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Corporate Reputation Review

Volume 18 Number 2

A Systems Approach to Understanding how

Reputation Contributes to Competitive
Carl Brnn
Norwegian University of Life Sciences, s, Norway
Peggy Simcic Brnn
Norwegian Business School, Oslo, Norway


Reputation has many interpretations, but most agree

that it is an intangible asset that can build competitive
advantage for a rm. 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 ow 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,
6986. doi:10.1057/crr.2015.5

KEYWORDS: competitive
advantage; reputation; strategy; systems thinking

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 denitions of corporate
reputation. Another survey found at least 49
different denitions (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 rms possible behavior in special
situations. Accounting sees reputation as one of
several types of intangible assets that are difcult to measure but that create value. For marketing, reputation comprises the associations
that individuals have with an organizations
name, and in the communication discipline


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Systems Approach to Understanding Reputation

reputation is dened as organizational characteristics that develop from the relationships

the organization has with its environment. In
organizational theory reputation is seen as the
cognitive representation of organizations as
stakeholders acquire meanings of the organization, 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; a
good reputation is an indicator of legitimacy.
In an effort to compare views between and
within the different disciplines, Barnett et al.
(2006) grouped the denitions into three
broad categories:

Awareness: Reputation as the attention that

a stakeholder gives an organization but
does not necessarily mean making a judgment - reputation is seen as a perception or
Assessment: Reputation as a judgment, an
estimate, an evaluation or a gauge; reputation says something about the status of an
Asset: Reputation as something of value
and signicance to the rm; reputation is a
resource, an intangible, nancial or economic asset.

It should be emphasized that there are common characteristics between categories but
they can also be differentiated. Awareness
does not imply an assessment, and assessment
does not imply transformation into an asset
(Barnett et al., 2006: 33). A denition of
reputation suggested by Barnett et al. (2006)
Observers collective judgments of a
corporation based on assessments of the
nancial, social, and environmental
impacts attributed to the corporation
over time. ((Barnett et al., 2006: 34).
This denition emphasizes that reputation is
something that someone outside of the organization sets. At the same time, the denition


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of reputation is socially created. An organizations reputation is therefore impacted by

peoples perceptions based on direct experience with products, the organizations behavior, its character, as well as by the
organizations history and what they are told
by others. This knowledge is colored by each
stakeholder or groups own values. Over time,
the cumulative impressions yield reputational
capital the intangible asset that should
enhance the organizations competitive
advantage. In short, reputation is the appeal
that an organization has in its environment,
but at the same time it is being compared with
other organizations. It is also important to
emphasize that reputation has a time dimension; a reputation is something that is built
slowly and that is lasting.
In this paper, we apply a view of reputation from the strategy discipline, that is, a
good reputation is a resource that gives
competitive advantage because competitors
cannot without difculty imitate it, acquire
it, or replace it. This approach views reputation as a type of intangible resource and
complies with the resource-based view
(RBV) of strategy (Barney, 1986, 1991). It is
a resource that should be protected, just as an
organization protects its other resources.
the reputation of a rm is arguably
the most valuable asset, and thus an asset
worth protecting. Just as the purchase of
other forms of insurance is considered
sound management practice, so too is
the purchase of insurance for a rms
reputation.(Peloza, 2006: 69)
It is thus not unreasonable to claim that
reputation is a strategic resource for the rm
and that thinking about how it affects the
rm is worth the effort. However, viewing
reputation as resource, an intangible one at
that, raises a number of issues, the primary
one being that managing intangible resources
is more problematic than tangible resources
due to their immateriality and difculty in
measuring in many cases.

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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.
The bolted-on approach is typical of organizations that do not couple their reputation
building actions closely to the rms strategy.
The efforts appear to be an afterthought or
add-ons; the activities appear to be insincere
to external stakeholders and thus lower the
estimation of the rm in their minds. The
accusation of engaging in greenwashing is a
common example as it raises the issue of
symbolic versus substantive actions. In contrast, the built-in reputation is one that is
closely grounded in the strategy of the rm.
It is perceived as a more natural component
of the rms activities and can be expected to
give positive associations with the rm in the
minds of a broader range of stakeholders, not
simply shareholders.
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. First, how
does reputation inuence the basic value
creating processes of the rm? Second, what
might be the consequences of implementing
one or the other approach, or some combination of the two, on the reputation of the
rm and its ability to thrive in the long term?
There are no denite answers to these questions, but there are methods available for
exploring potential consequences and learning more about a systems reactions to these
and other strategic initiatives. This paper
proposes that reputations contribution to
building competitive advantage can best be
understood by taking a systems thinking


The business environment is complex in

the broadest interpretation of the word. In
order to assist decision-makers a plethora of

strategy procedures, frameworks and recipes

have been developed. Typical examples
include various forms of value congurations; the McKinsey 7-S model, the balanced
scorecard (BSC) (Kaplan, 2005), and others.
These tools seek to impose a structure on
the environment as a basis for analysis and
action, and a general characteristic of these
approaches is that, with few exceptions (for
example, the BSC), they adopt a linear perspective. For example, a common starting
point for several of them is the identication
of factors that are seen to be relevant in a
given situation based on decision-makers
backgrounds and experiences. The results are
often given as a listing of issues, essentially a
laundry list, which at best are correlated to
the problem situation. Most do not propose a
causal model, and none are readily amenable
to testing. A further missing element in these
frameworks is the feedback relationships
among the factors, another is the time element. The BSC is one popular framework
that clearly illustrates the interconnections of
the major functional units in a rm. However, all too frequently even the circular
causality of the BSC is linearized into a
strategy map (eg, Figge et al., 2002) with
everything pointing to the nancial sector.
Thus, two important aspects of the business context are consistently ignored by most
of these frameworks. One is the recognition
of the organization as a system that is comprised of interrelated subsystems that must
function harmoniously (Sanchez and Heene,
1996). For example, at a high level, there are
two major subsystems the technical and the
social. Digging deeper, we can identify the
familiar functional divisions of marketing,
production, human resources. To be fair, the
traditional value chain is built on recognizing
these functions and identifying the linkages
in a qualitative manner. However, the value
chain analysis does not offer the decisionmaker a means of investigating the long-term
consequences of decisions across functional
divisions. The second aspect is the simple fact

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that time is not explicitly considered in most

of the popular academic and practitioner strategy literature (a notable exception is Warren,
1999a, b). Much of management theory and
practice is based upon static models of the rm
and its environment. By not considering either
the time element or feedback, managers frequently experience outcomes that are both
unexpected and undesired, including dysfunctions such as counterintuitive behavior, policy
resistance and unintended consequences
(Forrester, 1971).
For example, observations of the cyclical
nature of workloads, an increasing reliance
on emergency measures, and the fact that
previously effective methods no longer give
expected results (Davis and ODonnell,
1997) indicate that business organizations
appear to lead lives of their own, independent of managerial actions. These situations
relate to the resources and processes upon
which the rm bases its value creating activities. If these are out of balance, then subsequent poor performance should not be a
surprise. The managerial challenge is to
develop an understanding of the underlying
drivers of these events and patterns. Once
that understanding has been achieved, effective initiatives can be developed to lead the
rm towards its objectives.
Another point is that these tools refer to
traditional tangible and intangible resources,
which by denition play a clear role in value
creation. Reputation, seen by most managers
as an important resource, is an indirect intangible resource. Indirect resources reect peoples emotional response to, or expectations
about, an issue that concerns them. Typical
examples include reputation, staff morale or
non-nancial investor support (Warren,
2000). As such, the role reputation plays in
contributing to organizational performance is
more ambiguous and consequently easier to
oversee or to treat supercially.
Managers are dependent on information
to assess the status of their organizations.
Information comes in a variety of formats


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ranging from the regular reports generated by

the rms information systems, conversations
over a cup of coffee, interactions with external stakeholders and various media reports.
The manner in which all this information is
processed is important with respect to the
decisions and outcomes that are eventually
realized. 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, particularly when applied to
intangible resources such as reputation.


Since business organizations are complex

dynamic systems that encompass multiple
technical and social subsystems, no one
model is adequate to explain the full range of
observed behaviors. The broad range of theoretical perspectives in the eld of strategy
provides ample evidence of this situation.
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 identies the limits of their knowledge
and acknowledges the assumptions that they
make in structuring their situation.
Managers are always confronted with
multiple and often conicting signals about
the state of the organization and its environment. 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. Figure 1 identies
four levels of perception that give increasing
insight into systemic behavior, that is,
behaving in ways that relate to or affect the
entire body of an entire organization. This
framework distinguishes between the real
world and the systems thinking world. The
real world provides the decision-maker with
the empirical data; the systems thinking
world explores the potential mechanisms for

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generating the signals that are observed in the

real world.
In Figure 1, the levels of events and patterns
provide information in the form of problem
symptoms that may initiate managerial action.
Events are single instances that capture a
decision-makers attention. Typical examples
include a crisis in the form of an unexpected
story in the media or other unexpected
occurrences. In many cases the natural reaction is to respond to the event, a reactive
behavior. Clearly, some crises require a
prompt response, but not all crises are of this
kind. Some can be seen as having been built
up over time through a series of events that
were ignored. Looking at a series of events
over time introduces the dynamic element,
resulting in patterns. Pattern thinking can be
illustrated by plotting the number of problematic events that have occurred over some
period of time. When seen in this light,
essentially stepping back from the initial
emotional reaction, an event that receives
considerable media attention may, in fact, not
be as dramatic as rst imagined. The time
interval for developing the pattern will need
to be decided by the decision-maker, but it
serves to dampen the reactive behavior and
promote deeper reection.
However, effective management of a
dynamic system requires another level of
insight. Events and patterns do not just happen, there is something that caused the event
and which maintains the behavior over time.
The dotted line in Figure 1 separates the

Figure 1:

Levels of insight into complex

real tangible world from the systems

thinking world. The next level is that of
structures, models of relationships that will
generate the behaviors observed in the real
world. Systems thinking provides a language
and the tools that can help to identify potential structures that generate the observations in
the real world. These are models, or hypotheses, of what is happening under the hood so
to speak. The dening characteristic of these
models is that they represent endogenous
explanations for the observed behaviors. The
ways that the rm is organized with respect to
material and information ows, as well as
decision logic, determines the systemic behavior. It is an acknowledgment of internal
responsibility for organizational behavior, not
nger-pointing to outside of the rm causes.
Naturally, not all problems that a rm might
experience, including damage to reputation,
result from internal situations. But these are the
ones that managers have, in principle, direct
control over and thus it is reasonable to focus
attention on the rms internal conditions.
The process of developing structural
representations is signicantly inuenced by
the lower level in the schema, that is, mental
models. These are deep cognitive processes
that are developed through education, life
experiences, personality and many other formative events. People try to make sense of
their experiences (Weick et al., 2005) and
mental models are employed to do that. As a
consequence, mental models exert an inuence on the perception and organization of
events and patterns. They also control the
development of the models that represent the
behavior reducing structures. Mental models
rely on many assumptions that are mostly
accepted uncritically. In an ideal systems
thinking-based analysis, these assumptions
would be surfaced as part of the process and
tested for relevance. An open development
process such as this also allows for multiple,
competing explanatory models that can be
discussed and compared. The entire process
of perception and insights is part of a

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Table 1: Comparing Thinking Traditions

Traditional thinking

Systems thinking

Understanding the whole by understanding

the pieces.

To understand the pieces, one must drill

deeply into the details.

To understand relationships, it is necessary to

push back from the detail of the individual pieces.

The pieces are unique; the boundaries are sharp;

it is easy to categorize as this, and not that.
Thus, in order to understand the pieces, precise
measurement is required.

Pieces are unique, but relationships are generic;

distinctions are not either/or but fall along a
Quantication can aid in better understanding
relationships, measurement comes later.

reexive loop process (Ross, 1994) that

results in hypotheses that are tested against
the data and, if found to be useful, can
then be used to experiment with potential
When an issue is clearly structured we
expect general agreement across decisionmakers on the nature of the structure that
generates the observations. However, as the
situation becomes more ambiguous there
may be considerable disagreement regarding
the cause of the observations. Decisionmakers tend to assume that their understanding is the correct understanding of a
situation. This is a dangerous attitude because
research has shown that most peoples mental
models are signicantly decient in, among
other things, understanding the implications
of time delays and the circular causality of
feedback (Sterman, 1989; Schwenk, 1984);
the two elements missing from most of the
standard tools of strategy analysis.
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, which is based
on a reductionist and positivist perspective.
The main differences are indicated in
Table 1.


To understand the whole, one must understand

the relationships between the pieces.
The relationships generate performance over

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The underlying question is what is causing

these symptoms? To answer this question,
attention must be placed at the level of structure (see Figure 1). The systems thinking
approach seeks to generate endogenous
explanations of systemic behavior. When
explicated, these representations describe possible hypotheses for processes that, when put
into motion, generate the events and patterns
over time that are dened as problems.
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 rst 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. Arrows indicate
direction of causality; +/- polarity signs
indicate direction of causality. A positive sign
means that the driver and drivens move in
the same direction, and a minus sign indicates
that they move in opposite directions.
CLDs can be important communication
tools because they make explicit the
closed-loop relationships that characterize

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Action to
Change Actual

Figure 2:

A simple causal loop diagram

organizational (as well as other) systems. An

additional insight from a CLD representation
of a dynamic situation is that of time delays.
These are indicated by double slashes across an
arrow that depicts a causal relationship. In
Figure 2 there exists a time delay between
Actions to Change Actual Conditions and
the system state Actual Condition. Practically,
this means that it takes some signicant 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. 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 the case of a single
negative feedback loop, as in the case of
Figure 2, this can easily lead to undesirable
oscillations of the system state variables, for
example varying levels of service quality. The
time delay complicates both management and
communication processes.
The other systems thinking tool is the
stock and ow diagram (SFD). 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. They can be used in either a qualitative or quantitative mode, the latter
requiring the use of computer simulation.
In the next section, CLDs and SFDs are
used to illustrate the complexity of considering reputation in decision-making. How
they contribute to better understanding the
resource-based view, including reputation, is



The resource-based view of strategy lends

itself well to representation using systems
thinking. The strategy literature has described resources as stocks that are utilized and
replenished by ow variables (Dierickx and
Cool, 1989). Warren (1999a, b and 2000)
made the connection between the RBV and
system dynamics even more explicit in a series of articles that showed how resources,
competition and intangibles can be modeled
using both qualitative and quantitative system dynamics modeling. Kraatz and Love
(2006) argued for a dynamic process-based
approach to studying reputation and made
explicit reference to the language of systems
An important consequence of developing
an operational systems model of (the structure
in Figure 1) is that the decision logic is made
clear. In order to change the rates by which
the stocks are deployed and replenished, the
underlying policy logic must be specied.
This aspect of strategic management is associated with the notion of the dominant logic
(Prahalad and Bettis, 1986) that provided a
cognitive/behavioral explanation for differences in managerial styles of resource
The operational language of systems
thinking uses SFDs. Decision-making activities are depicted by ow or rate variables
expressed in units of action/unit of time, for
example investments per month. The variables that describe the state of the system
are called stock variables. The values of these
variables at any point in time describe the state
of the system at that time; they are accumulations of the variables of interest. Typical
business examples include the number of
employees, amount of debt and reputation
level. The relationship between rate variables
and stock variables is that our interest is in
maintaining the stock variables at certain
levels, and we accomplish this by controlling
the rate variables. These variables are linked

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Objectives are related to the Stocks


"Control agents" are related to the Flows

hiring STAFF/PERSONNEL firing, resigning

Figure 3:





paying expenses

Examples of stocks and corresponding flows

together through the decision logic, or decision rule, that takes the current stock level as
inputs, compares it to a target level, and acts
on the rate variable to make corrections as
needed. The most obvious analogy is that of
lling water in a bathtub. The variable of
interest is the amount of water in the tub.
The water level is adjusted by either controlling the taps or opening the drain, or a
combination of the two.
Figure 3 gives some typical examples of
stock and ows. Resources are stock variables and are shown as rectangles. These are
the system variables that indicate the state of
the system at any given time. The units of
the stock variables are those of the resource,
in this case various items such as cash, staff,
shares, etc. Typically, these are variables that
managers want to control. However, the
values of the stock variables can only be
affected through changes in the rate, or
ow, variables that are indicated as valves
on the double lined arrows leading into and
out of the stock. The rate variables represent
the decisions that are made to maintain the
level of the stocks at target values, for
example hiring to increase staff and downsizing to reduce staff. The rate variables are a
function of time.
In Figure 4, the resource stock is made up
of the people comprising the workforce. The
level of the workforce is directly controlled
by the hiring function. Management takes
this decision in conjunction with, for example, needs for labor in the production process


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and expectations for the future. The number

of workers is also affected by a draining
function called losing workers.
This ow variable is partially under control by managers through decisions to layoff
or re workers. But it is also affected by
decisions made by the workers themselves
retiring or quitting or through other exit
alternatives. In this example all of these exits
modes have been aggregated, which is a signicant modeling decision. The gure also
identies the decision logic, the information
that is required for decisions to be made.
Here we see that the hiring decision is based
solely on the size of the auxiliary variable
Workforce gap, dened as the difference
between the current workforce level and a
desired level. Clearly, this is an oversimplication but it serves to illustrate how
systems thinking forces decision-makers to
clearly dene their decision logic.
Free-standing variables, or auxiliary variables, are used to represent additional variables that make up the logic that drive the
system. They may also be used to perform
calculations. 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). The auxiliary variable hiring
delay is included to represent the effect of
time on the systems behavior. This is
important because it is not realistic to assume
that people come onboard immediately and
are fully functioning from the start. An

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hiring delay

hiring new workers



losing workers


Workforce loss
fraction (% per month)

Workforce gap
desired Workforce

Figure 4:

average knowledge
per employee

Stock and flow diagram representation of hiring and losing employees

immediate benet 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.
The clouds at the beginning of the
inow double arrow and the end of the outow dene the boundaries of the system.
These are the source (for the inow of new
workers) and the sink (where leaving workers depart for). In this example, where new
workers come from is of no concern, nor is
their eventual fate. More realistic models
may include a description of the hiring process and employee development chain but at
some point system boundaries must be set.
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. Who has not experienced the oscillations between hot and cold before achieving
the desired temperature? In terms of stocks,
ows and decision logic of the shower system
is shown in Figure 5.
In the simple shower example above, 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, time delays and lags between
action and response, and the human tendency to expect instantaneous results and to
overreact when they are not realized. However, even without the plumbing insights,
taking a shower is generally accomplished
without drama. The implications of taking a
systems perspective for strategic management, however, are signicant as managing a
business is an activity where, unlike taking a
shower in cold water, the consequences of
blissful ignorance of the drivers and barriers
to growth can be substantial. Nevertheless
many managers, like the ignorant shower
taker, perform their functions on the basis of
intuition and rarely questioned assumptions.
The methodology of systems thinking
directly challenges the intuition of management. It does so by requiring decisionmakers to reect on the basis of their understandings of how things work; thereby
questioning their mental models, and updating them in light of new understandings; to
wonder precisely what causes the water to
suddenly go from hot to cold.

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Piping and

The Strategic

Figure 5:

The dynamics of taking a shower (adapted from Morecroft et al., 1995)



The bolt-on versus the built-in approach to

reputation management can be usefully
addressed through the perspective of systems
thinking. In either case, managers need to
assess the possible consequences of their
choice of reputation management strategy.
Because business organizations are complex
systems, the selection will have both expected as well as unexpected consequences.
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.
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. The process begins when problem symptoms are experienced and actions
need to be taken to deal with them. There are
two general types of actions available. There is
a fast acting symptomatic solution, shown by
the top negative feedback loop, and a slower


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Side Effect


Figure 6:

Shifting the Burden system

acting fundamental solution, the bottom

negative feedback loop. Both actions ease the
symptoms, but through different means. The
former serves only to ease the symptoms and
does not address the underlying cause of
the symptoms. The fundamental solution,

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however, seeks to resolve the deeper issues.

This takes signicantly more time and this
delay is indicated by the double lines across
the arrow between fundamental solution and
problem symptom.
One of the central lessons of systems
thinking is that there is never just one outcome. Actions taken in complex systems
have multiple consequences. This effect is
shown by the arrow from the symptomatic
solution through the side effects variable to
the fundamental solution. The interpretation
is that the more the symptomatic solution is
applied, the more (unexpected) side effects
will be realized. 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 side
effects can have several consequences, one
of which may be to make it more difcult to implement fundamental solutions.
An example of unintended effects of overly
relying on short-term xes is that highquality employees may become disillusioned
by managements attitudes and leave the
rm, taking with them valuable resources
upon which the rm could have based a
fundamental solution.
In the case of reputation, the problem
symptoms may be a pattern of low ratings on
reputation rankings such as the RepTrak
Pulse. 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. The bolt-on strategy may
have some short-term benets where improving stakeholders immediate perceptions of the
rm results in an improvement in the ranking
scores and eases the immediate problem.
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. The shifting the burden archetype alerts managers to
the potential unintended consequences of
applying symptomatic solutions. In reality, a

balanced approach to solving hard problems

is required. In that view, the strategy that is
most likely to succeed is one that attempts to
nd a balance between short- and long-term
actions. In the following sections, we look in
more detail at how systems thinking can be
applied to reputation management.


System dynamics can be used to describe the

way in which organization functions through
the use of stock and ow symbols and elaboration of the decision-making logic. This is
not an idealized model nor is it a normative
model; it is a process description (Morecroft,
1984) of a system. The intention is to show
decision-making responsibilities, the system
goals, and resultant structure in a format that
allows for testing the effects of contemplated
actions in order to assess their efcacy with
respect to achieving desired objectives, while
also alerting decision-makers to secondary
The effect of reputation on a rms value
creation has been the subject of considerable
study (see eg, Roberts and Dowling, 2002).
Similarly, in its role as an important intangible
resource, the level of reputation affects the
rms ability to manage other resources. The
CLD shown in Figure 7 illustrates the role that
reputation plays in the functioning of a generic rm. The basic processes that managers
are concerned with are growth and investment. The positive, or reinforcing, feedback
loop for growth is identied as R1 and consists of a growing action (gaining customers) that
generates demand. The performance of the rm
in meeting the demand is shown in loop R2,
which is also a positive feedback loop. Note
that positive is not to be interpreted as
good. 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, or death spiral). As R1
and R2 increase, the rm grows.

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Other actions:
advertising, sales effort,
word of mouth, media

Positive (reinforcing)
feedback loop

Negative (goal-seeking)
feedback loop

Growing action

Demand for Firm's +

influences on

Figure 7:

Firm's value
Secondary effect of
performance, Reputation creating activities +
Positive influences demand
Internal pressure for
performance relief
Pressure to lower
+ Standards
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
Reputation affects
to invest
Investment in
the tendency to
Effect of Reputation on
lower performance
capability to perform

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. These are
resources in the classical sense and as demand
increases the rm must make corresponding
investments to increase production capacity
building new plants, acquiring equipment,
hiring new personnel. Loop B3 is a negative, or
balancing, feedback loop that describes the
investment process. The decision to invest is
driven by a performance gap, the difference
between what is actually produced and what is
expected. As the difference increases this raises
the perception that investments are needed,
which leads to an increase in capacity investments
and, after a delay, the new capacity is on-line and
performing. The negative feedback loop (B3) has
the characteristic of goal seeking. In the absence
of external inuences this type of feedback
loop will eventually nd equilibrium.
The dynamics of the performance standard
are shown in balancing loop B4. Performance
standards are established with the intent to
maintain some acceptable level of performance with respect to market and competitor


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expectations. The performance gap is an indicator of how well the rm is doing. If the gap
is acceptably small, then there is no problem
and no changes are needed. If the gap
becomes unacceptably large then action is
needed. One consequence is to increase the
perceived need for investment in production
capacity, which takes time as indicated by the
double slash marks between investment in
capacity and capacity to perform. If the performance gap persists, the pressure to lower the
standards may increase. This is a quick x type
of solution because it does not address the real
cause of the poor performance. If this action is
selected, the performance standards are revised
downward and the performance gap decreases. This is very much a stop gap measure
because the consequences of relying on slipping the standards, a continual reliance on the
quick x, will feed back to the reinforcing
loops R1 and R2. Since these are positive
feedback loops, a downward movement of
the Performance variable (due to lowered
standards and insufcient production capacity)
will resonate through R2 to R1 and eventually affect the demand and the growing action.

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Short Term



Long Term

LT forgetting

ST forgetting

LT memory
loss fraction

Direct sales
ST memory
loss fraction



effect of LT
memory on

Figure 8:

Forming reputation by the human information processing model

Customers will observe that the product is

decient, demand will drop and the customer base will shrink.
Reputation plays a number of important
roles in this process. One role is oriented
toward the customers where a positive reputation contributes to the growing action;
attracting new customers and retaining existing ones. This is reinforcing loop R5. The
second role is internally focused and affects
the rm in its ability to manage its resources,
indicated by the loop R6, and its effect on
maintaining standards even while the performance may be having difculties. This is
shown by loop R7. Since the reputation
variable is embedded in positive feedback
loops, once something happens to lower
peoples perceptions of the rm it can rapidly
damage the level of Positive Reputation that
has taken time to build up.
Forming a Positive Reputation about a rm
or a product is a complex cognitive process
that involves two steps, as shown in the SFD
of human information processing in Figure 8.
First, through the process of experiencing,
inputs from a range of organizational activities, some intentional and others unintentional, enter into Short Term Memory. These
experiences may include personal familiarity

with the rm, media reports, advertising and

sales campaigns, and word of mouth. Each of
these inputs may be more or less important to
individuals and once in short-term memory,
the inputs will either be forgotten or transferred to long-term memory. The transition,
called retaining, is inuenced by many factors but saliency of the input and repetition
serve to anchor the memories. Memories are
forgotten from long-term memory as well
but at a different rate than from short-term
memory. Once in long-term memory, the
memories contribute to forming the individuals assessment of the rms reputation,
which is a stock variable.
Memories are not the same as reputation
but they contribute to building a reputation.
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. In the absence of a specic mathematical formula, the relationship can be
represented as a graphical function that best
represents decision-makers understanding
of the relationship. In the course of using
the model, different assumptions about the
nature of the relationship can be easily tested
by changing the shape of the graph and

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comparing the results with those of other

graphical shapes.
Our main focus here, however, is on the
role that Positive Reputation plays in conjunction with the other resources. To illustrate this, in the following we focus attention
on how reputation can affect the ability of a
rm to attract highly competent employees.
Attracting quality employees is one of the
more obvious examples as evidenced by
recent interest in employer branding, such as
surveys by Universum that measures desirability of rms seen in the eyes of college
students and by the popularity of the Best
Place to Work rankings. The cascade effect
of a superior workforce has an obvious effect
on the quality of the rms products and
services, adding to the reputation of the
Again, the general structure of the basic
hiring process, depicted in Figure 4, is very
similar to that of the bathtub lling system.
But now there are two resources of interest
to the rm in this process. One is the acquisition of people; the other is the acquisition
of knowledge. These resources are not independent; they are bundled in that people
bring with them to the rm an individual
level of skills. Depending on the business, it
may be possible to nd a tradeoff between
quantity (number of workers) and quality
(knowledge per worker) but for many rms
the main problem is access to highly qualied
personnel for whom they must compete with
other rms. This type of potential employee
is also one who is more likely to be concerned about the reputation of a prospective
employer. That is, they place more weight
on the potential for personal development,
workplace environment and a number of
other factors that are not directly tied to
nancial rewards, although that is also an
important consideration.
Figure 9 extends Figure 4 to include the
employee attribute of knowledge. The single
line arrows represent information links.
These are the nerve signals that make up the


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decision logic and identify what information

is needed in order to make a decision. For
example, the decision hiring new workers
requires only information about the size of
the Workforce gap the difference between
the current workforce size, the desired
Workforce and the hiring delay.
The variable average knowledge per
employee illustrates one of the challenges of
the hiring function. The variable is inuenced by the Workforce and Knowledge
but these stocks have opposing effects on
the value of average knowledge per employee.
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. This has downstream effects on the forms performance
higher knowledge levels improve capacity to
perform, which in turn improves Performance,
both in the same direction (+).
The role that reputation plays in this system at one level is quite clear. A good reputation makes the rm a more attractive
employer and this eases access to highly qualied applicants. As such, since we have
operationalized reputation as a stock variable,
we can simply connect this stock with the
hiring decision with an information link.
This is a necessary but hardly sufcient presentation. The problem is that this representation says nothing about the nature of the
relationship between reputation and hiring
beyond that they are related.
In order to more accurately represent, and
thus study, the effect of reputation on the
workforce resource, the basic hiring structure
of Figure 4 must be expanded. In system
dynamics modeling, the clouds attached to
the rate variables indicate the boundaries of
the system. Where boundaries are placed is
an important conscious decision made by
modelers. Adding reputation to the model
requires additional detail to be added to the
description of the ow of workers. The
boundaries of the model must be expanded
to incorporate an upstream stock called

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hiring delay
hiring new workers


losing workers


capacity to

average knowledge
per employee

desired Workforce



Workforce loss
fraction (% per month)

Workforce gap

<average knowledge
per employee>


gaining knowledge
through hiring

Part of Loop B3
(Figure 7)

losing knowledge
through attrition

knowledge per
new hire
through learning

knowledge per
exiting employee


Figure 9:

Tracking resource attributes linking knowledge to the hiring structure

<Long Term

Note - from
Figure 8
<effect of LT memory
on reputation>



Reputation effect on
attracting applicants



hiring new

losing workers


Figure 10:

Expanding system boundaries to model the role of reputation

Applicants. Figure 10 shows the main elements of the new structure. Since the stock
variables Applicants and Workforce are connected on the same ow stream they must
have the same units of measure. 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.
Reputation plays a role in transforming
the universe of potential applicants, which is

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the ultimate source of this resource, into a

new state of being an applicant. After that
transition has been made, the needs and criteria for employment are applied to evaluate
the applicants.
This gure 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, and on other factors.
Ignoring the other factors, which may lie
outside the scope of managerial responsibility, the most signicant uncertainty is
associated with the effect of reputation on
attracting applicants. In order to effectively
manage reputation this relationship must be
explicitly represented. The problem is that
there is no general agreement in theory,
much less practice, as to what this is. Managers may have opinions on the nature of
the relationship, but these may be as
numerous as the number of managers asked
about it. Unlike traditional thinking that
demands precise measurement, systems
thinking focuses on quantifying relationships and is very effective in modeling soft
variables and relations such as this.
The stock and ow model identies the
role that reputation plays in attracting desirable applicants to the organization. However,
it says nothing about the nature of the relationship, beyond that one can expect a positive relationship between the two better
reputation results in greater attractiveness,
which yields more applicants. 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. In this mode, systems
thinking facilitates assumption surfacing on
the part of managers in a exible manner.
With a running simulation model their
assumptions can be quickly tested and assessed for veracity. Another approach can be to
incorporate empirical results from studies of
the elasticity of key variables to changes in
reputation ratings.


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According to Ruben et al. (2000), the systems

approach has been a particularly useful
foundation for what may be thought of as the
quality approach to organizations. However,
this is not to suggest that adapting the
approach is easy; organizational silos need to
be broken down, feedback is essential, participation is mandatory, 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, 2007).
The methodology we have discussed in
this paper involves building managerial policy-making models. There are a number of
advantages to using these kinds of tools. They
require policymakers to improve and complete their mental models of the causes of the
problem under consideration. In the process
of building a model, self-contradictions and
ambiguities are discovered and resolved.
Once the model is validated and running,
formal experiments reveal the probable outcomes of policy alternatives. No other strategic analysis tool enables decision-makers to
experiment with policies in a laboratory setting. Sensitivity analyses of the resulting
models reveals areas in which genuine debate
is needed; system dynamics is a powerful and
effective way to communicate among different stakeholders. An operating model can be
used to communicate with people who were
not involved in the actual building of the
model itself. This contributes to assuring a
smoother implementation processes.
Despite having clear advantages, wide
adoption of systems thinking has been relatively slow. There are a number of related
reasons for this. First, it is not easy to acquire
the skill to become comfortable with the
method. Sterman (1996, personal communication) has stated that, if it were easy,
everyone would be doing it. Although considerable insight into the reputation system
can be gained by employing causal loop and

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stock and ow diagramming techniques presented here in a qualitative analysis mode

(Morecroft and Sterman, 1994; Vennix,
1996), deeper insights require computer
simulation. The analytical evaluation of the
model must be carried out by computer
simulation. 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, for example). An excellent
self-study program may be found at: http://
www.systemdynamics.org/MITCollectionRoadMaps.htm (see also Sterman, 2000).
Systems thinking requires a break with
most of the hard earned thinking and analysis skills that managers have developed
over their careers. Systems thinking is,
however, a ourishing eld and a number
of universities also offer degree programs in
system dynamics. Perhaps the most important prerequisite for getting started is having
an organizational culture that values learning and experimentation.
In summary the six principles of systems
thinking are:
1. Every action produces a reaction Newtons Third Law of Organizational
2. Structure shapes behavior;
3. Complex interrelationships make a systems behavior difcult to understand;
4. Time clouds the picture;
5. Hard and soft factors interact; and
6. Feedback reinforces and counteracts.


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. 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, let

alone a senior manager tasked with its oversight (Dowling and Moran, 2012: 29). Leaving aside the question of the need for a
corporate reputation ofcer, our proposal to
apply the systems thinking methodology to
understanding how reputation inuences an
organization enables managers in different
functional units to be more proactive in their
relationship to this resource. Using this methodology, the question of bolt-on versus builtin can be evaluated with an eye towards
understanding both the expected and, perhaps
more importantly, the unexpected consequences of each approach. Systems thinking
operationalized through system dynamics
provides managers with a powerful and exible tool for developing deeper insights into
how resources can be best applied to creating
value for the rm. It can also improve the
ability of the rm to learn and, through that,
remain more competitive in the long run.
While the model developed in this paper
to illustrate the systems thinking approach to
reputation is hypothetical, the considerable
empirical work conducted by, for example,
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. Currently, application of this type of data is limited to the level of patterns in Figure 1.
Claimed relationships at this level are correlational, often based on normative theoretical
perspectives that are quite removed from the
daily realities of management.
The systems thinking approach is concerned with developing and testing operational explanations of organizational behavior.
This process is demanding and can be lled
with conict as deeply seated beliefs and
assumptions are surfaced and tested for veracity; and very frequently replaced by other
perspectives. Systems thinking does not claim
to be able to provide The Answer; but it is a
powerful language and a methodology for
exploring relationships, understanding the
consequences of existing and proposed

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