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Volume 18, Number 2
February 2012

Toward legitimacy

The research of Jean-Philippe Vergne looks at how arms firms survive and thrive in a socially contested industry

The global weapons industry is often seen as a shadowy world, rife with corruption and skulduggery. Management scholars have tended to neglect it, but Ivey Professor Jean-Philippe Vergne says that the industry has become much more competitive and transparent over the last 20 years.

In his research, Vergne studies “socially contested organizations” - firms that act legally but are accused of activities that are socially disapproved of. “I’m interested in how these industry actors manage contestation and protest to gain a competitive advantage,” he says.

In an award-winning paper in Organizational Research Methods and a paper in Academy of Management Journal, Vergne focused on the global arms industry. He asked two questions: Why are some firms able to maintain a good reputation and others not? And how does having a poor reputation affect firm performance? His research was based on three sources: interviews with prominent field actors, quantitative data from 200 of the world’s largest weapons producers from 1996 to 2007, and articles from 12 international newspapers from the same period.

Vergne found that industry stakeholders tend to group arms producers into categories that affect reputation. One category is country of origin. Different countries are perceived to have different levels of transparency. For example, France is perceived to be more transparent than Russia. “There is an assumption that arms producers from countries with more corruption are more likely to be involved in behaviour that’s not socially acceptable,” says Vergne.

Another category is the type of product that the company sells. Vergne finds that firms that are well diversified between military and civilian products tend to have a better reputation, regardless of the number of weapons they sell. Boeing, for example, is one of the top three arms producers in the world. Yet people tend to think of Boeing for its commercial aircraft.

A third category that drives reputation is the type of customer. If an arms firm sells to a ruthless dictator, for example, its reputation will be diminished.

In his study, Vergne observed that the events of 9/11 sent shock waves through the weapons industry, altering some of the reputational patterns that existed before. After 9/11, the perception of “a clash of civilizations” made the category of country affiliation even more important.

Because the attack was not carried out with conventional military weapons, the difference between the military and the civilian began to blur. After 9/11 the effect of being diversified into civilian products had less impact on reputation. “These changes in reputational patterns tended to benefit Scandinavian firms, who are located in very transparent countries, have fewer dodgy customers, and are typically not too diversified into civilian activities,” says Vergne.

Vergne next looked at the impact of reputation on the firm’s bottom line. The conventional wisdom is that arms firms don’t really care about their reputation, because there’s not much they can do about it. However, Vergne found that poor reputation has a consistent negative impact on firm performance.

This finding can be explained by the secrecy inherent in the arms industry. “Secrets create an asymmetry of information,” says Vergne. “As a consequence people tend to generalize informational cues and categories more than in an industry where there is no secrecy.” For example, if an arms manufacturer from country A is involved in a major corruption scandal, people will tend to see all arms producers from country A in the same way.

As a result, arms firms will often be punished by their own stakeholders and peers. If a firm blackens its name in the industry, its partners, subcontractors, and suppliers will often isolate it from further transactions. In his research Vergne has developed an econometric model which estimates when it can be profitable to refuse additional business from a customer with a bad reputation.

Vergne’s research has important implications for managers who work in contested industries. One lesson is that diversification can have a positive impact on reputation. For example, when Philip Morris diversified into food, its image changed from a cigarette manufacturer to a consumer products company. “By straddling these different categories, you can change the way external audiences perceive you,” says Vergne.

Managers can also learn from the responses of arms firms when they’re attacked in the press. These can range from replacing the CEO and changing the name, to adopting a code of ethics. Although the first two tactics sometimes work, Vergne found that publicizing a code of ethics can backfire. “Such a move will actually increase the scrutiny of the media, who often uncover more scandals that damage reputation even further.”

Arms firms don’t always see it as an opportunity when a competitor is attacked in the press. When one firm is tarnished, the image of all members suffers. “Although the industry is becoming more competitive, transparent and cleaner, it’s still corrupt relative to other industries,” says Vergne. “For managers, managing the reputation of the industry as a whole, as well as your own firm’s reputation, is really important.”

Professor Vergne's Homepage