Business Psychology - Latest Findings
Article No. 233
Business Practice Findings, by James Larsen, Ph.D.
New research discovers an overlooked factor that contributes to business survival.
Why do some businesses survive while others fail? Economists think they know, and if you ask them, they'll lecture you about economics. They'll tell you about production efficiency, and they'll explain how organizational designs influence business practices. They'll talk about companies they like and urge you to follow their examples. Economists will keep talking until you tell them to stop.
But business owners aren't so sure about economists. Business owners will ask you to name successful companies that are being run by economists. That's another way to end a conversation with an economist.
Business owners are concerned with survival, especially their own.
Scott Shane, from the Sloan School of Management at MIT, is familiar with all the technical factors economists urge upon us in running our businesses, but he is also familiar with another voice, that of sociologists.
Businesses exist in a social environment. People, not numbers, determine if a business succeeds or fails, and people are the special area of study of sociologists.
Sociologists have written widely on the subject of business success, but their arguments have lacked the influence of research support, especially research that considers both economic and sciological factors in the same study. Professor Shane conducted a study that filled this need.
Shane tested a business factor sociologists named legitimization. It refers to an attitude people have about a business - that it is legitimate. It may seem rather simple, but for new business owners who want to be taken seriously, appearing legitimate is crucial. It leads people to trust that the business can deliver on its promises, that it does know the best way to conduct its affairs. These perceptions are necessary for investors, customers, suppliers, and employees. It encourages them to act in complementary ways that contribute to the firm.
Without a perception of legitimacy, people question the new business at every turn, and owners frequently find that they must explain themselves, defend their decisions, and strive to convince people that they know what they're doing.
Sociologists believe that one of the most important ways to gain the perception of legitimacy is through certification. This occurs when important people certify that the business is sound. Government agencies and financial institutions offer such certification, but Shane chose to test a more potent form of certification for his study: certification by the media. He reasoned that media certification added widespread awareness by the public to the results of the certification, and this would enhance its social and its business impact.
Shane examined the success of 1,292 new businesses. He measured both economic factors and the effect of media certification by Entrepreneur Magazine. He held constant the economic factors, and he found a survival advantage for those businesses that sought out media certification by this publication.
Shane was impressed by the finding, and he recommends that new business owners seek out certification contests for their businesses. He lists several publications that conduct such tests: A.M. Best, Moody's, Consumer Reports, J.D. Powers, Business Week, and Entrepreneur Magazine. However, certification contests can occur in many settings, for example, in my home town we have a tradition of choosing the best barbecue ribs every July in a widely publicized street carnival downtown.
Certification contests result in rankings of products and/or firms, and there is a perception of legitimacy for the winners of these contests. Winners are better than losers, and contests examine factors the average consumer can't consider. Contests are also considered fair.
Shane believes business owners should devote considerable attention to certification contests. He sees them as a marketing strategy that provides the perception of legitimacy, and his research demonstrated that it confers a significant survival advantage upon those who use it well.
Reference: Shane, Scott and Maw-Der Foo (1999) New Firm Survival: Institutional Explanations for New Franchisor Mortality. Management Science, 45(2), 142-158. www.businesspsych.org
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