Business Psychology - Latest Findings

Article No. 268
Business Practice Findings, by James Larsen, Ph.D.

Trust and Business Success

New research explores factors important in business success.

There's a passion that drives the creators of new businesses. It's the dream that someday this new creation will blossom into a thriving business, with eager, hard-working employees and customers who are comfortable depending upon it. It will grow in all the important ways, with new customers, rising sales, new products and services, more employees, a wider geographical area, and increasing earnings. The hard work, tenacity, risk, and hardship that accompany new businesses are fueled by such dreams, but unfortunately, reality rudely stirs most new business creators from their dreams. Most new businesses disappear within five years leaving behind bewilderment and dismay.

New business owners are not alone in wanting an explanation. Spouses are anxious about the fate of their life savings and the time taken away from their families. Bankers and landlords, suppliers, and even new employees have a stake in the outcome of new ventures.

For researchers, the challenge is to discover the factors that lead to success, and with the large number of new business startups every year, one would imagine that this problem would have been solved long ago.

Not so.

J. Robert Baum, from the University of Maryland, has devoted much of his life to this question, and he has felt the frustration of testing promising factors for new business success only to find equivocal results when he analyzed the data. Recently, he completed a new study which retested many of the old factors, added a few more, and examined new ways that the old factors might influence new business growth. His results are promising.

Baum examined 442 new architectural woodwork firms over a six-year period. At the beginning of the study, he asked questions of both the CEOs and subordinates picked by the CEOs. His questions measured motivational factors relating to the CEOs starting their new businesses. During the following six years, he monitored the growth and prosperity of the firms. At the end of the study, he compared his measurements of the CEOs' motivational factors to the growth of the firms they led.

Baum made seven important discoveries, but one in particular stands out that we should remember. It involves self-efficacy.

Of all the motivational factors Baum examined, the strongest tie with long term success was the CEO's attitude of self-efficacy. It was an attitude that was noticed by subordinates. Self-efficacy is a belief a person has about himself/herself. It is the belief that you can be effective in completing the task at hand. You can cope with problems that will arise. You have the resources to weather tough times. You know what to do and how to do it. Self-efficacy is the attitude star quarterbacks exude when they approach their offensive lines and begin calling the count.

A clear attitude of self-efficacy turned out to be the strongest factor in leading to long term growth of the firm, and the fact that this was true says much about the nature of new firms and the problems they face.

Businesses exist in a web of trust relationships. Customers give their money trusting that the goods and services they purchase are fairly and accurately represented. Suppliers ship necessary materials trusting that payment will be forthcoming. Banks loan money and employees give up other employment opportunities, all trusting the owner to provide payments at the expected time.

New business owners must establish and nurture all these trust relationships, and their own attitudes of self-efficacy are very influential in prompting this trust. Tenacity, hard work, deep pockets, and even honesty are less influential.

Self-efficacy does not come as an act of will. Baum says it comes from enactive mastery.

Enactive mastery means that a person has had enough study and practice in an area to demonstrate mastery of it. He demonstrates it for others, but most importantly, he demonstrates it to himself. This leads to an attitude of self-efficacy. Understanding the links between enactive mastery, an attitude of self-efficacy, trust, and long term business success provide an important lesson for managers at all levels and in all settings.

Know what you're talking about. Be the expert, the world authority in your area. Practice it and allow others to see your performance. Study it and keep up with new developments in your field. Know the market and the competition.

If you do all this, you will have enactive mastery and a genuine attitude of self-efficacy. Trust follows next, and success trails along behind.

Reference: Baum, J. Robert and Edwin Locke (2004) The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth. Journal of Applied Psychology, 89 (4), 587-598.

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