H. A. Simon opines that firms aim at satisfying rather than maximizing profit.
| H.A. Simon has propounded this model in 1955, he argued that the real business world is full of uncertainty. Accurate and adequate data are not readily available where data are available, managers have little time and ability to process data and managers work under a number of constraints. Under such conditions, it is not possible for the firms to act in terms of rationality postulated under profit maximization hypothesis. |
Nor do the firms seek to maximize sales, growth or anything else. Instead they seek to achieve a ‘satisfactory profit’, a ‘satisfactory growth’, and so on.
This behavior of firms is termed as satisfactory behavior of firms in which a firm is a coalition of different groups connected with the various activities of the firm e.g. shareholders, managers, workers, input supplier, customers, bankers, tax authorities and so on. All, if these groups have some kinds of expectations often conflicting from the firm, and the firm seeks to satisfy all in one way or another.
Simon said that a firm has normally an aspiration level. An aspiration level is the level of achievement, which the firm hopes for in a particular field. For example, if a firm hopes to increase sales in the present year by 10%, it is his aspiration level about sales. The aspiration level of profit will depend on past experience and in fixing in future uncertainties will be taken into account. If it is easily attained, the aspiration level will be raised. If it proves difficult to attain, it will be revised downwards. When the actual performance of a firm falls short of an aspiration level, ‘search activity’ will be started so that remedial action can be taken to achieve the aspiration level by better performance. Search activity is the search for new alternatives of action.
But there is limit to search activities because of the cost to be incurred in obtaining information. Hence, all alternatives will not be explored. A satisfactory alternative course of action will be selected. Since the firm limits search activity due to involvement of costs, it does not maximize profit. Hence, the firms aim at ‘satisfying’, rather than ‘maximizing’. If the aspiration level is nearer to profit, the result that can be obtained under the assumption of satisfying is similar to the result under the assumption of profit maximization.
The aspiration level of the firm means the demarcation between the satisfactory and unsatisfactory results.
This behavior of firms is termed as satisfactory behavior of firms in which a firm is a coalition of different groups connected with the various activities of the firm e.g. shareholders, managers, workers, input supplier, customers, bankers, tax authorities and so on. All, if these groups have some kinds of expectations often conflicting from the firm, and the firm seeks to satisfy all in one way or another.
Simon said that a firm has normally an aspiration level. An aspiration level is the level of achievement, which the firm hopes for in a particular field. For example, if a firm hopes to increase sales in the present year by 10%, it is his aspiration level about sales. The aspiration level of profit will depend on past experience and in fixing in future uncertainties will be taken into account. If it is easily attained, the aspiration level will be raised. If it proves difficult to attain, it will be revised downwards. When the actual performance of a firm falls short of an aspiration level, ‘search activity’ will be started so that remedial action can be taken to achieve the aspiration level by better performance. Search activity is the search for new alternatives of action.
But there is limit to search activities because of the cost to be incurred in obtaining information. Hence, all alternatives will not be explored. A satisfactory alternative course of action will be selected. Since the firm limits search activity due to involvement of costs, it does not maximize profit. Hence, the firms aim at ‘satisfying’, rather than ‘maximizing’. If the aspiration level is nearer to profit, the result that can be obtained under the assumption of satisfying is similar to the result under the assumption of profit maximization.
The aspiration level of the firm means the demarcation between the satisfactory and unsatisfactory results.
Criticisms of Simon’s Satisficing Theory
This theory has the following weaknesses which are as follows:
- The main weakness of the satisficing theory of Simon is that he has not specified the ‘target’ level of profits which a firm aspires to reach. Unless that is known, it is not possible to point output the precise areas of conflict between the objectives of profit maximizing and satisficing.
- As commended by Boumol and Quant, it is constrained maximization with only constraints and no maximization.
- Simon does not clarify a satisfactory level of performance based on a certain level of rate of profits. According to Simon, there may be many satisfactory levels depending upon the groups that cooperate in the firm. It is difficult for the firm to choose such a profit rate that satisfies all groups function within the firm. Thus, the operational value of Simon’s model is limited.
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