The themes of technological innovation, entrepreneurship, and organizing

Innovation and Corporate Reputation: Britain’s Most Admired Company Surveys 1990-2009

Michael Brown

Birmingham City University, UK

Paul Turner

Anglia Ruskin University, UK

ABSTRACT

As much as 75% of a company’s value derives from its intangible assets. One of the most important of these intangible assets is corporate reputation. The Britain’s Most Admired Company surveys into corporate reputation includes nine characteristics, one of these is a company’s ‘capacity to innovate’. Surveys between 1990 and 2009 show that a good reputation for innovation does not guarantee a good overall reputation; nor does a reputation for innovation lead to business success. However, where a company has a reputation for innovation and is able to manage other characteristics, there is a better chance that this company will develop its innovation capability into long-term competitive advantage and profitability. Central to this conclusion is converting innovation into enhanced processes, products or services through effective implementation. The research identifies key attributes of companies that combine a reputation for innovation, with a good corporate reputation overall and business success.

DOI: 10.4018/978-1-61350-165-8.ch015

Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.

INTRODUCTION

This chapter discusses the relationship between innovation and corporate reputation. It analyses peers’ perceptions ofthe ‘capacity to innovate’ as measured in the Britain’s MostAdmired Company (BMAC) surveys of corporate reputation, against other measures of reputation such as leadership or financial soundness. Between 1990 and 2009, the surveys produced data on nine measures of reputation from 761 British companies. The perceptions of business leaders who participated in BMAC surveys provide a perspective on the value of innovation in determining a company’s overall reputation; and offer insights into the practices of those companies that achieve a high rating in the surveys.

We use Fombrun’s (1996) definition of corpo­rate reputation as the ‘net affective reactions of customers, investors, employees and the general public’. Reputation is an internally owned, ex­ternally evaluated, intangible asset that emanates from a company’s history, location, culture, and from its distinctive capabilities or competencies. (Kay 1993). One of these competencies is the capacity to innovate.

BACKGROUND

The Schumpeterian assumption that ‘static firms rapidly face losses and thus bankruptcy,’ (Kurz 2007) provides a compelling case for organisations to be innovative. However, Repenning’s (2002) view that ‘the history of management practice is filled with innovations that failed to live up to the promise suggested by their early success’ is indicative ofthe case against. Hawn (2004) echoes the view suggesting that; ‘some of the most in­novative companies in the history of American business have been colossal failures’. Innovation alone is insufficient; it does not guarantee delivery of corporate objectives, competitive advantage

or a superior, sustainable, corporate reputation, either in the medium or long term.

The analysis of the relationship between in­novation and corporate reputation is intended to provide insight into the paradox between the obj ective of innovation as a route to prosperity and the actuality of innovation practice, which can be fraught with difficulty (Dougherty & Heller, 1994). Do those companies that achieve a high reputation for innovation have philosophies or practices that can help in the solution to this paradox?

There has been research into the relationships between innovation and profitability (Xin, Yeung & Cheng, 2010); firm performance (Artz, Norman & Cardinal, 2010) and the role of institutional investors (Kochhar & Parthiban, 1996). Other areas of interest include the relationships between innovation and the dynamics of organisational in­novation (Monge, Cozzens & Contractor, 1992; the effectiveness of knowledge management (Vaccarro, 2010) cooperation and collaboration (De Faria Lima & Rui, 2010); and organisational change and renewal (Dougherty, 1992). Tzeng (2009) identified three classifications, or schools of thought about innovation from this research, namely those of capability, corporate entrepre­neurship and culture.

There is less research into the linkages between innovation and corporate reputation. The findings from the BMAC surveys suggest that there are ele­ments from each of Tzeng’s three classifications.

BRITAIN’S MOST ADMIRED COMPANIES SURVEYS INTO CORPORATE REPUTATION (BMAC) The Methodology of the BMAC Surveys

Since 1990, the BMAC survey has polled senior executives in companies with the highest market capitalisation on the British Stock Exchange. This process has provided data over a 19-year period producing approximately 3 million observations. The BMAC surveys provide continuity of data since 35% of the companies that have taken part were in both the first (1990) and the latest (2009) survey.

These data offer insights as to how a reputation for innovation (an intangible asset) translates into the practice of innovation, leading to successful business performance and hence profit (a tangible asset). Heil (2008) makes the case for an ontologi­cal enquiry with respect to organisational reputa­tion, identity and innovation, whilst Courtright and Smudde (2009) propose a process of ‘identity, image and reputation that situates message design in the context of diffusions of innovations theory.’ In both cases, there is an implied link between innovation and corporate reputation, though em­pirical evidence does not consistently support this relationship at the company level’. (Brito, Brito & Morganti, 2009).

Senior executives of each participating com­pany provided their perceptions for other com­panies in the sector in which they operated (e. g. finance, retailing, engineering) across each of nine characteristics that determine a company’s reputa­tion. namely; the quality of management (QM); financial soundness (FS); the quality of products (QP); the ability to attract retain and develop top talent (AADRT); value as a long term investment (VLTI); the capacity to innovate (CI); the quality of marketing (QMar); community and environmental responsibility (Cer); and the use of corporate assets (UCA). A company’s characteristics are scored on a Likert scale of 0-10, (0 = poor, 5 = average and 10 = excellent). Bipolar scales in the form of opposite adjectives, poor to excellent, capture the respondents’ attitudes towards each company within the sector, for each of the characteristics. The results are a most admired company for each of the characteristics, and for each sector and a ‘Britain’s Most Admired Company’ overall.

A Longitudinal Analysis of the ‘Capacity to Innovate’ Characteristic in the BMAC Survey: A Period of Stasis

Figure 1 shows the average ratings of each of the nine characteristics measured in the BMAC surveys from 1990-2009. Financial soundness, the quality of goods and services and the quality of management are the three characteristics that have consistently received the highest ratings. Financial soundness has finished in number one position for 12 out of the 19 years of the survey and the quality of goods and services on six occa­sions; and both shared the highest position in 2000. The quality of management is normally in second or third place. At the other extreme community and environmental responsibility is consistently the lowest rated of the reputation characteristics.

British executives and business analysts who contribute to the BMAC surveys rate the capac­ity to innovate as less important than other busi­ness attributes. For most of the period between 1990 and 2009, the relative performance of in­novation as a perceived strength in British com­panies was consistently low. In 1990 the capac­ity to innovate was in the bottom third of the characteristics and remained so for most of the years of the survey. There have been few periods when innovation achieved a high ranking or high performance ‘scores.’ The notable exception was during the dot. com boom of 1999-2001 when the capacity to innovate was a more desirable objec­tive for businesses than it had been in previous years and British companies raised their perfor­mance. The innovation characteristic was 4th out of nine in 2001. This was the highest position in the history of the surveys. However, by 2003, capacity to innovate again rated sixth or lower. From 2006-2009, only the quality of marketing and community and environmental responsibility ranked below the capacity to innovate in the BMAC survey.

There is further evidence for ‘innovation sta­sis’ when reviewing executive responses to the importance of BMAC characteristics between 2000 and 2008. Table 1 shows responses concern­ing the importance of the nine characteristics in the BMAC surveys in two years and, whilst the innovation score has increased marginally, it has remained in sixth position.

The Correlation between Innovation and Other Characteristics in the BMAC Survey

The rating of innovation in the BMAC surveys appears counter to the belief in the importance of innovation. An explanation for this may be to do with perceptions of actual performance rather than a critique of innovation as an objective for the future. Nevertheless, the BMAC surveys offer insights as to how an organisation can convert its innovativeness onto practical value added. They do this by showing the characteristics most closely associated with innovation. Table 2 identifies the relationship between innovation and other characteristics using a series of survey correlation coefficients. The table shows the correlation results at two points in time, 1992 and 2009.

In the first year of the analysis, (Saunders, Brown & Laverick, 1992) innovation (CI) is shown to be most strongly associated with the ability to attract talent and the quality of marketing. At this time, a reputation for innovation was dependent upon having innovative people in the company rather than having innovative processes. In addi­tion, the association between innovation and quality of marketing, the second highest correla­tion in 1992, points to innovation being recognised through a company’s external projections, its advertising or PR or through other aspects of the marketing mix such as distribution.

In the second year, however (2009), the rela­tionships had changed. The capacity to innovate is associated strongly with the quality of a company’s products though once again having a strong people relationship. Given that employee engagement and participation in innovation implementation

QM = Quality of management, FS = Financial Soundness, QP = Quality of Goods and Services, AAT= Ability to attract, develop and retain top talent, VLTI = value as a long term investment, C2I = Capacity to innovate, QMr = Quality of Marketing, Cer = Community and Environmental Responsibility, UCA = Use of corporate assets

is a complex role (Cadwallader, Jarvis, Bitner & Ostrom, 2010) there is sense in seeing the strength of the relationship between the people characteristic and innovation. Furthermore, Fidler and Johnson (1984) argued that:

‘The capacity of a decision unit to induce innova­tion implementation within an adoption unit is crucial to organizational success. Risk and com­plexity are characteristics of innovations that can lead to resistance within organizational adoption units. Communication costs, types of power, and communication channels are structural charac­teristics that can be used by a decision unit to overcome this resistance. The interaction of these factors can determine the degree of successful innovation implementation within organizations. ’

The results of the BMAC surveys suggest that effective people management, culture and communication are critical success factors to suc­cessful innovation. Indeed, Klein and Sorra (1996) proposed that ‘implementation effectiveness, the consistency and quality oftargeted organizational members’ use of an innovation, is a function of (a) the strength of an organization’s climate for the implementation of that innovation and (b) the fit of that innovation to targeted users’ values.’ The increasing strength of association between innova­tion and people management in the BMAC survey between 1992- 2009 is further recognition on the importance of this association on the part of those executives who participated in BMAC surveys.

There are two other areas where the association appears to be strong. In the first, the correlation between innovation and value as a long-term investment has increased markedly (an increase in correlation from 0.4 to 0.7). Secondly, the association between innovation and the quality of management characteristic has also increased markedly (from 0.5 to 0.7) thereby giving support to Michaelis, Stegmaier and Sonntag’s (2010) view that ‘companies should invest in transformational leadership training and in the selection of supervi­sors with this leadership style before initiating the implementation of innovations.’ The BMAC data give further credence to this finding.

The following sections will test some of the changes in strength of association by highlighting the type of company and business sectors that have performed well in the innovation characteristic and drawing lessons from their experiences.

The Ranking of Companies and Business Sectors in the Capacity to Innovate Characteristic in the BMAC Survey

Since 1990, only two companies that finished top in the innovation characteristic of the BMAC survey also came top overall (Tesco and BSkyB). Others have fared less well. The 1995 innovation winner for example, British Land, came in 20th in the overall positions for corporate reputation and Burford, 1997’s most innovative company, came in 36th overall. Technology company ARM Holdings, the 2006 innovation characteristic win­ner also came in 36th in the overall assessment of corporate reputation. TheAmerican MostAdmired Company surveys mirror the discrepancy between a reputation for innovation and overall reputation performance. In 2007, for example, Apple, Google and FedEx were the top three in the innovation category but did not make the top five overall. In 2006 only Apple and in 2005 only FedEx from the top three most innovative companies made the top 20 overall in the America’s Most Admired Company surveys. The conclusion from these comparisons is that a reputation for innovation is no guarantee of a reputation for overall business reputation.

There is further evidence of this ambivalence when looking at sector analysis for innovation reputation. Between 1994 and 2009, innovative­ness was a feature of many industries rather than just one showing a broad sweep of innovation in the British economy. On the other hand, there is the negative connotation that few industries appear to

have built a sustained competitive position through innovation. For example, the finance sector’s share of vote for innovation over the period 1996-2006 increased from 1% to 13%. However, after 2008, there was a collapse in the sector’s reputation for innovation. This may have been a backlash at too much innovation and too little governance or financial control, especially in the area of dealing with sub - prime mortgage financing and derivative products. The highest rated Bank in the BMAC survey in 2009 was Banco Santander at 44th place for innovation. Royal Bank of Scotland was the 170th most innovative company in Britain in 2009 (29th in 1999); Lloyds Banking Group was the 176th most innovative company (24th in 1998). The British financial services sector, once perceived as one of the most innovative of all the business sectors was, by 2010, an innovation laggard.

Other sectors have been able to build more sus­tainable reputations for innovation. The chemicals and engineering sectors have had high reputations for innovative practices. The technology sector, on the other hand has had a variable performance, though in recent times, BSkyB has enhance that reputation considerably. Telecommunications increased its share of the innovation ‘vote’ re­flecting developments in the mobile business and recently there was recognition for Autonomy (4th in 2009) and Qinetiq. Both the media and retail sectors, however, saw their shares of innovation votes fall over the period of the survey. In the period 2000-2002 Tesco, Iceland, Dixons, Next, Selfridges, French Connection and Morrisons were amongst those retailers rated highly for their innovative qualities (retailers received 23% ofthe votes for innovation.) By 2009, only Tesco, from the retailing sector, made the top 20 companies, though some oftheir suppliers Britvic, Diageo and Cadbury were all in high positions in this year.

Results ofthe BMAC survey from 1990-2009 show that a reputation for the capacity to inno­vate is difficult to sustain and furthermore is not a guarantee of a reputation for overall business performance. Whilst Tesco and BSkyB have shown excellence for reputation in innovation, overall and backed this up with strong financial results, British Banks, and other business sectors failed to convert innovation into business success with any consistency (and the banks’ failure was dramatic).

The Challenges of Innovation in Larger Companies

Why is innovation such a challenge? The evi­dence from the BMAC surveys seems counter to perceived wisdom about the importance of innovation in organisations. There are several possible explanations for this. First, executives regarded innovation in the lower range of critical management activities and therefore not deserv­ing of the higher scores given to, say, financial management or quality of management. Second, they regarded innovation as important, but did not rate the performance of British companies as being particularly innovative. A third possibility however, is that the executives had insights about the challenges of innovation in the type of large organisation that made up the constituents of the BMAC surveys and this was reflected in their assessment. There is research evidence to support this hypothesis.

On the one hand, there are arguments in fa­vour of the scale advantages of large companies and innovation success. Research has shown, for example, that ‘the financial rewards ofinnovation vary dramatically across firms and are tied closely to firms’ resource base. Firms that provide higher per-product levels of marketing and technology support obtain much greater financial rewards from their radical innovations than do other firms’ (Sorescu, Chandy & Prabhu, 2003). Those organi­sations that have resources to back up innovation are more likely to reap the benefits. Large organi­sations, though not exclusively, would feature in this category. On the other hand, research has also shown that there are barriers to innovation in large established firms. (Dougherty & Heller, 1994) and that ‘fostering innovation and supporting a culture in practice...is easier said than done’ (Jas - sawalla & Sashittal, 1993). In addition, even when a company was successful in innovation and had achieved a reputation for innovation, there was no guarantee that this would filter through to the company’s wider reputational standing.

Further analysis ofthe performance of specific companies that have featured in BMAC surveys may shed some light onto the subject ofinnovation and its conversion into business success.

INNOVATION AND PERFORMANCE: KEY LESSONS FROM THE RESULTS OF THE BMAC SURVEYS Innovation Stasis

Research from BMAC data has suggested that innovation is not as highly regarded as other business attributes such as financial soundness or quality of management in determining a com­pany’s reputation. Moreover, over the period of the BMAC surveys, the results for innovation remained in stasis. Why should this be the case given the strong assumption that innovation is such a critical aspect of sustained performance? One hypothesis is that the challenge of convert­ing innovation reputation and, by implication, innovation actuality into business performance is difficult. There are exceptions, such as Tesco, Rolls Royce and Johnson Matthey, but other companies are not able to sustain a reputation for innovation, nor are they able to develop a wider reputational or indeed a better business performance,

There are further insights when deconstruct­ing the total reputation score and analysing the capacity to innovate component against other components that make up total reputation. Two companies, Pilkington Glass and BSkyB, provide key lessons. Both companies were repeatedly top within their respective sectors (Building Materials and Media) in terms oftheir capacities to innovate.

Deconstructing the total reputation into its con­stituent parts provide s an opportunity to undertake a more detailed analysis of the performance of these two companies.

Innovation Paradox: The Case of Pilkington Glass

Pilkington Glass is a successful company that achieved sustained recognition for its capacity to innovate between the years 1990-2006 in the BMAC surveys. However, their experience also confirms that achieving an excellent reputation in a single characteristic will not necessarily filter through to an excellent overall reputation. The reason behind this may be that a good deal of the company’s strategic effort and resource is perceived as being allocated to a single area. Such focus may well detract from other important busi­ness activity, whether this is through a dilution of management effort or an imbalance in resource allocation. This observation supports Teece’s (1988) finding that the competitive potential em­bedded in new technology is difficult to capture. The experience of Pilkington demonstrates this point to some extent and we refer to this as the Pilkington Paradox.

Pilkington Glass was established in 1826 and, during the years ofthe BMAC survey from 1990, achieved an international reputation for innova­tion. Figure 2 outlines its composite scores. Over each ofthe years ofthe survey, Pilkington achieved high ratings from executives within the business sector in which the company operated for both the capacity to innovate and the quality of its products. The company’s innovations included developing a universal process for the manufacturing of flat glass, the development of K glass with coatings, automotive glass, laminated glass, fire resistant glass, bullet proof glass, energy saving glass, solar controlled and thematic insulation glass and self cleaning glass. Because of this combination of invention and innovation, Pilkington Glass was highly regarded. The company was able to
translate this innovation into quality of products backed by successful marketing.

However, whilst acknowledging an outstand­ing performance for innovation, executives and analysts in the BMAC survey did not rate Pilk- ington highly for other important business attri­butes, the most notable of which were value as a long-term investment and financial soundness.

The Financial Times carried an article reinforcing this point:

‘The company’s inventions include energy-saving andfire-resistant glass and advancedprocessesfor making car windscreens in complex shapes. But, like many UK companies, Pilkington had failed to turn its inventiveness into financial success ’

(Skapinker 2001).

Whilst being at the forefront of innovation in the sector, and whilst achieving international recognition for the advances made, difficulties re­mained in converting these successes into financial gain. In 2001, the company’s profits fell 3 8 per cent to £132m, and between 1996 and 2000; Pilkington shares underperformed the market by more than 50 per cent. Pilkington Glass is an example of a company that had excelled in innovation but less so in its reputation for financial management. Figure 3 shows that the two financial characteristics were consistently amongst the lowest rated.

Pilkington Glass was acquired by Nippon Sheet Glass in June 2006 for £2,2bn (Blitz, 2006), thereby ending a long run in which the company had attempted to stave off takeover. A focus on economies of scale and scope for innovation enabled Pilkington to increase its Group revenues to ¥ 588bn in 2010, with a profit of ¥ 0.9bn. Pilkington were able to report that, ‘controlled cash management and cost reduction continue to mitigate the impact of the challenging conditions in our markets’ (Pilkington Group, 2010).

BSkyB: A Holistic Approach to Innovation and Business Management

BSkyB had similar recognition to Pilkington as a company rated by executives in the BMAC surveys for its capacity to innovate. In 1997, the company was in tenth position behind such companies as Orange, Glaxo, Reuters and Tesco, but the follow­ing year BSkyB was in third position and in 1999 at number one in the survey. In 2000, 2001 and 2004 and again in 2007, 2008 and 2009, BSkyB was the most innovative company in Britain.

The philosophy of the company is to tie in innovation to customers’ needs. ‘This isn’t inno­vation for its own sake. It’s first, last and always about our customers. It’s about what new tech­nology can do for them and how we can use it to make Sky better’ (BSkyB, 2006). The impact of these innovations on the rating by executives in BMAC surveys is shown in Figure 3. Other facets of the company’s performance include collaborative partnerships to maximise a broad range of innovation capability and continuous improvement as part of the innovation process (Brown & Turner, 2008). A critical success fac­tor in achieving a reputation for innovation is the ability to execute ideas effectively and to al­locate sufficient resources to enable innovation in practice. BSkyB has this capability (Huston & Sakkab, 2006; Lafley & Charan, 2008; Brown & Turner, 2008). Often this requires a company to be very specific about which innovations it decides to back. As Steve Jobs, of Apple, put it, success comes from ‘saying no to 1,000 things’ so as to concentrate on the ‘really important’ creations’ (Burrows, 2004).

Figure 4 shows the performance of BSkyB in each of the characteristics from its introduction into the BMAC survey until 2009. In a similar way to Pilkington, BSkyB is highly rated for its capacity to innovate. The company was Britain’s Most Admired Company for innovation in 2007, 2008 and 2009 ahead of such companies as Rolls

Royce, Autonomy, Unilever, GSK, Tesco and Marks and Spencer.

BSkyB has also achieved high ratings in the important ‘stabilising’ characteristics of financial soundness and value as a long-term investment, even though in the early years of their existence the company suffered poor perceptions in both. In 2000, for example, BSkyB’s highest score in the BMAC survey was for its capacity to innovate; its lowest was for financial soundness. BSkyB’s performance was similar to that of Pilkington (see Figure 2) at the time, i. e. it was highly regarded as being a company with a propensity to innovate but not one with a strong financial performance. Both BSkyB and Pilkington Glass had the chal­lenge of balancing reputation for innovation with the financial characteristics of financial soundness and value as a long-term investment. Of the two companies, only BSkyB were able to address this challenge to the satisfaction of executives and analysts and ultimately shareholders. By 2009, both innovation and financial soundness were highly ranked. In addition, value as a long-term investment was also on an upward trajectory. In this latter year, BSkyB was a company that was able to be both innovative and profitable.

CONCLUSION

The analysis of peer perceptions ofthe innovation data from the BMAC surveys between 1990 and 2009 gives interesting insights. On the one hand, achieving a good reputation for innovation does not guarantee a good overall reputation; nor does a reputation for innovation lead to business success.

However, where a company has a reputation for innovation and is able to manage stabilising characteristics - such as financial soundness and value as a long-term investment, there is a better chance that this company will be able to develop its innovation capability into long-term competi­tive advantage and profitability. A key facet of this conclusion is a focus on converting innovation into

enhanced processes, products or services through effective implementation.

Our research identifies key attributes of com­panies that combine reputations for innovation, with good overall reputations and business success (Brown & Turner, 2008):

• They have CEO’s who play active parts in driving and supporting innovation and who elicit the support of the Board for investment.

• They ‘get the balance right between the big ‘I’ of invention and the little ‘I’ of inno­vation, and they view innovation as con­tinuous improvement as well as dramatic invention’.

• They focus on key innovations and do not diffuse their efforts.

• They include many people in the innova­tion process - hence, the important corre­lations between people management and culture and innovation.

• They make sure that innovation is custom­er-focused and relevant to end-users.

• Finally, they make sure innovation adds value to the bottom line.

FUTURE RESEARCH DIRECTIONS

Corporate Reputation is an important intangible asset that increasingly affects a company’s stock market evaluation. Since a reputation for the capac­ity to innovate contributes to overall reputation, there may be linkage between innovation reputa­tion, corporate reputation and company value. The findings from the BMAC surveys suggest that those companies that are able to forge this link benefit through both revenue and profit. However, many companies find this challenge difficult to meet. Further research into this area can add to academic understanding and has implications for competitive performance.