With increasing numbers of entrepreneurial ventures, we recognized the need for more reliable predictors of firm performance. To augment existing explanations of small firm performance, we used entrepreneurial self-efficacy and goal setting as predictor variables. We tested Bandura's concept of self-efficacy and Locke and Latham's model of goal setting with small firms. Though these models have been tested and accepted as reliable in large organizations, we saw a need to establish their "fit" in the entrepreneurial context. We expected founders with high self-efficacy to set higher goals that resulted in better firm performance. A survey of founder-managed natural food stores validated our hypotheses.
A small firm is a reflection of the founder's vision and value system (Chandler & Jansen, 1992; Eskew, 2004). Venture capitalists emphasize founders' quality and track records in their investment decisions (Goslin & Barge, 1986). However, previous research on demographic (e.g., education, experience) and psychological (e.g., locus of control, need for achievement) characteristics of entrepreneurs does not provide conclusive evidence of a meaningful relationship between the entrepreneur's demographic and psychological characteristics and small firm performance (Baum & Locke, 2004; Honjo, 2004; Krueger, Reilly, & Carsrud, 2000; Robb, 2002).
With calls to develop and apply theoretical constructs to the field of entrepreneurship (Bygrave & Hofer 1991; Clark & Sorensen, 2002, Jelinek & Litterer, 1994), we recognize the need to import and test theoretical constructs from other academic fields. This paper expands current knowledge by applying the concept of self-efficacy and goal setting with roots from sociology, psychology, and organizational behavior literature to explain entrepreneurmanaged firm performance.
Self-efficacy is the extent to which one believes he or she possesses the knowledge, skills, and ability to accomplish a goal in the face of difficulty. People's beliefs in their selfefficacy influence their choices, aspirations, exertions of effort, perseverance in the face of difficulty, cognitive abilities, and stress levels (Bandura & Locke, 2003; Gist & Mitchell, 1992). Sadri and Robertson (1993) examined the results of 21 studies and found a significant relationship between self-efficacy and work performance.
Bandura (2000) found that people with a strong sense of self-efficacy will persevere in the face of failure and setbacks and view obstacles as challenges rather than as reflections of personal deficiencies. Entrepreneurship research (Chandler & Jansen, 1992); Crane & Sohl, 2004) found the determination to succeed - drive - an important predictor of entrepreneurial performance. Entrepreneurs with strong self-efficacy should exhibit high levels of drive, resulting in better firm performance.
Lindsley, Brass and Thomas (1995) reviewed the effect of self-efficacy on performance. They proposed that the efficacy-performance relationship is a positive, cyclic one with reciprocal causation. Due to the reciprocal causation, these iterative loops often become "deviationamplifying." For example, in a deviation-amplifying loop, a deviation in one variable (decrease in self-efficacy) leads to a similar deviation in the other variable (lower performance), which, in turn, continues to amplify. Thus, the cyclic nature of the self-efficacy-performance relationship can result in a downward (decreasing) or upward (increasing) spiral.
Krueger and Dickson (1993) manipulated self-efficacy with positive or negative performance feedback, then assigned decision-making exercises involving dilemmas and gambles. Perceptions of self-efficacy directly correlated with perceptions of situational opportunity and inversely related to perceptions of situational threat. …