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