Herbert Alexander Simon one of the pioneers of behavioral theory dissatisfied with the profit-maximizing model and gave his own model in 1955 and called Simon’s Theory of Satisficing. Therefore, his theory was satisfying behavioral theory. He said that instead of maximizing profits, the business firms aim at merely satisficing. It means as per him, producers or business firms want to achieve a satisfactory level of profit rather than maximizing the level of profit. In alternative words, they want to achieve a satisfactory level of profit. Due to inevitable uncertainties surrounding decision making in reality, businessmen can never know whether they are maximizing profit or not.
Accurate and required data related to the business are not available. Thus, the managers have to take decision on the basis of past events and incomplete information about the future conditions of their business. It means in most of the large firms it cannot be known from where, how, and from whom the decisions are made. In the large firms except for single owner-manager, many people are involved in the top and medium management, all these persons are involved in different degree, in formulating the policy of the firm.
According to Edwin Mansfield, ‘the different groups within the firm develop their own view and intra-firm politics is important in the process of determining the policy of the firm’. For example, if there are different departments in the company each department struggles to maintain or increase its share in the company’s budget. Each department tries to keep other departments at a lower level. In this way, the political struggle within the firm plays an important role in determining its objectives.
Simon said that a firm has normally an ambition level. An ambition/aspiration level is the level of achievement that the firm hopes for in a particular field. For instance, if a firm hopes to increase sales in the present year by 5 percent, it is his ambition level about sales. The ambition/aspiration level of profit will depend on past experience and in fixing it future uncertainties will be taken into account. If it is attained easily the ambition/aspiration level will be higher and if it proves difficult to attain, it will be revised downwards. When the actual performance of a firm fails to get an ambition/aspiration level, search (research for new alternatives) activity will be started so that corrective action can be taken to achieve the ambition level by better performance.
However, there is a limit to such research activities also due to the cost constraint. Therefore, all alternatives will not be sightseen. A satisfactory alternative course of action will be selected and the firm will not go for all the alternatives for the maximization of profit due to such reasons. So, firms aim at satisficing rather than maximizing.
Simon’s theory of business objective is considered more useful and more logical because it depends on the aspiration level, the utility of past events, and search theory. It reflects the modern practices of modern businesses.
Limitations of Simon’s Theory of Satisficing
This theory is more logical and innovative. However, there are some shortcomings in this theory, this theory is incomplete and unclear in many regards. Major limitations are listed below;
- This theory is more demonstrative as it talks about satisficing profit but it is not clear about the level of that sort of profit.
- The theory did not explain the equilibrium of the firm.
- This theory has talked about the intra-firm conflicts and politics but did not give any solution to them and their effect on the profitability or decision making of the firm.