Abstract for: Do Stretch Goals Increase or Reduce Investments in Disruptive Innovations?
Dynamic decision making experiments using microworld simulators have been used extensively to investigate the causes of poor performance in dynamic environments and to directly test behavioural assumptions in system dynamics models. This paper contributes to this line of research by investigating the effects of stretch compared with moderate profit goals on innovation investment decisions using a laboratory experiment with the widely used Back Bay Battery Sim. Scholars investigating the ‘innovator’s dilemma’ have accumulated evidence showing that incumbent firms’ resource allocation processes usually direct investments to sustaining innovations in the existing core business, which leaves lower-tier, less profitable customers to new entrants’ and enables new, disruptive innovations to grow. Contrary to the common wisdom about the beneficial effects of stretch goals, our results show that stretch profit goals lead to lower levels of investment in new, potentially disruptive innovations. Stretch profit goals focus decision makers’ attention on achieving short term financial targets and undermine long term investments in a new, emerging business.