The Impact of Reputation on Corporate Competitiveness
“In the end, management doesn’t decide anything!”
Stakeholders bought into management's thinking early on, but their views shifted almost completely along the way.
The Era of Shareholder Value
Igor Ansoff, often referred to as the “father of strategic thinking,” recognized the existence of stakeholders as early as the 1960s in his legendary strategic masterpiece, *Corporate Strategy*. Ansoff viewed stakeholders through the lens of conflict. According to him, the desires of stakeholders were in constant conflict with one another. According to Ansoff, management’s task was to balance its own objectives in such a way that the conflicting objectives of the various stakeholders were adequately taken into account. This dynamic would tend to limit the company’s ability to generate maximum value for its owners.
To put it bluntly, stakeholders are seen as some kind of obstacle or constraint to shareholder value growth. Since I still encounter such views all too often, in this chapter I will explain why this is not a sustainable way of thinking.
It's time to work together
The cutting edge of thought took a completely new direction in the early 1980s, when R. Edward Freeman began to preach his " Strategic Management: A Stakeholder Approach." Freeman’s ideas were collaborative in nature, and the philosophical and ethical approach underlying them was positive. According to him, all stakeholders that a company can influence can also influence the company in a positive or negative way.
Since all stakeholders can influence one another—for better or for worse—wouldn’t it make sense to focus on shared interests? After all, there are far more of those than there are conflicts. This would create value for all parties more effectively! Let’s just identify the most significant links to stakeholders and focus on them through collaboration.
It may well be due to this line of thinking that top business schools now emphasize stakeholder thinking in their strategic management courses. Since then, numerous models aimed at understanding the importance of stakeholders have been developed, and these are of great benefit in strategic management.
Management doesn't decide anything
Nearly two decades later, Charles Fombrun—who had made a name for himself with his work on corporate reputation—examined stakeholders from a new perspective. According to Fombrun, every company has at least four key resources without which it certainly cannot function. These resources are key stakeholders: the society in which the company operates, current and future employees, capital owners, and finally, the company’s customers. No customers—no business. No capital—no business. No employees—no business. No license to operate—no business. Isn’t that simple?
Fombrun argued that these critical stakeholders determine a company’s competitiveness through their actions. The company that receives the most support from these stakeholders would be the most competitive in the market. In practice, this means that customers are eager to buy, the most talented people seek employment there, capital is obtained cost-effectively, and society supports the company’s operations through legislation and other forms of support.
Things are going well! But what if the opposite were true: what if no one wanted to do anything at all with the company? No business, right? Taken to its extreme, it’s easy to agree with that idea.
Let’s break this down in more detail. Ultimately, a company’s key stakeholders are autonomous actors. Customers decide for themselves who they do business with. Employees choose their jobs, and investors choose their investments. Societies enact their laws on a democratic basis. A company does not determine the actions of any of its key stakeholders. The stakeholders decide for themselves.
When discussing these issues, I’ve noticed that some listeners find the idea that competitiveness lies in the hands of anyone other than the company itself rather unsettling. The puppet masters don’t like it when the illusion of being in control vanishes into thin air. Strategic thinkers would prefer to remain firmly in the driver’s seat themselves.
RIKU RUOKOLAHTI | THE HANDBOOK OF REPUTATION MANAGEMENT | THE TRILLION-POUND PARADOX
The Age of Fame Begins
Our thinking has come a long way from where we started. Stakeholders, who were initially seen as nothing more than a hindrance, now determine a company’s competitiveness—or, in their own way, decide it. What, then, determines the vital support that stakeholders provide to a company? I would venture to suggest that stakeholders interpret a company’s ability, approach, and willingness to deliver value to them. A great workplace, a decent salary, a product or service worth the money, a fair tax footprint, an ethically sustainable way of operating, a return on invested capital, future technology, or perhaps a leap toward a more sustainable direction for the planet. The same works the other way around. Stakeholders also evaluate companies’ negative impacts in relation to their own moral and ethical code.
These critical assessments stem from the perceptions of the company that have accumulated in the minds of stakeholders over time. Bingo! At this point, our line of thinking arrived at corporate reputation. Reputation is, in fact, the common denominator for these perceptions, which stakeholders use to evaluate a company’s ability, approach, and willingness to create value for those around it. This line of thinking places reputation at the heart of a company’s competitiveness.
This logical insight is also the root reason why, as a young MBA student, I became particularly interested in reputation. So I didn’t arrive at the field of reputation through the traditional path of communications. I arrived here from the world of strategy and strategic management. I soon realized that this perspective differed from the mainstream of business management. The idea of systematic reputation management captivated me, and soon it did the same for T-Media and its clients.
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The Revolution in Reputation Management
A revolution would presumably involve rejecting an old doctrine and adopting a new one in its place. In this case, however, that is not the case. The principles and theories related to management and strategy still hold true.
Take, for example, the fact that the “4 Ps” of marketing aren’t going anywhere in the current climate. The world’s most wonderful company sells products (product) that no one needs, in a place (place) where no one goes, at a price (price) that no one will pay, and to top it all off, the company doesn’t even tell anyone (promotion) about what it offers. Even if the values and stakeholder relationships are otherwise in order, the business certainly won’t succeed.
On the other hand, a dominant market position generates profits for shareholders, regardless of what reputation theory might say. If you’re the only water supplier in the Sahara, or you own the country’s power grid or all the world’s oil reserves, you’ll do just fine financially—as long as lawmakers leave you alone. At this point, the licenses to operate in society are very concrete, but even those can be lost along with your reputation.
However, we assume that your company is doing what needs to be done with sufficient efficiency, marketing its products in the right places, and generally subjecting itself to the free will of its stakeholders. On top of all this comes a new factor that influences the free will of stakeholders: corporate reputation.
What is revolutionary here is the systematic harnessing of a company’s most important intangible asset.
Statistical modeling of reputation and analysis of its impact provide management with shared tools for discussing and managing the issue collaboratively. Communicating the work to external audiences—including boards, owners, and other stakeholders—also provides the initiative with clear objectives and continuity, even if the leadership team changes.
Of course, reputation has been built on success in the past as well. Take, for example, a few Finnish family-owned companies that most of us can name without much prompting. In the past, reputation management has been based on emotional intelligence, the culture of the ownership base, or the insights of individual people.
However, this work is often unstructured and unpredictable, and communicating or passing on reputation-based thinking within organizations can be somewhat difficult or even impossible. The reputation management revolution means that this issue must be systematically and sustainably managed by all those willing to do so.
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Riku Ruokolahtiis the Director of Development at T-Media and is responsible for Reputation&Trust business. Riku coaches senior leadership and executive teams on comprehensive reputation management.
Riku has written a handbook on corporate reputation and reputation management. The article published here , “The Impact of Reputation on Corporate Competitiveness ,” is the second chapter of the book’s first part: “The Holy Trinity of Reputation, Business, and Management.” View the book’s table of contents and all published chapters here.
Illustration: Harri Haarala
Video: Vesa Koivunen
