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JOURNAL OF STRATEGIC MARKETING 9 255–268 (2001)

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 share-
holder value have to meet four requirements: (1) a strong consumer proposition, (2) be
effectively integrated with the Ž rm’s other value-creating assets, (3) be positioned in a
sufŽ 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 over-
simpliŽ 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 Ž 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 Ž 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 conŽ dence in the functional or emotional beneŽ 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 difŽ cult to build brands and
certainly to maintain them on the basis of superior, demonstrable functional beneŽ ts. Com-
parably priced washing powders, personal computers or auditing Ž 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 conŽ dence in the choices that they make. Choice
today is difŽ 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 conŽ 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.


BUILDING VALUE-BASED BRANDING STRATEGIES 257

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 proposi-
tions are not enough. Brands have to be integrated with the Ž 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
Ž rm creates value. There is now wide acceptance of what strategists call the ‘resource-based
theory of the Ž rm’ (see e.g. Peterlaf, 1993; Collis and Montgomery, 1995). This represents some-
thing of a shift from the marketing-based idea of the Ž rm that was popularized by Levitt (1960)
in his famous ‘marketing myopia’ article. The resource-based theory proposes that deŽ ning a
Ž rm in terms of its assets and core capabilities offers a more durable basis for strategy than a
deŽ 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 modiŽ ed representation of the resource-based view of the Ž 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 Ž rm’s business processes. The core business processes of
most Ž rms can be grouped into three areas: (1) the product development process, which enables
a Ž rm to create innovative solutions to customer problems, (2) the supply chain manage-
ment process, which acquires inputs and efŽ ciently transforms them into effective products and
services and (3) the customer relationship management process, which identiŽ 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 Ž 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 Ž 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 manage-
ment processes in order to design and deliver the tailored responses efŽ 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 Ž 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 Ž rm’s differential advantage and its ability to
create shareholder value. However, these processes themselves are founded on the Ž rm’s core
capabilities, which derive from the resources or assets it possesses. A Ž 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 Ž rm’s tangible or balance sheet assets were seen as its most vital resource – its factories, raw
materials and Ž 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.
BUILDING VALUE-BASED BRANDING STRATEGIES 259

the Ž 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 Ž rm’s core business processes.
The resource-based model of the Ž 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 share-
holder value are the Ž 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 Ž 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-proŽ 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 conŽ 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 Ž 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 Brands Other


(%) (%) intangibles (%)

Utilities 70 0 30
Industrial 70 5 25
Pharmaceutical 40 10 50
Retail 70 15 15
Information technology 30 20 50
Automotive 50 30 20
Financial services 20 30 50
Food and drink 40 55 5
Luxury goods 25 70 5

Source: Interbrand.
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the Ž rm when it is effectively coordinated with the Ž 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 Ž rm has one important weakness: it assumes shareholder value is
solely dependent upon the Ž 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 proŽ tability. For example, prescription drugs,
soft drinks, tobacco and cosmetics have been consistently highly proŽ table, whereas textiles, steel,
car manufacturing and mining have been consistently unproŽ table. Market economics mean that
even strong brands Ž nd it difŽ cult to make a decent return in some markets, whereas in others
even mediocre brands can make good proŽ ts.
What determines the attractiveness and proŽ 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 com-
petition: 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 manage-
ment, 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 com-
petition, 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 proŽ t
margins and the absence of volume growth have resulted in a decline in the Ž nancial value of
these brands and the companies that own them.
Figure 3 summarizes these dilemmas. Strong brands in attractive markets will always be proŽ t-
able and create value for their shareholders. Examples of these include Microsoft OfŽ ce, Nokia
mobile phones and Mercedes S class. Weak brands in unattractive markets will always be
unproŽ 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 proŽ ts. However, in the long term they are unlikely to be proŽ 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 proŽ 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
BUILDING VALUE-BASED BRANDING STRATEGIES 261

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

economics or, if there are no viable proŽ 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 favour-
able 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’
conŽ 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.
BUILDING VALUE-BASED BRANDING STRATEGIES 263

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 require-
ments: (1) customers must see the brand as offering some important beneŽ t, (2) the beneŽ 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 Ž 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 Ž 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
Ž 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 pre-
mium for them. A differential advantage requires a demonstrable economic beneŽ 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 pre-
tax proŽ 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 sufŽ 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 proŽ t after
tax less net investment.
BUILDING VALUE-BASED BRANDING STRATEGIES 265

TABLE 2. Brand A: shareholder value analysis (£ millions)

Year

0 1 2 3 4 5

Price (£s) 1.0 1.0 1.0 1.0 1.0 1.0


Quantity (millions) 100.0 100.0 100.0 100.0 100.0 100.0
Sales 100.0 100.0 100.0 100.0 100.0 100.0
Operating costs 66.0 66.7 67.3 68.0 68.7 69.4
Marketing expenses 22.0 22.2 22.4 22.7 22.9 23.1
Net operating proŽ t after tax 8.4 7.8 7.2 6.5 5.9 5.3
Net investment 0.0 0.0 0.0 0.0 0.0 0.0
Cash  ow 8.4 7.8 7.2 6.5 5.9 5.3
Present value of cash  ow — 7.1 5.9 4.9 4.0 3.3
Cumulative present value — 7.1 13.0 17.9 21.9 25.2
Present value of continuing value — — — — — 32.6
Shareholder value — — — — — 57.8
Initial shareholder value — — — — — 84.0
Shareholder value added — — — — — -26.2

Brand A’s initial shareholder value is £84 million. This is estimated using the standard
perpetuity method by dividing the net operating proŽ 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 signiŽ cant fall in the net operating proŽ 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 Ž 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 -67.4 -26.2 23.2


Price increase +1% per annum -2.0 3.6 —
Price increase +5% per annum 63.1 130.0 —
Operating costs cut -5% 3.5 16.6 —
Marketing costs cut -10% -13.1 -4.2 —
Investment level cut -10% -28.0 -17.1 —

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 misunder-
standing – 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 signiŽ 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 proŽ 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 ButterŽ eld, 1999, pp. 268–70).
BUILDING VALUE-BASED BRANDING STRATEGIES 267

TABLE 4. Brand B shareholder value analysis (£ millions)

Year

0 1 2 3 4 5

Price (£s) 1.0 1.0 1.0 1.0 1.0 1.0


Quantity (millions) 50.0 55.0 60.5 66.6 73.2 80.5
Sales 50.0 55.0 60.5 66.6 73.2 80.5
Operating costs 33.0 36.3 39.9 43.9 48.3 53.1
Marketing expenses 11.0 14.6 14.6 14.6 14.6 14.6
Net operating proŽ t after tax 4.2 2.9 4.2 5.6 7.2 8.9
Net investment 0.0 1.7 1.8 2.0 2.2 2.4
Cash  ow 4.2 1.2 2.4 3.6 5.0 6.5
Present value of cash  ow 4.2 1.1 2.0 2.7 3.4 4.1
Cumulative present value — 1.1 3.1 5.8 9.2 13.3
Present value of continuing value — — — — — 55.5
Shareholder value — — — — — 68.8
Initial shareholder value — — — — — 42.0
Shareholder value added — — — — — 26.8

However, this is a mistake: the ultimate objective of the Ž 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 Ž 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 insufŽ 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 Ž 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 share-
holder value can be increased by sacriŽ cing short-term proŽ ts and increasing brand investment
268 DOYLE

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

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