Resource-Based Theory of the Firm

The central proposition of resource-based theory of the firm is that a resource leads to sustained competitive advantage over competitors. The resource-based theory of the firm explicates what a resource is and the basic characteristics that a resource has. Managers, consultants, and researchers of corporate reputation seek to demonstrate that corporate reputation improves corporate performance. The resource-based theory of the firm is frequently drawn on as an explanation for why a good reputation helps improve performance. This entry first provides an overview of the resource-based theory of the firm and discusses the resource properties of corporate reputation. It then describes how to test whether corporate reputation is indeed a resource for an organization.

Overview

Resources are the assets, capabilities, skills, knowledge, and so on that a firm has for creating sustained competitive advantage in its product or service markets. Many factors of production can be resources, including factory design, sophisticated equipment, inexpensive natural resources, creativity and talent of employees at all levels, corporate culture, and geographic location. Often, many factors of production are combined to create socially complex capabilities.

Jay Barney, in 1991, presented four properties that resources have, and these four are still frequently used for assessing resources. The four properties are (1) rare, (2) valuable, (3) imperfectly imitable, and (4) nonsubstitutable. A resource is rare if other corporations do not have the same resource. A resource is valuable if it improves efficiency (e.g., lowering cost per unit) or effectiveness (e.g., increasing revenue and, more generally, goal accomplishment). A resource is imperfectly imitable when other corporations cannot duplicate a resource that a corporation has. A resource is nonsubstitutable when other corporations cannot use other resources to offset the advantages that the corporation gains from the resource.

The Resource Properties of Corporate Reputation

Corporate reputation may have all four properties. A focal corporation’s reputation may be rare because it reflects the history of interactions between a corporation and its stakeholders. For instance, Starbucks has done much to raise its profile with stakeholders on many dimensions, from promoting quality coffee in coffee shops early in its history to announcing on April 6, 2015, that it will fund four years of college tuition for its U.S. employees. Another notable example focuses on product and service quality, a key dimension of reputation. Coca-Cola has built enormous brand loyalty over more than a century based on consistent product quality supported by engaging advertising. In other cases, such as with commodity producers, corporate reputation may be relatively indistinct. In these cases, reputation would not be rare and would not be a source of competitive advantage.

A good corporate reputation may be valuable because current stakeholders respond positively to the corporation and potential stakeholders are attracted to the firm by the positive signals resulting from a good reputation. Charles Fombrun provided many reasons and examples in his pathbreaking book Reputation: Realizing Value From the Corporate Image. Research shows that stakeholders, such as customers, suppliers, investors, employees, and community members, support a corporation with favorable economic and social transactions. For instance, employees may work harder and accept lower pay; the corporation may also attract higher-quality employees and retain them for longer. These employees may help improve product and service quality or reduce costs within the firm, thus adding value to the corporation. Buyers and suppliers may give better terms to the corporation so that they can be associated with the firm. For instance, many computer manufacturers advertised that they had “Intel Inside.” Customers of Coca-Cola pay a premium relative to what they pay for generic soft drinks. Community members may provide political support to corporations with good reputations, enabling them to build facilities more quickly.

Corporate reputation may also be imperfectly imitable. LIke being rare, a focal corporation’s reputation accrues over time based on its history of interactions with stakeholders, indicating that there are time compression diseconomies. Corporations have unique histories. Many stakeholder relationships thus are socially complex because they involve not only the stakeholder and the firm but also the network of stakeholders who communicate with one another directly and indirectly through intermediaries. Corporate reputation cannot be separated from the corporation itself and cannot be bought or sold. However, corporations can try to borrow the reputations of other corporations through strategic alliances to enhance their reputation and thus more fully imitate the reputation of the focal corporation. Moreover, corporations can seek to be acquired by another corporation with a higher reputation in order to utilize the reputation of the new owners when competing with the focal corporation.

Finally, a good corporate reputation may be nonsubstitutable. Barney observed that a positive reputation represents a psychological contract between the corporation and its stakeholders. A psychological contract differs from a legal contract, such as a guarantee or employment contract, because it is tacit and personal. Moreover, stakeholders develop good psychological contracts in addition to formal contracts. The fact that both types of contracts coexist suggests that each type has its own raison d’ȇtre, and thus, they are not close substitutes.

Testing to See if Corporate Reputation Is a Resource

There are many ways for testing if a good corporate reputation contributes to competitive advantage. The most common approach is to measure corporate reputation and include it in a regression analysis predicting performance with a set of other variables that control for alternative explanations. These alternatives can be viewed as possible substitutes for corporate reputation. David Deephouse provided an early example of this approach by using media reputation to predict bank accounting profits, specifically the return on assets relative to industry average. He controlled for product market strategies that could reflect substitute resources and other indicators of efficiency and market power suggested by research in financial economics on bank profitability. Violina Rindova, Ian Williamson, Antoaneta Petkova, and Joy Sever looked at the price premium that graduates of MBA programs in business schools received. Surveys and experiments also have been used to examine how stakeholders are affected by specific resources.

The resource-based theory of the firm is commonly used by researchers to explain why corporate reputation is an important contributor to corporate success. A good reputation may have all four properties of a resource: (1) rare, (2) valuable, (3) imperfectly imitable, and (4) nonsubstitutable.