The Fallacy of Only the Strong Survive: The Effects of Extrinsic Motivation on the Persistence Decisions of Underperforming FirmsJournal of Business VenturingDeTienne, DR; Shepherd, DA; and DeCastro, J.
2008
Authors from the College of Business:
Dawn R. DeTienne, Assistant Professor of Management
Even though traditional economic theory would suggest that under-performing firms would be selected out of the market, the fact remains that many of these firms persist for long periods of time, sometimes indefinitely. These firms represent a drain on the free market system because they squander resources and occupy market positions without showing reasonable levels of returns. They impose heavy costs in time, management resources, and impose uncertainty for venture capitalists, suppliers, customers, distributors, competitors, and employees. The negative impact of these under-performing firms leads to our research question: “What are the factors that lead entrepreneurs to persist with under-performing firms?” Building upon threshold theory and using a sample of 89 founders of high technology firms in Colorado, we explore and test the factors that lead entrepreneurs to persist with under-performing firms.
Our findings indicate that entrepreneurs persist with under-performing firms because they perceive that the industry will grow, the organization has been successful in the past, and the organization believes it can be successful (high collective efficacy). These results suggest that entrepreneurs believe if they continue to persist, firm performance may yet improve. Additionally, we found that when entrepreneurs have invested a significant amount of their own time, money, and energy they are more likely to persist and even more so if they have high levels of extrinsic motivation. This may represent a sunk cost mentality where the entrepreneur is unwilling to give up even though the indication is that the firm is under-performing. Finally, we found that when entrepreneurs have few other options available to them, they are more likely to persist and this is more so for those with low levels of extrinsic motivation. Thus, entrepreneurs persist with under-performing firms because of a belief that things will get better, because they are unwilling to give up, because they don’t have other options, and because monetary reward is less important.