The Economics of Reputation toolkit

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An easy-to-use digest of all the leading academic and business insights into the complex issue of reputation.

Transcript of The Economics of Reputation toolkit

The Economics of Reputation A practical toolkit for a complex subject Contents Introduction 1. What is reputation? 2. Why has reputation become a critical issue? 3. How is reputation created? 4. How does reputation bring value? 5. How is reputation measured? Concluding thoughts Further reading Introduction The Interest Over the last twenty years, interest in the subject of reputation has grown exponentially in both the business and academic world. Today, few CEOs would argue that their corporate reputation isnt one of their companys most valuable assets. In the business press, several publications have put forward reputation rankings which rate companies based on their overall reputations. In academic spheres, scholars have created their own tools for measuring reputation and delved into questions of definition, creation and valuation. Your brand reputation is everything and youve got to fight to protect it. RICHARD BRANSON Founder & Chairman The Virgin Group The Confusion Yet, as the volume of literature has grown, the task of developing a clear understanding of reputation has become ever-more problematic. Different definitions exist, various measurement tools have been proposed and a range of opposing ideas put forward. In todays world, where ideas are increasingly displacing the physical in the production of economic value, competition for reputation becomes a significant driving force, propelling our economy forward. MILES D WHITE CEO & Chairman Abbott Laboratories Aim This toolkit provides a straightforward way into the topic. We will focus on 5 fundamental questions. We will give an overview of the relevant literature produced by academic and business sources. We will share the perspectives of leading industry figures. We will consider where reputation research is heading in the future. Industry figures we spoke to... The Five Fundamental Questions ONE What is reputation? Different definitions of reputation exist in business and academia; with this lack of clarity there have been calls for scholars to unite around a commonly agreed upon definition. Salient Themes in Literature In our review of the existing literature, definitions appeared to cluster around three attributes REPUTATION AS PERCEPTION REPUTATION AS JUDGEMENT REPUTATION AS AN ASSET Perception Several definitions stressed how reputation is about stakeholders having a perception of a firm. In these definitions, reputation was discussed as a net perception or representation of an organisation. Reputation is a buyers perception of how well-known, good/bad, reliable, trustworthy, a firm is (Levitt, 1965) Reputation is the perceptual representation of a firms past actions (Fombrun, 1996) Reputation is the perception of a company developed over time (Bennett & Kottasz, 2000) Judgement A further significant theme was the idea that reputation involved observers making a judgement of a firm. Reputation was defined as an assessment, evaluation or gauge. Reputation is an overall evaluation of a company over time (Gotsi and Wilson, 2001) Reputation is a gauge of a firms relative standing (Fombrun and Rindova, 2001) Reputation is an estimation of a person or thing (Mahon, 2002) Asset Other definitions stressed that reputation was something of value or significance to a firm. Reputation was described as a resource or as an intangible asset. Reputation can be defined as an intangible asset (Drobis, 2000) Reputation is an intangible resource (Goldberg et al., 2003) Reputation is a valuable but fragile intangible asset (Miles and Covin, 2002) The Stakeholder Perspective Is reputation static or ever-changing? We think fluidity should be an important part of any definition of reputation. Now more than ever reputations are dynamic. Firms once highly regarded may be viewed unfavorably by contemporary standards In 2008, Starbucks was accused of wasting more than 23 million litres of water each day when it was revealed that its outlets deliberately left taps running non-stop in order to achieve health and safety targets around washing equipment. The so-called Dipper Tap scandal seriously damaged their reputation. Starbucks was demonised in the media and left facing customer protests and boycotts. Fifty years ago would this story have caused the same level of damage to a companys reputation? TWO Why has reputation become a critical issue? Today, due to a combination of factors, reputation is seen as a critical concern for consumers, businesses and academics alike. Salient Themes in Literature We found that the reasons given by scholars to explain the explosion of interest in corporate reputation could be broadly grouped into two categories CONSUMER WORLD BUSINESS WORLD The Consumer World Several academics have highlighted how one-off events and wider societal trends have driven interest in reputation. The rise of digital and high- profile reputation scandals were widely cited. Heavy press coverage of corruption and misconduct at previously trusted institutions has caused public outcry Today consumers have a voice. Social networks have empowered them A huge shift has occurred in the last 20 years digital has grown to become a central part of our everyday lives... Source: Hunter et al., 2010 & Fan et al., 2013 The Business World Others have attributed the growth in concern for reputation to changes that have occurred in the economy and the ways in which businesses operate. The pressure is on for organisations to be more transparent (see Carroll, 2009) consumers are challenging firms to share information such as profits, production techniques and environmental credentials. There is no longer anywhere to hide (see Carroll, 2009) a firm cannot afford to be let down by a reputational crisis (see Schnietz, 2009) The Stakeholder Perspective Has the rise of digital lessened the importance of corporate reputation? Many argue the rise of digital has forced organisations to pay greater attention to reputation, yet we believe the reverse is true. The pressure is on for organisations to be more transparent (see Carroll, 2009) Bad sentiment around a brand is quickly forgotten in todays digital world On the one hand, digital has forced organisations to pay more attention to their reputation as it has meant the spread of negative stories is quicker and more far- reaching than ever. However, we believe the ubiquitous nature of the digital in our lives today means that bad sentiment around an organisation is quickly forgotten by consumers as it is replaced by the next wave of headline, tweets and Facebook posts. Consider how supermarkets have recovered after the horsemeat scandal, or how Cadbury is still the one of the nations most loved brands despite a Salmonella scare in 2006. THREE How is reputation created? Once a firm understands this, they can take steps to actively build and manage their reputation, as well as repair it when it is damaged. Salient Themes in Literature From our review of the existing research, three distinct mechanisms for developing reputation were visible PARTNERSHIPS INITIATIVES ASSOCIATIONS Partnerships A number of studies explored how young firms without a reputation of their own can borrow the reputation of prestigious third parties by partnering with them. Young firms can benefit from the prestigious reputations held by investment banks that serve as underwriters during initial public offering stage (Gulati & Higgins, 2003) The benefits of associations with prestigious affiliations include higher survival chances, ability to attract future strategic alliance partners, improved innovation, growth and financial performance (Pollock & Gulati, 2007) Firms can borrow the reputations, preferably prestigious, of actors with whom they affiliate (Stuart, Hoang & Hybels, 1999) Initiatives A further cluster of studies focused on how firms can create a reputation through implementing reputation-building initiatives. Companies can build reputation by winning product awards and competitions (Reuber & Fischer, 2005) Companies can build reputation through symbolic actions and communications (Rinadova, Petkova & Kotha, 2007) Companies can build a reputation through innovation and new product introduction (Reuber & Fischer, 2005)