PERFORMANCE FEEDBACK THEORY
Performance Feedback Theory (PFT) is the major offset of the Behavioral Theory of the Firm
(Cyert and March, 1963) and one of the core theories that constitute the emerging field of
behavioral strategy. The core proposition is that the firm evaluates its performance relative to
its goals-aspirations. Negative discrepancies between performance and the aspiration lead to
the search for alternative strategies, while positive discrepancies strengthen the role of the
current strategy.
Keywords: performance feedback; historical aspirations; social aspirations; attainment
discrepancy; problemistic search; slack search; institutionalized search
THE THEORY
Using Simon’s (1955) bounded rationality, Cyert and March (1963) propose that the firm does
not strive for maximal but only for satisfactory performance. The question of whether
performance is deemed satisfactory depends on the attainment of goals-aspirations. The
authors formulate three aspiration sources:
 firm previous performance, constituting historical aspiration level,
 performance of the firm’s peer group, constituting social aspiration level,
 and firm previous aspiration.
When performance meets and exceeds aspiration and attainment discrepancy is positive, the
situation is considered satisfactory, and the firm is not motivated per se to search for alternative
strategies. On the other hand, when the firm achieve lower than strived for performance,
attainment discrepancy is negative, and the firm starts to look for alternatives in the process
called problemistic search. The process starts in the proximity of performance problem (local
search) and attempts to find a problem solution – alternative behavior. In case this search is
not successful, it widens (distant search) and the firm considers downgrading its future
aspiration.
Besides problem-induced problemistic search, two other types of search (for alternatives) exist
in PFT (Greve, 2003). First, institutionalized search stems from the firm’s long-term strategy
and is embodied in research and development activities. Second, the slack search may start
when the firm possess a sufficiently high value of slack (not fully utilized resources, such as
excess cash or available credit lines).
EXTENSIONS AND BOUNDARIES
By definition, performance feedback represents backward-looking experience-based
organizational learning process. However, the firm behavior is also motivated by
forward-looking processes that are based on cognitive maps of action-outcome linkages
(Gavetti and Levinthal, 2000). Further research (e.g., Chen, 2008) shows that firms behavior
is indeed explained by both experience and expectations.
As the theory assumes that unsatisfactory performance leads to problemistic search, one
would suppose that these firms are prone to changes. However, as threat rigidity theory (Staw
et al., 1981) contradicts, the firm that is under threat is rather rigid. The conflicting propositions
can be reconciled using attention-based view (Ocasio, 1997) and assuming that firms pay
attention to multiple reference points including performance aspirations (PFT) and survival
(threat rigidity theory) and switch attention between these points – i.e., when survival is
threatened, the firm starts to behave more conservatively.
EMPIRICAL APPLICATIONS
Most of the empirical research on the theory is of longitudinal quantitative nature. Due to the
time lags between performance (often operationalized as ROA) and changing behavior, the
research rules out cross-sectional studies. PFT has been used to explain a wide range of
strategic behaviors including R&D (e.g., Chen, 2008); acquisitions and divestments (e.g.,
Kuusela, Keil and Maula, 2017); product/innovation launches (Joseph and Gaba, 2015);
pricing (Greve, 2008b); entry to new markets (Ref and Shapira, 2017); alliances (Tyler and
Caner, 2016); or asset growth (Greve, 2008a).
The plurality of empirical methods and conceptual models (see below) represents one of the
main limitations in the generalizability of findings. There are several aspiration models in the
literature (Washburn and Bromiley, 2012) embodying very different assumptions about the
firm’s attentional structure. Besides that, a multitude of moderators exists in the literature
including board characteristics (Desai, 2016); firm size (Greve, 2008a); firm age (Desai, 2008);
or national culture (O’Brien and David, 2014). All these factors and number of others leads to
frequent contradictions in the literature’s findings that makes it an interesting area of further
research.
FURTHER READING
Cyert and March (1963) – original formulation of the theory.
Greve (2003) – introductory book on PFT.
Shinkle (2012) – review of the literature on aspirations, including other streams than only PFT.
Posen et al. (2018) – review of the literature on problemistic search.
REFERENCES
Chen, Wei-Ru. 2008. “Determinants of Firms’ Backward- and Forward-Looking R&D Search
Behavior.” Organization Science 19 (4): 609–22.
Cyert, Richard Michael, and James G. March. 1963. A Behavioral Theory of the Firm. 1st ed.
Upper Saddle River: Prentice Hall/Pearson Education.
Desai, Vinit M. 2008. “Constrained Growth: How Experience, Legitimacy, and Age Influence
Risk Taking in Organizations.” Organization Science 19 (4): 594–608.
———. 2016. “The Behavioral Theory of the (Governed) Firm: Corporate Board Influences on
Organizations’ Responses to Performance Shortfalls.” Academy of Management Journal 59
(3): 860–79.
Gavetti, Giovanni, and Daniel Levinthal. 2000. “Looking Forward and Looking Backward:
Cognitive and Experiential Search.” Administrative Science Quarterly 45 (1): 113–37.
Greve, Henrich R. 2003. Organizational Learning From Performance Feedback: A Behavioral
Perspective on Innovation and Change. 1st ed. Cambridge: Cambridge University Press.
———. 2008a. “A Behavioral Theory of Firm Growth: Sequential Attention to Size and
Performance Goals.” Academy of Management Journal 51 (3): 476–94.
———. 2008b. “Multimarket Contact and Sales Growth: Evidence from Insurance.” Strategic
Management Journal 29 (3): 229–49.
Joseph, John, and Vibha Gaba. 2015. “The Fog of Feedback: Ambiguity and Firm Responses
to Multiple Aspiration Levels.” Strategic Management Journal 36 (13): 1960–78.
Kuusela, Pasi, Thomas Keil, and Markku Maula. 2017. “Driven by Aspirations, but in What
Direction? Performance Shortfalls, Slack Resources, and Resource-Consuming vs. ResourceFreeing
Organizational Change.” Strategic Management Journal 38 (5): 1101–1120.
O’Brien, Jonathan P., and Parthiban David. 2014. “Reciprocity and R&D Search: Applying the
Behavioral Theory of the Firm to a Communitarian Context.” Strategic Management Journal
35 (4): 550–65.
Ocasio, William. 1997. “Towards an Attention-Based View of the Firm.” Strategic Management
Journal 18 (S1): 187–206.
Posen, Hart, Thomas Keil, Sangyun Kim, and Felix Meissner. 2018. “Renewing Research on
Problemistic Search - A Review and Research Agenda.” Academy of Management Annals 12
(1): 208–51.
Ref, Ohad, and Zur Shapira. 2017. “Entering New Markets: The Effect of Performance
Feedback near Aspiration and Well below and above It.” Strategic Management Journal 38
(7): 1416–34.
Shinkle, George A. 2012. “Organizational Aspirations, Reference Points, and Goals: Building
on the Past and Aiming for the Future.” Journal of Management 38 (1): 415–55.
Simon, Herbert A. 1955. “A Behavioral Model of Rational Choice.” Quarterly Journal of
Economics 69 (1): 99–118.
Staw, Barry M., Lance E. Sandelands, and Jane E. Dutton. 1981. “Threat Rigidity Effects in
Organizational Behavior: A Multilevel Analysis.” Administrative Science Quarterly 26 (4): 501–
24.
Tyler, Beverly B., and Turanay Caner. 2016. “New Product Introductions below Aspirations,
Slack and R&D Alliances: A Behavioral Perspective.” Strategic Management Journal 37 (5):
896–910.
Washburn, Mark, and Philip Bromiley. 2012. “Comparing Aspiration Models: The Role of
Selective Attention.” Journal of Management Studies 49 (5): 896–917.