Creating competitive advantage through intangible assets: the direct and indirect effects of corporate culture and reputation.

EXECUTIVE SUMMARY

Corporate culture and reputation are intangible assets firms use to create a competitive strategic advantage to differentiate themselves from other firms to enhance firm performance. Numerous articles cite how corporate culture may be an important intangible predictor of reputation, but only a few researchers have empirically tested the relationship between culture and reputation. Using a sample of 104 firms, we find that culture not only enhances financial performance (as indicated by other research), but also is positively related to reputation. Furthermore, our findings suggest that reputation acts as a mediator between culture and financial performance.

Keywords: corporate reputation, intangible assets, corporate culture, competitive advantage

INTRODUCTION

Research on corporate reputation has identified antecedents and consequences of reputation to better explain how a than may benefit and best strategically position itself through its reputation. The predictors of reputation were initially divided into two groups, economic and non-economic factors by Fombrun (1990). Different studies using different designs and methodologies have found that while financial performance is an important predictor of reputation, financial performance has accounted for as little as 11 to 15 percent of the variance (Hammond and Slocum, 1996; Roberts and Dowling, 2002) to as much as 38 to 59 percent (e.g., Brown and Perry, 1994; Fombrun and Shanley, 1990), leaving at least 40 to 89 percent of the variation unexplained by economic variables. Therefore, while researchers have been able to demonstrate that economic factors predict reputation (Sabate and Puente, 2003), less is known about the non-economic factors influencing reputation. Different researchers have explored the non-economic factors in different ways. Eberl and Schwaiger (2005) examine how competence and sympathy may influence reputation and Rindova, Williamson, Petkova and Sever (2006) use a stakeholder approach to better capture the predictors of reputation, perceived quality and prominence. The quest to identify key variables that predict reputation is important, since without this knowledge researchers cannot advise firms how they might enhance their reputation to augment their competitive advantage to increase their financial performance.

Our paper's focus is narrower than Eberl and Schwaiger (2005) and Rindova ct al. (2006) and specifically examines corporate culture as a non-economic predictor of corporate reputation; and reputation as a mediating variable between culture and firm performance. Prior research on reputation suggests that culture plays an important role in reputation development (Fombrun and Shanley, 1990; Fombrun, 1996; Dukerich and Carter, 2003; Alsop, 2004), since the internal (culture) and external (reputation) elements interact and inform each other (Hatch and Schultz, 2000). Preliminary empirical research shows a correspondence between culture attributes and reputation attributes (Flatt and Kowalczyk, 2000; Kowalczyk and Pawlish, 2002; Kowalczyk, 2005). In a similar study on culture, Carmeli (2004) found that culture interacts with communication and the industrial relations climate (workplace atmosphere) to predict external prestige of a firm (a similar variable to reputation). Our paper extends these research studies by examining the direct and indirect effects of culture and reputation on financial performance.

BACKGROUND AND LITERATURE REVIEW

Corporate reputation is a multidimensional construct, where a firm's reputation emerges from multiple constituent groups or stakeholders (e.g., customers, investors, employees, and the general public) and their interactions with each other (Fombrun and Shanley, 1990; Rindova, 2006, et al.). These multiple constituents use various criteria, economic and non-economic, to arrive at an overall general assessment and reputation of the firm that is "... a perceptual representation of a company's past actions and future prospects that describes the firm's overall appeal to all of its key constituents when compared with leading rivals (Fombrun, 1996, p. 72)."

Research on corporate reputation has progressed theoretically and empirically since 1990, when Fombrun and Shanley published their article on reputation ("What's in a name?"). Resource dependence or the Resource Based View (RBV) and institutional theory have been applied as two possible theoretical frameworks to better understand and explain how corporate reputation influences organizational performance, as well as to identify what factors shape a firm's reputation (e.g., Barney, 1991; Rao, 1994; Rhee and Haunschild, 2003; Carmeli and Tishler, 2004; Rindova et al., 2006). Empirically, research on measures of reputation (Fombrun, 1998; Cravens, Oliver and Ramamoorti, 2003), problems with measures of reputation (Fombrun and Shanley, 1990; Brown and Perry, 1994; Fryxell and Wang, 1994; Deephouse, 2000), and identification of the antecedents and consequences of reputation (Black, Carnes, and Richardson, 2000; Roberts and Dowling, 2002; Carmeli and Tishler, 2004) have helped identify predictors of reputation and establish the important role reputation performs to influence firm performance. While research has established a consensus that economic factors are key predictors of reputation (Sabate and Puente, 2003), recent research have begun to investigate non-economic factors that may help shape a firm's reputation.

Initially, Fombrun and Shanley (1990) referred to the predictors of reputation broadly as economic and non-economic; and Brown and Perry (1994) showed that the economic or financial halo could be statistically removed from a reputation score. Similarly, Roberts and Dowling (2002) decomposed the overall reputation into financial reputation and residual reputation to predict future financial performance. More recent research has shifted and expanded the range of predictors of reputation to include non-economical predictors. Eberl and Schwaiger (2005) proposed that reputation consisted of two organizational "personality" components, competence and sympathy, where competence represented a cognitive assessment and sympathy represented an affective assessment; they then removed the financial performance halos from competence and sympathy to better ascertain how these two constructs contributed towards reputation. Rindova et aL (2006) also divide the predictors of reputation into two types to reflect the two theoretical perspectives on reputation, economic and institutional theory. As such, they define reputation as being composed of both perspectives and define reputation as comprised of perceived quality and prominence, respectively.

Reputation and Culture as Intangible Assets

According to the resource dependence or resource based view (RBV), assets, skills and capabilities create value for the firm that leads to a sustainable competitive advantage and superior financial performance (Barney, 1991). Resources used to create a competitive advantage are categorized as tangible (e.g., financial assets, capital, production capability, etc.) or intangible assets (e.g., intellectual property, trade secrets, corporate reputation, culture, employee know-how, etc.) (Hall, 1993). These resources create value and meet the following conditions: 1) It is valuable due to its ability to add financial value to the firm (sources of differentiation); 2) It is rare (only some firms have it); 3) It is imperfectly imitable by other organizations; and 4) there are no substitutes Barney 1986; Barney, 1991; Rao, 1994). Culture and reputation are considered intangible assets because each add value through differentiation, is rare, difficult to imitate, and without substitution (e.g., Barney, 1991; Hall, 1993; Fombrun, 1996; Porter, 1996; Roberts and Dowling, 2002; Kaplan and Norton, 2004). In a survey of executives, corporate reputation was rated as the most important intangible asset contributing to business success because it is the "product of years of demonstrated superior competence, [and] is a fragile resource; it takes time to create, it cannot be bought, and it can be damaged easily (Hall, 1993, p. 616)". In the same study, Hall (1993, p. 617) found that culture was rated as the fourth most important intangible asset, after product reputation (rated number 2) and employee know-how (rated number 3), since culture afforded the ability to manage change, innovate, create team working and a participative management style, and the perception of high quality standards and customer service.

Intangible assets are characterized as more influential than tangible assets because they are more likely to meet Barney's (1991) four conditions (listed above). Hall (1992) refers to intangible assets as the "feedstock" of capability differentials essential for a sustainable competitive advantage and Hitt (2001) states that "intangible resources are more likely than tangible resources to produce a competitive advantage" (p. 14). Kaplan and Norton (2004) apply this perspective and develop a "strategic map" to demonstrate how intangible assets, like culture, may be used to attain a strategic advantage and higher performance outcomes.

The RBV also proposes that an organization's performance will be determined by the distinct bundles of resources or assets a firm has (Barney, 1991). These bundles generate the firm's sustainable competitive position by its "complex combination of organizational elements" and not necessarily by any single element, regardless of how important an element may be (Carmeli and Tishler, 2004). This is consistent with Porter (1996), who shows how a sustainable competitive advantage results from a tight strategic fit among a highly integrated set of tangible and intangible relationships. Our paper proposes that culture and reputation are intangible assets that contribute towards a firm's strategic advantage and performance differences directly and independently, as well as indirectly, via a small bundle of two interrelated intangible resource elements. How culture, reputation and financial performance are related to each other is outlined in the following sections.

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