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BUILDING REPUTATION ON THE INTERNET:LESSONS FROM AMAZON.COM AND ITS COMPETITORS

Violina P. RindovaAnd

Suresh KothaSchool of Business Administration

University of Washington, Box 353200Seattle, Washington 98195

vrindova@u.washington.eduskotha@u.washington.edu

Tel: (206) 221-5324Fax (206) 685-9392

December 1998Revised September 1999

Version 2.0

_____________Please send all correspondence to Professor Violina P. Rindova. We thank Tom Lee, Luis Martins, Terry Mitchell, andthe members of the Management and Organization Research Consortium at the University of Washington for theircomments and suggestions on an earlier version of this paper. This paper has benefited from the research assistance ofNancy Uy. We also thank Gabrielle Gerhard and Anu Wadhwa for their assistance in preparing this manuscript. Bothauthors contributed equally to the paper.

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BUILDING CORPORATE REPUTATION ON THE INTERNET:LESSONS FROM AMAZON.COM AND ITS COMPETITORS

ABSTRACT

This study examines the dynamics of reputation building on the Internet through an in-depth

analysis of the actions of a leading e-commerce firm – Amazon.com -- and the actions of two

close competitors. The study develops a strategic action framework of reputation building based

on three actions flows: symbolic, competitive, and relational. Through these strategic actions the

three focal firms, we studied, created balanced symbolic communications, redefined their

industry paradigm, built relationships that are both close and communal, and participated in

networks that increased their reach and reputation leverage. The study demonstrates that

Amazon.com enjoys superior reputational stock to those of its competitors and it outperforms

them consistently all three types of action flows. The paper offers implications of these insights

for Internet competition.

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BUILDING CORPORATE REPUTATION ON THE INTERNET:LESSONS FROM AMAZON.COM AND ITS COMPETITORS

Anything Amazon.com can do on the Internet, so, too, can Barnes & Noble. "There was a mystique about howdifficult it was to get started on the Web," says Steven Riggio, chief operating officer of Barnes & Noble, "butit's quickly fading." Hiring hot designers from Silicon Valley, Barnes & Noble now offers a Web shopfrontthat's just as inviting and useful as Amazon's, with easy-to-use subject indexes, online author events every day,book forums, book reviews, and other features. (Stross, 1997: 248)

The above quote from Fortune represents what appeared to be sound business logic: The low

barriers to entry in ecommerce create vast opportunities, especially for established businesses

with deep pockets. A year later, Fortune (1998) reported:

Barnesandnoble.com jumped in last year. It has developed a decent Website and forked over cash for spots onleading portal sites, just as Amazon has. Nonetheless, according to a SEC document it filed in preparation for aplanned IPO this fall, barnesandnoble.com sold only $22 million of books from February 1 to August 1.Amazon sold $203 million in the first six months of this year (Mardesich. and Gunther, 1998: 229)

The second quote shows that in reality the creation of a strong online presence has proven an

elusive goal for many companies, including some of the world's leading marketers such as Time

Warner, Procter & Gamble, AT&T, IBM, and MCIWorldcom. Although established firms have

stumbled, start-ups like Amazon.com, ebay, Yahoo!, and E*trade are now almost household names.

These firms have run against the conventional entrepreneurial practice of beginning small and

growing locally before aspiring to national recognition. Instead, they tie their growth to the rapid

creation of a national reputation.

How have firms like Amazon.com built their reputations? Both the novelty of the Internet as

a marketspace and the lack of sufficiently developed theory on reputation building leave this

question without clear answers. To address this question, this study inductively develops a

framework about how firms build favorable reputations on the Internet. Following the dictum that

dynamic phenomena, which are not well understood, are more amenable to qualitative research

(Glaser & Strauss, 1966; Miles & Huberman, 1984; Lee, 1999), we use a grounded theory

approach to induce new constructs by analyzing in-depth case data. We focus on Amazon.com,

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a company that has been very successful in building a strong reputation on the Internet.

Additionally, we compare its actions to those of two competitors -- barnesandnoble.com and

CDNow. Using an iterative process between data analysis and theory building, we develop a

framework focusing on reputation building on the Internet.

Recently, strategy researchers have drawn attention to the value of reputation as an

intangible asset (Dunbar, Garud & Kotha, 1998; Fombrun, 1996; Hall, 1992; 1993). Dierickx and

Cool (1989) and Barney (1991) posited that corporate reputation is among the few resources that

provide a firm with a sustainable competitive advantage. This is because reputations are difficult to

create, trade, or imitate. Further, they form a part of the macroculture of industries and

organizational fields (Abrahamson & Fombrun, 1994) and as such, influence the judgements of

various stakeholders about the resources they are willing to exchange with a firm (Rinodva &

Fombrun, 1999).

Several characteristics of the Internet intensify the importance of a firm’s reputation in

Internet-based exchange relationships, generally referred to as “e-commerce.” The novelty of the

Internet creates a pervasive uncertainty among buyers and sellers, and increases the importance of

reputation in mediating the flow of resource among them. Consumers generally rely on numerous

cues (e.g., product and distribution channel) in making purchasing decisions, and e-commerce

deprives consumers of such cues. Cue-utilization theory suggests that consumers use both intrinsic

cues (e.g., ingredients, taste, and texture) and extrinsic cues (e.g., price, packaging, and labeling) as

surrogate indicators of product or service quality (Richardson, Dick & Jain, 1994). Consumers

tend to rely more on intrinsic cues, and in their absence, their transaction risk increases, and so does

the importance of potential guarantees for product quality, such as a firm’s reputation (Shapiro,

1983; Weigelt & Camerer, 1988; Yoon, Guffey & Kijewski, 1993).

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Additionally, e-commerce start-ups are developing innovative business models based on

many new features (e.g., email alerts, chat rooms, and data streaming), which deliver value in ways

that have not been economically viable in a "traditional" physical settings (Hamel & Sampler, 1998;

Kotha, 1998). Because of the novelty, however, consumers may lack schemas (Fiske & tayloer,

1991) about how to engage in Internet-based transactions. Due to their limited experience with the

Internet, consumers lack two types of schemas, which facilitate buying behavior -- scripts (Abelson,

1981) and competitive categorization schemas (Porac & Thomas, 1990). Without competitive

categorization schemas consumers may have difficulties in understanding the type of services

offered by a firm, the relevant competitive offerings, and their similarities and differences.1 Without

ecommerce scripts, consumers may not know what sequence of events completes the exchange

(Abelson, 1981). Therefore, in the context of the Internet a firm’s reputation may be of greater

importance in purchasing decisions than direct comparisons across product offerings of competing

firms (Ward, Bitner & Barnes, 1992).

The lack of traditional physical constraints convert the Internet into an “infinite shelf-space”

that is highly unstructured. To break through this competitive clutter, a firm needs a significant

amount of visibility (a critical element of reputation) to generate traffic to its web site. Unlike the

physical world, there are no location and co-location advantages on the Internet. Thus, a firm’s

reputation also becomes a mechanism for generating sales.

In comparison with traditional markets, the Internet not only increases the importance of

having a strong reputation, but also changes the social context within which a firm can build one.

Factors such as lower cost of information acquisition, and greater information exchange among

stakeholders, are likely to accelerate the processes of reputation creation. Other factors, such as

1For example, both Yahoo! and Excite provide search functions. However, Yahoo! does so through a humangenerated classification of sites, whereas Excite uses an automatic search program, called spider. This difference

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lower entry barriers and the lower level of consumer knowledge about existing products and

services are likely to impede the process of reputation building. However, in the absence of a

theoretical framework about reputation building, it is difficult to evaluate the effectiveness of

firms’ strategies, and to untangle the process of reputation building amidst the dynamics of rapid

growth, radical technological innovations, and consumer conversion to the new marketspace.

Studying reputation building on the Internet necessarily requires that our approach depart

from existing research on reputation management. First, much of the extant literature has focused

on the relationship between financial or social performance of firms and their reputations (cf.

Brown & Perry, 1994; McGuire, Sundgren & Schneeweis, 1988). In contrast, we explore the

process of reputation building as a flow of strategic actions initiated by competing firms.

Second, whereas past researcher have studied reputation building in large established Fortune

500 firms (Fombrun & Shanley, 1990; Wartick, 1992), we study the strategic actions of Internet

start-ups, that many regard as likely wealth-creators in the next millenium (Hamel & Sampler,

1998). Although some of the dynamics of developing a reputation on the Internet may be

applicable to traditional firms, especially those seeking to integrate the Internet into their existing

operations, our focus is not on how traditional "physical" firms leverage existing reputations.

Finally, the extant research has relied extensively on the Fortune magazine’s rankings of the

most admired corporations and as such, has used “snapshots” of reputational standing (Martins,

1997). In contrast, we describe how Internet start-ups create, develop, and accumulate

reputational stock. By doing so, we extend the current understanding of organizational

reputations beyond the traditional approaches, which view reputation as an artifact of financial

performance, and toward a more strategic orientation, which views reputation as an asset stock to

be created, nurtured, and exploited.

leads to substantial differences in the amount and relevance of the information they retrieve.

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The structure of the paper follows the inductive logic of inquiry: We first discuss the

theory-building approach using the case method. We then describe the actions of Amazon.com,

and then compare them to those of its competitors, barnesandnoble.com and CDNow. The

description of actions is followed by our theoretical insights and propositions in an effort to show

the links between the empirical data and the inductive insights. We conclude by discussing the

contributions of the study.

METHODS

Research Design

To undertake this study we used the multiple-case method, which permits "constant

comparison" (Glaser & Strauss, 1967) or "replication" logic (Yin, 1984). We used "within-case"

analysis to distill new theoretical insights, followed by "between-case" analysis to confirm or

disconfirm these new insights (Elsbach, 1994). Our central case was Amazon.com— a start up,

which has achieved a remarkable reputation. The firm has become synonymous with e-

commerce because it symbolizes the commercial potential of the Web. According to the

Economist (1997a: 9), “Companies around the world are studying it [Amazon.com] as perhaps

the best model for tomorrow’s successes in electronic commerce.” In this respect Amazon.com

is an example of a firm that can be viewed as a “revelatory case” (Yin, 1994). For comparison

purposes, we chose two cases. The first one was Amazon.com's direct competitor in online book

retailing— barnesandnoble.com. The second case was CDNow— another Internet start up, which

has been successful, but has not been able to garner the reputation that Amazon.com has

amassed.

The firms chosen for investigation offer some important control characteristics. As an

online book retailer barnesandnoble.com is similar to Amazon.com in terms of industry

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characteristics. This industry similarity permits us to control for industry-specific sources of

reputational assets. Yet barnesandnoble.com, unlike Amazon.com, is the online division of

Barnes & Noble, the US industry leader in “traditional” book retailing. In other words, it is a

competitor with an established reputation and greater resources. These differences enable us to

control for the effect of greater resources and established market position as a source of

reputational assets.

CDNow is dissimilar to Amazon.com in terms of industry characteristics. However, as an

e-commerce pioneer, CDNow is similar to Amazon.com; and in fact, it was launched before

Amazon.com. Thus, the inclusion of CDNow permits us to control for the impact of first-mover

advantages, which past research has related to reputation creation (Lieberman & Montgomery,

1988). In Table 1, we compare the three firms on certain key dimensions and provide

background information pertaining to their genesis and business models.

Insert Table 1 about here

Data Collection

We began data collection through a series of interviews with a key informant, Jeff Bezos

-- Amazon.com’s founder and CEO. Interviews were conducted by one of the authors as a part

of a larger study on Internet competition. Additional ideas were derived from interviews with

Amazon.com’s VP for Business Development and a public-relations manager, as well as

informal interviews with executives from the publishing and book-retailing industries. The

limited access to informants directed our further data collection toward published information

sources. We used the interviews with key informants, and other informal discussions, as validity

checks on the constructs we derived from the published sources.

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The primary data sources for this study were firm press releases and media articles. We

searched the "Major Newspapers" and “All Magazines” databases of the Lexis/Nexis electronic

database for a three-year period starting from 1995 to 1998. This search generated more than

1,000 articles. Of those, we selected the articles published in The Wall Street Journal, Business

Week, Fortune, and The Economist for detailed thematic analysis. We limited our focus to these

sources because they are the primary opinion makers for the business community. The final

sample consisted of 388 articles from these sources for the period 1995-1998.

Additionally, we collected all press releases (PR Newswire and Business Wire) for

Amazon.com, barnesandnoble.com, and CDNow during this time frame. This resulted in 700

press releases for Amazon.com, 200 for barnesandnoble.com, and 240 for CDNow. Press

releases and published media reports complement each other as data sources because press

releases provide more detailed coverage of firms’ actions, whereas media reports offer somewhat

more independent reporting and contextualized information about a given action.

Data Analysis

As is typical in inductive research, we analyzed the data by first building individual case

studies of all three firms. As a "revelatory case," Amazon.com, offered the richest set of actions,

which we used to develop a classification scheme and a preliminary set of constructs pertaining

to reputation-building actions. Later, between-case analyses enabled us to refine these constructs

by drawing comparisons among firms (Brown & Eisenhardt, 1997).2

Identifying Strategic Actions. Following the lead of Fombrun and Shanley (1990), the

only study of corporate reputations that examines strategic behaviors, we focused on specific

2 The case of CDNow was added to the study after the key categories of symbolic, competitive, and relationalactions were developed based on the suggestion of an anonymous reviewer. To ensure consistency with the othercases, we followed the procedure described in this section allowing new categories to emerge. However, all actionsof CDNow fit into the existing categories.

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strategic actions undertaken by our focal firms that could be classified as signals interpretable in

the market place. Both authors read the interview notes and press releases, and independently

generated a list of actions through which the focal firms sought to establish themselves as

leading online retailers. Although the focal firms employed signals, many actions could not be

classified as just signals. Amazon.com, for example, invested in building various relationships

and engaged in communication activities that conveyed a certain identity. Through numerous

iterations, we classified the actions in three broad categories: symbolic, competitive, and

relational actions. We then used the vast amount of qualitative case material to refine the content

of each of these categories and to specify how they manifested themselves on the Internet. This

process led to the development of the ideas presented in the next section.

Using the classification scheme developed, each author coded all the actions of the three

focal firms. The intercoder reliability was .82 for the actions taken by Amazon.com, 0.75 for the

actions taken by barnesandnoble.com, and 0.90 for the actions taken by CDNow. These

reliability estimates represent a level of agreement that is within the acceptable range (Miles &

Huberman, 1984). The few disagreements that were found were then resolved through

discussions.

Operationalizing Reputation Stock. To draw comparisons about the relative effectiveness

of the various reputation-building actions, we sought to capture the reputational stock that each of

the focal firms has accumulated during its existence. Drawing on theoretical discussions of

reputation as (1) the salient characteristics that observers ascribe to the firm (Dutton & Dukerich,

1991; Fombrun & Shanley, 1990), and (2) the “esteem” to which a firm is held by the public

(Fombrun, 1996), we developed two measures of reputational stock. To operationalize a firm's

salience, we used its visibility in the media measured as the number of articles published about the

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firm in a given time period in the "Major Newspapers" database of Lexis/Nexis. To capture the

esteem, we used the tone of media coverage about a firm, i.e. the number of positive, negative or

neutral references to the firm’s name in publications such as Business Week, The Economist,

Fortune, and The Wall Street Journal. An independent research assistant coded all references to

the names of the focal firms as positive, negative, or neutral. One of the authors then coded a

sub-sample of 15% of the references. The intercoder reliability achieved between the two coders

was 0.92.

In the section that follows, we first highlight the differences in the level of reputational

stock accumulated by the focal firms. Based on the classification scheme discussed above, we

then describe various actions of the focal firms. Finally, we develop a model and propositions

that relate properties of the actions and the accumulation of reputational stock for future testing.

REPUTATION BUILDING ON THE INTERNET

Despite the growing recognition of corporate reputation as a valuable intangible asset,

most researchers, as noted earlier, have measured reputation in a rather limited way. Relying on

Fortune’s rankings limits reputation research in terms of companies covered and stakeholders

surveyed. To better capture the building of reputation over time we constructed the two measures

of reputational stock described in the “Methods” section. Figure 1A represents the different

levels of reputational stock accumulated by the focal firms measured in terms of media visibility,

or the number of articles in major newspapers that make references to the firm’s name. Figure

1B plots the accumulation of esteem, measured as the positive references about the firm’s name

made in opinion leading publications, such as Business Week, The Economist, Fortune, and The

Wall Street Journal.

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Insert Figures 1 (A&B) and 2 about here

Both Figures 1 A and B demonstrate the relative superiority of Amazon.com’s

reputational stock. Additionally, Figure 1B highlights the increasing disparity in reputational

stock between Amazon.com and the two other firms we studied. For example, the figure shows

that barnesandnoble.com’s esteem peaked in the third quarter of 1997 and then declined,

although its visibility in the media continued to grow. To probe further in the differences in

esteem, we constructed “esteem profiles” for each firm. The profiles presented in Figure 2 show

the relative percentage of positive, negative, and neutral references about each firm. The figure

indicates that Amazon.com enjoys the highest esteem: 53% of the references made to it are

positive and only 9% are negative. In contrast, 41% of the references made to

barnesandnoble.com are positive and 20% are negative. CDNow has both fewer positive (34%)

and greater negative (16%) references than Amazon.com.

Overall, the two measures of reputational stock we examined show comparable results

with respect of the degree to which our focal firms have been successful at accumulating

reputational stock. Amazon.com enjoys both greater visibility and esteem, and as such, can be

considered to have been the most effective in accumulating reputational stock.

barnesandnoble.com comes second; CDNow seems to have the lowest level of reputational

stock, especially in terms of esteem.

To examine why Amazon.com has been more successful in accumulating reputational

stock than its competitors, we studied its actions and compared them to those of

barnesandnoble.com and CDNow. We classified those actions in the three major categories

described below – symbolic, competitive, and relational.

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Symbolic Actions

We define as symbolic actions these activities through which the focal firms

communicated their identity and created meanings about themselves that extended beyond the

products and services they offered. These meanings often constitute web-site-related content that

takes customers beyond simply obtaining information and transacting a purchase order. Broadly,

such activities included the naming of the firm, the dissemination of its founding story, its web-

site design, advertising campaigns, and other promotional activities.

The Name. Recognizing that a company’s name identifies it to outside observers (Aaker,

1992), Bezos chose "Amazon.com" because of its metaphorical link to Amazon— the Earth’s

largest river. It signified the positioning theme of the firm, as well as its important value

proposition, as an "authoritative" source for online-book purchasing based on a large selection.

This meaning was not only chosen strategically by the firm’s founder but also disseminated

broadly in a press release:

Amazon.com's name pays homage to the Amazon River. Just as the Amazon River is Earth's biggest river--Amazon.com is Earth's Biggest Bookstore, offering 14 times the number of titles carried by the largest physicalbook superstore. (PR Newswire, June 10, 1997)

The name thus conveys a theme, which both identifies and positions the firm in its industry. It

also anchors consumers' imagination into a familiar image of the world's largest river.

Amazon.com's name also includes a “.com” extension, which identifies the firm as an

Internet-based company. It distinguishes it from traditional-book retailers such as Barnes &

Noble, but more importantly it conveys Amazon.com’s identity even to people who know little

about e-commerce. At a time when the general public had little understanding about e-

commerce, Amazon.com’s name provided the firm’s address--information that was critical for

attracting customers to its website. Currently the “.com” extension has become a pre-eminent

Internet symbol and Internet-related businesses are often referred to as “dot-com” businesses.

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Unlike Amazon.com, barnesandnoble.com took the name of its parent, thus obscuring the

differences between its physical and Internet distribution channels. CDNow also chose a name

that did little to emphasize its Internet identity. Although the name carries a potential connotation

with speed and timeliness, the firm never promoted such an association.

The Story. Another key symbolic action undertaken by Amazon.com was the

dissemination of the story about its genesis. The story tells observers that Bezos did not develop

a business to produce or retail a particular product category. Rather he chose a product to

maximize the benefits of e-commerce. Thus, again the story conveys a strong Internet identity

and reinforces the theme communicated by the name.3 In contrast, Barnes & Noble began on-line

operations not as an Internet company but as a bookseller on America Online. And CDNow’s

story describes the dissatisfaction of its founders with their local music store, which the founders

were determined to outdo. Thus, none of the competitors’ stories communicates a distinct

Internet identity.

Retail Façade. A major representation vehicle for an Internet company is its web site. All

three focal companies we studied positioned their web sites as virtual “stores.”4 The choice of the

“store” as a symbol, rather than a library or a database, enables these sites to trigger established

buying habits. To further strengthen this association, the three-commerce sites employed visual

symbols such as “shopping carts” and instructions to "proceed to the check-out counter" --

reminders of physical-store environments that customers are already familiar with.

3 It was Bezos who untiringly contributed to the dissemination of the firm's story globally. By making himselfreadily available to both the traditional and online reporters seeking interviews, he acts as the firm’s chief promoterand spokesperson. By maintaining a high profile, he managed to (and continues to) disseminate Amazon.com’scarefully crafted and consistently told story.4. Although this action may be taken for granted today, it is worth noting that in 1996 Simon & Schuster operated asite named “The Information Super Library,” which offered thousands of books published by Simon and Schusterfor preview and purchase. The site got more than 500,000 hits a day and was ranked as one of the top Web sites byBest of the Web.

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Amazon.com once again was a leader in developing the symbolism of a “store.” It went

one step further by leveraging technology. Notes Bezos [quoted in Fast Company, 1996]:

We want customers who enter Amazon.com to indicate whether they want to be "visible" or "invisible." If theychoose "visible," then when they're in the science fiction section, other people will know they're there. Peoplecan ask for recommendations-- ‘read any good books lately?’-- or recommend books to others.

Notably, Red Herring (1999) only recently discussed the problem of the “empty shop” on the

Internet, i.e. lack of customer co-presence, as a problem that many online retailers are just

starting to address.

Amazon.com took other innovative actions to promote its web site. As early as the third

quarter of 1996, Amzon.com created a tour of “Killer Web Sites.” This tour, led by David Siegel,

the author of “Creating Killer Web Sites,” took Internet surfers to web sites that Siegel promoted

as excellent in design. Additionally, the firm's web site has garnered several design awards.

Advertising. For a company that is so expressly “Internet” in its symbolic actions,

Amazon.com relies heavily on traditional advertising as a brand-building tool. A series of ads,

for example, refer to the largest buildings in the US and in the world–The Pentagon and The

Vatican–as potential storage spaces for its large selection of books. These advertisements deploy

physical symbols to represent the size of its virtual-book collection, thus continuing the

evocative interplay between virtual and physical realities embedded in the firm's name and the

web site symbols (e.g., shopping carts).

Finally, the symbolic actions of Amazon.com include initiatives through which it engages

various audiences and through which it creates broader meanings. For example, the firm

organized the “Street Lawyer” and “Be A Poet” contests, which involve audiences and broaden

the set of meanings associated with the firm. The firm also invited Pulitzer-Prize winning author,

John Updike to collaborate with the firm’s customers in writing an original online story (on a

real-time basis). According to Bezos:

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There are a couple of objectives with a promotion like this. One is to bring more people to the Web site andsome fraction of those people will convert into customers. It also helps with branding. The second objective …is to create a fun environment on the Web site.

Whereas some of these actions indeed enhance the retail experience of customers, they also

establish an identity of the firm that goes beyond that of just another "efficient" online store.

Neither CDNow, nor barnesandnoble.com have developed such a variety of symbolic activities.5

Overall, it appears from the data that Internet companies undertake symbolic actions to

varying degrees. Amazon.com, for example, has used more symbols and symbols of greater

variety than its competitors. The use of a variety of symbols contributes to reputation building by

enabling firms to reach more audiences and in a sense, to anticipate and answer more of their

potential questions about what the firm does, what it stands for, and what it intends to be known

for. This idea is consistent with research on organizational legitimacy that has suggested,

“skillful legitimacy management requires a diverse arsenal of techniques” (Suchman, 1995).

Despite their variety, Amazon.com’s symbolic actions follow a consistent theme. The

consistency of Amazon.com’s symbolic actions can be attributed to some degree to its selecting

an advertising agency as early as 1996 with an explicit assignment that included creating a

corporate identity, branding, website design, online and print advertising, and media planning

and placement. According to Amazon.com’s VP of Marketing: "CKS won us over because they

really understand how to create customer relationships, both online and offline." In contrast,

CDNow grew primarily by word-of-mouth, according to Jason Olim, its co-founder.

Barnesandnoble.com relied on its established brand and hired an advertising agency only in July

of 1998.

5 CDNow has joint promotional campaigns with MTV and VH1, which focus on the music, rather than on the firmand what it stands for.

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Another important aspect of the symbolic actions of e-commerce firms is the degree to

which they relied on symbols to orient consumers in the novel environment of the Internet.

Amazon.com skillfully used symbols that simultaneously signified the benefits and the novelty

of the Internet (e.g., the physical size of its collection is represented by the size of the Vatican),

while offering conceptual and metaphorical links to traditional-retail environments. This

approach enables firms to tap into consumers’ pre-existing experience and habits, and to

facilitate consumers’ integration of the novel business with their established frames of reference

(Weick, 1995). We summarize these ideas suggested by the data in the following propositions for

future testing:

Proposition 1: Symbolic actions that are diverse, yet consistent, will facilitate the accumulation ofreputational stock by e-commerce businesses.

Proposition 2: Symbolic actions that balance novelty and familiarity will facilitate the accumulationof reputational stock by e-commerce businesses.

Competitive Actions

We define competitive actions as those actions through which firms establish the

potential economic and competitive consequences of their participation in the market. Extensive

literature in economics has studied signals as a primary example of such actions (Milgrom &

Roberts, 1983; Heil & Roberts, 1991).

Signaling. A classical signal, which economists have studied, is price-cutting used by

firms to both build a reputation for toughness and deter the entry of competing firms (Milgrom &

Roberts, 1983). Barnes & Noble, for example, entered online retailing just days before

Amazon.com’s initial public offering (IPO) and offered deep price discounts in an effort to

dampen investors’ enthusiasm for Amazon.com’s IPO. However, Amazon.com matched Barnes

& Noble’s prices immediately, and within weeks offered deeper price discounts, thus also

sending a classical signal of its intent to defend its online lead vigorously.

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Advertising expenses is another classical signal: High levels of advertising expenditures

send a strong signal about a firm's commitment to quality (Shapiro, 1983) and desire to maintain

a leadership position (Ferrier, 1997). Amazon.com invests more than 23% of its revenues in

advertising. Moreover, it has chosen to operate with losses in order to continue its substantial

investments in advertising. Thus, it showcases advertising as an important element of the online-

business model, which involves extensive brand building.

Finally, when Barnes & Noble decided to spin off its online division--

barnesandnoble.com--in an IPO, Amazon.com announced a series of counter moves, including

an expansion of its book selection by 1.5 million titles; deeper price discounts on bestsellers; and

the addition of a personalized book-recommendation service. All of these actions were to

dampen barnesandnoble.com's IPO and to signal Amazon.com’s intent to defend its online

leadership position.

Re-defining the Industry Paradigm. Some of the competitive actions the three firms

undertook, however, have broader ramifications than just establishing their competitive

reputations or leadership intent. For example, Barnes & Noble’s motto since the 1970s has been

“The world’s biggest bookstore.” Amazon.com, as noted earlier, positioned itself as “The Earth’s

largest bookstore.” Barnes & Noble sued Amazon.com arguing that “[Amazon] isn’t a bookstore

at all. Rather, it is a book broker making use of the Internet exclusively to generate sales to the

public” (Munk, 1999). Amazon.com responded by filing a counter lawsuit. The lawsuits were

waged over the very definition of the boundaries of the book retail industry, as well as over the

definition of retail in the virtual space. Thus, their consequences extended beyond building the

players’ reputation for toughness and toward redefining the industry paradigm, within which

stakeholders make evaluations of these firms.

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Second, Amazon.com combined its price cuts, the classical signals of competitive

toughness, with an explanation that its lower prices are due its superior business model. It

explained that consumers were to benefit from the superior model enabled by the Internet, thus

diverting attention from the lower margins imposed by price wars (Porter, 1985). Finally, the

very fact that a start-up like Amazon.com launched a frontal attack on the industry leader sends a

meta-signal about the advantages associated with the new medium.

Our analyses of the three focal firms suggest that they relied on signals to manage their

competitive interactions, as game-theoretical models of reputation building would predict

(Weigelt & Camerer, 1988). Additionally, Amazon.com used its competitive actions to redefine

the industry paradigm (Kotha, 1998). Amazon.com’s competitive actions not only attacked and

defended a position; they also disseminated knowledge about the advantages of e-commerce, and

the firm’s superior business model. In doing so, it built a reputation not only for the firm but also

for the Internet as a new medium for commerce. This approach was consistent with its symbolic

actions, which emphasized Amazon.com’s Internet identity.

Since the economics of the Internet enable the pursuit of business models different from

the ones used in the "physical" world (Hammel & Sampler, 1998; Shapiro & Varian, 1998),

competitive actions may be more effective if they attempt to shape stakeholders’ beliefs about

the industry (Rindova & Fombrun, 1999). For example, Amazon.com is credited with redefining

some of the performance metrics related to the Internet by couching its losses as strategic

investments (Andres, 1998). Influencing stakeholders’ beliefs about the industry is likely to

affect a firm’s reputation because it is these beliefs that guide the evaluations that stakeholders

make of firms in order to bestow them with favorable reputations (Fombrun, 1996). We

summarize these ideas suggested by the data in the following propositions:

20

Proposition 3: Competitive actions that combine signals with actions that attempt to redefine theindustry paradigm will facilitate the accumulation of reputational stock by e-commerce businesses.

Relational Actions

We define relational actions as those activities of the focal firms that seek to motivate

repeated exchanges with stakeholders. Firms do so by tailoring the transaction content to the

specific needs and interests of each exchange partner.

Our analysis of the data suggests that all three focal companies emphasized the building

of relationships. Amazon.com recognized very early that Internet technology has shifted the

bargaining power toward customers (Hagel & Armstrong, 1997) and made customer relations the

centerpiece of its strategy. Explains Bezos:

Customer service is a critical success factor for online merchants. If you make customers unhappy in thephysical world, they might each tell a few friends. If you make customers unhappy on the Internet, they caneach tell thousands of friends with one message to a newsgroup. If you make them really happy, they can tellthousands of people about that.

Consistent with this view, Amazon.com engaged in multiple actions to build customer

relationships.

Personalization. Amazon.com goes to great lengths to develop a one-on-one relationship

with its customer. For example, it trains its employees about “the tone” of e-mail messages with

customers, so that the messages convey a sense of personal touch. It also offers innovative e-

mail-based personalized services: “Eyes" is a notification service, in which customers can

register their interests in a particular author or topic; “editor's service” provides editorial

comments about featured books. These services are automated and are available free of charge.

Finally, all three competitors have developed capabilities to maintain a personalized site for each

and every customer that has purchased items from them.

The personalized interaction enabled by Internet technologies, such as collaborative

filtering, provides e-commerce firms with significant amounts of customer-specific knowledge.

21

Through this knowledge e-commerce firms not only fulfill customers' transaction needs, but also

can help advance customers’ personal development goals. Social psychologists have argued that

relationships that are characterized by personalized knowledge of each other and assumed

responsibility for furthering each other’s objectives, can be defined as “mutual close

relationships” (Berschied, 1985; Levinger, 1980). Such relationships entail mutual disclosure and

investment through which the participants in a relationship become increasingly committed to

each other. Our analysis of the data suggests that e-commerce firms such as Amazon.com are in

a better position to develop this type of close relationships with their customers and to reap the

reputational benefits of the mutual commitment they engender.

Whereas the relationship between a firm and a stakeholder may not reach deep levels of

interpersonal intimacy, the evidence from customer comments and reviews posted on

Amazon.com’s website suggests that its customers are willing to commit resources to the

furthering of the firm’s objectives. According to Bezos customers’ e-mails offer "a tremendous

amount of feedback.”6 He also notes: "I want every customer to become an evangelist for us.

About 63 percent of the book orders come from repeat customers."

Whereas a customer focus is generally recognized as an important source of

differentiation for a firm (Kotha & Vadlamani, 1995), building relationships with investors has

not been considered a strategic priority in the literature (Rao, 1997). However, Amazon.com,

unlike the other two firms we studied, has taken relational actions vis-à-vis investors too. Under

the rubric “About Us” its website provides general company information and a list of its press

releases. Additionally, the site offers a section focused on investor relations, containing the

6 Based on customer e-mails, Amazon.com has added additional shipping options, made sending gifts easier, listedtitles that won literary awards and simplified searching options. Also, over 20,000 people provided suggestion onhow the firm should redesign its website to accommodate a music store.

22

firm’s annual reports, selected investor-related press releases, and a list of telephone numbers of

financial analysts who follow Amazon.com’s stock.7

Making such information readily available suggests that the firm understands investors’

objectives and attempts to help in their achievement. This approach caters particularly well to the

needs of the emergent population of amateur-day traders who buy and sell stock via the Internet.

This population of investors lacks the expertise of professional investors and is more likely to

consume the information provided by the firm. Moreover, they tend to be more attracted to a

firm about which they have information relative to other firms that fail to provide such

information. Once again, Amazon.com’s relational actions address the specific dynamics of

Internet exchanges.

Community. Amazon.com not only engages customers in a dialogue with the firm, but

also invites customers to talk to each other. The firm offers space for readers to post their “own”

reviews. It steps out of the way and lets its customers sell to each other. Thus, customers

themselves (along with the firm’s editors) create much of the editorial content on the firm’s Web

site. Creation of content by customers increases their involvement, enhances the credibility of the

site, and builds a community. Amazon.com is one of the pioneers of commercial on-line

communities. Hagel and Armstrong (1997: 5) pointed out that most e-commerce sites do not

encourage customer interaction; and the sites where users interacted generally were not

“business-oriented.” In contrast, Amazon.com’s efforts to build close relationships with

customers, e.g. to know their preferences, and take responsibility for advancing their goals,

promotes trust and facilitates the creation of a community around commerce. Creating a virtual

community has strong reputation effects because: (1) It intensifies and aggregates the flow of

7Barnesandnoble.com has no section about the firm and CDNow uses that section to list jobs openings and itsstrategic partners.

23

information about the firm, (2) it attracts and concentrates the potential target customer group,

and (3) it increases customer propensity to undertake a commercial transaction (Hagel &

Armstrong, 1997).

Participation in Networks. Amazon.com assumed a similar community building

approach in its relationships with distributors. Whereas the conventional wisdom argues that the

Internet provides infinite distribution, i.e., customers have direct access to any site once they are

on the Web, Amazon.com deliberately built a network of distributors, known as “The Associates

Program.” This program is a “referral” service from other websites to Amazon.com’s site. For

every purchase made through this link, the referring site receives a commission, while

Amazon.com expands its customer reach. Both barnesandnoble.com and CDNow followed suit

and introduced their own versions of the program in September 1997 and April 1998

respectively.

This distribution network resembles “grass-roots” political movements in that it is highly

decentralized and each participant contributes only a small fraction to the overall volume of

transactions carried by Amazon.com. Such networks are particularly well suited to capture traffic

and attention on the Internet, which decentralizes the information flows and consumer traffic

otherwise bound by a physical infrastructure.

In addition to spanning the Web with its own relational web, Amazon.com also has

entered exclusive bookseller relationships with five of the top six sites on the Web: AOL,

Yahoo!, Netscape, GeoCities, and Excite. Although the primary objective of such relationships is

to improve access to customers or technologies, they also enable the participating firms to

exchange reputational stakes. For example, when Yahoo! included Amazon.com in its list of

“What's Cool?” early in 1996, it gave a huge impetus to the reputation of Amazon.com.

24

Interestingly, the relationship was mutualistic: Yahoo!’s own reputation depends on its ability to

discover “cool” sites and thus to facilitate customers' search for such sites.

By obtaining funding from Kleiner, Perkins, Caufield & Byers, Amazon.com became

part of another exclusive network, which Kleiner Perkins’ money, contacts, and reputation hold

together. By joining such a network, Amazon.com acquired a fraction of the reputational stock

of the group, along with the responsibility to contribute with its own reputational stock to that of

the network. Figure 3 shows Amazon.com’s primary network of Internet partners. The boxed-in

portion of this figure illustrates the tighter links among the firms funded by Kleiner Perkins.

Insert Figure 3 about here

In contrast, barnesandnoble.com’s late entry made its reliance on partnerships to enhance

its online reputation almost one-sided. For example, it partnered with Firefly Networks, a leader

in personalization software, AOL, Microsoft and Hewlett-Packard. Hewlett-Packard explained

its motivation for the partnership with barnesandnoble.com as follows:

"Hewlett-Packard is proud to partner with a retail giant such as Barnes & Noble and provide solutions for theirmission-critical mixed computing environment [emphasis added]" (PRNewswire, 1997).

Barnes & Noble’s physical-world retail reputation is clearly a valuable asset; however, it is

not an asset that can be leveraged in the mutual borrowing and lending of Internet-based

reputations as can Amazon.com’s reputation. Again the creation of a strong Internet identity

through symbolic actions enabled Amazon.com to lend and borrow reputation from exclusive

networks. Based on the ideas derived from our data, we suggest the following propositions for

further research:

Proposition 4: Relational actions that build close relationships through personalization andinformation, which advances the other party’s objectives, will facilitate the accumulation ofreputational stock by e-commerce businesses.

25

Proposition 5: Relational actions that aggregate information and traffic flows by buildingcommunities and “grass-roots” networks will facilitate the accumulation of reputational stock by e-commerce businesses.

Proposition 6: Relational actions that enable firms to lend to and borrow reputation from networkswill facilitate the accumulation of reputational stock by e-commerce businesses.

In Figure 4 we summarize an inductive framework of reputation building on the Internet

discussed in this section. The framework illustrates the aggregation of specific actions into three

major categories and the Internet-related properties of the actions, which are likely to facilitate

the accumulation of reputational stock.

Insert Figure 4 about here

Flows of Actions

So far we focused on specific actions and their properties that are likely to facilitate the

accumulation of reputation on the Internet. By identifying three types of actions, our framework

recognizes that different strategic actions influence the ability of firms to accumulate reputation.

However, we also recognize the complexity of the whole process and we would like to draw

attention to some of the more holistic aspects of the reputation building process.

Our analysis suggests that the strategic actions through which reputations are built are

better understood as action flows (Dierickx & Cool, 1989: 1507). The idea of flows captures the

notion that firms take action, which over time produce cumulative effects and generate intangible

assets. Looking at actions as flows suggests that the volume, consistency, timing, and synergies

of the overall flows are as important as the content of the specific actions.

The importance of consistency and synergies across the different action flows arises from

the fact that they build reputation through different but not independent mechanisms. Symbolic

actions influence the interpretational frames that observers invoke (Weick, 1995); relational

actions build commitment; and competitive actions resolve competitive uncertainty (Heil &

26

Roberts, 1991). Yet relational commitments affect both perceptions of uncertainty and the

choice of interpretational frames (Uzzi, 1997). Interpretations of identity may induce different

propensity in stakeholders to engage in a relationship with a firm (Jones, 1995). For example,

Amazon.com developed a strong Internet identity through symbolic actions. This identity gave it

additional advantages in its competitive and relational actions. With a strong Internet identity,

the firm benefits more from an industry paradigm that favors Internet retailers (Munk, 1999).

Further, it benefits from interpretations about the Internet as a whole more strongly than other

Internet players (e.g., Cisco) whose identities are not as tightly linked to this medium. Therefore,

these systemic effects of action flows require that firms make strategic decisions based on

symbolic and relational, as much as on economic, considerations.

Looking at actions as flows also stresses the importance of their volume and timing. In

our data, Amazon.com took more actions and took more actions earlier than the other two firms.

Figures 5A and 5B compare the volume of actions undertaken by the three focal firms in terms

of their type and timing.

Insert Figure 5 (A&B) about here

Figure 5A shows that Amazon.com undertook more actions than its competitors in all

three categories. Most notably, it undertook twice as many symbolic actions as

barnesandnoble.com, and three times as many as CDNow. Figure 5B includes a time dimension:

It shows that Amazon.com not only undertook more actions across all categories, but also took

them earlier than its competitors. The contrast is particularly sharp between Amazon.com and

CDNow. Both firms entered online retailing around 1995. In 1996 Amazon.com undertook six

major strategic actions, and CDNow undertook none. In 1997 Amazon.com undertook 41

actions versus 5 for CDNow. By 1998 when CDNow undertook 34 actions, which is closer to

27

Amazon.com’s 47. By then, Amazon.com has acquired significant amount of reputational stock

and has begun to deploy it in various markets, including CDNow’s own turf – music retail.

Looking at actions as flows confirms the long-standing assertion of resource-based

theorists that the reputation building process is highly complex and probably only very

imperfectly imitable (Barney, 1991; Dierickx & Cool, 1989). Yet, our analysis also

demonstrates that studying strategic action flows enables us to track to some extent the

accumulation of reputation over time. Our framework identifies several specific building blocks

around which firms can develop reputation-building strategies consistent with their identities,

strategic goals, capabilities, and industry contexts. It also emphasizes that the process occurs on

several levels, which may require different decision rationales, e.g. symbolic, as well as

competitive; customer-focused, as well as, investor-focused and strategic-partner-focused.

DISCUSSION

This paper explores the creation of reputation by e-commerce firms, as exemplified by

the leading on-line retailer Amazon.com. It is perhaps one of the first systematic examinations of

how Internet firms build intangible assets through strategic actions. The Internet has intensified

the importance of building such intangibles. For example, The Wall Street Journal (Andres,

1998: R4) observed that the Amazon.com experience has convinced many that “brand building is

a key strategy,” and Business Week (Baker, Warner, & Dawley, 1998: 48) calls the firm’s

reputation “the one plausible defense against competitive attacks."

Our analyses demonstrated that Amazon.com built its reputation through flows of well-

orchestrated actions. Our framework highlights the key categories of actions and induces the

properties, which are likely to have facilitated the rapid accumulation of reputation by

Amazon.com. Our framework of reputation building differs from previous work on corporate

28

reputations that have sought to relate them to organizational attributes such as financial

performance (Canella & Rowe, 1994), social performance (Brown & Perry, 1994), and

organizational identity (Rindova & Fombrun, 1998; Whetten, 1997). Thus, a primary

contribution of the paper is a strategic action framework of reputation building grounded in the

new reality of the Internet.

Our in-depth analyses revealed three major sets of actions— symbolic, competitive and

relational— through which the e-commerce firms we studied built reputations.

Symbolic Actions. Our observations of the symbolic actions of Amazon.com and the

other two firms, confirm ideas in institutional theory about the role of symbolic actions in

garnering organizational support and legitimacy (Meyer & Rowan, 1977; Pfeffer, 1981;

Suchman, 1995). Although institutional theorists differ in the emphasis they place on firm-

propagated symbols (Suchman, 1995), they generally concur that organizations often cope with

environmental uncertainty by using symbols (Aldrich & Fiol; 1994; Suchman, 1995). We extend

these ideas by identifying that leading e-commerce businesses, such as Amazon.com balance

diversity and consistency, and also novelty and familiarity, in their use of symbols on the

Internet. In doing so they may be in a better position to influence the sense-making processes of

consumers or investors, and thus to accumulate superior reputations.

Further, our findings suggest the importance of being a first-mover in the interpretational

domain: Amazon.com was not a first mover in the industry, but it pioneered the dissemination of

symbols related to the Internet. Amazon.com made its symbolic flow a strategic priority. Thus,

our analysis shows the centrality of symbolic actions in the process of reputation building on the

Internet. Given our limited understanding of the role of cognitive processes in competitive

29

markets in general (Porac & Thomas, 1990), and in e-commerce in particular, the study of the

management of symbols can be considered a particularly germane area for future research.

Competitive Actions. Past research on reputation management has examined the use of

signals to manage reputation (Ferrier, 1997; Fombrun & Shanley, 1990; Milgrom & Roberts,

1983; Shapiro, 1983). This research, however, rests on assumptions from neoclassical economics

that market players arrive at similar rational conclusions, given the new information provided via

a signal. Such assumption perhaps hold better in established industries where the industry

participants share an industry paradigm for interpreting the meaning of different competitive

actions (Porac et al., 1989; Spender, 1989). In contrast, on the Internet a common paradigm may

be lacking and the establishment of one becomes a key aspect of the competitive behavior of

firm. For example, Amazon.com’s competitive actions often “showcased” the capabilities of the

new medium. They asserted the superiority of its business model over the brick-and-mortar

model of Barnes & Noble. Future research about the Internet should examine both what factors

drive the formation of shared industry beliefs and the role of reputations as focal points around

which such beliefs are formed (Abrahamson & Fombrun, 1994). In addition, future research that

compares the performance effects of competitive actions geared toward gaining competitive

positions versus actions geared toward redefining the industry would advance our understanding

of both competitive advantage and industry evolution.

Relational Actions. Whereas neoclassical economics has treated markets as settings

where impersonal arms’ length transactions take place; organizational theory has shown a

growing attention toward the role of relationships in exchanges. Nahapiet and Ghoshal (1995)

argued that organizations "provide many opportunities for sustained interaction, conversations,

and sociability both by design and by accident." They highlighted the importance of co-presence

30

(Giddens, 1984), co-location (Fairtlough, 1994), and organizational routines as contexts and

occasions in which actors come together and create relationships.

Our analysis suggests that the Internet offers virtual co-presence, co-location, and

interaction, which are almost continuous. In addition, it offers means for “memorizing” detailed

personal knowledge about exchange partners. These conditions move Internet companies further

away from arms-length transactional exchanges and intensify their relationship building

activities. The e-commerce firms we studied took advantage of personalization and interaction

technologies to develop relationships with customers that were both personal and communal. In

doing so, they cater both to the individuality of their customers and to their sense of community

and belonging. Whereas we highlighted the benefits of the concept of “close mutual

relationships” to capture these new aspects of the relationships between firms and stakeholders,

future research should also examine the organizational and economic investments required to

create and sustain such relations.

Relational actions also link firms to multiple networks, which in turn enable them to

achieve some degree of concentration of consumer traffic in the otherwise extremely

decentralized Internet environment. Thus, it seems that the decentralization of the Internet makes

the creation of networks even more compelling. Amazon.com’s relationships with top Internet

sites, such as Yahoo!, provide a structure that channels traffic to the site, whereas the “Associates

Program" with small individual sites gives it a network with a broad reach. Building such

relationships allows firms to mirror the growth of the Internet. It appears that through the social

structure of networks, Internet firms create a substitute for the lacking physical infrastructure

(Fombrun, 1986). Future research should delve deeper into some of the functions of Internet

networks, among which accumulation and leveraging of reputation seem to play a central role.

31

Thus, the overall contribution of the paper is a multi-disciplinary framework that enables

reputational researchers to study the reputational effects of various strategic behaviors of firms.

Only by studying the combined effects of symbolic, competitive, and relational actions can we

begin to disentangle the complexity of the reputation management process. Thus, the framework

we propose provides ways for tracking and analyzing the strategic creation of reputation and

emphasizes the links between reputation management and the competitive strategy of a firm.

By looking at strategic action flows, our framework also makes a contribution to

resource-based theory. Resource-based theorists have specified the conditions under which a

resource becomes a source of sustainable competitive advantage (Amit & Shoemaker, 1993;

Peteraf, 1993). However, the theory as currently articulated, offers little guidance to managers

and researchers about the process through which such resources are created (Porter, 1991). Our

case-based approach extends resource-based ideas by suggesting a process framework of

reputation building grounded in the concrete actions of three e-commerce firms.

Further, our framework links reputation building, and more generally, the development of

intangibles, to concepts from dynamic strategy— a concept, which in the past has been applied

primarily to examine interfirm-rivalry and competitive positioning (Smith, Grimm, & Gannon,

1992). By linking the development of intangibles to the dynamics of competitive strategy, we

blur the distinction between internally and externally driven sources of sustainable competitive

advantage.

In developing our ideas, we have noted several limitations in our approach. First,

regarding the actions that constitute the various flows, our focus was on realized strategies, i.e.,

we inferred Amazon.com’s approach from the pattern of its actions over time (Mintzberg &

Waters, 1985). Few actions were designed and undertaken with the primary objective to manage

32

the firm’s reputation. Thus, our framework highlights the reputational consequences of general

business activities, rather than distilling a “pure reputation-management” strategy. For that

reason, the content of actions in the various flows will vary from industry to industry. An

interesting area for future research would be to identify a core of activities that remain constant

across industries. Discovering such “reputation fundamentals” will enable us systematize the

process of reputation creation even further.

Second, this study emphasized actions that build reputation at the expense of actions that

exploit an established reputation. A fuller understanding of the role of reputation as an intangible

asset on the Internet will require an examination of the ways in which firms use their reputational

stock to pursue strategic initiatives, such as entering a new market or securing strategic partners.

Whereas we alluded to the differential access to networks that Amazon.com and

barnesandnoble.com had as a function of their reputations, many interesting questions remained

outside of the scope of the paper. Future research can benefit from examining the importance of

relative reputation in strategic partnering, and the transferability of ‘physical’ world reputations

to the Internet, and of Internet reputations from one market to another.

Our research focused on actions that Amazon.com took toward external stakeholders. It is

important for future research to understand what organizational processes and capabilities

support and sustain a given pattern of actions. Some of our interviews suggested that underlying

Amazon.com’s actions are substantial investments in technology and training. These investments

create capabilities for managing highly personalized or communal interactions.

Finally, our research focused on the reputation of the firm as reflected in the public

discourse. Public discourse reflects the general stance of the public or a stakeholder group

toward a firm, but it seldom reflects the views of any specific individual. Since it is ultimately

33

individuals that make purchasing decisions--for books and stocks alike--we recommend that

future research examine the formation of reputation at a more micro level.

Conclusion

The purpose of this study was to explore the dynamics of reputation creation on the Internet,

an important issue confronting both Internet start-ups and traditional firms contemplating entry

into cyberspace. We studied and compared the actions of e-commerce pioneers--Amazon.com,

barnesandnoble.com, and CDNow. Based on an in-depth analysis of Amazon.com as an

exemplar and the comparison with its competitors, we develop an action-based framework of

reputation building.

Overall, the paper offers one of the first studies on how Internet firms build intangible assets

through strategic actions. Although qualitative and exploratory in nature, the insights developed

in the paper capture phenomena that may define the competitive landscape of the future. For

example, the development of close mutual relationships between firms and stakeholders who

interact with each other in virtual communities may become more pervasive; the management of

symbols may become a central principle of competitive strategies designed to perform in markets

devoid of physical cues; the emerging array of new technologies can trigger frequent re-

definitions of industry boundaries and paradigms. In these environments, many of the actions

pioneered by Amazon.com can serve as templates of "reputation repertoires" that other Internet

and traditional firms are likely to emulate as they contemplate their sources of competitive

advantage in the next millennium.

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Table 1: A Brief Comparison of the Cases Selected for the Study

Company Amazon.com Barnesandnoble.com CD

Entry 1995 1997 1994

PrimaryStartingPoint

Book Retailing Book Retailing Music Retailing

Revenues 1996 -$15.7 mil

1997 - $147.8 mil

1998 - $610.0 mil

1996 - NA

1997 - NA

1998- $61.8 mil

1996 – NA

1997 - $17.4 mil

1998 - $56.0 mil

Founder(s)andBusinessIdea

In 1994, Jeffrey Bezos – theyoungest analyst at NewYork’s boutique investmentbank firm--D. Shaw--ranacross one statistic that caughthis imagination— Internetusage was growing at 2300% ayear. Recognizing theInternet's potential, he drew upa list of 20 possible productsthat could be sold on theInternet and narrowed theprospects to music and books.Both had a potential advantagefor online sale: far too manytitles for any single store tostock. He launched hisventure, Amazon.com, in July1995.

- Started as an online divisionof Barnes & Noble– the leaderin traditional book retailing inthe United States.

- The online division was firststarted as a book retailer onAOL, and created in responseto Amazon.com's growingonline success.

- The online division waslaunched as an aggressivecompetitive move just daysbefore Amzon.com’s IPO's wasto happen.

In the Summer of 1994, JasonOlim and his twin brotherfrustrated by the limitedselections in traditional retailmusic stores, came up with theidea for "cyberstore" that wouldoffer every Jazz album made inthe United States and 20,000imports.

Financingand Growth

- Backed by Kleiner, Perkins,Caufield & Byers, a venture-capital firm based in theSilicon Valley that has fundedfirms such as SunMicrosystems, AOL, Excite,@Home, Intuit, and Netscape,

- In May 1997 the firmcompleted a highly successfulIPO valuing the firm at $430mil (7 times its revenues)

- The firm's book collectionhas grown from 1 million to 4million (as of December1998).

- The firm has expanded intovarious other businessesincluding music, toys,auctions, greetings andelectronics

- Started by Barnes & Noble asan internal venture.

- May 1999 20% the ventureoffered to the public, thereminder owned in 50-50partnership between Barnes &Noble and Bertelsman,Eupore's largest PublishingHouse.

- The Olim brothers set up shopin the basement of their parents'home, but quickly outgrew thisspace.

- In response to Amazon.com'sexpansion into the MusicIndustry, the firm merged withrival N2K.

- Recently, the firm agreed tobe bought by Columbia House,the club membership.Columbia House is a jointventure between SonyCorporation and Time Warner.

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Figure 1:Cumulative Visibility and Cumulative Esteem Accumulated by the Three Focal Companies1996-1998.

(A): Cumulative Visibility Plots for All Three Focal Firms

(B) Cumulative Esteem Plots For all Three Focal Firms

Q1'96

Q2'96

Q3'96

Q4'96

Q1'97

Q2'97

Q3'97

Q4'97

Q1'98

Q2'98

Q3'98

Q4'98

AmazonBarnesandnoble

CDNow

0

10

20

30

40

50

60

Cumulative Esteem for Three FocalCompanies

Q1,96

Q2,96

Q3,96

Q4,96

Q1,97

Q2,97

Q3,97

Q4,97

Q1,98

Q2,98

Q3,98

Q4,98

AmazonBarnesandnoble

CDNow

0

50

100

150

200

250

300

350

Cumulative Visibility for Three FocalCompanies

42

Figure 2A Comparison of the Esteem of Profiles of the Focal Companies

8%

53%39%

16%

34%

50%

20%

41%

39%

Amazon('96-'98)-

Positive Neutral Negative

Esteem Profiles

CDNow('96-'98)

Barnesandnoble('97-'98)

43

Figure 3Amazon.com’s Network of Partners

Netscape*Jim BarksdaleMike HomerJim ClarkJohn Doer

AOL*Steve CaseBot PittmanTed LeonsisFrank Caufield

Excite*George BullVinod KhoslaBill CampbellSteve Case

@HomeTom JermolukMilo MedinWill HearstJim Barksdale

IntuitBill HarrisScott CookBill CampbellJohn Doer

iVillage

Yahoo!*

Alta Vista

GeoCities*

*Internet Portals

Amazon.com

Jeff BezosJohn DoerScott Cook

Firms within this box were funded by Kleiner,Perkins, Caufield & Byers, the most renownventure capital firm in the US. KPCB executivesare in italics.

- A thick line represents a partnership arrangement between Amazon.com and the firm.- A thin line represents a partnership between two Kleiner, Perkins, Caufield & Byers’ financed firms- A dotted line represents an executive of Kleiner, Perkins Caufield & Byers' funded firm sitting on the board ofanother KPCB funded firm

Source: Amazon.com's Press Releases and Fortune Magazine.

.

44

Figure 4An Inductive Model Of Reputation Building On The Internet Through Strategic Actions

Legend of the type of relationships among constructs:

[ ] -- “is a part of”= = -- “is associated with”=> -- “is a cause of”

45

Figures 5A Comparison of Action Flows of the Focal Firms by (A) Type and (B) Time

(A) A Comparison of the Type of Actions Taken by the Focal Firms

(B) A Comparison of Actions Taken by the Focal Firms by Time

05

1015202530354045

Symbolic Competitive Relational

Action Flows

Amazon barnesandnobleCDNow

05

101520253035404550

1996 1997 1998

Time

Amazon barnesandnobleCDNow