Book Series
Theories of the Firm
Fifth Edition
Demetri Kantarelis

Chapter 2: The firm as a decision-maker

28-47Rational decisions are at the heart of success of any profit-making firm. The firm is in a constant need for rational decision-making that involves planning, controlling, organising, staffing and motivating; oftentimes, subject to risk, uncertainty, complexity and emotion. Consider Figure 1. Duty number one of every firm, usually the task of the owner or leader, is to clearly articulate objectives or guiding long-term principles with respect to 'what to produce'. In turn, the firm's duty, usually the task of management under the supervision of or in conjunction with the owner/leader, is to make strategic, tactical and operational decisions with respect to 'how to produce'. Strategic decisions are primarily concerned with how to accomplish the firm's objectives and they are constantly modified by the diagnosis-prescriptions-effectiveness cycle (reported in the middle of the decision box in Figure 1). Tactical decisions are primarily concerned with how to accomplish the firm's strategic objectives. Ultimately, of course, decisions affect profit-making which in turn modifies the firm's decisions and objectives. Decisions could involve a small, large or infinite number of alternatives and criteria; they may be programmed (repetitive/routine) or non-programmed (one-time) and they are subject to opportunism, timing and of course emotion. Decisions based on a small number of alternatives and criteria (e.g., the decision to buy a new, non-specific machine, from a competitive market served by ten sellers) would be easier than the decision to invest a sum of money in the stock market.
1 Rationality
2 Satisficing
3 Additional factors that affect decisions
3.1 Economic decisions and cost/benefit analysis
3.2 Groups
3.3 Variety of evaluative frameworks
3.4 Bayesian decision-making
4 Fairness, gaming and risk preference
4.1 The risk-averse firm
4.2 The risk-loving firm
5 Uncertainty
6 Behavioural decisions
7 Summary
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