Corporate Reputation Review

Volume 18 Number 2

A Systems Approach to Understanding how
Reputation Contributes to Competitive
Advantage
Carl Brønn
Norwegian University of Life Sciences, Ås, Norway
Peggy Simcic Brønn
Norwegian Business School, Oslo, Norway

ABSTRACT

Reputation has many interpretations, but most agree
that it is an intangible asset that can build competitive
advantage for a firm. This paper takes a dynamic
resource-based view of reputation and argues that the
best way to understand how it contributes to competitive advantage is through a systems approach. The
systems thinking approach is concerned with developing and testing operational explanations of organizational behavior. It differs from the traditional approach
as it requires an understanding of the ‘whole’ through
the relationships between ‘organizational’ pieces. The
traditional approach is based on an understanding of
the whole by understanding the individual pieces.
This paper offers an explanation of the systems
approach starting with a basic understanding of causal
loop diagrams and stock and flow diagrams, progressing into the more complicated modeling of behavior
and interactions. How reputation plays a role in a
hypothetical example of the hiring process, often
referred to as employer branding, is used to illustrate
how the approach can be applied in reputation management. Systems thinking is recognized as a quality
approach to organizations but one that is complicated
and that has been slow to be adopted by organizations. Some insights into how to employ the approach
are offered at the end of the paper.
Corporate Reputation Review (2015) 18,
69–86. doi:10.1057/crr.2015.5

KEYWORDS: competitive
advantage; reputation; strategy; systems thinking
INTRODUCTION

A good reputation can give an organization
competitive advantage. This is because a
good reputation is valuable, rare, imperfectly
imitable and non-substitutable (VRIN). It
makes sense then that reputation is of great
value to an organization and should somehow be managed and protected. Reputation
is, of course, not a new idea.
Reputation is a portmanteau concept;
many interpretations are applied to it. For
example, in one study, Bennett and Kottasz
(2000) reported 16 definitions of corporate
reputation. Another survey found at least 49
different definitions (Barnett et al., 2006). Different academic disciplines have different views
of reputation (Fombrun and van Riel, 1997;
Van Riel and Fombrun, 2007). Economics
views reputation as characteristics or signals that
describe a firm’s possible behavior in special
situations. Accounting sees reputation as one of
several types of intangible assets that are difficult to measure but that create value. For marketing, reputation comprises the associations
that individuals have with an organization’s
name, and in the communication discipline

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Corporate Reputation Review,
Vol. 18, No. 2, pp. 69–86
© 2015 Macmillan Publishers Ltd.,
1363-3589

as well as by the organization’s history and what they are told by others. its character. the cumulative impressions yield reputational capital – the intangible asset that should enhance the organization’s competitive advantage. Asset: Reputation as something of value and significance to the firm. an intangible one at that. It should be emphasized that there are common characteristics between categories but they can also be differentiated. reputation is a resource. and thus an asset worth protecting. raises a number of issues. so too is the purchase of insurance for a firm’s reputation. It is also important to emphasize that reputation has a time dimension. At the same time. ((Barnett et al.Systems Approach to Understanding Reputation reputation is defined as organizational characteristics that develop from the relationships the organization has with its environment. and in sociology it is a social construction that results from the relationships that the organization establishes with its stakeholders in their common institutional environments.(Peloza. In short. and environmental impacts attributed to the corporation over time. Just as the purchase of other forms of insurance is considered sound management practice. This knowledge is colored by each stakeholder or group’s own values.reputation is seen as a perception or impression. reputation is the appeal that an organization has in its environment. 2006: 34).. an intangible.. (2006) grouped the definitions into three broad categories: ● ● ● Awareness: Reputation as the attention that a stakeholder gives an organization but does not necessarily mean making a judgment . viewing reputation as resource. social. 2006: 69) It is thus not unreasonable to claim that reputation is a strategic resource for the firm and that thinking about how it affects the firm is worth the effort. In an effort to compare views between and within the different disciplines. Awareness does not imply an assessment. However. (2006) is: Observers’ collective judgments of a corporation based on assessments of the financial. the organization’s behavior. the definition 70 Corporate Reputation Review Vol. just as an organization protects its other resources. the primary one being that managing intangible resources is more problematic than tangible resources due to their immateriality and difficulty in measuring in many cases. a reputation is something that is built slowly and that is lasting. we apply a view of reputation from the strategy discipline. 69–86 of reputation is socially created. that is. but at the same time it is being compared with other organizations. This definition emphasizes that reputation is something that someone outside of the organization sets. 18. Over time. A definition of reputation suggested by Barnett et al. a good reputation is an indicator of legitimacy. This approach views reputation as a type of intangible resource and complies with the resource-based view (RBV) of strategy (Barney. 2. An organization’s reputation is therefore impacted by people’s perceptions based on direct experience with products. © 2015 Macmillan Publishers Ltd. 1986. reputation says something about the status of an organization. financial or economic asset. … the reputation of a firm is arguably the most valuable asset. acquire it. It is a resource that should be protected. In this paper. or replace it. Barnett et al. 2006: 33). an estimate. an evaluation or a gauge. 1363-3589 . and assessment does not imply transformation into an asset (Barnett et al. 1991). a good reputation is a resource that gives competitive advantage because competitors cannot without difficulty imitate it. In organizational theory reputation is seen as the cognitive representation of organizations as stakeholders acquire meanings of the organization. Assessment: Reputation as a judgment.

The second aspect is the simple fact © 2015 Macmillan Publishers Ltd.. These ‘tools’ seek to impose a structure on the environment as a basis for analysis and action. However. not simply shareholders. In contrast. Typical examples include various forms of value configurations. another is the time element. 2002) with everything pointing to the financial sector.Brønn and Brønn Dowling and Moran (2012) identify two approaches to reputation – the bolted-on and the built-in – that provide a good platform for viewing the strategic nature of reputation. what might be the consequences of implementing one or the other approach. how does reputation influence the basic value creating processes of the firm? Second. frameworks and recipes have been developed. on the reputation of the firm and its ability to thrive in the long term? There are no definite answers to these questions. The challenge of understanding the organizational consequences of the bolt-on versus built-in approach to reputation is a good example of a strategic resource management problem and raises two questions. and others. there are two major subsystems – the technical and the social. the balanced scorecard (BSC) (Kaplan. The accusation of engaging in ‘greenwashing’ is a common example as it raises the issue of symbolic versus substantive actions. The bolted-on approach is typical of organizations that do not couple their reputation building actions closely to the firm’s strategy. The BSC is one popular framework that clearly illustrates the interconnections of the major functional units in a firm. with few exceptions (for example. For example. Most do not propose a causal model. Figge et al. In order to assist decision-makers a plethora of strategy procedures. the McKinsey 7-S model. First. the traditional value chain is built on recognizing these functions and identifying the linkages in a qualitative manner. at a high level. One is the recognition of the organization as a system that is comprised of interrelated subsystems that must function harmoniously (Sanchez and Heene. two important aspects of the business context are consistently ignored by most of these frameworks. 69–86 Corporate Reputation Review 71 . A further missing element in these frameworks is the feedback relationships among the factors. However. Thus. which at best are correlated to the problem situation. the BSC). BUSINESSES AS SYSTEMS The business environment is complex in the broadest interpretation of the word. 1363-3589 Vol. the built-in reputation is one that is closely grounded in the strategy of the firm. and a general characteristic of these approaches is that. This paper proposes that reputation’s contribution to building competitive advantage can best be understood by taking a systems thinking approach. 18. 2. 2005). 1996). the activities appear to be insincere to external stakeholders and thus lower the estimation of the firm in their minds. all too frequently even the circular causality of the BSC is linearized into a ‘strategy map’ (eg. we can identify the familiar functional divisions of marketing. they adopt a linear perspective. For example. production. The efforts appear to be an afterthought or add-ons. The results are often given as a listing of issues. Digging deeper. the value chain analysis does not offer the decisionmaker a means of investigating the long-term consequences of decisions across functional divisions. and none are readily amenable to testing. human resources. or some combination of the two. It is perceived as a more natural component of the firm’s activities and can be expected to give positive associations with the firm in the minds of a broader range of stakeholders. but there are methods available for exploring potential consequences and learning more about a system’s reactions to these and other strategic initiatives. essentially a laundry list. To be fair. a common starting point for several of them is the identification of factors that are seen to be relevant in a given situation based on decision-makers’ backgrounds and experiences.

Typical examples include reputation. 1363-3589 . 69–86 ranging from the regular reports generated by the firm’s information systems. Once that understanding has been achieved. As such. 2000). 1997) indicate that business organizations appear to lead lives of their own. The manner in which all this information is processed is important with respect to the decisions and outcomes that are eventually realized. policy resistance and unintended consequences (Forrester. the systems thinking world explores the potential mechanisms for © 2015 Macmillan Publishers Ltd. Given that managers are victims of bounded rationality. the best that can be expected is that they have methodological standards that enable them to formulate their understandings of a situation in an explicit manner that identifies the limits of their knowledge and acknowledges the assumptions that they make in structuring their situation. staff morale or non-financial investor support (Warren. Information comes in a variety of formats 72 Corporate Reputation Review Vol. independent of managerial actions. Much of management theory and practice is based upon static models of the firm and its environment.Systems Approach to Understanding Reputation that time is not explicitly considered in most of the popular academic and practitioner strategy literature (a notable exception is Warren. The broad range of theoretical perspectives in the field of strategy provides ample evidence of this situation. b). then subsequent poor performance should not be a surprise. which by definition play a clear role in value creation. no one model is adequate to explain the full range of observed behaviors. By not considering either the time element or feedback. behaving in ways that relate to or affect the entire ‘body’ of an entire organization. SYSTEMS THINKING Since business organizations are complex dynamic systems that encompass multiple technical and social subsystems. an increasing reliance on ‘emergency measures’. Reputation. effective initiatives can be developed to lead the firm towards its objectives. The real world provides the decision-maker with the empirical data. This framework distinguishes between the ‘real world’ and the ‘systems thinking’ world. an issue that concerns them. interactions with external stakeholders and various media reports. or expectations about. Indirect resources reflect peoples’ emotional response to. 18. observations of the cyclical nature of workloads. Another point is that these ‘tools’ refer to traditional tangible and intangible resources. the role reputation plays in contributing to organizational performance is more ambiguous and consequently easier to oversee or to treat superficially. 2. These situations relate to the resources and processes upon which the firm bases its value creating activities. particularly when applied to intangible resources such as reputation. that is. Managers are dependent on information to assess the status of their organizations. If these are out of balance. including dysfunctions such as counterintuitive behavior. managers frequently experience outcomes that are both unexpected and undesired. Figure 1 identifies four levels of perception that give increasing insight into systemic behavior. 1971). is an indirect intangible resource. These signals can provide valuable clues as to what is going on if they are processed in ways that enable the information to yield maximum insights. and the fact that previously effective methods no longer give expected results (Davis and O’Donnell. conversations over a cup of coffee. In the following section we introduce the method of systems thinking and argue that it is the most appropriate method for addressing the strategic issue of resource management. seen by most managers as an important resource. 1999a. The managerial challenge is to develop an understanding of the underlying drivers of these events and patterns. Managers are always confronted with multiple and often conflicting signals about the state of the organization and its environment. For example.

The entire process of perception and insights is part of a © 2015 Macmillan Publishers Ltd. The time interval for developing the pattern will need to be decided by the decision-maker. Clearly. essentially stepping back from the initial emotional reaction. determines the systemic behavior. not all problems that a firm might experience. mental models exert an influence on the perception and organization of events and patterns. as well as decision logic. These are deep cognitive processes that are developed through education. However. direct control over and thus it is reasonable to focus attention on the firm’s internal conditions. but not all crises are of this kind. including damage to reputation. In Figure 1. 18. in fact. 2005) and mental models are employed to do that. In many cases the natural reaction is to respond to the event. Systems thinking provides a language and the tools that can help to identify potential structures that generate the observations in the real world. The dotted line in Figure 1 separates the Figure 1: systems Levels of insight into complex ‘real’ tangible world from the ‘systems thinking’ world. Pattern thinking can be illustrated by plotting the number of problematic events that have occurred over some period of time. some crises require a prompt response.Brønn and Brønn generating the signals that are observed in the real world. The next level is that of structures. The process of developing structural representations is significantly influenced by the lower level in the schema. The ways that the firm is organized with respect to material and information flows. in principle. Some can be seen as having been built up over time through a series of events that were ignored. When seen in this light. People try to make sense of their experiences (Weick et al. effective management of a dynamic system requires another level of insight. It is an acknowledgment of internal responsibility for organizational behavior. But these are the ones that managers have. Looking at a series of events over time introduces the dynamic element. 2. life experiences. there is something that caused the event and which maintains the behavior over time. these assumptions would be surfaced as part of the process and tested for relevance. As a consequence. These are models. In an ideal systems thinking-based analysis. a reactive behavior. Mental models rely on many assumptions that are mostly accepted uncritically. They also control the development of the models that represent the behavior reducing structures. an event that receives considerable media attention may. The defining characteristic of these models is that they represent endogenous explanations for the observed behaviors. 69–86 Corporate Reputation Review 73 . Naturally. not finger-pointing to ‘outside of the firm’ causes. but it serves to dampen the reactive behavior and promote deeper reflection. Events are single instances that capture a decision-maker’s attention. Typical examples include a crisis in the form of an unexpected story in the media or other unexpected occurrences. that is. 1363-3589 Vol. the levels of events and patterns provide information in the form of problem symptoms that may initiate managerial action. models of relationships that will generate the behaviors observed in the real world. mental models. competing explanatory models that can be discussed and compared. Events and patterns do not just happen. An open development process such as this also allows for multiple. or hypotheses. resulting in patterns. of what is happening ‘under the hood’ so to speak. personality and many other formative events.. not be as dramatic as first imagined. result from internal situations.

A positive sign means that the driver and ‘drivens’ move in the same direction. 1363-3589 . Decisionmakers tend to assume that their understanding is the correct understanding of a situation. 2. This is a dangerous attitude because research has shown that most people’s mental models are significantly deficient in. in order to understand the pieces. Making the transition from the ‘real’ world to the systems thinking world requires a different way of thinking that contrasts with the more traditional approach. 1994) that results in hypotheses that are tested against the data and. distinctions are not either/or but fall along a continuum. However. 1989. which is based on a reductionist and positivist perspective. 74 To understand the whole. it is easy to categorize as ‘this. The systems thinking approach seeks to generate endogenous explanations of systemic behavior. if found to be useful. can then be used to experiment with potential initiatives. and a minus sign indicates that they move in opposite directions. generate the events and patterns over time that are defined as ‘problems’. Arrows indicate direction of causality. +/. attention must be placed at the level of structure (see Figure 1). understanding the implications of time delays and the circular causality of feedback (Sterman. Thus.Systems Approach to Understanding Reputation Table 1: Comparing Thinking Traditions Traditional thinking ● Systems thinking Understanding the whole by understanding the pieces. but relationships are generic. When an issue is clearly structured we expect general agreement across decisionmakers on the nature of the structure that generates the observations. Schwenk. as the situation becomes more ambiguous there may be considerable disagreement regarding the cause of the observations. these representations describe possible hypotheses for processes that. When explicated. CLDs can be important communication tools because they make explicit the closed-loop relationships that characterize © 2015 Macmillan Publishers Ltd. one must understand the relationships between the pieces. ● Pieces are unique. 18. among other things. the two elements missing from most of the standard tools of strategy analysis. and not that’. when put into motion. one must drill deeply into the details. The relationships generate performance over time.polarity signs indicate direction of causality. The main differences are indicated in Table 1. Quantification can aid in better understanding relationships. measurement comes later. 69–86 ● The underlying question is ‘what is causing these symptoms?’ To answer this question. the boundaries are sharp. ● To understand relationships. Corporate Reputation Review Vol. There are two tools associated with the systems approach that can be used to represent the structures that are hypothesized to generate the behaviors of interest. The first is the causal loop diagram (CLD) (see Figure 2). A CLD is a qualitative representation of the circular causal relationships between the variables that are seen to be relevant in a given situation and where actions taken at one point in time come back and cause an effect at a later point in time. ● reflexive loop process (Ross. precise measurement is required. ● The pieces are unique. ● ● ● To understand the pieces. 1984). it is necessary to push back from the detail of the individual pieces.

An additional insight from a CLD representation of a dynamic situation is that of time delays. An important consequence of developing an operational systems model of (the structure in Figure 1) is that the decision logic is made clear. The relationship between rate variables and stock variables is that our interest is in maintaining the stock variables at certain levels. SFDs give more insight into the operational details of the process under study because they have a stricter set of rules for representing the system structure. Practically. is explored. 1363-3589 Vol. 1986) that provided a cognitive/behavioral explanation for differences in managerial styles of resource management. In the next section. the underlying policy logic must be specified. including reputation. The other systems thinking tool is the stock and flow diagram (SFD). this can easily lead to undesirable oscillations of the system state variables. competition and intangibles can be modeled using both qualitative and quantitative system dynamics modeling. and we accomplish this by controlling the rate variables. the latter requiring the use of computer simulation. 69–86 Corporate Reputation Review 75 . 2. 18. Typical business examples include the number of employees. CLDs and SFDs are used to illustrate the complexity of considering reputation in decision-making. The values of these variables at any point in time describe the state of the system at that time. 1989). Kraatz and Love (2006) argued for a dynamic process-based approach to studying reputation and made explicit reference to the language of systems thinking. b and 2000) made the connection between the RBV and system dynamics even more explicit in a series of articles that showed how resources.Brønn and Brønn Actual Condition Desired Condition + + Gap Action to + Change Actual Condition Figure 2: A simple causal loop diagram organizational (as well as other) systems. amount of debt and reputation level. The strategy literature has described resources as ‘stocks’ that are utilized and replenished by ‘flow variables’ (Dierickx and Cool. How they contribute to better understanding the resource-based view. These are indicated by double slashes across an arrow that depicts a causal relationship. as in the case of Figure 2. The operational language of systems thinking uses SFDs. In the case of a single negative feedback loop. SYSTEMS THINKING AND THE RESOURCE-BASED VIEW The resource-based view of strategy lends itself well to representation using systems thinking. These variables are linked © 2015 Macmillan Publishers Ltd. for example varying levels of service quality. This is an important observation because it is well documented that decision-makers are generally oblivious to the presence of time delays in their actions (Sterman. 1989). In Figure 2 there exists a time delay between ‘Actions to Change Actual Conditions’ and the system state ‘Actual Condition’. they are accumulations of the variables of interest. this means that it takes some significant period of time between taking an action on the part of a manager and realizing the results of that action in the behavior of the system. They can be used in either a qualitative or quantitative mode. The time delay complicates both management and communication processes. This aspect of strategic management is associated with the notion of the dominant logic (Prahalad and Bettis. Decision-making activities are depicted by flow or rate variables expressed in units of action/unit of time. for example investments per month. In order to change the rates by which the stocks are deployed and replenished. The variables that describe the state of the system are called stock variables. Warren (1999a.

This is important because it is not realistic to assume that people come onboard immediately and are fully functioning from the start. or auxiliary variables. Here we see that the hiring decision is based solely on the size of the auxiliary variable Workforce gap. The auxiliary ‘Workforce gap’ has the units of people and is computed by subtracting the stock variable ‘Workforce’ (units: people) from the auxiliary ‘desired Workforce’ (units: people). 69–86 and expectations for the future. needs for labor in the production process 76 Corporate Reputation Review Vol. these are variables that managers want to control. This flow variable is partially under control by managers through decisions to layoff or fire workers. The water level is adjusted by either controlling the taps or opening the drain. The units of the stock variables are those of the resource. 2. 18. Resources are stock variables and are shown as rectangles. The most obvious analogy is that of filling water in a bathtub. shares. this is an oversimplification but it serves to illustrate how systems thinking forces decision-makers to clearly define their decision logic. which is a significant modeling decision. 1363-3589 . In this example all of these exits modes have been aggregated. staff. The figure also identifies the decision logic. The auxiliary variable ‘hiring delay’ is included to represent the effect of time on the system’s behavior. Figure 3 gives some typical examples of stock and flows. etc. or flow. compares it to a target level. The level of the workforce is directly controlled by the hiring function. The rate variables are a function of time. Free-standing variables.Systems Approach to Understanding Reputation inflows INVENTORY outflows STOCK producing delivering depositing CASH acquiring CAPITAL STOCK withdrawing Objectives are related to the Stocks scrapping "Control agents" are related to the Flows hiring STAFF/PERSONNEL firing. In Figure 4. They may also be used to perform calculations. defined as the difference between the current workforce level and a desired level. are used to represent additional variables that make up the logic that drive the system. or decision rule. for example. or a combination of the two. that takes the current stock level as inputs. the resource stock is made up of the people comprising the workforce. in this case various items such as cash. The number of workers is also affected by a draining function called ‘losing workers’. the values of the stock variables can only be affected through changes in the rate. the information that is required for decisions to be made. variables that are indicated as ‘valves’ on the double lined arrows leading into and out of the stock. The variable of interest is the amount of water in the tub. Clearly. These are the system variables that indicate the state of the system at any given time. An © 2015 Macmillan Publishers Ltd. Typically. Management takes this decision in conjunction with. for example hiring to increase staff and downsizing to reduce staff. However. and acts on the rate variable to make corrections as needed. resigning Figure 3: earning LIQUIDITY paying BOOK VALUE paying expenses depreciating Examples of stocks and corresponding flows together through the decision logic. The rate variables represent the decisions that are made to maintain the level of the stocks at target values. But it is also affected by decisions made by the workers themselves – retiring or quitting – or through other exit alternatives.

nor is their eventual fate. thereby questioning their mental models. 18. Nevertheless many managers. In this example. 2. In the ‘simple’ shower example above. like the ignorant shower taker. 69–86 Corporate Reputation Review 77 . and updating them in light of new understandings. 1363-3589 Vol. The methodology of systems thinking directly challenges the intuition of management. taking a shower is generally accomplished without drama. we see that understanding the behavior of the shower oscillating between too hot and too cold water supply requires a considerably deeper appreciation of plumbing infrastructure. however. More realistic models may include a description of the hiring process and employee development chain but at some point system boundaries must be set. and the human tendency to expect instantaneous results and to overreact when they are not realized. The ‘clouds’ at the beginning of the inflow double arrow and the end of the outflow define the boundaries of the system. where new workers come from is of no concern. A familiar and realistic example of the challenge of controlling a simple dynamic system is found in attempts to set the perfect temperature for a shower in a hotel where all the showers are served by a single water heater. However. These are the source (for the inflow of new workers) and the sink (where leaving workers depart for). are significant as managing a business is an activity where. flows and decision logic of the shower system is shown in Figure 5. unlike taking a shower in cold water. to wonder precisely what causes the water to suddenly go from hot to cold. perform their functions on the basis of intuition and rarely questioned assumptions. even without the plumbing insights. The implications of taking a systems perspective for strategic management. time delays and lags between action and response.Brønn and Brønn hiring delay (months) hiring new workers (people/month) Workforce (people) + losing workers (people/month) + + - Workforce loss fraction (% per month) Workforce gap (people) + desired Workforce (people) Figure 4: average knowledge per employee Stock and flow diagram representation of hiring and losing employees immediate benefit of using this methodology is that it requires the decision-maker to operationalize the system variables in very concrete terms and to represent the relationships explicitly. © 2015 Macmillan Publishers Ltd. the consequences of blissful ignorance of the drivers and barriers to growth can be substantial. Who has not experienced the oscillations between hot and cold before achieving the desired temperature? In terms of stocks. It does so by requiring decisionmakers to reflect on the basis of their understandings of ‘how things work’.

In either case. managers need to assess the possible consequences of their choice of reputation management strategy. The fundamental solution. The former serves only to ease the symptoms and does not address the underlying cause of the symptoms. Figure 6 shows the system archetype called ‘shifting the burden’ and provides an overview of the feedback structure that generates observations made in the real world. There is a fast acting ‘symptomatic’ solution. 2. 69–86 Symptomatic Solution + + Problem Symptom - - Side Effect + Fundamental Solution Figure 6: archetype - ‘Shifting the Burden’ system acting ‘fundamental’ solution. 1363-3589 . Because business organizations are complex systems. The archetype is called ‘shifting the burden’ because it illustrates the general effect of unintended consequences arising from applying symptomatic solutions to issues that have deeper causes. Both actions ease the symptoms. but through different means. shown by the top negative feedback loop. There are two general types of actions available. 18. and a slower 78 Corporate Reputation Review Vol. The process begins when problem symptoms are experienced and actions need to be taken to deal with them.Systems Approach to Understanding Reputation Action Decision Making Piping and Waterflow The ”Strategic” Goal Figure 5: The dynamics of taking a shower (adapted from Morecroft et al. the bottom negative feedback loop.. © 2015 Macmillan Publishers Ltd. 1995) SYSTEMS THINKING AND REPUTATION MANAGEMENT The bolt-on versus the built-in approach to reputation management can be usefully addressed through the perspective of systems thinking. the selection will have both expected as well as unexpected consequences.

which is also a positive feedback loop. the strategy that is most likely to succeed is one that attempts to find a balance between short. it is a process description (Morecroft. An example of unintended effects of overly relying on short-term fixes is that highquality employees may become disillusioned by management’s attitudes and leave the firm. the more (unexpected) side effects will be realized. 2. In the following sections. and resultant structure in a format that allows for testing the effects of contemplated actions in order to assess their efficacy with respect to achieving desired objectives. As R1 and R2 increase. DYNAMIC REPUTATION MANAGEMENT System dynamics can be used to describe the way in which organization functions through the use of stock and flow symbols and elaboration of the decision-making logic. In that view. The correct understanding is that all of the variables that are in the loop move in the same direction – and this direction can be increasing (called a virtuous circle) or decreasing (a vicious circle. The intention is to show decision-making responsibilities. Similarly. © 2015 Macmillan Publishers Ltd. feedback loop for growth is identified as R1 and consists of a growing action (gaining customers) that generates demand. 1984) of a system. The built-in approach represents a fundamental solution that will also ease the problem symptoms but will do so through other means and with some time delay. 1363-3589 Vol. The bolt-on strategy may have some short-term benefits where improving stakeholders’ immediate perceptions of the firm results in an improvement in the ranking scores and eases the immediate problem. These may be hidden from the initial decision-maker as the effects may be delayed and can have consequences in other parts of the organization. The performance of the firm in meeting the demand is shown in loop R2. The side effects can have several consequences. 18. or reinforcing. a balanced approach to solving hard problems is required. One of the central lessons of systems thinking is that there is never just one outcome. The basic processes that managers are concerned with are growth and investment. in its role as an important intangible resource. The effect of reputation on a firm’s value creation has been the subject of considerable study (see eg. Roberts and Dowling. the problem symptoms may be a pattern of low ratings on reputation rankings such as the RepTrak Pulse©. while also alerting decision-makers to secondary consequences. This is not an idealized model nor is it a normative model. A bolt-on reputation management approach can be seen as the quick and dirty symptomatic solution to some more fundamental problem that is generating the consistently low ratings. taking with them valuable resources upon which the firm could have based a fundamental solution. 2002). The positive. we look in more detail at how systems thinking can be applied to reputation management. Actions taken in complex systems have multiple consequences. the firm grows. one of which may be to make it more difficult to implement fundamental solutions. 69–86 Corporate Reputation Review 79 . This effect is shown by the arrow from the symptomatic solution through the ‘side effects’ variable to the fundamental solution. The CLD shown in Figure 7 illustrates the role that reputation plays in the functioning of a generic firm.Brønn and Brønn however.and long-term actions. This takes significantly more time and this delay is indicated by the double lines across the arrow between fundamental solution and problem symptom. The interpretation is that the more the symptomatic solution is applied. seeks to resolve the deeper issues. the system goals. the level of reputation affects the firm’s ability to manage other resources. or death spiral). Note that ‘positive’ is not to be interpreted as ‘good’. In the case of reputation. The shifting the burden archetype alerts managers to the potential unintended consequences of applying symptomatic solutions. In reality.

acquiring equipment. If the gap is acceptably small. © 2015 Macmillan Publishers Ltd. sales effort. 2. Reputation creating activities + Positive influences demand Internal pressure for Performance Reputation performance relief + + + Pressure to lower Performance Gap + B3 Forming + Standards Positive Reputation Capacity to perform Ability of the Firm to Reputation affects Firm's + + + meet demands for ability to perform by performance Perceived need R6 influencing access to resources Reputation affects to invest + Investment in the tendency to R7 Effect of Reputation on + capacity lower performance capability to perform standards <Positive Reputation> + Causal loop diagram of reputation effect on performance Growth places demands on the processes that generate the performance that is required – production of goods and services through technology and social processes. feedback loop that describes the investment process. the ‘pressure to lower the standards’ may increase. 18. The performance gap is an indicator of how well the firm is doing. a continual reliance on the quick fix. The dynamics of the performance standard are shown in balancing loop B4. If the ‘performance gap’ persists. One consequence is to increase the perceived need for investment in production capacity. In the absence of external influences this type of feedback loop will eventually find equilibrium. or balancing. the difference between what is actually produced and what is expected. The decision to invest is driven by a performance gap. which takes time as indicated by the double slash marks between ‘investment in capacity’ and ‘capacity to perform’. the ‘performance standards’ are revised downward and the performance gap decreases. Since these are positive feedback loops. As the difference increases this raises the perception that investments are needed. If the gap becomes unacceptably large then action is needed. a downward movement of the ‘Performance’ variable (due to lowered standards and insufficient production capacity) will resonate through R2 to R1 and eventually affect the ‘demand’ and the growing action. This is a quick fix type of solution because it does not address the real cause of the poor performance. will feed back to the reinforcing loops R1 and R2.Systems Approach to Understanding Reputation Other actions: advertising. Loop B3 is a negative. This is very much a stop gap measure because the consequences of relying on slipping the standards. hiring new personnel. These are resources in the classical sense and as demand increases the firm must make corresponding investments to increase production capacity – building new plants. after a delay. Performance standards are established with the intent to maintain some acceptable level of performance with respect to market and competitor 80 Corporate Reputation Review Vol. 69–86 expectations. The negative feedback loop (B3) has the characteristic of goal seeking. which leads to an increase in capacity investments and. media Positive (reinforcing) feedback loop Negative (goal-seeking) feedback loop + Growing action + + R1 Demand for Firm's + offerings Demand External influences on Positive Reputation Figure 7: PerformanceStandards R2 R5 Firm's value Secondary effect of B4 performance. the new capacity is on-line and performing. 1363-3589 . If this action is selected. word of mouth. then there is no problem and no changes are needed.

inputs from a range of organizational activities. called ‘retaining’. 69–86 Corporate Reputation Review 81 . attracting new customers and retaining existing ones. This is shown by loop R7. One role is oriented toward the customers where a positive reputation contributes to the ‘growing action’. once something happens to lower peoples’ perceptions of the firm it can rapidly damage the level of ‘Positive Reputation’ that has taken time to build up. and its effect on maintaining standards even while the performance may be having difficulties. media reports. Forming a Positive Reputation about a firm or a product is a complex cognitive process that involves two steps. indicated by the loop R6. the relationship can be represented as a graphical function that best represents decision-makers’ understanding of the relationship. Each of these inputs may be more or less important to individuals and once in short-term memory. The transition. through the process of ‘experiencing’. the inputs will either be forgotten or transferred to long-term memory. different assumptions about the nature of the relationship can be easily tested by changing the shape of the graph and © 2015 Macmillan Publishers Ltd. 2. which is a stock variable. Memories are forgotten from long-term memory as well but at a different rate than from short-term memory. 18. is influenced by many factors but ‘saliency’ of the input and ‘repetition’ serve to anchor the memories. 1363-3589 Vol. advertising and sales campaigns. as shown in the SFD of human information processing in Figure 8. enter into ‘Short Term Memory’. demand will drop and the customer base will shrink. The second role is internally focused and affects the firm in its ability to manage its resources. First. some intentional and others unintentional. Memories are not the same as reputation but they contribute to building a reputation.Brønn and Brønn Advertising information WoM information Personal experience information experiencing Media information saliency threshold Short Term Memory repetition retaining Long Term Memory LT forgetting ST forgetting LT memory loss fraction Direct sales information ST memory loss fraction changing Positive Reputation effect of LT memory on reputation Figure 8: Forming reputation by the human information processing model Customers will observe that the product is deficient. This is reinforcing loop R5. Since the reputation variable is embedded in positive feedback loops. These experiences may include personal familiarity with the firm. the memories contribute to forming the individual’s assessment of the firm’s reputation. In the absence of a specific mathematical formula. Once in long-term memory. In the course of using the model. The translation from a stock of memories to a level of ‘Positive Reputation’ is not well understood in detail but can be represented by the variable ‘effect of LT memory on reputation’. and word of mouth. Reputation plays a number of important roles in this process.

although that is also an important consideration. A good reputation makes the firm a more attractive employer and this eases access to highly qualified applicants. the ‘desired Workforce’ and the ‘hiring delay’. the other is the acquisition of knowledge. The role that reputation plays in this system at one level is quite clear. The boundaries of the model must be expanded to incorporate an upstream stock called © 2015 Macmillan Publishers Ltd. 2. workplace environment and a number of other factors that are not directly tied to financial rewards. it may be possible to find a tradeoff between quantity (number of workers) and quality (knowledge per worker) but for many firms the main problem is access to highly qualified personnel for whom they must compete with other firms. For example. and thus study. both in the same direction (+). Figure 9 extends Figure 4 to include the employee attribute of ‘knowledge’. 69–86 decision logic and identify what information is needed in order to make a decision. In order to more accurately represent. Again. since we have operationalized reputation as a stock variable. But now there are two resources of interest to the firm in this process. As the stocks change over time in response to hiring decisions and the quality of job seekers the result can be variation in the ‘average knowledge per worker’. however. depicted in Figure 4. Where boundaries are placed is an important conscious decision made by modelers. the general structure of the basic hiring process. the decision ‘hiring new workers’ requires only information about the size of the ‘Workforce gap’ – the difference between the current workforce size. The problem is that this representation says nothing about the nature of the relationship between reputation and hiring beyond that they are related. Attracting quality employees is one of the more obvious examples as evidenced by recent interest in employer branding. In system dynamics modeling. they place more weight on the potential for personal development. The single line arrows represent information links. Adding reputation to the model requires additional detail to be added to the description of the flow of workers. Depending on the business. These resources are not independent.Systems Approach to Understanding Reputation comparing the results with those of other graphical shapes. 18. they are bundled in that people bring with them to the firm an individual level of skills. That is. This has downstream effects on the form’s performance – higher knowledge levels improve ‘capacity to perform’. These are the nerve signals that make up the 82 Corporate Reputation Review Vol. This is a necessary but hardly sufficient presentation. The variable ‘average knowledge per employee’ illustrates one of the challenges of the hiring function. The variable is influenced by the ‘Workforce’ and ‘Knowledge’ but these stocks have opposing effects on the value of ‘average knowledge per employee’. adding to the reputation of the organization. To illustrate this. One is the acquisition of people. is on the role that ‘Positive Reputation’ plays in conjunction with the other resources. in the following we focus attention on how reputation can affect the ability of a firm to attract highly competent employees. As such. Our main focus here. the basic hiring structure of Figure 4 must be expanded. This type of potential employee is also one who is more likely to be concerned about the reputation of a prospective employer. is very similar to that of the bathtub filling system. the effect of reputation on the workforce resource. which in turn improves ‘Performance’. 1363-3589 . such as surveys by Universum that measures desirability of firms seen in the eyes of college students and by the popularity of the Best Place to Work rankings. the ‘clouds’ attached to the rate variables indicate the boundaries of the system. we can simply connect this stock with the hiring decision with an information link. The cascade effect of a superior workforce has an obvious effect on the quality of the firm’s products and services.

Brønn and Brønn hiring delay (months) hiring new workers (people/month) + Workforce (people) losing workers (people/month) + + - + + capacity to perform average knowledge per employee desired Workforce (people) + + + + Performance Workforce loss fraction (% per month) Workforce gap (people) <average knowledge per employee> Knowledge gaining knowledge through hiring Part of Loop B3 (Figure 7) + losing knowledge through attrition + knowledge per new hire increasing knowledge through learning knowledge per exiting employee + learning productivity Figure 9: Tracking resource attributes – linking knowledge to the hiring structure <Long Term Memory> Note . Both are measured in units of ‘people’ but the difference is that they are people in different states. Applicants have yet to be transformed into the workforce because they have not been hired. Since the stock variables ‘Applicants’ and ‘Workforce’ are connected on the same flow stream they must have the same units of measure. 69–86 Corporate Reputation Review 83 . Figure 10 shows the main elements of the new structure. 18. 2. Reputation plays a role in transforming the universe of potential applicants.from Figure 8 <effect of LT memory on reputation> changing Positive Reputation Reputation effect on attracting applicants Workforce Applicants attracting applicants hiring new workers + losing workers other factors Figure 10: Expanding system boundaries to model the role of reputation ‘Applicants’. which is © 2015 Macmillan Publishers Ltd. 1363-3589 Vol.

it is not easy to acquire the skill to become comfortable with the method. 69–86 SUMMARY AND MANAGERIAL IMPLICATIONS According to Ruben et al. personal communication) has stated that. and on ‘other factors’. into a new state of being an applicant. feedback is essential. Sterman (1996. the systems approach ‘has been a particularly useful foundation for what may be thought of as the quality approach to organizations’. However. However. formal experiments reveal the probable outcomes of policy alternatives. There are a number of related reasons for this. 2. The problem is that there is no general agreement in theory. Ignoring the other factors. An operating model can be used to communicate with people who were not involved in the actual building of the model itself. systems thinking focuses on quantifying relationships and is very effective in modeling ‘soft’ variables and relations such as this. One common way to deal with this uncertain relationship is to graphically represent the input from ‘Positive Reputation’ to an output ‘reputation effect on attracting applicants’. and there needs to be recognition that the environment shapes the organization at the same time as the organization shapes the environment (Doorley and Garcia. They require policymakers to improve and complete their mental models of the causes of the problem under consideration. (2000). the most significant uncertainty is associated with the effect of reputation on attracting applicants. The methodology we have discussed in this paper involves building managerial policy-making models. systems thinking facilitates assumption surfacing on the part of managers in a flexible manner. Sensitivity analyses of the resulting models reveals areas in which genuine debate is needed. No other strategic analysis tool enables decision-makers to experiment with policies in a laboratory setting. 1363-3589 . This contributes to assuring a smoother implementation processes.Systems Approach to Understanding Reputation the ultimate source of this resource. wide adoption of systems thinking has been relatively slow. There are a number of advantages to using these kinds of tools. system dynamics is a powerful and effective way to communicate among different stakeholders. which may lie outside the scope of managerial responsibility. The stock and flow model identifies the role that reputation plays in attracting desirable applicants to the organization. beyond that one can expect a positive relationship between the two – better reputation results in greater attractiveness. In the process of building a model. which yields more applicants. 2007). the needs and criteria for employment are applied to evaluate the applicants. In this mode. Managers may have opinions on the nature of the relationship. participation is mandatory. This figure shows that the rate at which potential employees are converted into ‘Applicants’ depends on the level of ‘Positive Reputation’ via the ‘Reputation effect on attracting applicants’. Unlike traditional thinking that demands precise measurement. After that transition has been made. as to what this is. Although considerable insight into the reputation system can be gained by employing causal loop and © 2015 Macmillan Publishers Ltd. but these may be as numerous as the number of managers asked about it. self-contradictions and ambiguities are discovered and resolved. Another approach can be to incorporate empirical results from studies of the elasticity of key variables to changes in reputation ratings. With a running simulation model their assumptions can be quickly tested and assessed for veracity. First. 84 Corporate Reputation Review Vol. it says nothing about the nature of the relationship. everyone would be doing it’. ‘if it were easy. Once the model is validated and running. Despite having clear advantages. In order to effectively manage reputation this relationship must be explicitly represented. this is not to suggest that adapting the approach is easy. much less practice. organizational silos need to be broken down. 18.

often based on normative theoretical perspectives that are quite removed from the daily realities of management. 4. 18. CONCLUSION The question posed by Dowling and Moran of whether corporate reputations should be built-in or bolted-on was a starting point for this paper. Systems thinking is. 1994. deeper insights require computer simulation. The analytical evaluation of the model must be carried out by computer simulation. Using this methodology. An excellent self-study program may be found at: http:// www. ‘Hard’ and ‘soft’ factors interact. understanding the consequences of existing and proposed © 2015 Macmillan Publishers Ltd. the question of bolt-on versus builtin can be evaluated with an eye towards understanding both the expected and. Systems thinking requires a break with most of the hard earned thinking and analysis skills that managers have developed over their careers.htm (see also Sterman. 5. Leaving aside the question of the need for a corporate reputation officer. While the model developed in this paper to illustrate the systems thinking approach to reputation is hypothetical. 1996). 2000). Structure shapes behavior. Vennix.systemdynamics. 2. the unexpected consequences of each approach. perhaps more importantly. our proposal to apply the systems thinking methodology to understanding how reputation influences an organization enables managers in different functional units to be more proactive in their relationship to this resource. Complex interrelationships make a systems behavior difficult to understand. application of this type of data is limited to the level of patterns in Figure 1. for example. through that. however. This process is demanding and can be filled with conflict as deeply seated beliefs and assumptions are surfaced and tested for veracity. for example). but it is a powerful language and a methodology for exploring relationships. Systems thinking does not claim to be able to provide ‘The Answer’. and very frequently replaced by other perspectives. a flourishing field and a number of universities also offer degree programs in system dynamics. 2.Brønn and Brønn stock and flow diagramming techniques presented here in a qualitative analysis mode (Morecroft and Sterman. Several simulation software programs are readily available and most suppliers offer extensive and ongoing workshops and user updates to support their clients (Vensim and Isee Systems. Every action produces a reaction ‘Newton’s Third Law of Organizational Motion’. They presented a framework that showed the components of a strategy-based corporate reputation but concluded that ‘… few organizations have a dedicated budget for its development and management. and 6. Perhaps the most important prerequisite for getting started is having an organizational culture that values learning and experimentation. 69–86 Corporate Reputation Review 85 . let alone a senior manager tasked with its oversight’ (Dowling and Moran.org/MITCollectionRoadMaps. Claimed relationships at this level are correlational. the considerable empirical work conducted by. Currently. Feedback reinforces and counteracts. In summary the six principles of systems thinking are: 1. The systems thinking approach is concerned with developing and testing operational explanations of organizational behavior. It can also improve the ability of the firm to learn and. the Reputation Institute can play an important role in specifying many of the relationships that need to be examined in detail in order to develop a functioning model. 3. 2012: 29). Systems thinking operationalized through system dynamics provides managers with a powerful and flexible tool for developing deeper insights into how resources can be best applied to creating value for the firm. 1363-3589 Vol. Time clouds the picture. remain more competitive in the long run.

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