Universiti Teknologi Mara Kelantan

Universiti Teknologi MARA Kelantan

CSSR 2009

The Impact of Company’s Corporate Reputation on its Competitive Advantage in the Market Zainudin Bin Hj Awang*1, Khairunisa Binti Hassan 2 1.

Faculty of Info. Tech. and Quantitative Sciences, MARA University of Technology, Kelantan 2. Commerce International Merchant Bankers, Kota Bharu, Kelantan *

[email protected]

ABSTRACT The competition for customers is stiff when the rate of increase in the number of competitors offering similar products to the market is faster than the demand from customers. Perhaps the positive impact of its corporate reputation could help the firm to survive and grow in this highly competitive marketing environment. This study attempts to assess the influence of corporate reputation of the firms on the customers’ perceived quality towards their products and their competitive edge in the market. The study obtained 400 usable questionnaires from household respondents who were shopping furniture for their newly completed bungalows. The data were collected using selfadministered questionnaires and analyzed using Structural Equation Modeling (SEM) in AMOS 16.0. The study found the influence of firm’s corporate reputation on the perceived quality of its products is highly significant. The study also found the influence of products’ perceived quality on the competitive advantage of the firms is highly significant. However, the direct influence of firm’s corporate reputation on the competitive advantage of its products is not significant at α = 0.05. In other words, the favorable corporate image of a firm has an indirect effect on its competitive advantage in the open market competition through the perceived quality towards its products. The results indicate that the firm’s corporate reputation is only helpful in marketing only if it could trigger the perceived quality for their products in the eyes of their potential customers. The findings of the study provide important implications to the manufacturers of competitive products in their effort to push their output into the market and, more importantly, to ensure the survival of their business into the future. Keywords: Corporate Reputation, Perceived Quality, Competitive Advantage

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Universiti Teknologi MARA Kelantan

CSSR 2009

1. I)TRODUCTIO) The market for household furniture in Kelantan has becoming competitive lately in the sense that the rate of increase in the number of firms offering the products is higher than the rate of increase in demand for the products itself. As usual, in the highly competitive environment among the competitors, the customers are being exposed to almost similar range of products choices, aggressive sales promotion, and price war. The corporate reputation literatures revealed that the competing firms could differentiate themselves from their competitors and achieve the competitive advantage by deploying valuable resources and capabilities that are superior, scarce, and inimitable (Roberts and Dowling, 2002). This study was interested to determine the influence of corporate reputation of the competing firms on the competitive advantage of that particular firm in term of customers’ purchasing behavior for household furniture.

2. LITERATURE REVIEW 2.1 Definition of Corporate Reputation Business literatures define corporate reputation as the stakeholders’ overall impression of an organization overtime (Bailey, 2005), and it reflects the organization’s relative standing, internally with its employees, and externally with its other stakeholders (Fombrum et al., 2000). The literatures also suggested the corporate reputation as the outcome of managers’ efforts to prove their success and excellence in managing the organization. The firms could achieve favorable levels of corporate reputation through acting reliable, credible, trustworthy and responsible in the market in the eyes of their stakeholders. The prominent researcher in the area such as Fombrum (1996) defines corporate reputation as a perceptual representation of a company’s past action and future prospects that describe the firm’s appeal to all its key constituents when compared to other leading competitors. Other researchers in the area, Shenkar and Yuchtman-Yaar (1997) associated the concept of corporate reputation of a firm to the perceived image, perceived prestige, and perceived goodwill.

However, still there are differences among the corporate reputation researchers themselves concerning the definition, and the issues are still on-going especially with regard to the reputation construct, the way in which the construct is operationalised and its contribution to the organization success.

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Universiti Teknologi MARA Kelantan

CSSR 2009

2.2 Corporate Reputation and Competitive Advantage The role of corporate reputation in marketplace is similar to brand equity, particularly when the company’s name is a part of brand identification (Yoon et al., 1993). Some sectors in the service industry, especially banks, hotels, hospitals, consulting firms, and educational institutions rely heavily on their corporate reputation to attract and retain their customers (Nguyen and Leblanc, 2001). In fact, this study believes that almost all retailers in the market today regardless of what products they are selling are interested to develop and preserve their respective corporate reputation. The study done by Nguyen and Leblanc (2001) found that the customers are more inclined to purchase the products or services from companies whom they perceived as having favorable reputation among their competitors.

Fombrum (1996) stressed that a good corporate reputation would enhance profitability because good reputation would attract customers to products, attract investors to securities, and attract employees to do their jobs properly. Thus, corporate reputation of a firm should be considered as an asset and wealth that gives that firm a competitive advantage because the firm will be regarded as reliable, credible, trustworthy and responsible for employees, customers, shareholders and financial markets.

Gupta (2002) found the empirical evidence between corporate reputation and competitive advantage for the firms by successfully differentiating it from competitors. Among the components of competitive advantage are willingness to purchase, willingness to pay premium price, customer satisfaction and customer loyalty. Meanwhile, the components of company’s reputation found by Gupta (2002) are corporate ability and corporate social responsibility. This finding supports the popular view in business literature that when customers are faced with parity in price and quality of a product, they would prefer to choose products from the company that contributes to corporate social responsibility when making the consumption related decision. The corporate reputation researchers such as Robert & Dowling (2002) and Eberl & Schwaiger (2005) have highlighted the growing body of literature describing the corporate reputation as a valuable resource which could influence the favorable financial performance of a company. In other words, the companies scoring higher on the perceived corporate reputation are more likely to have healthier financial accounts. Likewise, Shapiro (1983) revealed the significant influence of corporate reputation on the customers’ market retention and increased sales volume. Further, the researcher (Shapiro, 1983) stressed the benefits to the company that flow from having a good corporate reputation, which has been associated with increased financial performance, include providing

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Universiti Teknologi MARA Kelantan

CSSR 2009

indicator of product quality when customers are faced with a choice among competing products in the market. The excellent financial performance of any company could only be achieved through increased sales, premium price and customer retention.

The findings of a study done by Robert and Dowling (2002) supports the results of Shapiro (1983) that good corporate reputation provides healthier financial performance through the reduced organizational costs. The reduced organizational cost is achieved through the attraction of high caliber staff and high staff retention rate. In the same note is the finding by Kotha et al. (2001) which relates good corporate reputation to reduction of supplier-buyer exchange uncertainty through increased sales and reduced transaction costs. Again, the final result would enhance the financial performance of a company.

The same idea is supported by Podony (1993). In his study, he identified the inverse relationship between good corporate reputation and costs – whereby firms with good corporate reputation have lower costs (e.g. transaction, financial, advertising, and employee costs). And the lower operational costs would provide opportunity for such firms to further enhance their reputation. This indicates that once a company achieved favorable corporate reputation in the eyes of its customers, it would standout among its competitors to reap benefits, which would in turn further improve the reputation.

In summary, the literatures on corporate reputation support the idea that the company with favorable corporate reputation would stand a better chance to survive in the competitive environment. In relation to that, this study is specifically interested to evaluate the effect of favorable corporate reputation of a firm on the perceived quality of its products as a source of competitive advantage for the firm itself in the market. To be specific, the study has selected the household furniture market among the urban population.

2.3 Perceived Quality Quality is the most important factor underlying the long-term success not only for products and services, but also the survival of the organization itself. Everybody in the management is talking about improving quality as the main weapon to help the company to survive in difficult times. However, it is now well established that it is not quality per se but customers’ perception of quality that drive preferences and consequently satisfaction, loyalty, sales, and profitability. (Zeithaml, 1998). Perceived quality is the overall subjective judgment of quality relative to the expectation of quality. These expectations are based on one’s own and others’ experiences, plus various other sources

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Universiti Teknologi MARA Kelantan

CSSR 2009

including brand reputation, price, and advertising (Boulding et al. 1993; Johnson et al., 1995). Thus, it is not necessary to use or examine a product to form the perception of its quality.

3. THE OBJECTIVES OF THE STUDY This study is designed to achieve the following objectives: 1) To assess the influence of corporate reputation of a firm on customers’ perceived quality towards its products in the market. 2) To assess the influence of customers’ perceived quality towards the products on the competitive advantage of that particular firm among competitors in the market. 3) To assess the direct influence of corporate reputation of a firm on the competitive advantage of that particular firm among competitors in the market

4. THE RESEARCH QUESTIO)S This study is designed to address the following two research questions namely: 1) How significant is the role of perceived quality in linking the relationship between corporate reputations to competitive advantage? In other words, is there exists an indirect relationship between corporate reputation and competitive advantage through perceived quality? Or does perceived quality mediates corporate reputation with competitive advantage? 2) How significant is the direct relationship between corporate reputation of a firm and its competitive advantage?

5. THE RESEARCH HYPOTHESES This study has put forward three research hypotheses to be examined empirically. H1: The favorable corporate reputation of the firms has a positive and direct effect on the customers’ perceived quality towards their products. H2: The customers’ perceived quality towards the products has a positive and direct effect on the competitive advantage of the firms among competitors in the market. H3: The favorable corporate reputation of the firms has a positive and direct effect on the firms’ competitive advantage among competitors in the market.

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Universiti Teknologi MARA Kelantan

CSSR 2009

6. THE RESEARCH METHODOLOGY 6.1 Population and Sample The Population for this study consists of the owners of newly completed bungalows in urban areas in Kelantan from 2006 to 2008. Prior to buying their dream house, these people are either staying at their rented houses or at the house provided by their employers. The study interviewed 500 families who were planning to purchase the furniture before moving into their newly completed bungalows. The respondents selected falls in the bracket of higher socio-economic status in term of qualification, occupation and income. They are university graduates, working as senior staff either in government departments, private organizations, or the self-employed professionals. Their monthly household income ranges from RM10,000.00 to RM 100,000.00. The data collected through self-administered questionnaires handed personally to the respondents after completing initial interviews to explain personally the purpose of study and to obtain their consent to participate. The respondents were given the opportunity to respond the questionnaires at their own convenient time. They returned their response through the self-addressed envelope in a few days. A total of 400 completed responses received, which represent a satisfactory rate of 80%.

6.2 The Validity and Reliability of the Instruments The instrument used for this study was Reputation Quotient, which was developed, tested and validated by Fombrum et al. (2000). The 20 measurement items were grouped into six categories namely emotional appeal, products and services, vision and leadership, workplace environment, social and environmental responsibility, and financial performance.

The usefulness of the instruments is determined by its validity and reliability. Previous studies found that the dimension contained in the Reputation Quotient instrument are supported by qualitative studies (Greoland, 2002), and the instruments meet the requirement of validity (Fombrum et al., 2000).

Reliability refers to the degree a questionnaire is free from error and therefore can provide consistent result (Caruana, 1997). The Cronbach’s Alpha enables the evaluation of the reliability of an instrument. According to Fombrum et al. (2000), Cronbach’s Alpha for the reputation instrument exceeds 0.84, which indicate that the items in the instrument perform well on reliability.

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Universiti Teknologi MARA Kelantan

CSSR 2009

6.3 The Model for the Study

Perceived Quality

Corporate Reputation

Competitive Advantage

Figure 1: The schematic diagram of the model

The Variables in the Model: 1.

Dependent variable The dependent variable is competitive advantage of a firm, which is the variable of primary interest in the study. From the search in the literatures, the competitive advantage items consist of willingness to purchase, willingness to pay premium price, customer satisfaction and customer loyalty.

2.

Independent variable The independent variable is the corporate reputation of the firms. From the literatures, the corporate reputation components consist of emotional appeal, products and services, vision and leadership, workplace environment, social and environmental responsibility, and financial performance.

3.

The mediating variable in the study is the customers’ perceived quality towards the products produced by the firms. From the review of literatures, the study adopted three perceived quality items namely the perceived quality of products sold, the perceived quality of service provided, and the perceived quality of environment in the store and its surrounding area.

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Universiti Teknologi MARA Kelantan

CSSR 2009

The Model Converted into AMOS Syntax for Analysis Figure 2: The Model in AMOS 7.0 Software

e1

e2

e3

e4

e6

e5

1

1

1

1

1

1

CR1

CR2

CR3

CR4

CR5

CR6

1

Corporate Reputation

e14

1

Perceived Quality

PQ1

1

e11

1

PQ2

PQ3 Competitive Advantage

1

1

1

e12

e13

e15

1 CA1

CA2

CA3

CA4

1

1

1

1

e9

e8

e7

e10

Indicators of Items in the Model: CR1 = emotional appeal, CR2 = products and services, CR3 = vision and leadership, CR4 = workplace environment, CR5 = social and environmental responsibility, CR6 = financial performance PQ1 = perceived quality of products, PQ2 = the perceived quality of service

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Universiti Teknologi MARA Kelantan

CSSR 2009

PQ3 = the perceived quality of environment CA1 = willingness to purchase, CA2 = willingness to pay premium price CA3 = customer satisfaction, CA4 = customer loyalty

7. THE RESULTS A)D A)ALYSIS Figure 3: The Structural Equation Modeling Results Using AMOS 7.0

e1 1 CR1

e2 7.80

1

e3 1

8.36

CR2

e4

CR3

1

7.90

CR4

2.38

2.75

1

8.52

2.98

e6

e5

CR5

3.68

1

7.24

8.05

CR6

2.87

1.00

Corporate Reputation

e14

1

2.66

8.11

1

PQ1

e11

1.00 8.05

Perceived Quality

0.76

1.1

PQ2 1.29

1.59

PQ3

1

Competitive Advantage 1.23

1.00

1.18

8.00

7.33

7.85

1

e13

7.85

CA3

CA4

1

1

1

1

e7

7.89

1.09

CA2

e8

e12

e15

CA1

e9

1

e10

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Universiti Teknologi MARA Kelantan

CSSR 2009

Table 1: The Fitness Index: Baseline Comparisons Indexes

Model Default model

NFI 0.901

RFI 0.913

IFI 0.904

TLI 0.902

CFI 0.930

All indices obtained are above 0.9 which indicate that the proposed model is suitable.

Table 2: The Regression Weights and the Corresponding Probability Values Variable

Path

Variable

β

SE( β)

C.R.

P-value

Perceived_Quality

<---

Corporate_Reputation

2.656

0.390

6.817

***

Competitive_Advantage

<---

Perceived_Quality

1.586

0.537

2.955

.003

Competitive_Advantage

<---

Corporate_Reputation

0.757

0.414

1.825

.068

CR1 CR2 CR3 CR4 CR5 CR6 CA1 CA2 CA3 CA4 PQ1 PQ2 PQ3

<--<--<--<--<--<--<--<--<--<--<--<--<---

Corporate_Reputation Corporate_Reputation Corporate_Reputation Corporate_Reputation Corporate_Reputation Corporate_Reputation Competitive_Advantage Competitive_Advantage Competitive_Advantage Competitive_Advantage Perceived_Quality Perceived_Quality Perceived_Quality

2.755 2.379 1.000 2.976 3.683 2.871 1.230 1.000 1.181 1.087 1.000 1.097 1.287

0.407 00.347

6.764 6.864

*** ***

0.440 0.582 0.476 0.082

6.767 6.331 6.030 15.093

*** *** *** ***

0.074 0.072

15.858 15.156

*** ***

0.056 0.063

19.686 20.435

*** ***

*** indicates highly significant at 0.001

7.1 The Result of Hypothesis Testing

H1: The favorable corporate reputation of a firm has a positive and direct effect on the perceived quality towards their products. From the above table, the p-value is 0.001. Thus, this hypothesis is empirically supported.

H2: The favorable perceived quality towards the products has a positive and direct effect on the competitive advantage of the firm in the market. From the above table, the p-value is 0.003. Thus, this hypothesis is also empirically supported.

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Universiti Teknologi MARA Kelantan

CSSR 2009

H3: The favorable corporate reputation of a firm has a positive and direct effect on the firm’s competitive advantage in the market. From the above table, the p-value is 0.068. Thus, this hypothesis is empirically not supported.

The Result of Hypothesis Testing is Shown Graphically in the Diagram

H1

H2

Perceived Quality

Corporate Reputation

Competitive Advantage

H3

7.2 Discussion of the Results The present study contributes to better understanding concerning the impact of corporate reputation on competitive advantage for the firms dealing in household furniture business.

This empirical research showed that the direct impact of corporate reputation on competitive advantage is not significant since hypothesis 3 is not supported. The study found that the corporate reputation has an indirect impact on competitive advantage through the perceived quality since both hypothesis 1 and hypothesis 2 are supported.

These findings indicate that the strength of corporate reputation of the firms per se does not help them to survive through the competitive environment of household furniture market. In this case the management should communicate the corporate reputation of their firm effectively to their stakeholders internally and externally in order to trigger their perception towards the products

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Universiti Teknologi MARA Kelantan

CSSR 2009

positively as having good quality, reliable, good value for money, etc. In other words, achieving favorable corporate reputation for the firm is one thing but communicating the favorable corporate reputation to stakeholders so that they would perceive the products as having favorable quality is a separate issue. In this case, the management of a firm should not just work hard to achieve the favorable level of corporate reputation for their firm but they should also communicate their favorable corporate reputation accordingly to all their stakeholders so that the firm could enjoy the benefits in the form of competitive advantage.

8. LIMITATIO) OF THE STUDY In any behavioral research study, like the current survey, common method bias is a potential problem that needs to be considered because such biases could pose a rival explanation for the strength of relationships between constructs (Podsakof et al., 2003). A possible obstacle is that the sample for this study was taken among respondents of higher socio-economic status in term of education, occupation, and household income. Samples from different socio-economic status should be obtained to verify the consistency of the results. Another obstacle is this study only focused on the household furniture products, which is a long-lasting investment in a home. The result might be different if the study is done for consumable items. In fact, the study done by Ou and Abratt (2006) found the impact of corporate reputation is not significant on competitive advantage for grocery stores since the firms are dealing with perishable products.

9. CO)CLUSIO) Corporate reputation is a long-term judgment and evaluation of a firm by its stakeholders. It implies the long-lasting, collective assessment rendered over a long period of time (Gioia et al., 2000). The judgment, evaluation, and assessment by stakeholders include the emotional appeal of a firm, the range of products and services offered the vision of its leadership, the workplace environment in the firm, the social and environmental responsibility of the firm, and its financial performance. This study found all six components of corporate reputation quotients (Fombrum et al., 2000) provides significant contribution to the corporate reputation of the firm itself. Above all, superior corporate reputation would result in the outstanding competitive advantage of the firm, and more importantly, it would lead to excellent financial performance. The main challenge for any management is to lead their company to survive and grow into the future amid the growing number competitors competing for a stagnant market, and the performance of management will be assessed by its shareholders through the annual financial results.

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CSSR 2009

RERE)CES Bailey, A.A. (2005). Non-fulfillment of promotional deals: The impact of gender and companyreputation on consumers’ perception and attitudes. Journal of Retailing and Consumer Services, 12(4), 285-295. Boulding, William, Ajay Kalra, Richard Staelin, Valarie Zeithaml, 1993. A dynamic process model of service quality: From expectations to behavioral intentions. Journal of Marketing Research. 30(1), 7-27 Caruana, A. (1997). Corporate reputation: Concept and measurement. Journal of product and brand management. 6(2), 109-118. Eberl, M. and Schwaiger, M. (2005). Corporate reputation: disentangling the effects on financial performance. European journal of Marketing. 39(8) 838-854 Fombrum, C. (1996). Reputation. Harvard Business School Press, Boston. Fombrum, C.J., Gardberg, N. and Sever, J.M. (2000). The reputation quotient: A multi-stakeholder measure of corporate reputation. The Journal of Brand Management. 7(4), 241-255. Gioia, D.A., Schulz, M. and Corley, K.G. (2000). Organizational identity, image, adaptive instability. Academy of Management Review. 25(1), 63-81. Groeland, E.A.G. (2002). Qualitative research to validate the RQ dimensions. Corporate Reputation Review, 4(4), 308-315 Gupta, Shruti. (2002). Strategic dimensions of corporate social responsibility as sources of competitive advantage via differentiation. Unpublished Doctoral Dissertation, Temple University, USA. Johnson, Michael D., Eugene W. Anderson, Claes Fornell. 1995. Rational and adaptive performance expectations in a customer satisfaction framework. Journal of consumer research. 21(4) 695-707 Kotha, S., Rajagopal, S. and Rindova, V. (2001). Reputation building and performance: An empirical analysis of the top 50 pure internet firms. European Management Journal. 19(6), 570-586. Nguyen, N., and Leblanc, G. (2001). Corporate image and corporate reputation in consumers’ retention decision in services. Journal of retailing and Consumer Services. 8(3), 227-236. Ou, W. and Abratt, R. (2006). Diagnosing the relationship between corporate reputation and retail patronage. Corporate Reputation Review. 9(4), 243-257. Podony, J. (1993). A status-based model of market competition. American Journal of Sociology, 98(4) 829-872 Podsakoff, P.M., MacKenzie, S.B. and Podsakoff, N.P. (2003). Common method biases in behavioral research: A critical review of the literatures and recommended remedies. Journal of Applied Psychology. 88, 879-903.

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CSSR 2009

Roberts, P.W. and Dowling, G.R. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23(12), 1077-1093 Schwaiger, M. (2004). Components and parameters of corporate reputation – an empirical study. Schmalenbach Business Review. 56, 46-71 Shapiro, C. (1983). Premiums for high quality products as returns to reputation. Quarterly Journal of Economics. 98(4), 659-679 Shenkar, O. and Yuchtman-Yaar, E. (1997). Reputation, Image, Prestige, and Goodwill: an interdisciplinary approach to organizational standing. Human Relations. 50(11), 1361-1381 Yoon, E., Guffey, H.J. and Kijewski, V. (1993). The effects of information and company reputation on intentions to buy a business service. Journal of Business Research. 27(3), 215-228. Zeithaml, V.A. (1998). Consumer perceptions of price, quality, and value: A means-end model and synthesis of evidence. Journal of Marketing. 52, 2-22.

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