Businesses are considered to operate in imperfectly competitive markets. As information is not complete, uncertainty prevails. This type of assumption about the firm is more realistic.

Each group within businesses, be it, owners, managers, workers, consumers, and suppliers will have different utility functions. Owners will seek to maximise profits, managers will seek better salaries, and workers will seek higher wages and better work conditions. Consumers will seek low prices, more variety, and quality.

Theoretically, the most important groups are considered to be managers, shareholders, and workers. How do the goals of a firm originate and what factors affect its success? Understanding human behaviour and having a keen sense of knowledge of the antecedents and consequences present in the environment and the associations assists in making feasible suggestions in the creation of goals to achieve a vision.

This brings us to behavioural theory. The most important feature is that it does not focus directly on the goals of a multi-product large firm rather it tries to explain the process of how these goals originate. According to Cyert and March, the goals of firms originate mainly because of the demands of alternate groups. These further depend on the availability of information, expectations, aspirations, and achievements of other groups in the same or other firms.

The basic dichotomy in the structure of a firm is accepted in the behavioural model. In this dichotomy, on one hand, there is the organisation as a whole called the firm and on the other hand, are the individual groups and sub-groups within the firm. The individual group and sub-groups within the firm have different objectives than the firm as a whole. Demands and past achievements are highly correlated.

The demands of each group do not remain static and keep on changing according to past achievements of the group and that of other groups in getting their demands met and other changes in the firm and its environment. Here, changes in the firm are significant because if performance remains static or stagnant, demand may also remain static. Then there is the role of time lag. This is the time lag between past achievement and future aspirations. Cyert and March emphasised that the time lag can be used by the firm to generate and accumulate surplus which eventually can be used for conflict resolution.

The conflict between different groups as the demands of various groups and sub-groups may be in continuous conflict with each other and the groups me be constantly bargaining with each other. The role of top management is extremely significant in Cyert and March model not only does the top management set the goals of the firm but the goals may conflict with various groups within the firm. Top management works towards reconsolidation.

The firm has five identified goals according to these theorists; production goal, inventory goal, sales goal, market share goal, and profit goals. A smooth production process implies that production is evenly distributed over time and seasonal as well as cyclical variations in demand are taken care of.

If demand is too high it may require overworking by workers and other factors of production. Similarly, if demand dips it may lead to lower production and laying off of workers. Inventory goals could come from the production department or sales department. In some instances, the firm may have a separate inventory department.

The production department will always seek sufficient stock of raw materials while the sales department will seek sufficient stock of finished products. The strategy for sales will be a part of the sales goal. It may further involve market research, analysing the competitors, and deciding the advertisement strategy. Top management sets the profit goal to satisfy the shareholders. Furthermore, as the firm may have relied on banks and other financial institutions for its financing, profit goals also access the benchmark to satisfy them.

According to Cyert and March, the law of diminishing returns operates even in the case of top managers' abilities to make decisions. Therefore the firm mainly focuses on satisfying behaviour.

Herbert Simon originally gave the concept of satisfying behavior in 1955. Among the common constraints which are not themselves the object of rational calculation is the set of alternatives open to choice, the relationships to determine the payoffs as a function of the alternative that is chosen. The decisions by top management are based on bounded rationality.

It could be concluded that top management act in a limited rational way. Information is generally sought only if some problem is there. Hear the concept of position bias comes to the fore.

The desire of various managers for the security of power in the organisation leads to this bias. Just to show the importance of their demand, they may overstate the requirements and this may eventually lead to an upward bias in the cost structure of the firm. Individuals who create visions of the future and inspire organisational members to want to achieve those goals. At all points in time, accountability is key.

Ritesh Barot is a business and financial analyst

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