The Elements of Reputation of Small and Entrepreneurial Firms: Reexamining the Role of Performance.

• Author: Mukherji, Ananda

INTRODUCTION

Our focus in this research is to examine and understand the nature of reputation inasmuch as it applies to small and entrepreneurial businesses. While there is a large body of work in the area of corporate reputations (Boyd et al., 2010; Hammond & Slocum, 1996; Highhouse et al., 2009; Rindova et al., 2005; Rindova et al., 2010; Roberts & Dowling, 2002; Saxton & Dollinger, 2004), some of it may not fully apply to small and entrepreneurial firms for two reasons. One, the extant reputation research focuses largely on large firms whose shares are traded in formal financial markets and their information is available in the public domain. Two, in a number of research studies, reputation is based on rankings provided by Fortune magazine or other business publications (Chakravarthy, 1986; Gatewood et al., 1993; Fombrun & Shanley, 1990; Hammond & Slocum, 1996; McGuire et al., 1988; Roberts & Dowling, 2002). Small and entrepreneurial firms are different in both respects in that they are not large firms and they are outside the radar of business magazine rankings. It is also to be noted that Fortune and other business magazine rankings have methodologies that are created by business journalists that may be at variance with extant theory, and business scholars have little influence on the research that is conducted.

An important difference between large and small firms is that in the case of large firms, reputation has implications at national and also at international levels, plus it involves certain institutional constituents in ways that small firms are free of. While reputations are critical, small firms have a relatively lower spatial impact; they tend to develop, build, and use reputations that matter in a smaller area with local and regional implications. To that extent, everything that is known about large firms based on prevailing research may not apply fully to small firms and separate research may be necessary to obtain meaning insights. We approach reputation from a resource-based perspective, because it is a key intangible element (Carmeli & Tishler, 2004) or resource that, if developed appropriately, can provide firms with sustained competitive advantage (Barney 1986, 1991, 2001). An "organization's competitive position is derived from a complex combination of organizational elements" (Carmeli & Tishler, 2004, p. 1259) and firms with assets like reputation, which is valuable and rare, possess qualities that may provide firms with competitive advantage to obtain superior outcomes (Barney 1991; Grant 1991). What is critical about good reputations is that they are typically difficult to imitate, making replication by rivals difficult, and this inimitability is central to the firm's ability to create value (Roberts & Dowling, 2002). Intangible elements like culture and reputation are relatively inflexible (Chatterjee & Wernerfelt, 1991); hard to accumulate and not easily transferred (Carmeli & Tishler, 2004); they can affect multiple uses at the same time and serve simultaneously as inputs and outputs for activities (Itami & Roehl, 1987); and are not consumed when used (Collis & Montgomery, 1998). Moreover, "intangible resources are more likely than tangible resources to produce a competitive advantage" (Hitt et al. 2001, p. 14). It is an intangible element that is thought to enhance customer satisfaction and loyalty, employee attraction and retention, and investor awareness (Fombrum, 1996; Robert & Dowling, 2002). Researchers mention that reputation is an invaluable asset whose beneficial outcomes are far better understood than its formation (Carmeli & Tishler, 2004; Highhouse et al., 2009).

Reputation: Its Definition and Components

Reputation research has been referred to by some scholars as "Byzantine" in complexity (Highhouse et al., 2009) as constructs such as organizational image, identity, and legitimacy have all been used to refer to something resembling reputation (Barnett et al., 2006; Brown et al., 2006). Reputation is "defined as stakeholders' perceptions about an organization's ability to create value relative to competitors" (Carmeli & Tishler, 2004, p. 1033). Reputation is an organization's attribute which is a broad multidimensional single-construct whose value is determined through the interaction and interrelationships among multiple attributes, both internal and external to the firm (Barney, 1991; Dowling, 2001 in C p. 590). Roberts and Dowling, expanding on Fombrum's (1996, p. 72) work, define reputation as "a perceptual representation of a company's past actions and future overall appeal to all its key constituents when compared to other leading rivals" (2002, p. 1078).

All of these point to the idea that reputation consists of beliefs or opinions that are generally held about someone or something. The 'something' in this particular case is firms, specifically small firms. Firms are aware that "reputation is determined by the value (quality) of the actor's previous efforts" (Podolny & Phillips, 1996, p. 455). What is it that firms do in order to build good reputations? How do they go about building good reputations? According to Fombrun (1996), managers engage in explicit reputation-building activities to improve their firms' reputations. While managers do many things, both implicit and explicit, in order to build good reputations, we can only focus on a few essentially for reasons of parsimony as, otherwise, we will have a model that will be both byzantine and needlessly complex. To develop a testable model, we will present a series of limited activities that we believe would most directly impact a firm's reputation. Rindova et al. (2005) present two perspectives of reputation - one being an economics perspective and the other based on institutional theory. In our research, we focus on the economics perspective, which suggests that reputation forms on the basis of past actions through which firms signal to stakeholders their true attributes (Clark & Montgomery, 1998; Weigelt & Camerer, 1988). What are these past actions and previous efforts of managers? We will argue that managers and small business owners focus their attention acutely on signals emanating from the external environment and their relatively small size creates a sense of vulnerability and the paramount need to be sensitive to signals from their immediate surroundings. For the rest of this report, small firms, entrepreneurial firms, and simply firms will be used interchangeably.

The Principal Constructs of the Research Model

Of the numerous activities of managers and small business owners, we focus on six areas in this research that we argue impact reputation. The reason we present the model and its constructs is because small business owners and entrepreneurs have limited resources and will likely focus on those areas that they believe are somewhat more in their control. Broadly, small firms are focused on the information environment of their businesses in that they are sensitive to signals that indicate shifts and trends, customers' needs, and the moves of their competitors. Consequently, they attempt to be quick to analyze signals, interpret them, decide appropriate responses, and disseminate information quickly inside the organization. Apart from the information environment, small firms use the information to formulate and implement their strategic responses. Once the information has been understood, firms use their market knowledge to decide on tactical issues like focus on efficiency and strategic issues like business scope. Business scope addresses issues about serving more diverse or different customers, having a broader range of products and/or services, and developing and serving niches. Finally, marketing effectiveness is the ability to achieve a greater product range, new customers, new markets, increased market share, and revenue growth. The six areas we focus on that impact reputations of small firms are (1) information analysis, (2) information sharing, (3) market knowledge, (4), efficiency focus, (5) business scope, and (6) marketing effectiveness. In the paragraphs that follow, we expand and explain each of these six areas, present them in a model, and develop plausible hypotheses that we then empirically test.

Information Analysis. Firms attempt to assess their market environments by attempting to understand the nature of signals that emanate from them. The aim is to have a market orientation which firms hope will be a source of competitive advantage (Jaworski & Kohli, 1993). Firms attempt to have information gathering architectures that may range from being simple to relatively sophisticated. This allows firms to effectively respond to information that they collect, generate, and analyze (Hult et al. 2005; Morgan et al., 2009). The types of architectures that firms have and deploy is not what we investigate, but we are interested in knowing if firms...