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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-
simpli 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.
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. Com-
parably 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
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).)
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 share-
holder 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
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 rm when it is effectively coordinated with the rm’s other resources in order to enhance
all the core business processes.
economics or, if there are no viable pro t opportunities, to give the money back to shareholders
through share buy backs or raised dividends.
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) ).
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.
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 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.
BUILDING VALUE-BASED BRANDING STRATEGIES 265
Year
0 1 2 3 4 5
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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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 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).
BUILDING VALUE-BASED BRANDING STRATEGIES 267
Year
0 1 2 3 4 5
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 share-
holder 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.
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