How Do Reputation and Legitimacy Affect Organizational Performance

This paper explores overlap between two similar constructs, reputation and legitimacy, and their effect on organizational performance. Firms face pressures to both develop reputations based on differentiation and to achieve isomorphism by attaining legitimacy. In this paper, we discuss how an organization's ability to balance these two pressures is related to its performance. Further, we discuss how these constructs are created at multiple levels (e.g., individual). Introduction The construct of reputation is central to many branches of social sciences including economics (Shapiro, 1983), sociology (Podolny, 1993), and organizational sciences (Weigelt & Camerer, 1988). In field of management, various theories include reputation to explain organizational outcomes including resource-based view (Barney, 1991), transaction cost economics (Hill, 1990), and game theory (Weigelt & Camerer, 1988). Reputations have also been studied at individual level to explain intra-organizational outcomes (Kilduff & Krackhardt, 1994). Despite fact that organizational reputation is central to study of organizations, reputation is often interchanged for related constructs. For example, related constructs such as image, identity, status and legitimacy are used throughout literature; however, they mean different things depending on author (Dutton & Dukerich, 1991; Gatewood, Gowan, & Lautenschlager, 1993). The two constructs of legitimacy and reputation have been confused and used interchangeably (Rao, 1994). This leads to confusion for readers and impedes progress in accumulation of knowledge on this important subject. For purposes of this paper, a corporate or organizational reputation is a set of attributes ascribed [socially constructed] to a firm, inferred from firm's past actions (Weigelt & Camerer, 1988:443). Legitimacy is defined in this paper as 1. the normative justification of and 2. the cognitive validation of an entity as desirable, proper and appropriate in a widely shared system of beliefs and norms (Rao, 1994:441). Reputation and legitimacy overlap but result from different pressures that organizations face: pressures to be different and pressures to be same. Research on organizational legitimacy indicates that it is ascribed based on factors at different levels including organization itself and its institutional environment (Kostova & Zaheer, 1999). Research on organizational reputation has not yet focused on multi-level sources of organizational reputation. We attempt to clarify this issue by explaining how organizational reputation is constructed by external actors based on factors at several different levels: individuals, products and capabilities within organization, organization itself, and its institutional environment. Thus, this paper contributes to literature on organizations and organizational reputation in several different ways. First, it provides a clarifying review of reputation and similar and related constructs, including legitimacy. second, it explains how reputation and legitimacy result from different pressures. Finally, this paper explains how external actors construct organizational reputations based on factors at different levels both internal and external to organization. Organizations: Homogeneity or Heterogeneity? One of most salient organizational outcomes to researchers is organizational performance. However, performance is understood in different ways in different theories. For example, resource-based view is generally concerned with understanding differences in performance across organizations while institutional theory is concerned with organizational survival. The theories also differ as to what factors give rise to organizational performance. For example, several relevant theories argue that relative homogeneity across organizations is important for organizational performance; others argue that differentiation across organizations will be positively associated with success. …