The Impact of CSR and Corporate Reputation on Business Strategy

This report delves into the significance of Corporate Social Responsibility (CSR) and Corporate Reputation (CR) in contemporary business environments. It highlights the growing importance of CSR as a tool for sustainable development and the impact of CR on a firm's competitive advantage, especially for companies relying on intangible assets like innovation and organizational culture. The report discusses the influence of corporate governance scandals and irresponsible behavior on CR, emphasizing the need for ethical corporate policies. It explores the relationships between CSR, Corporate Image, and Corporate Brands, drawing on various studies to analyze the impact of CSR on financial performance and customer loyalty. The report examines the positive correlation between CSR and customer loyalty, emphasizing how customers prefer and trust socially responsible companies, ultimately influencing their purchasing behavior and brand recommendations. The report concludes by emphasizing the importance of CSR in differentiating products and attracting and retaining customers, offering recommendations for business strategy formulation to improve companies' market position and customer relationships.

The importance of Corporate Social Responsibility (CSR) and Corporate Reputations (CR) is growing, as
CSR is the main tool of the enterprise to increase sustainable development in developed and developing
countries (Balmer and Geyser, 2003, 2006). Appropriate management of corporate reputation is
especially important for firms that are having their main strengths and developing their competitive
advantage and differentiation strategies based on such intangible assets as innovation, high intellectual
capital and high organizational culture (Barney, 2001). The differentiation strategies are linked with
resource-based view of developing strategy, providing how valuable and difficult it is to imitate such
intangible assets like Corporate Reputation and Corporate Brands; therefore, these can provide for high
profits and rapid growth of firms (Walker, 2010; Riera and Iborra, 2017). Corporate Reputation (CR) has
become even more important nowadays due to the corporate governance scandals linked to the
dangerous products and services, corruption, involvement in politics etc. The recent worldwide
corporate scandals highlighted the influence of irresponsible behaviour on damage for reputation and
brand and bankruptcy of the well-known enterprises claiming themselves as responsible. The Corporate
Hypocrisy, due to the irresponsible corporate policies, has attracted attention of many scholars in recent
years as well (Janney and Gove, 2011; Armstrong and Kesten, 2013; Arli et al., 2017; Shim and Kim,
2017). There are several theoretical and many empirical studies that are dealing with corporate
reputation and company image, brands that provide for organizational success by allowing them to
differentiate themselves from other organizations while remaining fully legitimate (Deephouse and
Carter, 2005). In this field of research, the most popular issue that is being addressed is linked to
marketing, branding and communications. There is some important empirical proof of relationship
between CR and Corporate Branding (CB) and financial performance (Roberts and Dowling, 2002). The
CSR, corporate reporting requirements are as well driving the current interest in corporate reputation.
Corporate image represents the public perception of the firm and is linked to the composite
psychological impression of the firm’s name. It is the public perception of the company unlike identity of
the company. However, there is no clear agreement among scientists regarding the relationship
between CSR, Corporate Image (CI) and Corporate Reputation (CR) and Corporate Brands (CB) and their
outcomes. In addition, there are various definitions of CR, CI and CB that are making development of
theoretical frameworks even more difficult (Dowling, 2001; Crane et al., 2008; Wartik, 2012; Matera and
Baena, 2012; Harvey, 2014).
Several studies have tried to explain the relationship between CSR and financial performance of firm.
Among the list, Mittal et al (2008) investigated the relationship between CSR and organizational
profitability in terms of economic value added (EVA) and market value added (MVA). The authors found
that there exists a positive relationship between CSR and company's reputation and that there is little
evidence that companies with a code of ethics would generate significantly more economic value added
(EVA) and market value added (MVA) than those without codes. Also Hossein, et al. (2012) examined the
link between CSR and economic performance by examining different impacts of positive and negative
CSR activities on financial performance of hotel, restaurant and airline companies, theoretically based
on positivity and negativity effects. Findings suggest mixed results across different industries
contributing to companies‟ appropriate strategic decision-making for CSR activities by providing more
precise information regarding the impacts of each directional CSR activity on financial performance.
Similarly Emilson, (2012) researched into the correlation between CSR and profitability using economic

value added (EVA). The study shows a low positive correlation between profitability and CSR. But
previous research and the practical examples from the selected companies show a strong positive
correlation between CSR and profitability. In the same vein, Skare and Golja (2012) investigated the
relationship between CSR and financial performance. The authors confirmed that CSR firms in the
average enjoy better financial performance that non-CSR firms.
Csr and loyalty
Customer loyalty is the basic goal of each company, especially in the conditions of strong competition,
economic crisis, and international scandals. It is considered a vital objective for a company’s survival and
growth as well as an important basis for developing a sustainable competitive advantage. Loyalty can be
defined as a customer’s unconditional commitment to the company and his or her strong relationship
with the brand, which is not likely to be affected under normal circumstances. Customer loyalty refers to
the intention to apply a set of behavioral forms that signal the motivation to keep the relationship with a
certain company, which includes increased spending on the company’s products, positive word of
mouth, and repeated purchases. Customers are limited and the most valuable resource of each
company to have a direct impact on the company’s profit level. Research has shown that a 5% increase
in customer loyalty could increase profits by 25% to 85%. A 2% increase of customer retention has
almost the same effect as a 10% cost reduction.
Loyal customers bring various benefits to the company, but the creation of customer loyalty is not easy;
it is a long process that will not pay off initially and could even lead to losses (Marinković, 2012). But
loyal customers increase their purchases of certain products over time. At the same time, they are ready
to buy and use other products from the product range of the company to which they are loyal, so they
are important for delivering long-term profits (Chung et al., 2015). A cost reduction in loyal customers’
services could also be achieved. They are less sensitive to price changes than other customers
(Marinković, 2012). Loyal customers gladly recommend products they use to their friends and
acquaintances, thereby creating and spreading positive worth of mouth, which has much more
credibility and reliability than communication through media (Jobber & Fahy, 2006). Loyal customers are
a very important source of new ideas for products’ and services’ quality improvement. Customer loyalty
is influenced by numerous factors (price, quality, product/service availability, satisfaction, etc.).
As the goal of this research is to explain the relationship between CSR and loyalty, the focus is on this
relationship. Research has shown that customers prefer products from companies involved in social
causes (García de los Salmones et al., 2005, p. 373). Customers have more trust, purchase more, and
prefer to recommend socially responsible companies (Vlachos, Tsamakos, Vrechopoulos, & Avramidis,
2009). Numerous studies have shown a positive relationship between perceptions of CSR and customer
loyalty (Ailawadi, Neslin, Luan, & Taylor, 2014; Chung et al., 2015; García de los Salmones et al., 2005;
He & Li, 2011; Lee et al., 2012; Marin et al., 2009; Perez et al, 2012; Srbljinović, 2012). Customers
appreciate companies’ participation in humanitarian events, programs devoted to energy conservation,

sponsorship of local events, etc. These activities can influence creation of higher customer loyalty
(García de los Salmones et al., 2005, p. 373). Growing market competition means companies must
search for new ways to differentiate products and attract and retain customers, so basing a business
strategy on the CSR concept became a good way for companies to make a difference and stand out.
Customers’ perceptions about companies’ socially responsible behavior influence their relationship with
the company and its products; thus, this research examines if companies’ socially responsible behavior
influences customers’ loyalty. Based on the results obtained, recommendations for business strategy
formulation and CSR activities can be offered to improve companies’ position in the market and within
customers’ minds.