Behavioral theory of the firm

The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M. Cyert and James G. March. The work on the behavioral theory started in 1952 when March, a political scientist, joined Carnegie Mellon University, where Cyert was an economist. A behavioral model of rational choice by Herbert A. Simon paved the way

Theory of Competitive Advantage

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is ubiquitous,

Contingency Theory

A contingency theory is a theory of the firm that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent (dependent) upon the internal and external situation. Contingent leaders are flexible in choosing and adapting to succinct strategies to

Evolutionary Theory of the Firm

Nelson and Winter argue that an evolutionary theory of organization is a superior description of firm behavior than orthodox views around optimization and that routines act as the genes of the firms in their model. The evolutionary theory defines the firm as a set of essential skills, gained from its learning ability. The theoretical assumption

Institutional Theory

According to Scott (2008), institutional theory is “a widely accepted theoretical posture that emphasizes rational myths, isomorphism, and legitimacy.” Researchers building on this perspective emphasize that a key insight of institutional theory is imitation: rather than necessarily optimizing their decisions, practices, and structures, organizations look to their peers for cues to appropriate behavior. In defining institutions, according

The Invisible hand theory of Adam Smith

The invisible hand theory describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many

Theory of Organizational Ecology

Organizational ecology theory examines how organizational populations change and develop over time through stages of founding, growth, transformation, decline, and death (Hannan & Freeman, 1977, 1989). The theory addresses the forces of social, political, and economic systems that (1) increase organizational diversity, for example, creating new organizational forms, and (2) decrease organizational diversity, for example,

Resource dependence theory

Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behavior of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any company. The basic argument of resource dependence theory can be summarized as follows: Organizations depend on resources. These