Creating powerful brands

xxv Part 1 Foundations of Brand Management CHAPTER 1 Why it is Crucial to Create Powerful Brands.... 229 Building Service Brand Equity.... His cutting edge work on strategically building

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Creating Powerful Brands

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Creating Powerful Brands

Fourth Edition

Leslie de Chernatony, Malcolm McDonald and Elaine Wallace

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CopyrightÓ 2011 Leslie de Chernatony, Professor Malcolm McDonald and Elaine Wallace Published

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This book is dedicated to my wife, Carolyn, daughter, Gemma and son, Russell,with love

- Leslie de ChernatonyDedicated to all my academic colleagues who have helped me over the years,with thanks

- Malcolm H.B McDonaldDedicated to Seán and Ann Wallace, with love

- Elaine Wallace

ABOUT THE AUTHORS xiii

PREFACE xvii

HOW TO USE THIS BOOK xxi

ACKNOWLEDGEMENT xxv

Part 1 Foundations of Brand Management CHAPTER 1 Why it is Crucial to Create Powerful Brands 3

Summary 3

Confusion about What Marketing is 4

The Growing Importance of Intangible Assets 6

Shareholder Valuedadding Strategies 13

What is a Product? 13

The Importance of the Brand 16

Conclusion 24

Building Successful Brands 25

Book Modus Operandi 26

CHAPTER 2 Understanding the Branding Process 27

Summary 27

Brand Success Through Integrating Marketing Resources 27

The Concept of the Brand 29

Characteristics of Brands 34

Brands as Relationship Builders 37

Historical Evolution of Brands 39

Brand Evolution: Distributors’ Brands and Generics 43

Brand Categorisation 45

Brand Consumerisation Spectrum 53

The Value of Brands to Manufacturers, Distributors and Consumers 54

The Importance of Brand Planning 56

The Issues Influencing Brand Potential 58 Conclusions 63 vii

Marketing Action Checklist 64

Student Based Enquiry 66

Part 2 Brand Management in Different Sectors CHAPTER 3 How Consumers Choose Brands 71

Summary 71

Brands and the Consumer’s Buying Process 72

Extended Problem Solving 74

Dissonance Reduction 79

Limited Problem Solving 82

Tendency to Limited Problem Solving 85

Consumers’ Low Involvement with Brands 85

Consumers’ Need-States 87

Differential Brand Marketing 89

Consumers’ Perceptions of Added Values 91

Brand Information: Quality or Quantity? 96

Clues to Evaluate Brands 97

Brand Names as Informational Chunks 98

The Challenge to Branding from Perception 99

Naming Brands: Individual or Company Name? 103

A Strategic Approach to Naming Brands 106

Brand Name Alternatives Generated 107

Issues Associated with Effective Brand Names 108

The Brand as a Risk Reducer 111

Conclusions 113

Marketing Action Checklist 115

Student Based Enquiry: 117

CHAPTER 4 How Consumer Brands Satisfy Social and Psychological Needs 123

Summary 123

Added Values Beyond Functionalism 124

Brands and Symbolism 127

Self-concept and Branding 131

Brand Values and Personality 133

Brand Personality and Relationship Building 140

The Contribution of Semiotics to Branding 143

Conclusions 147

Marketing Action Checklist 149

Student Based Enquiry: 152

CHAPTER 5 Business-to-Business Branding 155

Summary 155

Brands and Organisational Marketing 156

The Unique Characteristics of Organisational Marketing 163

Nature of Brands in Organisational Markets 166

Who Buys Brands? 167

Anticipating the Role of Buying Centre Members 169

The Organisational Buying Process 171

Brand Values in Business-to-Business Branding 174

Brands as Relationship Builders 177

Factors Influencing Brand Selection 182

Providing Organisational Buyers with Brand Information 188

The Company as a Brand 192

Varying Receptivity to Branding 196

Conclusions 197

Marketing Action Checklist 199

Student Based Enquiry: 201

CHAPTER 6 Service Brands 205

Summary 205

New Ways of Thinking about Services 206

The Challenge of Services Branding 208

Intangibility 209

Heterogeneity 213

Inseparability of Production and Consumption 214

Perishability 216

Moving Beyond the Fast-moving Consumer Goods Model 217

The Process of Building and Sustaining Powerful Services Brands 219

Branding to make Tangible the Intangible 223

Consistent Service Brands through Staff 225

Service Brands with the Optimum Consumer Participation 229

Building Service Brand Equity 233

Conclusions 234

Marketing Action Checklist 235

Student Based Enquiry 236

CHAPTER 7 Retailer Issues in Branding 241

Summary 241

ix

Contents

The Store as a Brand 242

Retaining Customer Loyalty and Building Engagement 244

The Internationalisation of Retail Brands 246

Store Brands 247

Success Factors of Store Brands e Consumer Behaviour and Economic Cycles 248

Retailer Support for Own Label 250

The Arrival and Demise of Generics 253

The Increasingly Powerful Retailer 254

The Responses of Weak and Strong Manufacturers 255

Whether to Become an Own Label Supplier 258

How Retailers Select Own Label Suppliers 262

Prioritising Brand Investment through Different Retailers 264

Winning with Brands rather than Own Labels 267

Understanding the Balance of Power 269

Category Management 272

Using Information in Category Management 275

Efficient Consumer Response (ECR) 277

The Evolution of ECR 278

How Firms Implement ECR 280

How Firms Measure the Success of ECR 282

Conclusions 283

Marketing Action Checklist 285

Student Based Enquiry 288

CHAPTER 8 Brands on the Internet 293

Summary 293

Moving into a Virtual Environment 293

Reconceiving the Concept of‘Brand’? 296

The Importance of the Online Brand Experience 298

The Evolving Role of the Internet in Brand Building 303

The Challenges Facing Brands on the Internet 307

Brand Equity of Online Brands 310

Conclusions 311

Marketing Actions Checklist 312

Student Based Enquiry: 315

Part 3 Winning the Brands Battle CHAPTER 9 How Powerful Brands Beat Competitors 321

Summary 321

Brands as Strategic Devices 322

Cost-driven or Value-added Brands? 324

Value-added Brands with Cost-driven Characteristics 330

Identifying Brands’ Sources of Competitive Advantage 333

Focusing Brands’ Competitive Advantages 336

Sustaining a Brand’s Competitive Advantage 337

Sustaining a Service Brand’s Competitive Advantage 340

Anticipating Competitor Response 343

The Meaning of Brand Share 346

Striving for Profitable Brands 349

Characterising Successful Brands 351

Need for Promotional Support 355

Should a Company build Brands or buy Brands? 357

Extending Brands 358

Conclusions 363

Marketing Action Checklist 364

Student Based Enquiry 366

CHAPTER 10 The Challenge of Developing and Sustaining Added Values 371

Summary 371

Positioning Brands as Added Value Offerings 372

Noticeably Different, Relevant and Welcomed Added Values 378

Identifying Added Values 381

Adding Value through Consumer Participation 389

Adding Value through Customisation 391

Adding Value through Building Relationships 393

Protecting Brands against Counterfeit Brands 395

Conclusions 399

Marketing Action Checklist 401

Student Based Enquiry 402

CHAPTER 11 Brand Planning 407

Summary 407

Understanding the Meaning of Core Values 408

Maintaining the Brand’s Core Values 409

Bridging the Brand’s Values 413

Defining Brand Dimensions 415

The de Chernatony e Mcwilliam Brand Planning Matrix 418

Determining Brand Performance 424

xi

Contents

Managing Brands Over their Life Cycles 424

Rejuvenating‘Has Been’ Brands 434

A Systematic Approach for Revitalising Brands 435

Conclusions 438

Marketing Action Checklist 440

Student Based Enquiry 442

CHAPTER 12 Brand Evaluation 447

Summary 447

Growing Brand Equity 447

Commercial Models of Brand Equity Growth 452

Measuring Brand Equity 454

Methods of Measuring the Financial Value of a Brand 461

Conclusion: Financial Implications for Brands 466

Marketing Action Checklist 467

INDEX 471

About the Authors

Professor Leslie de Chernatony

Professor of Brand Marketing, Università della

Svizzera Italiana, Lugano, Switzerland and Aston

Business School, Birmingham, UK Managing

Partner, Brands Box Marketing and Research

Consultancy

The Chartered Institute of Marketing cites Prof

Leslie de Chernatony as one of the 50 gurus

who have shaped the future of marketing This is

because of his pioneering work on Brand

Manage-ment for which he has an international reputation

His cutting edge work on strategically building brands has helped many

organisations to develop more effective brand strategies

With a doctorate in brand marketing, Leslie has a substantial number of

publications in American and European journals, in addition to frequent

presentations at international conferences Several of his papers have won best

paper awards His books have been translated into Chinese, Russian, Polish,

Czech and Slovenian He has several books on Brand Management, a recent

one being‘From Brand Vision to Brand Evaluation’, published by

Butterworth-Heinemann and backed by online videos from Oxford Learning Lab Winning

several major research grants helped him and his team progress projects on

factors associated with brand success, services branding and the future of brand

management

Leslie is Visiting Professor at Thammasat University in Bangkok He is a Fellow

of the Chartered Institute of Marketing, Fellow of the Market Research Society

and Liveryman of the Worshipful Company of Marketors

Leslie's work has resulted in TV programmes and radio broadcasts He is

Afirm advocate of the need for managers to benefit from his work on brandmarketing, he has run many highly acclaimed management developmentworkshops throughout Europe, the USA, the Middle East, the Far East, Asia andAustralia His advice has been sought by numerous organisations throughoutthe world on developing more effective brand strategies On several occasions

he has acted as an Expert Witness in court cases over branding issues

Leslie can be contacted atdechernatony@btinternet.com

Emeritus Professor Malcolm H.B McDonald,

MA (Oxon), MSc, PhD, D.Litt FCIM, FRSA

Malcolm, until recently, Professor of Marketing

and Deputy Director, Cranfield School of

Manage-ment with special responsibility for E-Business, is

a graduate in English Language and Literature from

Oxford University and in Business Studies from

Bradford University Management Centre He has

a PhD from Cranfield University He also has an

Honorary Doctorate from Bradford University

He has extensive industrial experience, including

a number of years as Marketing Director of Canada

Dry

He is Chairman of Brand Finance plc and spends

much of his time working with the operating boards of the world's biggestmultinational companies, such as IBM, Xerox, BP and the like in many coun-tries in the world, including Japan, the USA, Europe, South America, ASEANand Australasia

He has written forty three books, including the best seller‘Marketing Plans;how to prepare them; how to use them’ and many of his papers have beenpublished

His current interests centre around the measurement of thefinancial impact ofmarketing expenditure and global best practice key account management

He is Professor at Cranfield, Henley, Warwick, Aston and Bradford BusinessSchools

Malcolm can be contacted at:m.mcdonald@cranfield.ac.uk

Dr Elaine Wallace

J.E Cairnes School of Business & Economics,

National University of Ireland Galway

Dr Elaine Wallace is Lecturer in Marketing and

Associate Head of Development and Promotion at

the J.E Cairnes School of Business & Economics,

National University of Ireland Galway Elaine has

developed programmes in Brand Management and

Branding Strategy at undergraduate and

post-graduate level

Having graduated with an honours degree in

Commerce, Elaine worked initially with Siemens

Limited on corporate marketing and then with

Unilever as a trade marketer for brands including Persil and Timotei She

subsequently worked as Panadol Product Manager for Glaxo SmithKline and

was a member of the European launch team for NiQuitin CQ Elaine also

worked as Nurofen Brand Manager in Boots Healthcare and managed the

launch of Nurofen for Children into the Irish market

Elaine completed her doctorate at the University of Birmingham, working with

Professor de Chernatony Her subsequent research has explored the

anteced-ents and componanteced-ents of service employee performance, the role of the front

line employee as brand champion and the nature and management of brand

sabotage Elaine adopts qualitative and quantitative methodologies in her

research, has published in international journals and presented at international

conferences Her research activities to date, have been supported in part by

funding from the Irish Research Council Elaine is also interested in brand

building, as well as exploring the relationship between consumers and brands

and the impact of controls and compliance requirements on brand orientation

Elaine can be contacted atelaine.wallace@nuigalway.ie

xv

About the Authors

As we look forward with confidence that this new edition significantly benefits

students and managers, we look back to how this book became a well

estab-lished core text in many business schools internationally and amongst a lot of

managers It seems not that long ago when we embarked on this project, yet as

our publisher attests, thefirst edition of this book appeared in 1992 That was

the year when the European Union offered the potential for developing brands

that could cross frontiers without too much hindrance Cries were heard about

identities being lost as corporations sought to consider how more standardised

approaches could be followed in their brand strategies Yet today we see a

loose-tight approach being followed that helps different communities to celebrate

their diversity, but at the same time allows them to conform to societal norms

Successful brands did not adopt the“one shape fits all” mantra Rather, they

evolved using a loose-tight approach They are tight in so far as there are a core set

of brand values that are not transgressed, yet loose since country managers have

the latitude to enact the brand values in a manner more suited to their country

The changing environment makes this new edition even more relevant Having

a good foundation in the principles of brand management is essential if

resources are to be wisely used to grow brand value One only needs to look at

league tables to appreciate the significant financial value of brands It is

becoming more common to see organisations monitoring brand equity and

brand value and then to assess how different brand strategies are contributing

to changes in brand equity and brand value

A passive view about the role of customers in branding used to be the norm In

other words customers were viewed as the end of the value chain consuming

the value of brands Brand managers who believe in this notion are cutting their

brands’ life expectancies Customers are part of real or virtual communities and

they expect to be able to shape the nature of brands The result is that customers

are increasingly both co-creators of brands and brand publics The internet not

only levels the playing fields between large corporates and SMEs, but also

empowers customers to make brands betterfit their needs

xvii

The growth of the services sector, at the expense of the manufacturing sector,necessitates the need to understand the principles of services branding.Appreciating the differences between services and goods branding is but part ofthe process of managing services brands Capitalising on the benefits ofcommitted and passionate staff whose personal values are aligned with theirbrand values is the hallmark of many successful services brands Thrivingservices brands do not enjoy such vitality just because they identify gaps inmarkets Rather, it is because they then take new brand propositions inside theorganisation, engaging staff to be involved in developing integrated processesthat deliver unique and welcome brand experiences.

Retailer brands no longer play a game of catch-up behind leading brandmanufacturers Rather, they are innovators, reshaping markets Well devisedbrand promises, coherently delivered through very sophisticated processes,belittle the term‘private label’ Impressive though retailers’ brand strategies are,there are those who question whether there are some retailer brands that areexcessively adopting category conventions resulting from years of investment

by category leaders, making it more difficult to appreciate the differencebetween them and the brand leaders

These changing conditions are but a few of the factors that prompted us tothoroughly revise this book In this new edition we have stayed true to theenduring objective of previous editions of this successful book, i.e to clarify theconcept of brands and to help students and managers appreciate issues that aregermane to their growth

Frequent interactions with managers in management development shops made it clear that they wanted grounded, pragmatic frameworks thatenables them to better characterise their brands and develop sound strategiesfor growth The use of this text on MBA, MSc and undergraduate pro-grammes showed that they needed to have a solid foundation in brandmanagement, which gives them insights to powerful models This bookbridges the requirements of managers and students Powerful brandingtheories are not just well grounded, but are also easily applied in a variety ofsituations Our concern has therefore been to provide a solid grounding formodels and frameworks, while at the same time indicating how readers cantake advantage of these through examples and through the exercises that wehave provided Furthermore, we sought to make the ideas applicable acrossconsumer, service and business markets, to both corporate and SMEmanagers and to those operating in either the for profit or the not for profitsectors

work-As part of our intent of thoroughly revising the book, we also wanted to bring

in a new perspective from someone who is very well versed in brandmanagement We were delighted when Dr Elaine Wallace accepted our

invitation to become a co-author Elaine has been undertaking research into

brand management with us over many years Her experience as a Brand

Manager and an academic at the National University of Ireland Galway are

ideal for this book Furthermore Elaine's insightful perspective and

consider-able breadth and depth of knowledge have significantly contributed to this new

edition We are also pleased that Elaine, from her Irish location, has helped

bring a more international orientation

xix

Preface

How to Use this Book to Achieve

the Best Results

Each chapter of this book has undergone significant revision In addition to

the exercises in the Marketing Action Checklists, Student Based Enquiry

exercises are set enabling students to explore some of the topics in more detail

and to engage them in the application of frameworks A new selection of

advertisements is used to bring the material to life, along with excerpts from

websites A unique enhancement of this book is the availability of two and

a half hours of video produced by Oxford Learning Lab (http://bit.ly/

oxlbrnd2) This video streaming provides more insights to some of the

topics in this book

We asked ourselves whether the structure of the text is still appropriate for the

changing environment Our conclusion is that we have a structure that is still

sound It logically moves from laying the foundations of brand management,

which can then be applied in different sectors, enabling organisations to beat

competitors in the branding battle This enhanced book is structured in three

parts that logically enables students and managers to appreciate the nature of

brands and how to help grow and nurture these valuable assets The constituent

parts are:

PART ONE FOUNDATIONS OF BRAND

MANAGEMENT

Thefirst two chapters address the core characteristics of brands and the factors

that influence their growth

Chapter 1 lays the foundations for this book, summarising the latest thinking

and best practice in marketing and takes a fresh look at organisations’ assets,

which are represented by the brand

Chapter 2 provides an overview of the key issues in planning for brand success

by explaining the nature of brands, reviewing their evolution, identifying

PART TWO BRAND MANAGEMENT

Chapter 5 focuses on business-to-business brands, appreciating how they arebought, the importance of value, brands as relationship builders, the role ofemotion and the importance of corporate identity

Chapter 6 discusses the importance and characteristics of service brands,addressing the numerous issues critical to building them, including the role ofthe service employee as brand ambassador

Chapter 7 first explores the concept of the retail brand, store loyalty and brandimage then it considers store brands and examines aspects such as shelfspace allocation, power dynamics between retailers and manufacturers,customer loyalty and consumer response to store brands in specific productcategories

Chapter 8 considers how branding principles can be used to help grow brands

on the internet, exploring the role of online communities and the opportunitiesarising from their having a greater involvement shaping brands

PART THREE WINNING THE BRANDS BATTLE

The remaining four chapters address techniques to win the branding battle andevaluate brand success

Chapter 9 adopts a strategic perspective on positioning, identifying sources

of sustainable competitive advantage to beat competitors through building,buying or extending brands and then exploring factors associated with brandsuccess

Chapter 10 explains the critical role of added values, suggesting ways ofidentifying these and ensuring their sustainability in challenging environments.Chapter 11 considers planning issues that ensure consistent brand values overtime through adopting a holistic perspective on brands

Chapter 12 explores the concept of brand equity and its dimensions, looks at

ways of valuing brands and then considers the contribution from employing

brand scorecards

GETTING THE MOST FROM THE ADDITIONAL

TEACHING RESOURCES

This new edition of Creating Powerful Brands is complemented by a package of

free additional teaching resources These valuable resources contain a series of

slides that summarise the key concepts introduced during each chapter

Lecturers can gain access to this material by registering at www.textbooks

elsevier.com

The slides have been created to help lecturers who intend to use Creating

Powerful Brands as their core teaching text The materials enable lecturers to

identify key areas of the text when preparing lectures whilst the annotated

diagrams enhance the presentation of material Each chapter concludes with

‘Talking Points’ which facilitate student engagement through the exploration,

application and evaluation of key concepts each chapter introduces

It is my hope these additional teaching resources will help with lecture

preparation and enrich the student learning experience

Dr Darren Coleman, Managing Consultant, Wavelength Marketing

Darren has worked at a number of blue chip organisations in brand,

propo-sition and strategic marketing As the Managing Consultant of Wavelength

Marketing (www.wavelengthmarketing.co.uk) Darren now works with

orga-nisations that look to differentiate their brand through service and expect

measurable marketing returns Darren holds a brand marketing PhD He also

frequently presents at academic and practitioner conferences on brand and

other marketing-related issues

Darren can be contacted atdarren@wavelengthmarketing.co.uk

xxiii

How to Use this Book to Achieve the Best Results

Every effort has been made to locate the copyright owners of material used The

authors would like to thank all of the organizations who have granted

permission to include material copyrighted to them in the book

xxv

1PART Foundations of Brand Management

CHAPTER 1

Why it is Crucial to Create

Powerful Brands

SUMMARY

This introductory chapter lays the foundations for the remaining chapters of

this book It summarises the latest thinking and best practice in the domain of

marketing and takes a fresh look at the real nature of an organisation’s assets,

such as market share and supplier and customer relationships, all of which are

represented by the brand It also questions traditional thinking and practice in

asset accounting and suggests alternative approaches designed to focus

atten-tion on the core purpose of this book e how to create powerful brands

After almost a century of marketing, it is sad to note that as recently as 2005, the

Harvard Business Review reported that of 30,000 new products launched in the

USA, 90 percent of them failed because of poor marketing The other 10 percent

went on to become successful brands

If this seems like a somewhat dramatic way to start a book on branding by three

professional, experienced practitioners, researchers, teachers and writers, let us

say at once that the reason is that, wherever we go in the world, chief executive

officers immediately accost us with questions about either their corporate or

product/service brands Alas, we have to reign in their obvious enthusiasm for

branding with some questions relating to the markets they serve, to the

segments within those markets and to where they are positioned in these

segments vis-à-vis their competitors Only then can a sensible discussion take

place about their brands

Indeed, even a cursory glance at the work of gurus like Phillip Kotler, Tom

Peters, the ex-chairman of Unilever Sir Michael Parry and the like, reveals a very

broad agreement that the main components of world class marketing are:

1 A deep understanding of the market place

2 Correct needs-based segmentation and prioritisation

3 Segment-specific propositions

4 Powerful differentiation, positioning and branding

5 Effective strategic marketing planning processes

6 Long-term integrated marketing strategies

CONTENTSSummary 3Confusion

About WhatMarketing is 4The GrowingImportance ofIntangibleAssets 6ShareholderValue-addingStrategies 13What is

a Product? 13The

Importance ofthe Brand 16Conclusion 24Building

SuccessfulBrands 25

How brands encapsulate the value-creating capabilities of an organisation 25

Book ModusOperandi 26Further

Reading 26

Creating Powerful Brands DOI: 10.1016/B978-1-85617-849-5.10001-7

Ó 2011 Leslie de Chernatony, Professor Malcolm McDonald and Elaine Wallace Published by Elsevier Ltd All rights reserved.

3

7 A deep understanding of the needs of major customers

8 Market/customer-driven organisation structures

9 Professionally-qualified marketing people

10 Institutionalised creativity and innovationThe order is important and justifies our belief that it is impossible to discussbranding in isolation from the context to which it belongs, because everything

an organisation does, from production through to eventual consumption, alladapt to and converge on the business value proposition that is offered to thecustomer This value proposition has to have a name attached to it, so thebrand name comes to represent everything a company does or strives to do.Hence the crucial importance of brands

This chapter begins by reminding readers what marketing is and how it works,then goes on to spell out the growing importance of intangible assets and howsuccess is measured Finally, it describes what product management is andconcludes by spelling out this difference between a brand and a successful brand

CONFUSION ABOUT WHAT MARKETING IS

We all know that one of the stumbling blocks to those of us in marketing is thecacophony of definitions of marketing that exists It doesn’t help when one ofCIM’s ex Presidents, Diane Thompson declared: “Marketing isn’t a function It

is an attitude of mind” Many will wonder how an attitude of mind can bemeasured, researched, developed, protected, examined, etc Of course she wascorrect in one sense, because marketing as a function can never be effective inany organisation that does not put the customer at the core of its operations.Add to this the hundreds of different definitions of marketing to be found inbooks and papers on marketing and the confusion is complete A selection of

30 such definitions are to be found in McDonald’s 6th edition of MarketingPlans, most of which involve doing things to customers (2007)

Whilst definitions such as CIM’s are admirable and correct, they provide littleguidance on what should be included and excluded, with the result that theyare difficult to use for a research exercise on what should be measured inmarketing Therefore, let us be unequivocal about marketing Just likefinance,

or HR, or IT, it is a function, a specific business activity that fulfils a mental business purpose The following describes marketing in terms of what itactually entails

funda-Marketing is a process for:

n Defining markets in terms of needs

n Quantifying the needs of the customer groups (segments) within thesemarkets

n Putting together the value propositions to meet these needs and

communicating these value propositions to all those people in the

organisation responsible for delivering them

n Playing an appropriate part in delivering these value propositions (usually

only communications)

n Monitoring the value actually delivered

For this process to be effective, organisations need to be

consumer/customer-driven (McDonald M., 2007) This consolidated summary of the marketing

process is shown diagrammatically in Fig 1.1

The map of the process in Fig 1.1 works to simplify what is a complex process,

into a series of manageable steps It provides a practical framework for

understanding and tackling the multitude of issues that comprise marketing,

leading to sustainable competitive advantage; but in particular, it helps to

determine the parameters of measurement and accountability

Value

required

Value delivered Value

Choose markets/segments Define objectives

Define price/value proposition Define marketing strategies Estimate expected results

Marketing plan(s)

Define markets/segments

Evaluate market/segments attractiveness

Understand value required Understand competitor value positioning

3 Deliver value proposition Deliver product/service

R&D Inboundlogistics Operations

Outbound logistics ServiceExchange information

Communication value

Design/implement marketing communication programme Design programme

Initiate dialogue Exchange information

Negotiate/tailor Commit Exchange value

Monitor marcom programmes

Steps 1 and 2 are about strategy determination, while Steps 3 and 4 are abouttactical implementation and measurement It is these latter two that have come

to represent marketing as a function that is still principally seen as sales supportand promotion

We have used the term‘Determine value proposition’, to make plain that we arehere referring to the decision-making process of deciding what the offering tothe customer is to be e what value the customer will receive and what value(typically the purchase price and ongoing revenues) the organisation willreceive in return The process of delivering this value, such as by making anddelivering a physical product or by delivering a service, is covered by‘Delivervalue proposition’

It is well known that not all of these marketing activities will be under thecontrol of the marketing department, whose role varies considerably betweenorganisations The marketing department should be in charge of thefirst twosub processes, ‘define markets and customer value’ and ‘determine valueproposition’, although even these need to involve numerous functions, albeitcoordinated by specialist marketing personnel However, the responsibility fordelivering value is the shared domain of the whole company, requiring cross-functional expertise and collaboration It will include, for example, productdevelopment, manufacturing, purchasing, sales promotion, direct mail,distribution, sales and customer service

The marketing process is clearly cyclical, in that monitoring the value deliveredwill update the organisation’s understanding of the value that is required by itscustomers The cycle may be predominantly an annual one, with a marketingplan documenting the output from steps 1 and 2; but equally, changesthroughout the year may involve fast iterations around the cycle to respond toparticular opportunities or problems

Choices may be influenced by physical assets and/or the less tangible butsubstantial value afforded by the organisation’s people, brands, financial statusand information technology

The authors make a plea here that rather than arguing incessantly about a suitabledefinition of marketing, we at least take this one as a starting point for considering therole of brands and how powerful brands create success

THE GROWING IMPORTANCE OF INTANGIBLE ASSETS

In 2006, Proctor and Gamble paid £31 billion for Gillette, of which only £4billion was accounted for by tangible assets, as Table 1.1 shows

Recent estimates of companies in the USA and in the UK show that over 80

percent of the value of companies resides in intangibles Whilst this has

reduced during the recession of 2008/9, intangibles will nonetheless remain

a substantial percentage of corporate wealth Table 1.2 and Fig 1.2 show some

of this research Fig 1.3 shows a typical breakdown of intangibles, whilst Table

1.1 above is an example of the breakdown of intangibles in a recent acquisition

Yet very little is known about intangibles by shareholders and the investment

community Traditional accounting methods are biased towards tangible

assets, for this is where the wealth used to reside

Generalising from this, what typically appears in a balance sheet can be seen

from Fig 1.4 below However, when a predator bids for such a company, it is

often forced to pay substantially more than the£100 million shown in this

balance sheet

Table 1.1 Intangibles

n Gillette brand £ 4.0 billion

n Duracell brand £ 2.5 billion

n Retail and supplier network £10.0 billion

n Gillette innovative capability £ 7.0 billion

(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005)

Table 1.2 Some Market Definitions (Personal Market)

Invisible Business: Some Research Findings

•Brand Finance analysis of top

25 stock markets – $31.6 trillion (99% of global market value)

•62% of global market value is intangible – $19.5 trillion

•Technology is the most intangible sector (91%)

•The technology sector in the USA is 98% intangible

Source: Brand Finance, 2005

7

The Growing Importance of Intangible Assets

100 80 60 40 20 0

USA Unrecorded Value Disclosed intangibles Tangible

Spain Australia Canada India Singapore

55%

Tangible Assets 25%

Developed Markets

Brands are estimated to represent at least 20% of the intangible value of businesses on the major world stock markets Brands combine with other tangible and intangible assets to create value

Intangible assets

Brand

Software Patents

Distribution rights

Tangible assets

Assembled workforce Business goodwill

Marketing intangible

Technology intangibles Customer intangible Contract intangibles

In this hypothetical example shown in

Fig 1.5, it can be seen that in this case, it is

£900 milliond£800 million more than is

shown in the balance sheet in Fig 1.4

The problem is that it leaves a balance sheet

that doesn’t balance, so this is corrected in

Fig 1.6, which shows a balancingfigure of

£800 million

A critic of accounting procedures might be

justified in pointing out that this £800

million entry is the mistake made by

accountants in valuing this company and

that it takes an acquisition (or the threat of

an acquisition) to work out how big this

mistake is

Of course this is not true and in any case,

the share price of a company is usually a good guide to its worth There are also

clear rules agreed internationally concerning how such intangibles should be

recorded and treated, following an acquisition But this isn’t the point

The point is that incongruously, most large companies have

formally-constituted audit committees doingfinancial due diligence on major

invest-ments such as plant and machinery, using discounted cashflows, probability

theory, real option analysis and the like; yet few have anything even remotely

rigorous to evaluate the real value of the company’s intangibles There is

a massive body of research over the past 50

years on how companies carry out strategic

planning and much of it verifies that a lot of

what passes for strategy amounts to little

more than forecasting and budgeting,

which are of little value to the investment

community in estimating risk; with the

result that it uses its own methods and

frequently downgrades the capital value of

shares, even when the earnings per share

have been raised and when forecasts appear

to look good

As readers of this book will know, in capital

markets, success is measured in terms of

Shareholder Value Added (SVA), having

taken account of the risks associated with

- Shares

- Loans

- Overdrafts etc.

- Shares

- Loans

- Overdrafts etc.

future strategies, the time value of moneyand the cost of capital The role of powerfulbrands in this assessment of risk is crucial.First, however, there are some basicconcepts relating to risk and return andstock markets all over the world that arebest explained here Fig 1.7 shows a simple

business risk A combination of high ness andfinancial risks can be fatal.For example, although there were otherfactors at play, Sir Freddie Laker’s airline inthe 1970s involved a highfinancial gearing

busi-He then chose to compete on the busy, highrisk London/North Atlantic route, employ-ing a low price strategy His high financialgearing/breakeven model subsequently left him open to tactical low pricepromotions from more global, established airlines, such as British Airways Theresult wasfinancial disaster

Compare this with Virgin’s low financial risk entry in the same market, with

a highly differentiated marketing strategy Virgin is now an established andprofitable international airline

Fig 1.8 shows a typical stock exchange,

with shares plotted against return and risk

From this it can be seen that a Beta is drawn

(the diagonal line)

At the low end, investors do not mind

a lower return for a low risk investment,

whilst at the high end, investors expect

a high return for a high risk investment At

any point on the line (take the middle

point for example), the point of

intersec-tion represents the minimum that any

investor would be prepared to accept from

an investment in this sector This weighted

average return on investment is referred to

as the cost of capital Any player in such

a sector returning the weighted average cost

of capital is neither creating nor destroying

shareholder valuedto return more is creating shareholder value; to return less

is destroying shareholder value

It is interesting to note, however, that the reason the capital value of shares is

often marked down after a company has created shareholder value is that the

investment community does not believe that such a performance is sustainable

This is often because they have observed that the source of profit growth has

been cost cutting, which is, of course,finite; whereas customer value creation is

infinite and is only limited by a company’s creativity and imagination

A good example of this is a major British retailer in the mid-90s, shown in

Fig 1.9, from which it can be seen that whilst underlying customer service was

steadily declining, the share price was rising

The inevitable almost terminal decline of this retailer was only reversed after

a customer-oriented Chief Executive began to focus again on creating value for

consumers, rather than boosting the share price by cost cutting Shareholders,

in the meantime, suffered almost a decade of poor returns

It is, of course, not as simplistic as this and those readers who would like a more

detailed explanation of the technical aspects of stock market risk and return,

together with the relevant financial formulae, are directed to Chapter 3 of

‘Marketing Due Diligence; reconnecting strategy to share price’ (McDonald,

Smith and Ward, 2007)

We have gone to so much trouble to explain how stock markets work in

rela-tion to risk and return because, as this book will make clear, the most

estab-lished way to reduce risk is through powerful brandsdwhich is why Proctor

High

Low

High Low

and Gamble paid£27 billion pounds for the intangible assets of Gillette Also,although brand names per se account for only around 30 percent of intangibleassets, they are without doubt the most valuable and e according to RitaClifton, Chairman of Interbrand (2009) e account for a quarter of all globalcorporate wealth.

Indeed, in the case of Proctor and Gamble’s acquisition of Gillette (Table 1), it

is clear that their excellent relationship with their channels is only possiblebecause of the strength of their brand names Equally, their innovation capa-bility can only be effective if it has an outlet through powerful brands

5 15 25 35 45 55 65 75 85 95

Service Positive Value for Money Share Price (Indexed)

Base: Marks & Spencer Customers

FIGURE 1.9

A major UK retailer

Risk Return

o

Increase return more than risk

Any strategy which moves the company to a point below the shareholders’ risk/return line reduces shareholder value

Optimal adding strategic direction

Most marketing strategies are aimed at generating growth in sales revenues and

profits but, for many mature products and markets, such strategies increase the

risk profile of the business; indeed, the word ‘growth’ can normally be taken to

indicate a risk-increasing strategy This does not automatically mean that these

strategies cannot be shareholder value-enhancing; but it does mean, as can be

seen from directions A and B in Fig 1.10, that the return from the more risky

strategy must increase proportionately more than does the risk profile of the

company Direction B shows an increase in return less than the increase in risk,

thus reducing shareholder value Remember that merely moving along the

shareholders’ indifference line does not create shareholder value; this is

achieved only by moving to a position above the line

SHAREHOLDER VALUE-ADDING STRATEGIES

More interestingly, direction C in Fig 1.10 highlights another type of

share-holder value-enhancing strategy that is often ignored in marketing plans A

reduction from the current risk profile of the business (diagrammatically

shown as a move to the left) means that shareholder value can be created even

if the rate of return is reduced slightly This time, the reduction in return must

be proportionately less than the reduction in the risk profile Since risk is

associated with volatility in returns, this means that marketing strategies that

make the future returns more stable and predictable can be shareholder

value-enhancing, even if these less volatile future returns are slightly reduced Thus,

marketing strategies designed to increase customer loyalty through long-term

discounts and so on can, if properly designed, be shareholder value-enhancing,

even though the discounts given actually reduce profit levels

Obviously, the optimal marketing strategy seeks to increase returns while

reducing the associated risk levels (i.e., the volatility of these increased returns),

see direction D of Fig 1.3

Any such strategy must leverage some already established, sustainable

competitive advantages orfirst seek to develop a new, sustainable, competitive

advantage, as the overall purpose and focus of strategic marketing is the

identification and creation of such sustainable, competitive advantages

A good example of this, was BMW’s launch of the Minidlow-risk, because all

the upmarket, hot hatches indicated that a market existed and low share risk

because the proposition was highly differentiated and well positioned

WHAT IS A PRODUCT?

Let us preface our introduction to the topic of brands by asking ourselves‘what

is a product?’ or ‘what is a service?’ The central role that the product plays in

13

What is a Product?