JOURNAL OF STRATEGIC MARKETING 9 255–268 (2001

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Building value-based branding strategies
PETER DOYLE

Warwick Business School, University of Warwick, Coventry CV4 7AL, UK

Marketing professionals oversimplify the problem of building successful brands. As companies such as Xerox and Procter & Gamble have learned, brands can have strong consumer franchises yet still not generate value for investors. Brands that create shareholder value have to meet four requirements: (1) a strong consumer proposition, (2) be effectively integrated with the rm’s other value-creating assets, (3) be positioned in a suf ciently attractive market and (4) be managed in order to maximize the value of the brand’s long-term cash ow. This paper shows that, when managers attend to all four determinants, they can enhance brand values and develop more effective marketing strategies. KEYWORDS: Brands; shareholder value analysis; marketing; strategy

INTRODUCTION In recent years many of the companies most renowned for their branding and marketing skills have been seen to stumble on the stock market. Coca-Cola, Procter & Gamble, Marks & Spencer, Gillette, Xerox and British Airways have all jettisoned their chief executives in the face of sliding share prices. Brands have not been the promised panacea in today’s highly competitive environment. In contrast, many of the companies that have dramatically succeeded in creating value for investors, such as Dell, Vodafone and General Electric, have not been noted for their branding investments. Many marketing-orientated companies such as Procter & Gamble and Gillette have oversimpli ed how brands add value to the performance of a business. Marketing has overwhelmingly focused on the importance of developing an attractive consumer proposition and establishing a relationship with the customer through consistent and continuous brand investment. In contrast, this paper demonstrates that, if brands are to create value, four factors are required (Fig. 1). Certainly an attractive consumer value proposition is the number one underpinning of a successful brand. However, this is not enough. The brand has to be effectively integrated with the rm’s other tangible and intangible resources, which are the foundations for its core business processes. The market economics in which the brand operates must also permit returns above the cost of capital to be earned. Finally, management has to pursue brand strategies that are directly linked to shareholder value creation. By focusing solely on their customer value proposition, managers can over-invest in brands. Like Procter & Gamble they can overestimate the growth potential of their brands, which in turn can trigger damaging erosion in their margins (Business Week, 2000). The results can only be a declining share price and the unravelling of the company’s corporate strategy. For
Journal of Strategic Marketing ISSN 0965–254X print/ISSN 1446–4488 online © 2001 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/09652540110079038

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marketing executives, ignoring the market realities and the nancial drivers of the share price leaves them exposed in the boardroom as functional advocates rather than genuine contributors to the balanced development of the business. The remainder of this paper looks at the four determinants of brand performance. BRANDS AND THE CUSTOMER VALUE PROPOSITION Marketers normally see their key area of expertise as building and developing brands. A brand with a successful customer value proposition (Bcp) can be considered as consisting of three components, namely an effective product (P), clear differentiation (D ) and, most importantly, added values (AV ), which give customers con dence in the functional or emotional bene ts of the brand. In summary, Bcp = P × D × AV. (1)

Building a successful brand starts with developing an effective product or service. Unfortunately today, with the speed at which technology travels, it is increasingly dif cult to build brands and certainly to maintain them on the basis of superior, demonstrable functional bene ts. Comparably priced washing powders, personal computers or auditing rms are usually much alike in the performance they deliver. In order to gain and retain customers, managers need to look at differentiating their offers further though design, logos, packaging, advertising, service and similar. Besides making the offer look different, differentiation is the central way in which the brand seeks to communicate its added values. Added values aim to give customers con dence in the choices that they make. Choice today is dif cult for customers because of the myriad of competitors seeking patronage, the barrage of communications and the rapid changes in social mores and technology. Brands aim to simplify the choice process by con rming the functional or emotional associations of the brand. Increasingly, it is the emotional or experience associations that a successful brand promises that create the consumer value. These may be the aspirational values of ‘the ultimate driving experience’ of a BMW or ‘Rolex – the watch the professionals wear’. Many of today’s newer brands focus on shared experiences and emotions as much as prestige. They promise individuality, personal growth or a set of ideas to live by. Examples are Nike with its ‘Just do it’ attitude, joining the ‘Pepsi generation’ or Microsoft with its the sky’s the limit ‘Where do

FIGURE 1. Determinants of the successful brand.

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you want to go today?’ message. For these brands, no claims are made about the superiority of the product or its special features – the promise is about shared values and feeling good about one’s self. The other familiar part of the brand-building process is positioning: what target segment the brand is aimed at and the differentiation platform – why customers should buy it. Finally, marketers stress the importance of continuous and consistent advertising, promotions and point of sales in order to build the customer relationship. (For reviews of the marketing approach to brands see e.g. Kapferer (1997) and Aaker and Joachimstaler (2000).) BRANDS AND THE BUSINESS VALUE CHAIN However, as traditional companies such as Xerox and Procter & Gamble and, more recently, dot.coms such as Yahoo! and PriceLine have discovered, communicating attractive value propositions are not enough. Brands have to be integrated with the rm’s other resources in order to build superior business processes if they are going to deliver a differential advantage and create shareholder value. In order to understand how brands can add value we need to start with a model of how a rm creates value. There is now wide acceptance of what strategists call the ‘resource-based theory of the rm’ (see e.g. Peterlaf, 1993; Collis and Montgomery, 1995). This represents something of a shift from the marketing-based idea of the rm that was popularized by Levitt (1960) in his famous ‘marketing myopia’ article. The resource-based theory proposes that de ning a rm in terms of its assets and core capabilities offers a more durable basis for strategy than a de nition based upon the customer needs the business seeks to satisfy. In other words, sustained success depends upon more than merely identifying market opportunities. More critically it depends upon having the special capabilities for delivering at lower cost and higher quality or building more effective customer relationships than the competition. Figure 2 is a modi ed representation of the resource-based view of the rm. Starting from the top, the objective of the strategy is to create shareholder value, as measured by rising share prices or dividends. As the Financial Times (2000) recently concluded, ‘the model of capitalism, which emphasises shareholder value, is the yardstick on which global capital markets are converging’ (p. 7). Business Week’s (2000) conclusion was identical: ‘the fundamental task of today’s CEO is simplicity itself: get the stock price up. Period!’ (p. 48). The key to creating shareholder value in competitive markets is in possessing a differential advantage – giving customers superior value through offers or relationships that are either perceived as superior in quality or lower in cost. Achieving this differential advantage in turn depends upon the effectiveness of the rm’s business processes. The core business processes of most rms can be grouped into three areas: (1) the product development process, which enables a rm to create innovative solutions to customer problems, (2) the supply chain management process, which acquires inputs and ef ciently transforms them into effective products and services and (3) the customer relationship management process, which identi es customers, understands their needs, builds customer relationships and shapes the perceptions of the organization and its brands. In order to be able to make superior offers to customers, a rm must have outstanding business processes that enable it to be more innovative than its rivals (e.g. Sony and 3M), to have operations that deliver customer solutions at a lower total cost (e.g. Wal-Mart and Toyota) or to be outstanding at managing customer relationships (e.g. Dell and American Express). It is important to recognize that these core processes are not independent. For example, if a

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FIGURE 2. Brands within the resource-based theory of the rm.

company’s marketing strategy is based on achieving superior customer relationships through individualized solutions, it will also need the product development and supply chain management processes in order to design and deliver the tailored responses ef ciently. Without the combination of effective core processes it will not be able to execute the strategy. Second, while the company has to manage these processes, it does not have to conduct them. Increasingly rms are becoming part of networks and processes are being outsourced to specialists. Companies such as Dell and Virgin, for example, focus on the product development and customer relationship management processes and outsource most of their supply chain activities. Core business processes are the drivers of the rm’s differential advantage and its ability to create shareholder value. However, these processes themselves are founded on the rm’s core capabilities, which derive from the resources or assets it possesses. A rm cannot have superior business processes unless it has access to the necessary resources and the ability to coordinate them effectively. Resources can be divided between tangible and intangible assets. Traditionally, a rm’s tangible or balance sheet assets were seen as its most vital resource – its factories, raw materials and nancial assets. However, in today’s information age, with services taking over from manufacturing as the economy’s engine, investors increasingly view intangible assets, i.e.

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the rm’s knowledge, skills and reputation, as the key to superior business processes. In 2000, tangible assets accounted for less than 20% of the value of the world’s top 20 companies. Finally, maintaining the up-to-date asset base on which everything is founded depends upon investment. It requires investment in physical assets, but even more on recruitment, training, staff development and, in the case of brands, advertising and communications. Brands form part of the intangible asset base that drives the rm’s core business processes. The resource-based model of the rm suggests several insights into the role of brands and the creation of shareholder value. First, marketers should guard against exaggerating the importance of brands. In many industries the much more important drivers of the core processes and shareholder value are the rm’s patents and technology and, in particular, the skills and commitment of its staff. An impression of the relative importance of brands against other tangible and intangible assets is given by some estimates from Interbrand (Table 1). Only in luxury consumer goods are brands the dominant source of value. In many of the newer, faster growing industries, such as information technology, pharmaceuticals and nancial services, brands play a much smaller role. If companies over-invest in traditional branding activities, they under-invest in other tangible and intangible resources. For example, an under-investment in new technology and lack of genuine innovation appears to have played an important part in the decline of Procter & Gamble and Heinz (Berthon et al., 1999). Second, strong brands can be undermined by a poor marketing strategy. A poor marketing strategy is one that is not geared to creating shareholder value. Marketers often set their strategic objectives as maximizing awareness, growth or market share rather than the value of long-term cash ow. When this happens the brand’s value is eroded by the cost of servicing too many low-pro t accounts, by over-investment in marketing communications and by underpricing. Finally, successful brands impact most directly on the customer relationship management business process thereby enhancing the con dence and satisfaction customers gain from the product. However, effective brand management also engages with the product development and supply chain management processes (see Jaworski and Kohli, 1993). In the past, brands such as Jaguar, MG and Schlitz Brewing have seen their nancial values fatally eroded by the companies’ inability to provide the quality, delivery and performance for making a reality of the desired images. Brand management must be seen as an integrated part of the total management process rather than a specialist marketing activity. Brand management only becomes a core capability of
TABLE 1. Relative importance of brands and other assets Tangibles (%) Utilities Industrial Pharmaceutical Retail Information technology Automotive Financial services Food and drink Luxury goods
Source: Interbrand.

Brands (%) 0 5 10 15 20 30 30 55 70

Other intangibles (%) 30 25 50 15 50 20 50 5 5

70 70 40 70 30 50 20 40 25

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the rm when it is effectively coordinated with the rm’s other resources in order to enhance all the core business processes. BRANDS AND THE ECONOMICS OF MARKETS The third requirement for successful brand building is attractive market economics. The resource-based model of the rm has one important weakness: it assumes shareholder value is solely dependent upon the rm’s competitiveness. Unfortunately, the possession of a differential advantage is only part of the picture. Another part is the attractiveness of the market in which the business operates. Industries differ greatly in pro tability. For example, prescription drugs, soft drinks, tobacco and cosmetics have been consistently highly pro table, whereas textiles, steel, car manufacturing and mining have been consistently unpro table. Market economics mean that even strong brands nd it dif cult to make a decent return in some markets, whereas in others even mediocre brands can make good pro ts. What determines the attractiveness and pro tability of a market? The two most important factors are the intensity of competition and the level of pressure from customers (see e.g. McTaggart et al., 1994; Grant, 1998). When competition is intense, brands may be unable to generate returns above the cost of capital. Four factors typically determine the intensity of competition: the amount of excess production capacity, the degree of product standardization, the number of competitors and the growth in the market. The level of customer pressure is a function of two determinants: the price sensitivity of customers and their negotiating leverage. Market economics explains much of the paradoxical performance of companies such as Procter & Gamble, Gillette, Unilever and Kellogg. These companies are stars in brand management, but they have delivered very poor returns to shareholders in recent years. This is because the grocery markets in which they predominantly operate are characterized by intense competition, which is caused by excess capacity, me-too products, own labels and little growth. They also face a high level of customer pressure from the large supermarket groups, which are increasingly price sensitive and possess immense negotiating power. The result has been that, while these brands maintain high awareness and market shares, the pressures on their pro t margins and the absence of volume growth have resulted in a decline in the nancial value of these brands and the companies that own them. Figure 3 summarizes these dilemmas. Strong brands in attractive markets will always be pro table and create value for their shareholders. Examples of these include Microsoft Of ce, Nokia mobile phones and Mercedes S class. Weak brands in unattractive markets will always be unpro table – investment will not produce returns above the cost of capital. Examples include Chrysler, Smiths Crisps and Radion. The results are more uncertain for the other two strategic brand positions. Weak brands in attractive markets (e.g. Lotus SmartSuite and Ericsson mobile phones) are equivocal: if the brand leader is not aggressive and buyers are not price sensitive these brands can make modest pro ts. However, in the long term they are unlikely to be pro table (i.e. their returns will be less than the cost of capital) because customers can choose better alternatives. Strong brands in unattractive markets (e.g. Weetabix and Stella Artois) will usually be pro table, but their weak growth outlook will mean shareholder returns are unlikely to be exceptional. The importance of market economics to a brand’s potential value means that marketers need a more sophisticated approach. Managers have to recognize that, in today’s hypercompetitive markets, some brands, even those maintaining high awareness and market shares, do not represent sensible investments for shareholders. Rather than swimming against the tide, it is better to either refocus on innovation and strike off in new directions towards markets with more favourable

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FIGURE 3. Market economics and the value-creating potential of brands.

economics or, if there are no viable pro t opportunities, to give the money back to shareholders through share buy backs or raised dividends. VALUE-BASED BRAND STRATEGIES The last determinant of brand performance is developing a strategy that is geared to maximizing shareholder value. Without a value-based strategy a business can throw away the opportunities created by strong customer propositions, effective cross-disciplinary integration and even favourable market economics. This occurs when management becomes purely concerned with meeting marketing objectives such as market share or customer awareness, which commonly lead to underpricing and over-investment. The governing objective of public companies is to maximize shareholder value. The goal of a brand strategy is to contribute to this governing objective. The corollary for marketers is to understand what determines shareholder value. Again this is well understood by investors – value is determined by expectations about the present value of the long-term cash ow the strategy will generate. The present value of a brand’s future cash ow is a function of four factors: the level of its cash ow, the speed at which it comes in, the duration it lasts and the riskiness of these future returns (for comprehensive presentations of shareholder value analysis see Rappaport (1998) and Copeland et al. (2000) ). The difference between a strong brand and a weak brand is that the former has more positive associations with these four determinants of value – if it is properly managed. In general, the task of brand management is to ensure that the level of cash ow is high, that it achieves its full cash-generating potential quickly, that the brand endures and that the cash ows are not put at unnecessary risk.

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This paper now brie y summarizes the evidence of how successful branding impacts on cash ow and then illustrates the practical implications for managers (for more detailed surveys see Srivastava et al. (1998, 1999), Aaker and Joachimstaler (2000) and Doyle (2000) ).

Brands increase the level of cash ow
The level of cash ow is the most important determinant of shareholder value. A brand’s cash ow is determined by four factors: its price, growth, costs and investment. If a brand can achieve a brand premium this has a major impact on its value. There is considerable evidence that successful brands do achieve price premiums. Successful brands should also grow faster, again increasing the level of cash ow. Brand leaders commonly have lower costs, in particular because of scale economies in marketing spend. Finally, strong brands can have lower investment levels (as a proportion of sales) because of their greater potential leverage over the supply chain.

Accelerating a cash ow
Because money has a time value, opportunities for reducing the lag in a brand’s achievement of its potential increase the value of the brand to shareholders. Again there is evidence that consumers respond more quickly to marketing campaigns and new product introductions when they are familiar with the brand name and have positive attitudes towards it.

Extending the duration of a cash ow
The longer a brand name endures, other things being equal, the greater its value to investors. One of the important ways in which brands add value is through increasing the longevity of the product. Most of the world’s most valuable brands have been around for 30 years or more. Well-known brand names have longevity because consumers believe in them, are more willing to try new versions and because they refer them to new generations of customers.

Reducing the risk attached to the future cash ow
Investors discount the future expected cash ow by the company’s cost of capital. The cost of capital is a function of the risk investors perceive in the brand’s future. The greater the risk the lower the brand is valued. Strong brands should offer a lower perceived risk because of higher consumer loyalty and reduced vulnerability to competition. If investors believe a brand’s cash ow is stable and predictable it will have a higher net present value and, consequently, create more shareholder value. A value-creating strategy is one that exploits these advantages so as to increase the present value of the brand’s future cash ow. When marketing managers are not geared to maximizing the value of the long-term cash-generating potential of the brand, they erode investors’ con dence in the business and, ultimately, undermine the viability of the brand. DEVELOPING A VALUE-BASED STRATEGY Developing a strategy starts with an audit of the four determinants of a brand’s value-creating opportunities.

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Is there an effective customer value proposition?
Research is necessary in order to ascertain whether target customers perceive the brand as offering distinctive value. An effective customer value proposition meets the following requirements: (1) customers must see the brand as offering some important bene t, (2) the bene t must be seen as unique and not offered by other brands, (3) the advantage must be sustainable and not easily imitated by rivals and (4) the proposition must be effectively communicated to the market.

Is the brand effectively integrated into the business value chain?
Management need to assess whether the level and balance of the investments made into the brand and other tangible and intangible investments are appropriate. They should also determine that the brand is not being handicapped by inadequate performance in key business processes such as quality control, service and delivery performance, upon which the brand depends.

How attractive is the brand’s market economics?
Fast-moving consumer goods companies have learned that even well-managed brands with attractive customer propositions can offer poor value-creating opportunities for investors. If the industry is expected to be characterized by erce competition and powerful price-sensitive buyers in the future, then the brand may not justify investment. The business might be better looking for investment opportunities elsewhere.

Is the brand strategy geared to maximizing shareholder value?
The right strategy has a marketing mix that is orientated to maximizing the net present value of the brand’s future cash ow. Common strategic mistakes are over-investing in the brand and underpricing. Brand managers often do not appreciate the idea that the purpose of branding is to create the capacity for charging higher prices. Unless a brand is capable of commanding a price premium it does not create economic value. When a brand creates this capacity through the effectiveness of its customer proposition, then management has important strategic choices. It can (1) charge the full price premium without losing market share, (2) charge the same price as competitors and gain share or (3) charge a modest price premium with some share gain. In order to determine which brands in a company’s portfolio are creating value, they can be plotted in a brand value matrix that plots relative prices against changes in market share. Figure 4 shows the matrix for one company’s portfolio of ve brands. The company believed that all its brands were unique, whereas the matrix shows that in fact only two (brands D and E) out of the ve commanded a price premium without loss of market share. Brands B and C charged price premiums, but customers did not value their special features with a loss of market share being the result. The brand value matrix highlights the distinction between a brand difference and a brand differential advantage. Managers often confuse the two. Many brands are different in that they have features or qualities engineered into them that are not possessed by others. However, these differences are often not be valued by customers in terms of a willingness to pay a premium for them. A differential advantage requires a demonstrable economic bene t in terms of price premium or market share gain.

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FIGURE 4. Measuring a brand’s differential advantage.

VALUING BRAND STRATEGIES In order to demonstrate how the shareholder value objective reshapes a branding strategy this paper explores two of the non-value creating brands, brands A and B.

Brand A
Brand A is mistakenly viewed as a big success by the marketing department. It has been brand leader in its sector for almost 20 years. Awareness and consumer attitudes are excellent and pretax pro ts are a healthy 12%. Unfortunately, analysts do not believe that brand A will remain a value-creating brand. Brand A has two major problems. First, it is in a no-growth market. Investors know that it is virtually impossible to create long-term value added without volume growth. Second, there has been a slow decline in brand A’s margins. In order to maintain volume in a sector attracting increasing own label competition, management has not been able to raise prices suf ciently to recover rising operating and marketing costs. Annually, costs have risen 1% faster than prices and investors expect similar pressures in the future. Table 2 shows how analysts typically estimate the value-creating potential of brands and the companies that own them. Explicit forecasts of cash ow are usually made for 5–10 years ahead and then the value of the brand at the end of the period is called its continuing value. The shareholder value created by a brand is the value of its cash ow over the planning period plus the continuing value. Cash ow is what is left for shareholders – the net operating pro t after tax less net investment.

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TABLE 2.

Brand A: shareholder value analysis (£ millions) Year 0 1 1.0 100.0 100.0 66.7 22.2 7.8 0.0 7.8 7.1 7.1 — — — — 2 1.0 100.0 100.0 67.3 22.4 7.2 0.0 7.2 5.9 13.0 — — — — 3 1.0 100.0 100.0 68.0 22.7 6.5 0.0 6.5 4.9 17.9 — — — — 4 1.0 100.0 100.0 68.7 22.9 5.9 0.0 5.9 4.0 21.9 — — — — 5 1.0 100.0 100.0 69.4 23.1 5.3 0.0 5.3 3.3 25.2 32.6 57.8 84.0 -26.2

Price (£s) Quantity (millions) Sales Operating costs Marketing expenses Net operating pro t after tax Net investment Cash ow Present value of cash ow Cumulative present value Present value of continuing value Shareholder value Initial shareholder value Shareholder value added

1.0 100.0 100.0 66.0 22.0 8.4 0.0 8.4 — — — — — —

Brand A’s initial shareholder value is £84 million. This is estimated using the standard perpetuity method by dividing the net operating pro t after tax by the brand’s cost of capital, which is taken to be 10% here. Essentially the perpetuity method assumes that the brand earns just its cost of capital in the future (for more on the methodology see Brearley and Myers (2000) and Doyle (2000) ). Unfortunately, as described, investors are less optimistic about this assumption. They believe that holding the volume will mean erosion of the margins as costs rise faster than prices. This leads to a signi cant fall in the net operating pro t after tax over the years and a corresponding decline in the predicted cash ow. Net investment (after depreciation) is assumed to be zero because the volume is constant over the period. However, the consequence is that the brand’s value to shareholders sinks to £57.8 million, which is a decline of 31%. If brand A were typical of the company’s portfolio, then a similar fall would be expected in its share price. And, indeed, this or worse has in fact happened to many well-known branded goods companies in recent years. Investors realized that strong brands cannot offset the effects of unfavourable market economics and perhaps misguided brand strategies. Table 3 simulates whether alternative strategies could curtail the decline of brand A. As described earlier there are four alternative strategies: to increase the level of cash ow and its speed, duration and stability. Here this paper will explore only the rst of these, increasing the level of cash ow, which is generally the most important. Growth is a powerful way of increasing the level of cash ow and shareholder value. As Table 3 shows, if brand A could increase sales from its historic plateau to growth of 5% a year, this would add £23 million to its value. Unfortunately, a growth strategy in these mature markets is usually a trap that managers pay dearly for in terms of declining margins and cash ow. Increasing the volume by almost 30% in 5 years is unlikely to be attainable at an economic cost. Tactics for raising the brand’s price are often a better option for strong brands operating in unfavourable market conditions. These tactics can include better negotiating with the trade, reduced discounts, category management initiatives, better customer segmentation and premium line extensions. Here a 1% annual price increase (i.e. the same in ation rate as the operating and

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TA BLE 3.

Options for brand B in preserving shareholder value Shareholder value added (£ millions) Percentage change in volume per annum -5 0 5

Increase growth Price increase +1% per annum Price increase +5% per annum Operating costs cut -5% Marketing costs cut -10% Investment level cut -10%

-67.4 -2.0 63.1 3.5 -13.1 -28.0

-26.2 3.6 130.0 16.6 -4.2 -17.1

23.2 — — — — —

marketing costs) would increase the brand’s value by £3.6 million, whereas a 5% annual increase would raise its value by a massive £130 million. The other ways of increasing the cash ow are cutting the operating and marketing costs and reducing the level of investment behind the brand. In principle, cutting the operating costs has the biggest leverage. However, in practice, most well-managed companies have by now exhausted most of the opportunities for substantial cost cuts. What deters brand managers from considering price increases and cuts in marketing expenses is that they are likely to reduce sales. However, such objections are based on a misunderstanding – the objective of marketing should be to increase the value of cash ows not sales. Maximizing sales is a recipe for ruin. As Table 3 shows, even if the volume falls by 5% annually as a result of higher prices or cuts in marketing spend, the shareholder value is still signi cantly higher than under the current strategy. Indeed, a key advantage of strong brands is that they have lower price elasticities. One of the commonest strategic mistakes in managing brands is failing to take advantage of these economic principles.

Brand B
Brand B is in a different strategic position. Brand B has been an innovator in a growth market. Unlike brand A, it does charge a price premium – unfortunately this has resulted in a loss of market share and sales revenue stagnating. Nevertheless, its price premium has resulted in a healthy pro t position and its value to shareholders is estimated at £42 million by the perpetuity method. A strategic review suggests that a greater shareholder value could be achieved by investing more in marketing. Brand B is in an attractive market and has a good reputation. The problem is that it needs more brand support in order to communicate its premium positioning. Table 4 projects that increasing its brand marketing spend by £3.6 million would increase unit sales by 10% annually over the next 5 years or around the growth rate of the market. The calculations also factor in the increased working capital that is needed in order to support the growth. However, the net result is a £26.8 million increase in the shareholder value, thereby raising the value of the brand by two-thirds. CONCLUSIONS Marketing professionals commonly assume that marketing objectives, i.e. market share, customer satisfaction, loyalty, etc., are the ultimate goals of the business (see Butter eld, 1999, pp. 268–70).

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TABLE 4.

Brand B shareholder value analysis (£ millions) Year 0 1 1.0 55.0 55.0 36.3 14.6 2.9 1.7 1.2 1.1 1.1 — — — — 2 1.0 60.5 60.5 39.9 14.6 4.2 1.8 2.4 2.0 3.1 — — — — 3 1.0 66.6 66.6 43.9 14.6 5.6 2.0 3.6 2.7 5.8 — — — — 4 1.0 73.2 73.2 48.3 14.6 7.2 2.2 5.0 3.4 9.2 — — — — 5 1.0 80.5 80.5 53.1 14.6 8.9 2.4 6.5 4.1 13.3 55.5 68.8 42.0 26.8

Price (£s) Quantity (millions) Sales Operating costs Marketing expenses Net operating pro t after tax Net investment Cash ow Present value of cash ow Cumulative present value Present value of continuing value Shareholder value Initial shareholder value Shareholder value added

1.0 50.0 50.0 33.0 11.0 4.2 0.0 4.2 4.2 — — — — —

However, this is a mistake: the ultimate objective of the rm is to create value for shareholders by maximizing the net present value of the future cash ow. Marketing objectives can easily con ict with the shareholder value objective. For example, the obvious way of increasing market share, customer satisfaction and loyalty is to offer the lowest prices with excellent service and heavy brand investment. However, such policies would lead to an almost certain nancial meltdown because they do not generate an adequate free cash ow. Building an effective, differentiated customer proposition is the core requirement for building a successful brand. When a brand possesses such a differential advantage it should be able to charge premium prices and maintain or grow market share, which are the ultimate sources of cash generation. However, an effective customer proposition is insuf cient for guaranteeing that a brand will create value for investors. A brand will fail to achieve its potential if is not integrated with the rm’s other tangible and intangible assets, which form the basis of its core business processes. Such problems might be created by inadequate investment in new technology or a poor interface between marketing and other business functions. In such situations brands become obsolete or fail to meet the quality, delivery or service requirements of customers. A brand with a successful consumer proposition can also fail to be value generating for investors because of deteriorating market economics. This has occurred in many heavily branded consumer goods markets where stagnant markets, excess capacity and powerful price-sensitive buyers have eroded margins. Powerful brands have been caught in a dilemma caused by trying to maintain traditional levels of brand investment in the face of a declining cash ow. Finally, brands fail to achieve their value-creating potential when marketing managers pursue strategies that are not orientated to maximizing the shareholder value. This often occurs for long-established brands because they fail to adapt their volume goals to the new realities. Then prices become too low and brand investment too high for optimizing the value of future cash ows. For new brands in attractive markets the opposite situation can occur. Here, the shareholder value can be increased by sacri cing short-term pro ts and increasing brand investment

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in order to build a market share. The key conclusion is that brand strategies need to be tested by rigorous shareholder value analysis. REFERENCES
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