The Effectiveness of Corporate Reputation Management for Product Innovations. Christina Sichtmann, Freie Universität Berlin, Germany.

Transcription

1 The Effectiveness of Corporate Reputation Management for Product Innovations Christina Sichtmann, Freie Universität Berlin, Germany Abstract In this paper, a causal model is developed to measure the effectiveness of corporate reputation on two main drivers of innovation diffusion the purchase intention and the word-of-mouth (WOM) behaviour of potential customers. The results of an empirical study indicate that corporate reputation is in fact an effective way to enhance an innovation's diffusion. It is particularly successful for gaining new customers and encouraging customers to recommend a firm's products. Introduction To secure sustainable survival and market growth of a company it is essential to constantly introduce product innovations (Pauwels et al., 2004). However, failure rates are exceptionally high (e. g. Montoya-Weiss and Cantalone, 1994; Cooper and Edgett, 1996). In order to address new-product failure rates, attempts were made by both marketing research and practice to develop new theories and strategies (e. g. Ali et al., 1995; Hultink and Robben, 1999). However, these endeavours did not substantially increase new-product success. On the contrary, it seems that there is still need for further research to better understand the relationship between launch strategy and an innovation's diffusion in order to reverse this trend. One promising approach that may positively influence consumers' adoption of an innovation is the use of a firm's reputation. It offers the advantage of utilizing brand or company name awareness and image to enter new markets. Knowledge of the company and its positive associations reduce buyer uncertainty, decrease the costs of gaining distribution and improve the efficiency of promotional spending (Aaker and Keller 1990; Tauber 1988). Amazingly, in spite of these advantages, the role of corporate reputation for the adoption of product innovations has been rarely addressed in the marketing literature, and only few empirical studies about this phenomenon exist. The general belief that a positive reputation has positive effects on an innovation's adoption is typically based on anecdotal evidence. The knowledge whether and how strong reputation influences consumers' adoption behaviour may however help established companies to plan a more efficient marketing mix with a stronger focus on reputation management instead of innovation specific activities if reputation proves to be important. Additionally, prior research primarily focuses on the relationship between reputation and purchase intentions which only partly reflects the diffusion process of a product innovation. With regard to consumers' adoption behaviour, the WOM behaviour is equally important (Bass 1969). Innovators and early adopters are often thought for advice when it comes to adopting a new product. Consequently, the more early adopters recommend an innovation, the more consumers adopt the innovation. Finally, for firms it is interesting to know whether corporate reputation has the same impact for the adoption behaviour of all customers, i.e. customers as well as new consumers. This knowledge may help to evaluate the potential to gain new customers and the cross-selling potential associated with a firm's reputation.

2 Against this background, the objective of this study is to empirically analyze the relationship between the reputation and respectively the purchase intention of consumers or their WOM behaviour with regard to a product innovation. Furthermore, it is tested whether reputation has the same effect on the adoption behaviour of existing customers as well as new customers. Based on these goals, first the concepts analyzed and the link between them are discussed. Second, an empirical study is presented where the relationship between those concepts is examined. Finally, the study's implications and limitations are discussed Theoretical Background In general, reputation can be defined as the stakeholders overall estimation of a firm, i. e. the assessment of the company s ability to meet the expectations of its stakeholders (Fombrun, 1996). This study focuses on the (potential) customers of a company. Thus, in this context the term reputation can be specified as the assessment of a company s ability to meet the customers expectations about the quality of its offerings (Shapiro, 1983). Reputation is a social phenomenon resulting from social interaction of consumers who share their experiences with other consumers (Granovetter, 1985). It can be seen as an aggregate of experiences with a company across all previous transactions (Yoon et al., 1993). In this study, reputation is understood as the public assessment of a company in the eyes of consumers, that results from social interaction through individual communication processes and which can be used to assess the quality of its future offerings. An innovation's success depends mainly on the diffusion of an innovation in the market, or, how consumers accept an innovation which is in the focus of adoption and diffusion theory. While diffusion theory refers to the innovation adoption process over time, adoption theory focuses on individual decision processes (Rogers, 2003).One of the most important contribution of diffusion theory is the Bass model for forecasting the rate of adoption (Bass 1969). An innovation's diffusion is modelled as the result of the adoption behaviour of consumers and WOM behaviour. Adoption provides the basis for a successful diffusion of an innovation. Early adopters then are sought for their opinions about the new product which leads to further adoption. Analyzing the impact of reputation on consumer's adoption behaviour, we should consider both variables. However, adoption and WOM behaviour of consumers are not only target variables of diffusion but are interrelated. Due to the Bass model we may assume a positive relationship between the purchase intentions of consumers and their WOM behaviour with regard to a product innovation: H1: The higher consumers' purchase intention the higher their level of WOM behavior. The positive effects of reputation on consumers' adoption behaviour results from the reduction of consumers uncertainty (Yoon et al., 1993). In the case where information about the quality of a product is not available, reputation can serve as an information surrogate by extrapolating the experiences of other customers to the future (Fombrun and Shanley, 1990; Chiles and McMackin, 1996). Consumers use it as an indication of quality (Shapiro, 1982). Moreover, reputation is not confined to one product but can be transferred to other products of the company. As few information is available about the quality of product innovations consumers may infer its quality from a company's reputation. Also, reputation serves as a pledge in the hands of consumers (Spremann 1988). Corporate reputation is an asset that is valuable and significant to a company (Shapiro, 1983; Herbig and Milewicz, 1993; Fombrun, 2001). This asset can be destroyed if the quality of a company s

3 offering does not meet the expectations of a consumer who in turn spreads the word about the bad quality in the market and thus keeps other consumers from buying from this company. Facing the potential loss of its asset, a reputable company is motivated to offer high-quality products influencing consumers' behaviour positively. Numerous theoretical and empirical studies have in fact shown that reputation has a positive effect on the purchase behavior (Shapiro, 1982; Montgomery, 1975; Yoon et al., 1993; Milewicz and Herbig, 1994). This leads to the following hypothesis: H2: The higher the reputation of a company the higher the purchase intention with regard to a product innovation. Furthermore, it is to be assumed that reputation not only has a positive influence on the purchase intention but also on the WOM behaviour of consumers. This relationship can be ascribed to the social risk linked to a recommendation. A bad recommendation would fall back negatively on the adviser which s/he tries to avoid by relying on a firm's reputation. Also, people who are sought for advice can use reputation as an information source themselves. This is particularly important for goods with a high share of experience and credence qualities (Darby and Karni, 1973) that the adviser cannot evaluate her/himself. H3: The higher the reputation of a company the higher the level of positive WOM behavior of a potential customer of a product innovation. With innovations, companies seek to serve existing customers better but also to gain new customers. However, new customers may be more uncertain about the product innovations than customers who already had experiences with a supplier. They therefore use the experiences of others as an information surrogate. Existing customers in contrast may rely more heavily on their own experiences, or base their purchase decision on their loyalty, switching costs or information costs. Therefore, reputation may play a more important role for the purchase decision of customers who never had experiences with a supplier. On the contrary, reputation may have a greater impact on the WOM behaviour of existing customers. As it is to be assumed that existing customers had good experiences with highly reputable firms leading to customer satisfaction they are more likely to recommend a product to others. New customers however, have to rely on the reputation when giving an advice. Therefore, the influence of reputation on consumers' WOM behaviour may be lower for new customers: H4: Experiences of a consumer with a supplier moderate the hypothesized relationships. Data and Research Method An empirical study was conducted in order to test the hypotheses derived above. The survey object chosen was mobile videophoning which was not introduced to the market at the time of the survey in Germany. This choice reflects several requirements the research context had to satisfy to be able to isolate the effect of reputation: (a) the innovation had to be a radical innovation (Mohr 2001) with a high degree of uncertainty; (b) to eliminate spillover effects of other marketing activities the innovation was not to be available on the market yet, but (c) should in fact be marketable in the near future so that consumers at least had an idea about its functions and (d) should consider to purchase the innovation in reality. Four versions of the questionnaires were sent out randomly each representing one of the four mobile phone providers currently offering services on the German mobile phone market. Respondents were 520 undergraduate und graduate students at a German University. The student sample can be

4 substantiated by the fact that this study aims to analyse causal relationships for which a homogeneous sample is favoured (Calder et al., 1981). First, a more precise prediction of consumers' behaviour is expected due to less variance in respondents' behaviour. Second, a homogeneous sample is associated with fewer measurement errors that occur due to sample characteristics. After performing multivariate outlier analysis and exclusion of influential outliers, (Mullen et al., 1995) 468 respondents remained in the sample. In addition, tests of multivariate normality based on skewness and kurtosis of the observed variables were performed. The tests indicate that the data are approximately normal (e. g. Bollen, 1989). Results The questionnaire was developed using variables and rating scales that draw on previous studies (e.g. Anderson and Weitz, 1992; Ganesan, 1994; Doney and Cannon, 1997). Reputation was measured with the items "Company x does have a good reputation", "Company x is frequently recommended", "Experiences that other people have made with company x are positive", and "In general, the media coverage about company x is positive" (Cronbach s α: 0.78, Ø variance explained: %). The WOM behaviour was measured with Talking to friends I speak positive about company x and If a good friend asked me for advice which mobile phone company to choose I would recommend company x (Cronbach s α: 0.78, Ø variance explained: %). Six-point Likert scales with strongly agree and strongly disagree as anchors were used. The purchase intention was measured with a single indicator asking respondents to rate the likelihood with which they would use the UMTS service provided by the supplier given in the questionnaire ( very probable and very improbable as anchors). After having evaluated the quality of the measures applied, a linear structural equation model was estimated with LISREL 8.54 using maximum likelihood method (Table 1). The overall fit indices suggest that the model adequately represents the data. Table 1: Structural Model results H1 PI WOM H2 CR PI H3 CR WOM 0.14 (p=0.00) 0.42 (p=0.00) 0.75 (p=0.00) PI=Purchase Intention, WOM=WOM behaviour, CR=Corporate reputation; completely standardized coefficients estimated by LISREL 8.54 are shown; χ2-value/df=2.86, RMSEA: 0.06, GFI=0.98, AGFI=0.98, RMR=0.04, NFI=0.98, CFI=0.99 The empirical findings suggest that the first three hypotheses framed out are corroborated by the data. After having found support for the main effects predicted, the influence of the moderator variable was assessed. For this purpose, the sample needed to be split into two groups based on a differentiation criterion separating customer with and without supplier experiences respectively. Experiences with a supplier were measured with the question Did you ever use mobile phone services from company x? (yes/no). A multiple group structural equation model (Jöreskog and Sörbom 1996) was estimated to compare the subsamples for both moderator variables (see table 2 for the results). With respect to consumers with experiences with a potential supplier of mobile videophoning, the χ2-differences indicate a significant moderating effect on the influence of reputation on both consumers purchase intention and WOM behavior.

5 Table 2: Moderating Effects of the Variable Experiences (common metric solution) Model χ2-value Df structural equation coefficient invariant model with experience without experience PI WOM no significant difference CR PI rcr WOM behavior freed paramete PI=Purchase Intention, WOM=WOM behaviour, CR=Corporate reputation New potential customers seem more inclined to purchase an innovation if the supplier does have a good reputation. The results suggest that customers who already have experiences with a supplier in fact seem to base their purchase decision on other factors. On the contrary, having a good reputation enhances the chance that an existing customer will recommend the company to other consumers. This relationship is weaker although still strong for consumers with no experiences. Implications Implications are threefold. First, the results show that there is in fact a statistically significant influence of the purchase intention on the probability that a consumer will recommend the innovation to other potential customers. However, the standardized coefficient of 0.14 indicates that this effect is quite small attenuating Bass' forecasting model. Thus, to enhance an innovation's success companies should not only focus on marketing activities to encourage adoption behaviour but also encourage market mavens and opinion leaders who do not necessarily adopt the service (Wiedmann et al., 2001) to spread WOM. Second, the empirical findings prove that reputation is an important determinant of adoption. Instead of launching innovation specific marketing strategies as specific investment it seems efficiently to focus more strongly on reputation management. Third, analyzing the moderating effects of supplier experiences with a certain supplier the data show that reputation helps reputable firms to gain new customers. This information is particularly interesting by combining it with the fact that 97.4% of the respondents already use mobile services of different suppliers. If customers who do not have experiences with a supplier currently use services from other mobile phone providers, the results suggest that with a product innovation a highly reputable company is able to attract customers from competitors and thus can enhance its market share. Consequently, reputation management appears to be an effective option in highly competitive markets where market growth can only be achieved by pulling consumers away from competitors. Limitations and Directions for Future Research Several limitations have to be acknowledged. These include the convenience nature and the geographic region of the sample. Furthermore, the results are also limited to the specific research object chosen. Also, the findings are limited to the specific understanding and measurement of the concepts applied in the study. Finally, this study focused on reputation management as an isolated strategy. However, there are additional variables that influence the purchase intention and the WOM behaviour of consumers which have not been considered. Future studies should examine more strategies to influence an innovation success and analyse the interaction effects with the corporate reputation.

6 References Aaker, D.A., Keller, K.L., Consumer evaluations of brand extensions. Journal of Marketing 54, Ali, A., Krapfel, R.J., LaBahn, D., Product Innovativeness and Entry Strategy: Impact on Cycle Time and Break-Even Time. Journal of Product Innovation Management 12, Anderson, E., Weitz, B., The Use of Pledges to Build and Sustain Commitment in Distribution Channels. Journal of Marketing Research 29, Arrow, K. J., The Limits of Organization. W. W. North Company New York, NY. Bass, F., A New Product Growth Model for Consumer Durables. Management Science 15, Bollen, K.A., 1989.Structural equations with latent variables, Wiley, New York. Calder, B.J., Phillips, L.W., Tybout, A.M., Designing Research for Application. Journal for Consumer Research 8, Chiles, T.H., McMackin, J.F., Integrating Variable Risk Preferences, Trust, and Transaction Cost Economics. Academy of Management Review 21, Cooper, R.G., Edgett, S.J., Critical Success Factors for New Financial Services. Marketing Management 5, Darby, M.R., Karni, E., Free Competition and the Optimal Amount of Fraud. The Journal of Law and Economics 16, Doney, P.M., Cannon, J.P., An Examination of the Nature of Trust in Buyer-Seller Relationships. Journal of Marketing 61, Fombrun, C.J., Reputation Realizing Value from the Corporate Image. Harvard Business School Press, Boston, MA. Fombrun, C.J., Corporate Reputations as Economic Assets. Hitt, M.A., Freeman, R.E. and Harrison, J.S. (Eds.), The Blackwell Handbook of Strategic Management, Blackwell Publishing, Oxford, MA, pp Fombrun, C.J., Shanley, M., What's in a Name? Reputation Building and Corporate Strategy. Academy of Management Journal 33, Ganesan, S., Determinants of Long-Term Orientation in Buyer-Seller Relationships. Journal of Marketing 58, Granovetter, M., Economic Actions and Social Structure. American Journal of Sociology 91, Herbig, P., Milewicz, J., The Relationship of Reputation and Credibility to Brand Success. Journal of Consumer Marketing 10,

7 Hultink, E.J., Robben, H.S., Launch Strategy and New Product Performance: An Empirical Examination in The Netherlands. Journal of Product Innovation Management 16, Jöreskog, K., Sörbom, D., LISREL VIII: User's Reference Guide, Chicago. Milewicz, J., Herbig, P., Evaluating the Brand Extension Decision Using a Model of Reputation Building. Journal of Product & Brand Management 3, Mohr, J., Marketing of High-Technology Products and Innovations, Upper Saddle River. Montgomery, D.B., New Product Distribution: An Analysis of Supermarket Buyer Decision. Journal of Marketing Research 12, Montoya-Weiss, M., Cantalone, R., Determinants of New Product Performance: A Review and Meta-Analysis. Journal of Product Innovation 11, Mullen, M.R., Milne, G.R., Doney, P.M., An International Marketing Application of Outlier Analysis for Structural Equation: A Methodological Note. Journal of International Marketing 3, Pauwels, K., Silva-Risso, J., Srinivasan, S., Hanssens, D.M., New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry. Journal of Marketing 68, Rogers, E.M Diffusion of Innovations. New York. Shapiro, C., Consumer Information, Product Quality, and Seller Reputation. The Bell Journal of Economics 13, Shapiro, C., Premiums for High Quality Products as Returns to Reputations. The Quarterly Journal of Economics 98, Spremann, K Reputation, Garantie, Information. Zeitschrift für Betriebswirtschaft 58, Tauber, E.M., Brand leverage: Strategy for growth in a cost-control world. Journal of Advertising Research 28, Wiedmann, K.-P., Walsh, G., Mitchell, V.-W., The German Manmaven: An Agent for Diffusing Market Information. Journal of Marketing Communications 7, Yoon, E., Guffey, H.J., Kijewski, V., The Effects of Information and Company Reputation on Intentions to Buy a Business Service. Journal of Business Research 27,