Signaling Differentiation or Legitimacy? Signaling Differentiation or Legitimacy?

How Architects Socially Construct their How Architects Socially Construct their

Reputations for ExpertiseReputations for Expertise

Candace JonesBoston College

Ivan ManevUniversity of Maine

Cambridge Colloquium on Complexity and Social Networks

October 28, 2002

Developing an expertise in a specific field is

what differentiates you. Prisons are very

complex projects. [The State agency] is not

going to trust a new firm designing a prison

facility. Justice facilities are very, very

complex and very, very specialized. So the

secret is to become an expert in the fields

that the State is distributing work.

Partner, Architectural Firm 31

Reputation building is a social process of consensus about what and who should receive esteem (Becker, 1982).

– constituents who develop criteria and standards,

– actors who signal key attributes to constituents (Rindova & Fombrun,

1999)

– a system to distribute recognition and renown• relational embeddedness (Krackhardt, 1992; Uzzi, 1996)

• structural embeddedness/holes (Coleman, 1988; Burt, 1992

• through key 3rd parties– regulators, critics, analysis, awards, rankings (Lang & Lang, 1988; Rao, 1994; Zuckerman,

1999; Fombrun & Shanley, 1992, Deephouse, 1996, 1999)

How do professional service firms build their reputations for expertise?

A professional service firm builds its

reputation through content and channel

Content: What was signaled?Content: What was signaled?

Uniqueness: by differentiating itself from

competitors through know how

Legitimacy: by establishing trustworthiness

through third parties-- credentials and/or

relations

Reputation through differentiationReputation through differentiation

RBV emphasizes internal development of unique competencies and relations not easily imitated (Barney, 1991; Hall, 1992)

– Expertise in drug research for specific diseases (Henderson & Cockburn, 1994)

– Relationships with clients (Artz & Brush 1999; Gulati & Gargiulo, 1999)

Since constituents can rarely verify the possession of unique resources, they rely on signals

Implicit assumption of matching between parties

Reputation through LegitimationReputation through Legitimation An institutional perspective emphasizes external

validation (Becker, 1982; Fombrun & Shanley, 1990; Rao, 1994)

– Winning certification contests (Rao, 1994)

– Gaining credentials from agencies or professions (Abbott, 1988; Deephouse, 1996; Zuckerman, 1999)

– Embedding relations to signal knowledge of clients & processes, and acceptance by others (Baum & Oliver, 1991; Gulati & Gargiulo, 1999)

Implicit assumption of stability and reproduction of social order

Tradeoffs between differentiationTradeoffs between differentiationand legitimation?and legitimation?

Firm performance declines as resource allocations move away from the industry norm– banking (Deephouse, 1996, 1999)

– airlines (Miller & Chen, 1995)

– large, publicly traded corporations (Geletkanycz & Hambrick, 1997; Zuckerman, 1999)

Novel activities and resources hinder shared understandings, creating confusion for constituents (Aldrich & Fiol, 1994; Zuckerman, 1999).

Differentiation and Legitimation?Differentiation and Legitimation?

Resource-based and institutional perspectives may

provide complementary perspectives (Oliver, 1997)

– Draw on resources and manage institutional capital through

symbolic processes (Lounsbury & Glynn, 2001; Suchman, 1995)

– Capabilities and legitimacy coevolve in complementary ways

(Jones, 2001).

– Professionals need uniqueness to provide innovative

solutions to problems (Sutton & Hargadon, 1996) & legitimacy

through credentials to perform work (Abbott, 1988)

CHANNEL: THROUGH WHOM CHANNEL: THROUGH WHOM WAS SIGNAL VERIFIED?WAS SIGNAL VERIFIED?

Reputation built through information about present behavior and depend on embeddedness of relations (Raub & Weesie, 1990)

– Relational embeddedness: ties with specific clients (Uzzi, 1996, 1997)

– Structural embeddedness: overlapping ties among clients and professionals (Gulati & Gargiulo, 1999)

– Third parties: information through brokers (Burt,

1992, Burt & Knez, 1995), trade or professional journals

REPUTATION THROUGH RELATIONSREPUTATION THROUGH RELATIONS

Most empirical reputation research examined

– surveys, rankings and media reports such as Fortune 100,

500; Best 100 Companies for Women, Corporate Social

Responsibility (e.g., Fombrun & Shanley, 1990; Zuckerman,

1999; Deephouse, 2000;)

– case studies (e.g., Hitchcock, Fine etc)

Ignoring information flows through networks of

relationships

REPUTATION THROUGH RELATIONSREPUTATION THROUGH RELATIONS

Network researchers – social relations shape reputation through controlling how

information flows

– Competing arguments: closure and structural holes• Closure allows for consensus and information spread (Coleman, 1988;

Granovetter, 1995)

• Structural holes allows for actor to control information and for non-redundant information (Burt, 1992)

• Several scholars argue for tradeoffs between closure and holes (Gulati & Gargiulo, 1999; Gulati & Singh, 2000; Ahuja, 2000)

• Uzzi finds curvilinear relationship between relational embeddedness and performance (1997)

REPUTATION BUILDING TACTICSREPUTATION BUILDING TACTICS

– Yet, network scholars rarely measure reputation (e.g., Granovetter, 1985, 1992; Gulati, 1995; Gulati & Gargiulo, 1999; Uzzi, 1996)

– Do firms build their reputations through

• third parties: brokers such as analysts and rankings?

• dyadic relations (relational embeddedness)?

• structural embeddedness?

PURPOSE OF THE STUDYPURPOSE OF THE STUDY Fine grained analysis of how signal content (e.g., differentiation

and legitimation) and channel contributed to a firm’s reputation

We examined::

– Architects’ signals of differentiation and legitimation on knowledge and client relations

– Whether architects emphasized brokers (e.g.,media), relational embeddedness or structural embeddedness as sources of reputation signals

– How clients responded to these signals and sources

SIGNALING STRATEGIES FOR DIFFERENTIATING SIGNALING STRATEGIES FOR DIFFERENTIATING AND LEGITIMATING KEY RESOURCESAND LEGITIMATING KEY RESOURCES

Resources

Ties

Differentiate

dyadic ties

Legitimate

third parties

Expertise

(Professionalknowledge)

Show tacitknowledge throughexperience

Emphasizeprofessionalcredentials

Gain awards toshowcase skills

Relationships

(strength of tie& networkposition)

Develop strong tieswith clients. Thishistory creates uniqueunderstandings

Emphasizeestablished reputationwith third party

Embed clientrelations

RESEARCH CONTEXTRESEARCH CONTEXT

Institutional building market for state buildings in a western state

Focus on expertise

– Studies, programs & designs

– Construction projects eliminated: selected by

lowest bid

RESEARCH DATARESEARCH DATA

Projects over $500,000 in estimated

construction budget Required competitive submittal process:

32 projects 1993-1995 selected 29 projects used for study

Average of 10.5 lead architectural firms

competing for project

PROJECT SELECTION CRITERIAPROJECT SELECTION CRITERIA

Formal Rating Criteria firm specific project experience, architects’ experience, past performance, capacity of firm (e.g., number of licensed professionals), firm location to project site, team approach & objectives (team means interorganizational project team)

Informal Criteria“Quality”: preserving historical value of a building, aesthetics, culture, heritage and other issues…However, these are not critical issues to legislative analysts and the Governor. They want it cheaper, faster, and functional.”

Assistant Director for State Agency

PROJECT COMPETITION PROCESSPROJECT COMPETITION PROCESS

StateState released Request for Proposal (RFP):project scope and budget

Architectural firm responded with Statement of Qualification (SOQ). Composed of four sections:

Prior firm experience Individual resumes Firm Capacity: Age, Size, No. licensed professionals Firm References—clients for past year and past 5 years

SOQs: Proprietary Data—not publicly shared or available

Client Evaluators gave reputation score for SOQClient Evaluators gave reputation score for SOQ• Interorganizational (State Agency, User Client, Bldg Board)• 110 client evaluators- Avg 6 per project. • Low co-occurrence (3 on 3 projects)• Professionals: architects

PROJECT COMPETITION PROCESSPROJECT COMPETITION PROCESS

Architectural firm

SIGNAL

SCORE

Selection committee

Bldg board

User client

State agency

DATA SOURCESDATA SOURCESState Archives: Project Competitors, Evaluation sheets, Prior dollar amount awarded and

project awards

Architectural Firm SOQs (Proprietary data) Sampling Strategy:Intense (11+), Frequent (2-10) & Rare (1) 189 of 218 SOQs (67%) submitted for 29 projects.

Interviews (N = 37) 18 Architectural firms (35% of pop), Clients (State Agency & User client), 14

Engineering firms 27% of pop), AIA rep

Regional Trade Magazine Best project awards from 1990 to 1995

QUALITATIVE DATA &METHODSQUALITATIVE DATA &METHODS

Coded 56 (30%) firm SOQ introductory statements across 7 projects

Stratified sampling on budget & bldg type to maximize heterogeneity (Cook & Campbell, 1979)

– Two low budget of different building types• $568,000 clubhouse and $750,000 visitors center

– Three average budgets of different building types• $10,700,000 Technology Research center• $11,000,000 Performing Arts center• $15,000,000 University classroom

– Two high budgets of different building types• $50,000,000 hospital wing• $50,000,000 football stadium renovation

QUANTITATIVE DATAQUANTITATIVE DATA SOQ acted as network generator

– client listing– Strength of ties (repeated work)– created adjacency matrix architectural firm and client

interactions (489 x 489) SOQ generated firm prior experience

– 3-20 prior projects per firm SOQ (N = 593)• types of experience (market & bldg), treated cumulatively and

sorted by project date

SOQ listed firm credentials – # Licensed professionals and state registrations

QUANTITATIVE MEASURESQUANTITATIVE MEASURES

Dependent Variable– Reputation score from selection committee

Controls:– Firm age– Rivalry (number of firms competing for project), – Prior award (months since last state award), – building market

• education, performing centers, technology, office/housing. Office/housing = omitted

• Type: program vs design

QUANTITATIVE MEASURESQUANTITATIVE MEASURES

Uniqueness – Emphasizes history of experience & matching

on experience & relations– Knowledge

• Prior experience: # projects in market & bldg type

• Cost Advtg: cost per square foot on prior projects

– Client Relationships• User Frequency: # prior projects for user client

• State Frequency: # prior projects for state agency

QUANTITATIVE MEASURESQUANTITATIVE MEASURES

Legitimacy– Emphasizes credentialing by third party

– Knowledge • # licensed professionals• # state registrations• Awards- listing in regional trade magazine for best project

award in prior three years (binary)

– Client Relations• Reputation: prior average score of firm on state competitions• Client Embeddedness: Burt’s constraint measure

– sum of direct and shared indirect relations

QUANTITATIVE METHODSQUANTITATIVE METHODS

Hierarchical OLS Regression– Indep Var: SOQ data on prior projects– Dep Var: Reputation score from clients– How a firm’s signaling strategies predict its reputation

score

Between method triangulation– Does signal framing match experience?– To what do constituents attend when assessing a firm’s

reputation score?

SIGNALING EXAMPLES: UNIQUENESSSIGNALING EXAMPLES: UNIQUENESS Experience

– [Our firm] has successfully completed 34 major science and computer center facilities

Cost Advantage– Cost estimating is of great importance and is continuous throughout the

project. We determine cost effective solutions and accomplish proper results within budget

Client Relations: State and User – [We] have designed and completed 13 medical buildings for the [State]

over the past seven years– [We] have developed a strong working relationship with user groups and

University entities responsible for developing new facilities on campus

SIGNALING EXAMPLES: LEGITIMACYSIGNALING EXAMPLES: LEGITIMACY Credentials

– Our current staff size includes 23 licensed architects broad range of experience and diversity of interests. Because of our size and experience, we are able to staff as needed in the design and production process to meet the most stringent schedule

Awards– In addition to receiving over 30 major design awards, the firm was named as the [regional]

AIA firm of the year

Registrations-practice scope– [Firm XX] is a regional design firm which specializes in architecture for education and

healthcare

Client Embeddedness– The firm has experience in nearly every type of institutional facility. Our client list

includes all the major universities and colleges in the state, school districts, many towns and cities, and a wide range of business, commercial, recreational and military clients

ARCHITECTS’ SIGNALING STRATEGIES (SOQ Intro)

High Budget(N=12)

Avrg Budget(N=23)

Low Budget(N=21)

Mean(N=56)

UNIQUENESSExperience .75 .827 .857

Cost Advtg .33 .347 .38

Client Relat+ .75 .696 .33 P = .05

Avg. .61 .623 .522 2.78

LEGITIMACY#LPs/Credentl .50 .217 .286

Geo Scope .08 .043 .048

Reputation .75 .608 .095Awards .25 .174 .048Client Embedns .083 .13 0Avg. .333 .234 .095 .51

Paired T-test for means of uniqueness & legitimacy signals P=.000+ANOVA for differences between budgets

HIERARCHICAL REGRESSION ON REPUTATION SCOREVariable Base Uniqueness Legitimacy Unique Legit Full

Control Knowl Relat Knowl Relat

Budget -.17* -.19* -.19* -.20* -.22** -.20* -.24** -.25**Firm Age .01 -.01 -.06 -.06 .00 -.01 -.06 -.06Rivalry -.17* -.16* -.16* -.17* -.17* -.16* -.17* -.17*LastAwrd .03 .04 .02 .03 .10 .03 .08 .07Education -.31* -.29* -.31* -.39** -.31* -.30* -.37** -.35*Performn -.04 -.01 -.05 -.08 -.01 -.02 -.05 -.02Tech -.34* -.25** -.34** -.41** -.30* -.35** -.37** -.37**Program .21* .18* .18* .21** .17* .16+ .18* .16+

Unique Experience .21** .17* .15+Cost advtg .07 .07 06User Freq .06 .03 06State Freq .16* .13 .00

Legit # LPs .23** .20* .18*Awards .13* .13+ .11# Registrns -.27*** -.23*** -.26***

Pr Reput .19* .19* .17*Constraint .62** .42+ .29Constraint ² -.58* -.35 -.23F 2.86** 3.15*** 3.08*** 4.73*** 3.91*** 2.92*** 4.72*** 3.82***R² .12 .16 .15 .23 .20 .18 .29 .31 R² -- .04 .03 11 .08 .06 .16 .19Adj R² .08 .11 .10 .19 .15 .12 .23 .23 F -- 3.84* 3.03+ 8.27*** 5.72*** 2.75* 6.29*** 4.15***

DISCUSSIONDISCUSSIONUniqueness Controls for market & project type renders unique history of

experience marginal in matching

Differentiating knowledge by experience – Route that has marginal effectiveness (4% variance)– Insignificant in presence of legitimacy variables

Differentiation through dyadic client relations was ineffective– Most emphasized strategy in PSF literature

– Public agencies may need to distribute work across firms

DISCUSSIONDISCUSSIONLegitimacy Credentialed knowledge was powerful predictor

With more licensed professionals– easier to justify “objective selection”– facilitates blame deflection if things go wrong – Clients were professionals (architects)

Legitimation through awards effective

Work across many states, highly ineffective – reduces dependency on & influence of state clients– More difficult to “sell” as local firm to public

DISCUSSIONDISCUSSION

Client Relationships verified by others was powerful predictor

Client embeddedness was curvilinear– too few overlapping ties make firm an unknown quantity,

amplifying uncertainty.

– Too many overlapping ties amplify problems on projects among those in network

Prior ratings among institutional clients created “path dependency” in reputation

IMPLICATIONSIMPLICATIONS Routes to Reputation

– Dyadic relations • most emphasis in PSF literature• the least effective strategy with institutional clients

– Media rankings• Awards in trade journal was somewhat effective• May cultivate reputation as “overkill”

– Embeddedness in client & architectural firm network• Most effective by itself, but drops out in presence of knowledge variables• Must be managed due to curvilinear effects

– Institutionalized into client ratings was most effective