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
*
zainudin888@kelantan.uitm.edu.my

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 self-
administered 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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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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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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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 stand-
out 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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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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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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6.3 The Model for the Study

Perceived
Quality

Corporate Competitive
Reputation 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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The Model Converted into AMOS Syntax for Analysis

Figure 2: The Model in AMOS 7.0 Software

e1 e2 e3 e4 e5 e6
1 1 1 1 1 1

CR1 CR2 CR3 CR4 CR5 CR6

Corporate
Reputation e14
1
1 PQ1 e11
1

Perceived 1
PQ2 e12
Quality

1
PQ3 e13

Competitive 1
e15
Advantage

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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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 e2 e3 e4 e5 e6
1 1 1 1 1 1
7.80 8.36 8.52 7.90 7.24 8.05

CR1 CR2 CR3 CR4 CR5 CR6

2.38 2.98 3.68

2.75 2.87
1.00

Corporate
Reputation e14 8.11
1
PQ1 e11
2.66 1
1.00
8.05
1.1
0.76
Perceived 1
PQ2 e12
Quality
1.29 7.89
1.59
1
PQ3 e13

Competitive 1
e15
Advantage

1.23 1.09
1.00 1.18
8.00 7.33 7.85 7.85

CA1 CA2 CA3 CA4

1 1 1 1

e9 e8 e7 e10

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Table 1: The Fitness Index: Baseline Comparisons Indexes

Model NFI RFI IFI TLI CFI

Default model 0.901 0.913 0.904 0.902 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 <--- Corporate_Reputation 2.755 0.407 6.764 ***
CR2 <--- Corporate_Reputation 2.379 00.347 6.864 ***
CR3 <--- Corporate_Reputation 1.000
CR4 <--- Corporate_Reputation 2.976 0.440 6.767 ***
CR5 <--- Corporate_Reputation 3.683 0.582 6.331 ***
CR6 <--- Corporate_Reputation 2.871 0.476 6.030 ***
CA1 <--- Competitive_Advantage 1.230 0.082 15.093 ***
CA2 <--- Competitive_Advantage 1.000
CA3 <--- Competitive_Advantage 1.181 0.074 15.858 ***
CA4 <--- Competitive_Advantage 1.087 0.072 15.156 ***
PQ1 <--- Perceived_Quality 1.000
PQ2 <--- Perceived_Quality 1.097 0.056 19.686 ***
PQ3 <--- Perceived_Quality 1.287 0.063 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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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 Competitive
Reputation 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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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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