THE BRAND VALUE CHAIN
Jan Lindemann
The value creation of brands lies in their impact on customer purchase decisions. The manifestation of brand value is the economic value that can be derived from current and future purchases of the brand’s products and services. In order to maximize the value generation of a brand it is important to understand the flow from the brand to its impact on customers’ purchase decisions. This flow can be described in a brand value chain. There have been several concepts that have tried to describe and explain the relationship between brand, marketing actions, and financial outcomes. One of the most well-known academic approaches comes from Kevin L. Keller, a professor at Tuck Business School who identified a value chain consisting of four elements: marketing program investments; customer mindset; brand performance; and shareholder value.1 While Keller’s four building blocks describe the main marketing investments and metrics their interplay remains at a very top-level view. Another value chain concept is the “purchase funnel” and its derivatives which has been made famous by McKinsey but is also used by other consultancies in different variations.2 Based on market research studies it starts with the total possible market for the brand and then analyses how many potential customers are lost at each stage of the funnel until the actual customers that buy the brand remain. Over the last couple of years the purchase funnel has been criticized for its strict linear nature. Nevertheless, it is still a widely used tool.
The brand value chain described here is based on the brand value concept and is the result of first-hand experience. The rationale for breaking up the value creation of the brand in distinctive stages is not to claim or prove straight line relationships between all stages but to provide a useful logic to identify, understand, quantify, and manage the economic value generation of a brand. This brand value chain, shown in Figure 12.1, consists of the five distinct elements: brand content;
FIGURE 12.1 The brand value chain
customer touch points; customer perception; customer behavior; and financial outcome.
A brand consists of a set of values and associations by which it can be identified, codified, and managed. The content of the brand comprises all key elements that create perceptions about the brand in the consumers’ mind including the brand name and its visual and experiential representations (logo, packaging, specific product and design features, customer service). These will immediately evoke a set of associations. For existing brands these associations are the result of a company’s marketing activities and customers’ experience with the brand as well as with the product(s) or service(s) it sells. Some brand associations can be very distinctive others will be similar to competitors. For example, the distinctive associations of BMW are performance, quality engineering, and style. These are not only communicated through the tag line “The Ultimate Driving Machine” but also through the overall purchase and product experience. On the perception of these attributes the brand excels relative to other car manufacturers. These associations are not just the result of the company’s communication and marketing activities but of all operations that impact the customer experience including design, engineering, driving experience, and dealerships. The interaction of all business activities creates the brand perception. The brand is therefore the result of the promise and delivery of an experience. It is thus an important component and expression of business strategy.
BRAND CONTENT
The first element in the value chain is the definition of the brand content which is achieved in a positioning statement. At the core of the brand is the brand’s DNA or platform which comprises the core values of the brand from which the brand’s positioning core attributes and perceptions are derived. The core values are the result of the company’s history, its view about the future for its markets and customers, and its capabilities to provide a differentiated and relevant offer to its customers. The core values and the resultant positioning of the brand can be altered by systematic management action. However, in order to remain credible with consumers and to be able to deliver the brand successfully the core values of a brand in most cases can only be altered gradually in order to avoid impairing the value creation of the brand. Brands, such as Coca-Cola, IBM, and Mercedes Benz are successful examples of continuity and consistency in their brand values. Some brand perceptions are the result of company operations and culture that may not have been codified or formalized at the beginning of the business but have become a modus operandi of the business. Microsoft, and Google are examples of brands that have emerged in this way. On the other hand, brands can also be created from scratch in particular when the image of the brand is all the customer is buying. Good examples of manufactured brands are Absolut, O2, and Grey Goose Vodka. The brand content needs to be codified in a way that it can be communicated and applied internally as well as externally. Common pitfalls are either overly simplistic reductions of the brand essence to a tag line for the advertising campaign or overly elaborate write-ups that lack clear definition. Although refreshment is a core theme of the Coca-Cola brand, there are several more elements that define the core of the brand. The prolific use of brand consultants has resulted in many bland and exchangeable brand essence or platform statements. A useful brand essence combines the distinctive associations with the brand with the company’s ability to deliver these throughout the customer experience.
The purpose of brand management is to optimize the use of the brand’s core values to produce maximum financial results. The core values of a brand do not change easily as they have been the result of, and the reason for, the commercial success of the brand. Only if these values cease to represent the DNA do they need to be changed in order to reflect the new commercial reality. The brand DNA is part of a company’s business strategy. In the context of business strategy, management can set these core values and the overall positioning of the brand. However, if these are not reflected in the activity and behaviors of the brand then the economic value of the brand is easily affected. It is, after all, the brand perception of the buyers of the company’s products and services that determine its commercial success. Management ambitions or mere window dressing through changes in corporate design or advertising communications are not sufficient to create sustainable brand value. A prominent example was BP’s re-branding under the motto “beyond petroleum” in 2001 which was supposed to reposition the oil company as a future oriented investor in renewable energies represented by a sun like symbol as a new logo. As part of the rebrand the Amoco brand in the US was re-branded and the identity globally aligned. The investment in the communication campaign was significant. The company spent more then US$250 million just on the advertising plus the global redesign of all its petrol forecourts. The process was very well executed and resulted in significant improvements of the BP brand in consumers’ perception. A consumer survey found that 21 percent of them thought BP was the “greenest” of oil companies, followed by Shell at 15 percent and Chevron at 13 percent. The campaign also won a 2007 gold Effie from the American Marketing Association. BP said that between 2000 and 2007, its brand awareness went from 4 percent to 67 percent.3 From a pure communication perspective the “beyond petroleum” campaign was well designed and executed. However, commercial reality and the company’s behavior did not match the brand’s promise. Investments in renewable energies hovered at about 1 percent of the group’s capital expenditure nearly as much as the spend on the advertising campaign. While many new companies were developing renewable energy solutions BP’s efforts remained peripheral at best. In addition, the company’s reputation was severely harmed by its handling of the explosion at one of its Texan oil refineries that killed several employees. After 8 years of “beyond petroleum” the new CEO Tony Hayward re-focused the company back on petroleum. The head of the renewable energy business resigned and the business is up for disposal through either initial public offering (IPO) or sale.4 BP is an example where management ambition and communication strategy did not follow the business behavior and strategy. The result was a significant waste of resources and destruction of shareholder value.
A similar fate encountered British Airways as it dropped its “Britishness” to become BA and “the world’s favourite airline.” The re-branding was bold and expressed the airline’s international ambition to be a “world citizen.” However, in its home market the core of BA’s customer base was less cosmopolitan, prompting the airline to bring back the Union Jack symbol and re-focus the brand on its British heritage. Again, shareholders did not benefit from this venture.
Coca-Cola’s experiment with New Coke is another example where management strategy tried to stray from the brand’s core by introducing a new and improved formula. While blind tasting and market research may have suggested that consumers preferred the newly engineered taste, the effect on the brand was devastating. The company had fiddled with the original and secret formula which formed part of the myth of being the original cola drink. Luckily, the brand was strong enough to survive and today New Coke is a distant memory and a case study on how not to re-position a brand. How strong and powerful the core values of brands can be, if properly managed and communicated is demonstrated by brands such as Coca-Cola, Nike, Apple, Kellogg, Gillette, IBM, Nivea, and BMW that have developed iconic brand status through sticking to their core values. These brands have not changed the core values of their brands for many decades. Even the re-launch of the Mini by the BMW group focused on the core value of the Mini brand first communicated in the 1960s.
The values and their communication need to be adapted to market conditions and sentiment. The Marlboro cigarette brand was initially marketed to female consumers. Its breakthrough success however came with the repositioning as a macho cigarette with cowboy imagery. The Marlboro man became one of the leading brand icons in marketing history. The DNA of consumer brands which are mainly driven by communications can be more easily changed than the DNA of a corporate brand where the whole organization needs to follow by aligning communications and behaviors. That can mean changing the emphasis of the values or the way they are expressed in communications and through company behavior. For example, the financial crisis of 2008/9 has made stability and trust an important value for many financial services brands. Although most brands had this in their DNA it had been de-emphasized as customers perceived all banks to be safe. The crisis changed this and re-focused banks’ attention to communicate trust as a core value.
Communication and emphasis of the core values may change to adapt to changing market conditions and Zeitgeist. A successful brand meets a customer need in a relevant and clearly differentiated manner from its competitors. Relevant means that it is obtainable for the target audience. Customers may not be aware of the need but realize it when confronted with the offer. Sony’s Walkman and Apple’s i-pod are good examples of such solution-driven needs.
Brands can also be created from scratch in particular if the actual product is indistinguishable from many others as is often the case with vodka. Brands such as Absolut and Grey Goose were newly created brands without heritage or history. Selling vodka from Sweden or France was not an obvious concept as both markets lacked global recognition for vodka heritage. Absolut was the first brand that addressed the premium segment of the global vodka market. The concept of purity and premium was nicely packaged in an advertising campaign and a distinctive bottle. It hit strong consumer demand and has become one of the most valuable spirits brands. As the premium vodka category matured the super premium segment emerged. The Grey Goose brand was created in 2000 and its super premium position was carried by the fact that it originated from France, which for the American consumers was a clear sign of premium. In the telecommunication market, the Orange and O2 brands are good examples for engineered brands that have become very successful. In 2007, Orange became the operating brand for all of France Telecom’s activities. These examples illustrate that successful brands can be created from scratch. However, among the leading 100 global brands about 70 percent have been in use for more than 50 years with the younger brands having developed mostly in new categories such as IT and the Internet. The majority of these brands have emerged from a combination of communications and behaviors.
CUSTOMER TOUCH POINTS
Customer touch points represent all key contact points between the company and the market. Once the brand positioning is defined it needs to be communicated and delivered through all customer relevant touch points which are the second link in the brand value chain. Management actions need to focus initiatives and investments on the customer touch point delivery of the brand. All relevant business functions that have a direct and visible effect on the customer experience need to be aligned to the brand positioning. The brand positioning needs to be used as a framework for their specific activities. Marketing and sales need to ensure that all communications follow the strategic brand positioning in look, feel, and content. This includes pricing strategies, advertising, Internet presence, sponsorships, sales and product brochures, packaging, channel and point of sale presence, corporate identity, tone of voice, brand architecture or managing the relationship of different brands as well as any other communication materials such as employee and investor relations materials. In the case of a multinational company this requires coordination and supervision of the operations in each country. While headquarters provides strategic direction, guidelines, and have ultimate responsibility for managing the brand, local marketing functions need to have sufficient flexibility to adjust to their specific market conditions. An advertising campaign for a shampoo that shows a lady washing her hair in a small lake under a waterfall in an exotic location may communicate natural beauty and ingredients as well as freedom in the western world, however: in the developing world such a scene will be interpreted as poor, unsophisticated, old-fashioned, and unclean. That means the same brand values can require different communications to address the interpretations of different market conditions and sentiments. These cultural differences are, in particular, important for brands that want to be seen as part of the local fabric. In many markets consumers have little awareness that Colgate or Mars are large global brands. Overall, most leading global brands are successful due to their consistency across all communications and touch points. Apple, BMW, and Gillette are examples of brands that have very successfully established a consistent global brand appearance at all levels. The brand positioning also needs to guide and direct product design and development as well as R&D to ensure that products and services reinforce the core brand values. This does not mean that the creativity of researchers and engineers is constrained but it indicates that efforts must focus on the largest value enhancing opportunities. VW’s Phaeton is an example for a product that does not fit with the values of the VW brand such as simplicity and affordability. Not surprisingly it has been one of the biggest flops in recent car history. Samsung provides its R&D team with strategic brand guidance to ensure that efforts are focused on brand-aligned products and services.5 On the other hand R&D can be the source of products and services that create leading global brands such as HP, Intel, Microsoft, Apple, and Google.
Brands that do not have direct access to the end-user/buyer need to focus on product, communications, and the service they offer because these are the touch points that a company can manage and influence. There are also several co-marketing efforts such as in-store promotions, point-of-sale, and shelf management where the brand owner can assert influence albeit at a lower level of control. While marketing communications and product development, which are to large extent closely related, are important many companies have embraced a more holistic view of branding beyond the traditional marketing functions. This is, in particular, the case for service companies or companies that have direct control over a significant part of their distribution though retail outlets, direct sales forces, the Internet, and telephone sales. For example, Hermès and Tiffany sell solely through controlled retail outlets such as their own shops, company-controlled and branded concession stores, and the Internet. Apple generates about 15 percent of its sales through its own branded stores. Oracle, IBM, GE, and Accenture generate all of their sales through a direct sales force. Amazon, eBay, lastminute.com, and expedia.com sell only via the Internet. In these cases the additional customer touch points need to be integrated into the brand experience. The retail environment of an Apple or Hermès shop is a key purchase enhancing factor. This has implication for shop design, materials use, shop lay-out, and store location. In addition, the look and behavior of the shop assistant is another important brand touch point. A shop assistant in an Apple store will look and behave differently to a shop assistant in a Hermès shop. The retail brand Abercrombie & Fitch have clear requirements for their customer-facing personnel to consolidate the “healthy” appearance of their advertising models.
To optimize these customer touch points, human resource (HR) departments need brand guidelines for selecting, training, and managing sales personnel and managers in a way that will enhance the perception of the brand and support the sale of branded goods and services. Even if the customer interaction is confined to the telephone the tone of voice, waiting time, and handling of complaints or orders are important elements of the customer experience particularly if there is no other human interaction. For example, Virgin mobile has developed, in the UK, a particular and distinctive tone of voice that fits with its core brand value of being young, unconventional, and the customer’s champion.
For most B2B and service brands their employees are the most important customer touch point. The appearance and behavior of a relationship manager or consultant from companies such as IBM, GE, or Accenture has a significant impact on the client perception of the brand. Many companies have recognized that their brand values need to be an integrated part of the personnel recruitment, development, and management process. To successfully engage employees requires a close alignment of the brand communication process with the other corporate processes such as recruitment, people development, and organization. An isolated communications campaign lecturing employees about brand values that is not organizationally relevant has little impact and can render such an exercise trivial. On the other hand if the employees have been made strong advocates then this can substantially enhance sale and delivery of the company’s products and services. Employee alignment enhances product development, R&D, sales, and customer service management.6 In order to foster this process the brand can be integrated into the remuneration process of employees. At many companies, such as Samsung Electronics, senior executives are partly remunerated according to brand value creation. The chairman sets brand value targets the achievement of which became part of the promotion and bonus process. The integration of brand value into the remuneration process directly rewards brand building and alignment of employees.
Although this ultimately involves all parts of the business, the customer-facing operations are relatively more important in delivering the brand. In service organizations a relatively larger part of the organization is involved in the brand as more employees have direct interaction with the customer. A consumer brand such as Coca-Cola or Nivea is not delivered by the employees as these products are sold through intermediaries and the company’s employees rarely interact with the consumers of the product.
In service or retail delivered brands a dedicated part of the employees interact directly with the consumer or customer although the Internet has become an increasingly important brand delivery point. A financial service brand is delivered through branches and telephone centers and a retail brand through the sales personnel. Brand promise and delivery are not limited to communications such as design, advertising, and messaging but involve other operations such as R&D, customer service, and sales. Some are better at communication and delivering their brand through operational and product excellence than through traditional marketing communications like advertising. For example, Samsung Electronics has made a deliberate effort to put their brand positioning at the core of their product design and development as well as their channel marketing efforts. Once the brand positioning is agreed it needs to become an essential part of the whole operation in particular of all customer focusing functions such as product development, distribution, customer service, sales, and communications to ensure a consistent brand delivery through all customer touch points. In order to build its premium image in the US Samsung pulled distribution of its mobile phones from Wal-Mart and focused only on specialized stores. The Apple brand is consistently implemented throughout the organization. Products, pricing, communications, investor presentations, trade shows, the Apple stores, and resellers form a consistent experience of the Apple brand. The more consistently the brand communications and experience are executed through all touch points the stronger the impact on existing and potential consumers of the brand. The main customer touch points are communications, product, design, customer service, point of sale, retail environment, and price. Consistency ensures that each piece of communication and experience reinforces the same brand message thus increasing its impact.
The alignment and optimization of all brand touch points delivers a strong and consistent brand message to existing and potential customers. These brand communications and experiences create and impact demand from consumers. If they are properly orchestrated and delivered effectively, the brand’s values will be understood by consumers and impact their purchase decisions. In a media and message cluttered world a company’s brand communications needs to be as focused and as consistent as possible to be able to affect customers’ purchases. Apple and BMW are good examples of such an integrated approach. Product design, function delivery, experience, advertising, point of sale, packaging, and after-sales service operate as a seamless process that elevates the companies products beyond their functional benefits to a unique offer that can charge customers prices that go far beyond the delivery of the tangible product features.
CUSTOMER PERCEPTIONS
The next link in the brand value chain reflects the impact of management actions and touch point execution on the perception of actual and potential consumers. The combined brand touch points can create a virtuous cycle of brand awareness, deeper knowledge, integration into the consideration set, purchase, repurchase, and recommendation to others. These activities are not linear, they occur simultaneously which makes their coordination and consistency even more important. The perceptions and associations consumers have about the brand are the result. The key metrics for assessing customer perceptions are the quality of awareness (prompted, un-prompted, top of mind), knowledge (details about the brand’s offer), differentiation (to competing offers), relevance (price point, offer), performance on core values and delivery (consumers view on how the brand performs against its claims), consideration, preference, purchase intent, satisfaction, recommendation, and re-purchase intent. These so-called brand equity metrics measure and assess a brand consumers’ perceptions of the brand and their intended purchase behavior. They also assess how close or far potential customers are from purchasing the brand.
CUSTOMER BEHAVIORS
While brand perceptions are important they need to convert to purchases to be commercially relevant and effective. This leads to the next link in the brand value chain – consumer behavior. The brand communication and experience impacts customers’ perceptions about the brand and what it offers. These perceptions drive consumer behavior. The higher the relevance and the differentiation of the brand the stronger its impact on consumers’ purchase decisions that then result in price, volume, and frequency of purchase. The purpose of brand management is to increase the number of customers buying more of the company’s products and services more frequently at the highest price possible. Customer behavior materializes at the point of purchase (direct or intermediary) through purchase price, volume and frequency, as well as re-purchase.
FINANCIAL OUTCOMES
Consumers’ purchase behavior produces the revenues of the business from which its extracts profits and ultimate value for its shareholders or owners. The brand impact is a continuous process which produces an on-going stream of cash flows. Brand communications and experience ensure that customers purchase the brand again and again thereby creating a loyal customer base. At their best, brand perceptions create a mental monopoly with a large customer base that no longer considers other brands. This then produces a sustainable earnings stream. The historic and future expected cash flows derived from the brand build the basis for analysts’ and investors’ assessment of the company’s share price. This is where the brand fulfils its ultimate role in creating sustainable shareholder value.
If the brand communication and delivery provide a relevant and differentiated offer the right audience will buy the brand and, depending on the emotional connection with the brand, create a deep and sustained bond between the brand, its offer, and the consumer. Apple, BMW, Harley-Davidson, Coca-Cola, Porsche, Louis Vuitton, Chanel, and Gillette are just a few examples of brands that have, through consistent and focused brand touch point management, created such a strong bond with their consumers that many would not seriously consider another brand. These brands have created a “mental monopoly” within consumers’ mind that ensures a loyal customer base. This psychological impact triggers behaviors that produce a financial result for the company. The psychologically triggered purchase of the brand’s offer results in consumers’ behavior towards the brand. The brand’s offer is considered and the consumer purchases what they believe is the right mix of functional and emotional benefits. From the revenues created through consumer purchases the business extracts profits and value for shareholders. The level and predictability of demand for the brand’s goods and services result in relatively higher returns (for example, EBITDA, operating cashflow) at relatively lower risk (for example, beta) which translate into superior shareholder value generation.
BRAND MANAGEMENT IMPACT
The brand value chain is not only a useful tool in identifying and understanding the value creation of brands from conception to value creation. It is also a way of managing the value creation of a brand. Each element of the chain has a distinctive function: Definition of the brand DNA; communication and delivery of the brand through all defined touch points; brand reception by consumers according to perception of functional and emotional benefits; and behavior through purchase price and volume, financial impact through revenues, cashflow, and sustainable shareholder value. The functions can be managed and optimized according to their impact on value creation. Through cause-and-effect modeling, the relationships between the different elements and impact on value creation of each element can be identified, assessed, and measured. This provides clear management guidance on which brand element creates most value, touch point hierarchy according to value creation, and the economic outcome of consumers brand perceptions. The model can also be used to hypothesize the effect of different brand strategies such as which touch point or brand message should be emphasized to optimize brand value. This has a direct implication on brand investments. The framework can assess the return on investment of the different brand elements. The budget allocation process becomes better grounded in value creation and direct economic impact.
The brand value chain describes the economic impact of the brand on the company’s value creation. It identifies each key element, its function, and impact within the value chain. It therefore provides a formidable management tool and framework for quantifying the return on brand investments. The brand value chain embeds the brand within the company’s operations.
THE EMPLOYEE BRAND VALUE CHAIN
While the main value creation of the brand is based on revenue generation from customers it can also impact other stakeholders of the business such as employees, the general public, investors, and regulatory institutions albeit to very different degrees. To these stakeholders the brand communicates and delivers a different offer than to customers. Some companies have created employer brands that attract the best available talent. Throughout all employment levels a corporate brand can be an important factor to obtain the best available workforce. While this is important for all businesses it is vital for a service business where the main brand delivery is through its employees. This is the case for companies such as IBM, Accenture, GE, Goldman Sachs, Microsoft, and SAP. These companies are therefore keen to attract the best available talent to their businesses. A key consideration for many employees, in particular so called knowledge workers, next to remuneration is development and training as well as the status of the employer’s brand. The attraction of the employer brand is derived from its perception of its success in its chosen markets.
In addition and often related the company’s market reputation employee specific factors such as compensation, development potential and career opportunities, training, work environment, and the CV appeal of the brand are driving employee choice. It obviously depends on the economic environment and the attractiveness of the skill-set of the specific employees. In recessionary times job safety and salary dominate choice. However, with people-driven businesses dominating the economies in the developed world the “war on talent” is an on-going theme within most companies. The brand is therefore an important aspect for people desiring to work for a specific company. Employee specific elements can emerge from a business’s operations. Having learned at or worked for a blue chip company adds value to nearly all CVs. In addition some companies are better known for their training, people development, earnings potential, and corporate culture. For many years Google has been one of the preferred choices of graduates. Companies such as GE, Goldman Sachs, Microsoft, BMW, McKinsey, BCG, PwC, Toyota, and Tata, to name a few, attract the best graduates because of the benefits they offer employees. In the US the top employment choices for graduates are leading brands such as Google, BCG, and Goldman Sachs. However, the brand impact on employees is different to consumers as they are experiencing the brand on a daily basis for 8 hours or more. This means that discrepancies between promise and delivery are easily detected. In addition, functional and material benefits are key drivers for employees. Even blue chip brands such as Goldman Sachs, BCG, and McKinsey not only offer great training and development opportunities but also above peer group financial compensation. Despite the attraction of blue chip brands the actual brand experience at the workplace can change perceptions and favor lesser known brands and companies. The 2008 result for Fortune’s best places to work includes in the top 25 only nine well-known brands. It indicates that a strong brand attracts top talent but that overall employee’s appreciation is driven by the actual experience which may differ from the overall market reputation. Nevertheless, work culture and employee endorsement can be significant brand and business value drivers. Some of the fastest growing global brands have been built on their work culture without the use of any paid advertising. Google and Starbucks are the result of their superior employee attraction and perception. Google attracts the most creative talent that expands the depth of application and thus the brand. Starbucks lives off the experience delivered by its baristas and other staff. Both organizations have built the value of their brands through a strong focus on employee engagement and work culture. At Starbucks the employees are at the core of the brand delivery. They way they treat customers and make the coffee is key to the experience in-store. Starbucks ran into operational problems when the company accelerated store openings but did not maintain high-quality staff selection and training. This resulted in poor customer experiences in many of the newly-opened stores. As a result the company’s CEO Howard Schultz implemented store closures and slowed down the pace of expansion to ensure that all Starbucks stores can deliver the brand experience and live up to the brand’s reputation. McDonald’s have made significant efforts in building their brand with employees. They have established internal training and career development programs to shake off the “McJobs” image and in the UK have even been awarded their own qualifications equal to GCSEs, A levels, and degrees, in subjects such as fast-food restaurant management.7 That means McDonald’s employees can, if they so wish, receive a degree from the company. The other positive effect is that employees feel cared for and start developing pride in working at McDonald’s. That is quite a shift in perception. Employee engagement and branding cannot only benefit a company internally but also externally. The link between employee engagement and business outcomes is well established. Employee engagement results in lower turnover rates, higher advocacy of the company and its products, and extra efforts to please customers. In many companies employees are also the window to customers.8
The success metrics for the brand impact on employees is the level of qualifications of employees, turnover rates, productivity, revenues and EBITDA per employee. In order to align employees with the brand, companies must design corporate brand values which need to be communicated and implemented throughout the organization including recruitment and management. The brand values need to be part of the performance review and affect promotions as well as compensation. However, the brand values need to be relevant and not just paid lip service. Credibility is fundamental in making brand engagement with employees work. They experience the brand every day and can immediately detect whether it is just communication or reality.
THE INVESTOR BRAND VALUE CHAIN
Another group that is affected by the corporate or organizational brand are investors. However, their reliance on brand operates very differently from other stakeholders. Investors recognize that strong brands attract consumers and customers that generate revenues from which shareholder value is extracted. This is, in particular, true for consumer-facing businesses and traditional consumer brand conglomerates such as The Coca-Cola Company, P&G, Nestlé, Unilever, Baierdorf, and PepsiCo. In these businesses brands are the key drivers of their financial success. However, for assessing value creation and investment decisions they rely on the analysis of financial data such as revenue growth, EBITDA margin, free cash flow, ROE, price to book values, and P/E ratios. These are historically available for all publicly-traded companies and are analyzed with complex statistical models to identify trends. However, the golden rule is that past performance is insufficient to predict future performance. The investment decision to buy a stock of a company is based on the expectation of future value creation which consists of appreciation of the share price and dividend payments. That means that investors rely on a future promise of cash flows when making investment decisions. The assessment of this promise is based in most cases on sophisticated quantitative analyses of past performance, economic and industry data as well company specific information. Equity analysts produce detailed reports and make recommendations regarding share prices. However, the years 2008 and 2009 demonstrated that despite all the analytical sophistication, analysts and fund managers failed to anticipate and adjust to one of the worst stock market crashes in economic history. With very few exceptions fund managers lost a fortune throughout 2008 and at the beginning of 2009. Before the crisis unfolded some very prominent economists and analysts predicted that the S&P 500 index would rise again in 2008 just before it nosedived. This clearly shows that despite the detailed analyses and sophisticated statistics the vast majority of analysts, economists, and investors were completely taken by surprise by the crisis. Forecasts and historic analysis are very valuable tools but ultimately they cannot predict the future. Future cash flows are what investors are buying when they buy shares in quoted companies. Here strong brands provide comfort as they enhance the likelihood of future cash flows. Although analysts and institutional investors base their investment decision on detailed financial assessments strong brands provide a certain level of backup and guarantee because in the end it is hard to predict future cash flow. The main effect of brands on investors is the financial results they produce. There is also the security they provide based on the proven effect they have demonstrated. It is therefore little surprise that shares of companies with strong brands outperform their peers. They do so because they provide better and more predictable financial results. Investors trust the brand but only with proof of their financial success. So in order to impress investors with brands companies need to demonstrate what cash flows they can produce. There can be situations when brand value can help in investor communications. Orange, in the first year after their flotation on the London stock exchange, then only operating in the UK, used the value of their brand to demonstrate to investors that despite negative cash flows they were investing in and building a strong brand that in the near future would produce positive cash flows. This helped to convince investors and stabilized the share price at a crucial moment for the company. Orange became a leading brand in the UK mobile network market and delivered not only strong cash flows but a very high share price when sold to France Telecom. The brand was so strong and attractive that many years later France Telecom decided to re-brand all its major operations in all its markets to Orange. There are several companies that have used the financial value of this brand to demonstrate to investors that they are buying the shares of a company with a strong brand. Samsung, Intel, Philips, and The Coca- Cola Co. have stated or referred in their communications, including annual reports, to the value of their brand as a sign of the strength of their operations and the sustainability of their cash flows. Investors are happy to see a strong brand but they need the proof that this brand can deliver the expected future cash flows. As such investors will always rely on financial analyses for making investment decisions. Their view on the future performance of the business is positively supported by a strong brand. Companies can use the value of their brand(s) to reassure investors about the future performance of the business but they will need to deliver in the long run and in most cases they have. The brand value chain for investors works through the financial results generated by the branded business. A strong brand lends credibility to the outlook of the business, expansion of the company into new products and markets as well as some guarantee for future cash flows. Apple is a good example where investor’s belief next to technology and management in the brand supports their valuation of future cash flows. However, if revenues, EBITDA, and cash flows do not match investors’ expectations the share price will be immediately affected.
Ultimately, the brand value communication with investors is only effective through the delivery of key financial data. That is the reason why investor relations focus on the communication of these items. Nevertheless it can be helpful to inform investors about the strength and potential of the company’s brand(s) to support management strategy and expected financial returns. This is more easily achieved by businesses that are dominated by or only operate under one brand.
CONCLUSION
The brand value chain is helpful in identifying, understanding, mapping, quantifying, and managing the value creation of brands. The approach identifies the key stages and how they interact to create financial results. It therefore provides an invaluable tool for managing the complex nature of brands. The value chain can be applied to all relevant brand audiences and thus extended into a comprehensive brand reputation model. The purpose of the brand value chain is to provide an economically logical framework for managing and quantifying the value creation of brands.
NOTES
- Kevin L. Keller and Donald R. Lehmann, 2003, p. 23.
- McKinsey, 2003.
- “Beyond Petroleum pays off for BP,” 2008.
- Paul K. Driesen, 2009.
- John Quelch, and Anna Harrington, 2005.
- Corporate Executive Board, 2009.
- Times online 28 Jan 2008.
- See Corporate Executive Board, 2009.
BIBLIOGRAPHY
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