I promised to report back on the reaction to our mini white paper on “Does this soft stuff matter?” among the senior leadership team.

It was a gratifying experience.  The “brand framework” provided a clear model for debate around what the relevant messaging was for external audiences versus internal audiences.  It demonstrated why not every expression of the brand needs to tell the whole story (the reason why previous versions of the vision, mission, promise, value proposition, positioning etc had all sounded pretty much the same).  And it reinforced the need for simplicity - agreeing on a single idea that they could make their own.

There remains a healthy level of debate about what that single idea is, and how it should be expressed.  But the path to getting there is now clear.

Tagged as: Business Strategy

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Another day, another request (relayed via an agency) for a brand valuation.  As best I can tell, the client’s interest in brand valuation is purely a function of the desire to prove that marketing is important.  Like many others, this client appears to believe that the business case for marketing and the demands for marketing accountability will all be met by a brand valuation.

Regular readers of this blog will know why I consider this belief to be misguided.  Others with the desire to find out can review the posts and articles in the brand valuation section of the topics tab of this website.

If brand valuation is not the answer, then what is?  Well, the answer is a function of the question.  In my experience, there are four big questions as regards the measurement of marketing performance.  The first step towards demonstrating marketing accountability is working out which of the four questions you are really being asked.

The four questions populate the four quadrants of a 2×2 matrix.  On one axis is the focus – customer perspective vs. financial perspective.  On the other axis is the time frame – short term (next 12 months) or long term.  All important questions to do with marketing accountability and measurement fall into one of these four quadrants.

The four questions can be articulated as follows:

• How do our customers behave? (customer perspective/short term)
• What is the impact of marketing on current sales and profit? (financial perspective/short term)
• How strong is our franchise with customers? (customer perspective/long term)
• What is the impact of marketing on our business value? (financial perspective/long term)

All four questions are worthy of study – and there are specific measurement techniques appropriate to each.  Brand valuation is a partial answer to one of them (the financial perspective/long term one).

Tagged as: Brand Measurement, Brand Valuation, Business Value, Customer Value, Marketing Accountability, Marketing ROI

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I am a strong believer in the strategic importance of marketing – so it may seen a little odd that I am conflicted about the importance of companies having a Chief Marketing Officer.

Let me explain my thinking – the ideal scenario is that marketing (defined as a focus on the creation of customer value, and the definition of a powerful go-to-market strategy) is so embedded in the thinking of the executive leadership team that there is no need for someone to be designated as “chief marketing officer.”   All major decisions are already debated using the twin lenses of customer value and shareholder value. 

From this perspective, the creation of an executive-level CMO position is an explicit recognition that a company does not naturally see things through the lens of customer value, and needs to delegate a specific individual to play that (remedial) role.  No wonder that the average tenure of a CMO is so short!

Tagged as: Business Value, marketing and finance

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The “hard” sciences (such as physics and chemistry) are often obsessed with the search for universal truths – those reassuring phenomena (such as gravity) that are constant across time and place.

In our desire to present marketing as a “hard” science, marketers often fall into the same mindset of wanting to find the one, perfect solution to a given problem – the optimal combination of product features that will yield the highest conjoint scores; or the positioning concept that will have universal appeal.

This is a dangerous myth. If I have learnt one thing, it is that anything to do with humans is going to involve a limited dose of universality (in the form of a Jungian archetypes or a levels of need in Maslow’s hierarchy) and a big dose of variability. For example, while it is true that all humans crave status, we have remarkably different preferences for the specific way in which this need for status should be met - for some it is about flashy cars, for others it is about the number of followers we have on Twitter. For some, security is essentially a financial concept; for others, security is predominantly an emotional concept.

This variability means it is a myth to try to conceive the “perfect” product or positioning. There is no universal “perfection” – the concept of “perfect” only makes sense in the context of a clearly defined audience.

This means there are as many “perfect” products or positionings as there are clusters of individuals with similar wants and needs. The goal of marketing is to identify the optimal strategy for appealing to an economically viable number of these clusters.

This inevitably means that brand strategy is based as much on who we are NOT trying to appeal to, as much as who to appeal to. It is liberating to recognize that branding is not about creating universal appeal – it is about identifying the specific segment of the population to whom you are able to present a uniquely compelling proposition.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, Earthlings, rational, Vulcans

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Type 2 Consulting was created to serve an evident need for more business-literate marketers.  Our explicit ambition was – and remains – to support the emergence of a “next generation” of marketers who are able to integrate marketing and finance.  We consider this combination of skills to be essential for the creation of strategies that balance the needs of customer value and shareholder value. 

Marketing and finance is only one dimension of the integrated thinking that we believe is necessary for this “next generation” of marketers to demonstrate.  We believe that business-literate marketing involves having a working understanding of strategy, technology and (in a services company) HR as well.  But the integration of marketing and finance is our primary focus.

We were aware that only some marketers would be interested in our services, although we believe passionately that all marketers should consider that basic fluency in finance to be essential.   But it took a remark by one of the other speakers at the Thunderbird Winterim two weeks ago to crystallize my thinking about the segmentation of Type 2’s audience.  Perceptively, he remarked “The participants wanted to hear about my topic – but they needed to hear about yours.”

I am totally OK with the fact that most marketers do not like finance.  But we all like respect.  If the answer to the title of this blog post is “the respect of my business colleagues”, then I see basic financial literacy as something that all marketers should want, not just need.

Tagged as: Customer Value, marketing and finance

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My previous post on the topic of “transactionships” has clearly struck a chord based on the number of calls and emails that I have received.  The feedback has revealed a fundamental schism in attitudes:

• Some argue that businesses are purely commercial enterprises with which it is impossible to have a true “relationship” – the best you can hope for is to be efficiently targeted and processed
• Some believe that businesses exist in the context of communities and, in order to retain their legitimacy, must develop the capacity for relationships rather than just transactionships

These points echo my earlier post about the “balancing act” of business – that you need to find a sustainable balance between creating customer value (a.k.a “being a valued contributor to the community”) and shareholder value (a.k.a “capturing enough of the customer value to keep your investors happy”).   A cynic might argue that, for a business, a “relationship” is the way in which to maximize the value of a transactionship over time.  He/she would say that businesses need to demonstrate just enough concern about diversity, the environment, and the other components of corporate social responsibility in order to keep customers transacting with them.

The proof of this particular pudding is beautifully illustrated by the current practice of ”green washing”.  Businesses with even the most dubious track record of environmental performance are falling over themselves to stress their “green” credentials.  Their motive is transparent – while a few may have genuinely had a “Damascus road” epiphany about the virtues of sustainability, the majority are just motivated by the desire to keep their customers transacting with them.

So – is it realistic to expect businesses to have real “relationships” ?  And why would they want to do so?

I have some thoughts to share – but I would welcome your input before doing so.  Keep comments coming to me at j.knowles@type2consulting.com

Tagged as: Business Value, Customer Value, rational

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I have been having a fascinating dialogue over the past few months with Chris Kenton, the founder of SocialRep and former BusinessWeek journalist, about the strategic significance of social media.

One issue we have debated at length is the relationship of social media to CRM (customer relationship management), especially as a number of companies (including Oracle) are now actively describing their social media technologies as “Social CRM.”

I observed to Chris that CRM is a misnomer.  Only a Vulcan would refer to a system that only captures information on the commercial interactions between two parties as a “relationship” management system.  It should be called CTM (customer transaction management) because what the technology enables is a “transactionship.”   A relationship requires understanding who a person is, not just what a person does.

This struck a chord with Chris – he shared the results of some research he led while at the CMO Council that suggested that marketers believed that CRM has contributed to a decline in their “customer intimacy”.  They were spending more time analyzing customer behavior than actually speaking with them!

Both Chris and I are huge fans of CRM.  We believe that CRM technology has enabled companies’ ability to serve their customers better (through improved information) and more efficiently (through reduced cost).  Personally, I thank the CRM Gods every time that a company “recognizes” me when I call their call center or access their website because I know that I will not have to waste my time reminding them of my preferences and recent purchases.

We also value the impact that CRM has had on marketing – Chris is eloquent on the subject of how CRM has enabled “scientific marketing” to replace the “just go with your gut” approach so celebrated in “Mad Men.”

But, as a customer and an Earthling, I want to deal with companies that offer a relationship, not just a transactionship.

Tagged as: Business Strategy, Customer Value, Earthlings, Vulcans

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The core theme of my presentation to the Thunderbird MBA Winterim in New York yesterday was that business success is a balancing act.

Specifically, sustainable business success is founded on achieving a balance between customer value and shareholder value.  Until you create customer value, there is no opportunity to create shareholder value (except where you have monopoly or the ability to extract revenue through force).  The goal of business is therefore to create strategies that allow you to deliver products and services for which customers are prepared to pay a price that exceeds your economic costs.

That simple maxim is actually very hard to achieve on a consistent basis.  Companies are constantly veering too far in the direction of customer value or shareholder value.  They are either continuing to delight their customers with high quality products and services but failing to earn enough to cover their economic costs (which include a charge for the capital they employ); or they are delighting their investors but leaving customers feeling fleeced.

The best advice I could give the participants in the Winterim (and clients for whom I work) is to develop the discipline of explicitly reviewing things from a marketing and a finance perspective.  That is the best way that I know to ensure that businesses can maintain their franchise with their customers while simultaneously ensuring that they remain in business.

Tagged as: Business Strategy, Customer Value, marketing and finance

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I had the privilege of giving the 3 hour concluding presentation to the Thunderbird MBA Winterim in New York today.  My theme was “Does Marketing Matter?” – a deliberate provocation to a group just about to start their job search for careers in marketing.

My point was a serious one:  they face a brutal recruitment environment and will need to distinguish themselves as potential recruits.  I suggested that they can do so by demonstrating their ability for integrative thinking – specifically by their ability to integrate the marketing and finance perspectives on business.

One aspect of our discussion was how to think about the resources that generate economic value for the business.  I urged them to think about this issue from both a marketing perspective (which focuses on the company’s understanding of its markets, and the quality of its franchise with customers) AND a financial perspective (which focuses on the efficiency of its business model, and the quality of the tangible and intangible resources it controls).

A particularly insightful part of the discussion centred on the divergence between the book value and the market value of companies, and whether the currently recognized forms of tangible and intangible asset (see my previous post) represented a comprehensive list of assets.  The concept of “human capital” was the focus of the debate.

To a marketer, it is patently obvious that one of the key assets of a business is the ingenuity of a company’s employees.  This is the source of their ability to craft new and valued sources of customer value. 

To an accountant, this is problematic since an “asset” needs to be legally owned and controlled by the company.  Now that slavery has been abolished, companies do not own their employees (even though employees may still feel that way at times!).   Legal ownership is limited to the output generated by employees, whether in terms of physical product or intellectual property.

This highlights one reason why, even when we include the five categories of intangible assets sanctioned by the International Accounting Standards Board, the gap between book value and market value of companies will not be completely closed.

Tagged as: Accounting, Business Strategy, Business Value, Customer Value, Intangible Value, Intellectual Property

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The issue of what constitutues an asset is an important one if, like me, you like to be able to understand the relationship between a company’s reported assets and the valuation it enjoys in the market place.

As my previous post noted, any discrepancy between the two must reflect EITHER that the company is reporting its assets at less than market value OR that there are certain resources that are generating value (a.k.a “assets”) but that are not eligible for inclusion in the officially sanctioned list of assets. 

For the longest time, this was a debate of minimal economic significance.  Until the early 1980s, the difference between market value and book value was rarely more than 20%.  But the discrepancy was still deemed to be sufficiently troubling for the economist, James Tobin, to win the Nobel Prize for Economics for revealing its cause.  He showed that the discrepancy could be eliminated through “marking to market” (restating assets from their book value to their market/replacement value). 

This seemed to solve the problem – at least, until the merger boom of the 1980s and 1990s when the purchase price of companies regularly represented 4x book value or more.  It was clear that the purchasers were paying for more than just the tangible assets of the businesses they acquired.  This heralded the recognition of a new set of assets – intangible assets.

The UK led the charge with Finanical Reporting Standard 10 (“Goodwill and Intangible Assets” – issued in December 1997) which was mirrored and expanded by US Financial Accounting Standard 141 (“Business Combinations” – issued June 2001).  A multi-national standard, International Financial Reporting Standard 3, came into effect in April 2004.

The aim of each of these was to achieve greater transparency about the scale and nature of the intangible assets that acquiring companies believed they were acquiring in the merger.  IFRS 3 went the furthest in suggesting 5 classes of intangible asset that companies should use for reporting the “goodwill” component of the purchase price (the amount by which the purchase price exceded the net assets of the acquired company).

These five categories are:

1. Tecnology-based asssets (such as patents)
2. Contract-based assets (such as exploration rights)
3. Artisitic assets (things covered by copyright)
4. Customer-related assets (such as customer lists and market research)
5. Marketing-related assets (such as trademarks)

Because each of these categories of intangible asset was based on a form of intellectual property, they met the reporting requirement for an asset, namely “a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

Problem solved?  So we now have an exhaustive list of corporate assets (both tangible and intangible) and can reconcile book value with market value?

Just as the initial euphoria about Tobin’s Q “solving” the market to book problem through the revaluation of tangible assets proved misplaced, so I believe the current confidence in the exhaustive nature of the current list of corporate assets will prove unfounded.

I will explain why in my next post.

Tagged as: Brand Equity, Business Value, Intangible Value, Intellectual Property, mergers

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The last time I did a detailed calculation of the level of intangible value in the S&P 500 was in the dark days of March 2009.  I did not realize it at the time, but my analysis was done the bottom of the market (8 March 2009 was the low point).  So it is high time I looked at the composition of market value again.

Here is the latest data (figures as at January 8 2010):

• Aggregate market capitalization of the S&P 500:  $10.7 trillion
• Aggregate book value of the S&P 500:  $4.8 trillion
• Aggregate tangible book value of the S&P 500:  $2.1 trillion

A couple of points are worth noting:

• Tangible book value represents only 20% of market value (2.1/10.7)
• Declared intangible assets now represent a larger proportion of book value than tangible assets ($2.7 trillion vs $2.1 trillion)
• The aggregate value of balance sheet assets (both tangible and intangbile) accounts for less than 45% of market value (4.8/10.7)

So the big question is “what explains the other 55% of market value?”

There are two ways to close the gap between the balance sheet and market value:

• Restate balance sheet assets to show their market value rather than their book value (currently assets are shown at the lower of historic cost or net realizable value) – otherwise known as “marking to market”
• Include resources that are clearly responsible for generating value for companies but that do not meet the accounting definition of an asset (“a resource controlled by the enterprise”) and so are not eligible to appear on the balance sheet

The answer to the 55% question is a mix of the two.  I will develop this argument further in subsequent blog posts.

Tagged as: Business Value, Intangible Value

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I have just come across an old (October 2000) paper by Millward Brown, the research firm, about the determinants of a brand’s elasticity.  It may be nearly 10 years old, but its analysis is evergreen.

As expected, the analysis shows that it is easiest for brands to extend into categories that are functionally similar.  It also shows that the other determinant of successful brand extension is the degree to which the brand’s value proposition transcends purely functional considerations, and the extent to which this augmented “meaning” is relevant in the new category.  Hence the title of their paper “Does your brand mean enough to diversify?”

As noted extensively in this blog, customer value in an Earthling world is driven by more than purely functional considerations.   Customer want answers both to the question “what can you do for me?” and to the question “what can you mean to me?” – being a strong brand means having a compelling answer to both questions.  A Vulcan will select you on the basis of the first alone, but an Earthling will require a compelling answer to both.

The Millward Brown paper illustrates how the answer to the second question also determines the extent to which your “augmented” value proposition could support an extension of your brand into additional areas.

Tagged as: Brand Equity, Business Strategy, Customer Value, Earthlings, Vulcans

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I am nearing the end of a series of client workshops that will have taken me to 13 locations around the world over the past month.

The thing that has most struck me about the experience is that a corporate culture can be every bit as strong as a national culture, even for a firm that focuses on hiring locally in each market and that has made a number of significant acquisitions.  I have been amazed by the way in which all of the operations that I have visited are united by a set of shared values and culture.

That is not to say that there is not something distinctively French about their French operations, and something distinctively Japanese about their Japanese operations.  These operations clearly manifest their local cultures and customs – but the dominant impression that you take away from meeting them is the similarity of their aspirations and values.

The usual explanation for this phenomenon is that the national operations have become “Americanized” (my client is headquartered in the US).  I believe this is wrong.  I have worked with many American companies that are way more formal and hierarchical than the stereotypical German or Japanese company.  I believe that the truth is that the company has recognized the importance of creating a corporate culture that transcends national culture.

By articulating a way of doing business and demonstrating a set of behaviors that embodies a consistent set of values, the company has created a corporate culture that is the same across the globe, and that is enriched – not threatened – by national “interpretations” of these underlying values.

It is a remarkable thing to behold.

It is also a powerful source of competitive advantage – this commonality of beliefs was a major factor in allowing the company to respond swiftly and effectively to the market meltdown last year, and in facilitating its ability to integrate a number of recent acquisitions.

Tagged as: Business Strategy, Earthlings, Vulcans

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Continuing my theme of Reason and Emotion as complementary sources of customer value, this post deals with the problems that arise when the two are deemed to be at odds with one another.

A belief that Reason and Emotion cannot coexist leads directly to two fallacies:

• The first is that “good products sell themselves”
• The second is that marketing is there to compensate for some weakness in the product

The first is what I call “The Field of Dreams” fallacy because it is based on the belief that “if you build it, they will come” – this may work for mythical baseball players, but it is the reason why many technologically superior products have failed to gain traction in the market.

The second is the “Lipsticking the Pig” fallacy – the belief that the role of marketing is to create an emotional appeal for products that are functionally inferior (as is “this product is not selling well – let’s get marketing to produce a glossy brochure and a promotional event so we can shift our inventory”).

As I mentioned in my last post, the mark of good brands is that they offer a value proposition that is as compelling to our heads as it is to our hearts.  Reason and Emotion are both sources of customer value.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, Earthlings, rational

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Another week on the whistlestop world tour (the chosen continent for this week being North America) and the observation about the (mis)characterization of Emotion as the opposite of Reason has been emphatically reinforced.

Once again, the groups seemed rather uneasy at the prospect of having to articulate the emtional component of their value proposition to clients.  It is easy to see why – in companies with a strong finance culture it is a grave rebuke to be told “you are being emotional” as it means that you are not thinking straight.

It is a magical moment when the participants realize that the value proposition of a high performing service can be lifted from “buy ours because we have the fastest feeds and speeds” to “ours is uniquely able to meet a wider set of needs” through the acknowledgement of the functional and emotional drivers of the customer’s decision.

The head and the heart do NOT represent mutually exclusive forms of logic.  Rather, they are complementary forms of logic – one focusing on “what does this product do for me?” while the other focuses “which one feels right for me?”

This debate reminds me of the observation by the seventeenth century French philosopher, Blaise Pascal, that “le coeur a ses raisons que la Raison ne connait pas” (the Heart has reasons that Reason does not recognize).  This statement is generally understood to mean that the heart is irrational.  I think this is wrong.  What Pascal is actually saying is that the heart has a logic of its own, and it is different from “rational” logic.

The goal of good branding is to craft value propositions that have both rational logic AND emotional logic, not just one or the other.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, Customer Value, Earthlings, rational

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I have just returned from a whistlestop tour of Europe doing a series of brand definition workshops for a large financial services provider.

I was struck by how deeply embedded the notion is that emotion is the opposite of reason.  Given this, I quite understood why the workshop participants were initially reluctant to talk about the emotional dimension of their value proposition to clients.  If emotional = irrational, then branding is little more than deceit.

By the middle of each workshop, a light bulb would go off as the participants realized that the opposite of rational is irrational, and the opposite of emotional is unemotional.  They came to see that reason and emotion represent different - but equally valid – dimensions of the customer purchase decision. 

They saw that reason focuses on the transaction and asks “does this product or service meet my needs?” in terms of technical performance.  Emotion focuses on the relationship and asks the more visceral question of “does this feel right for me?”.  Both are important sources of value for customers.

Armed with this insight, they saw that there were two fallacies that needed to be corrected:

• First, the belief that marketing is the panacea for generating sales for an undifferentiated and even substandard product (a tactic known as “perfuming the pig”);
• Second, and perhaps even more harmful, the belief that a superior product or service will achieve success without marketing support (also known as the “build it and they will come” mentality)

By the end of the workshops we were on a roll about what their services can both do for customers and mean to them!

Tagged as: Brand Equity, Brand Strategy, Customer Value, Earthlings, Vulcans

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One of the struggles in working with senior management groups on complex topics is the danger that the discussion begins to focus narrowly on one specific aspect of the topic on which a number of those present have deep expertise or strong opinions (or both).  It is totally natural that people want to find a way to simplify the complexity of the topic but the risk is that, all of a sudden, a decision about the whole strategy looks like it will be made on the basis of one relatively minor dimension.

I have found that a useful technique for preventing this is to attach an explicit financial value to the individual items on the agenda.  The number represents the additional financial value that could be generated by an insightful group discussion of that topic.  So item 1 “Minutes of the last meeting” will have a modest notional value attached to it but item 3 “Sources of incremental growth” might have a $500 million notional value.

I have found that this approach has two benefits:

• It ensures that the allocation of time in the meeting is in closer proportion to the financial importance of the topic than might otherwise be the case (participants will often cut short an unproductive discussions with the remark ”why are we wasting our time on a topic that has little financial value when there are other, more valuable items yet to discuss?”)
• It ensures that the discussion of a truly important topic is not allowed to hinge on a single, relatively minor aspect – even if there is strong debate about that aspect (participants will make a remark like “we are not going to let a $500mn decision hinge on the choice of stationery supplier”)

I encourage marketers to adopt this technique when presenting to senior leadership teams.  Begin your presentation as follows ”Our first topic – strategic positioning – is potentially a $50mn topic, so we would welcome a detailed discussion.  Our third topic – social media strategy for our holiday sales promotion – has a more modest upside value of $5mn but we would still welcome your input.” I guarantee that jaws will drop and your career prospects will rise…

Tagged as: Business Strategy, Business Value, Marketing Accountability

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The ANA has just released its 2009 State of Marketing report, subtitled “The Shift” in deference to Prophet’s sponsorship of the survey and the release of their senior partner’s book “The Shift: The Transformation of Today’s Marketers into Tomorrow’s Growth Leaders.”

The survey report serves as the basis for reiterating the key points from Scott Davis’s book, specifically the  five dimensions of the transformation that marketers need to make in order to make the move from “being merely a sales enabler to being a value driver across the enterprise”  – or, as the book terms it, to becoming a Visionary marketer. 

The language may be a bit self aggrandizing but the ideas are good, specifically the core idea about how the influence of marketers is in direct proportion to their contribution to driving the growth agenda of the business.  In finance theory, the value of a business is driven by three things – profit, growth and risk.  Scott Davis is right to get marketers to up their game from just a focus on marketing efficiency (that primarily sees marketing’s contribution in terms of margins and therefore profit) to one that focuses on growth.

This change of mindset is probably the single biggest thing that marketers can do to elevate their impact from the tactical to the strategic.

One critical component for doing so is for marketers to gain a deeper understanding for how the business actually works - my favorite data from the survey was the contrast of the level of cross-functional collaboration by “visionary marketers” vs. their visually-challenged peers.  60% of the visionaries claimed to collaborate closely with finance and 39% with operations vs. figures of 26% and 9% for their myopic peers.

PS The five dimensions on which marketers need to “shift” are:

• From creating marketing strategy to driving business impact
• From controlling your message to galvanizing your network
• From incremental improvements to pervasive innovation
• From managing marketing investments to inspiring marketing excellence
• From an operational focus to a relentless customer focus

Tagged as: Business Strategy, Business Value, Customer Value, marketing and finance

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While going through my research archives looking for something else, I rediscovered a piece of McKinsey research from late 1996 with this title.  It was a meta-study of 27 individual studies that examined the importance of brand as a driver of purchase behavior across a number of business categories.

Their finding was that, on average across the B2B and B2C markets studied, brand accounted for 18% of the total purchase decision.  The figure ranged from 3-12% for consumer purchases of computers (3 US studies) to 36-39% for consumer purchases of computers (3 European studies).

Their research also revealed that, in 17 of the 27 studies, there was a “brand loyal” segment for whom brand was the determinant factor in their purchase decision.  The size of this segement varied from 10% in retail banking to 35% in telecoms, with an average of 21% across the 17 studies.

It is interesting that similar results about the economic significance of brands are produced by a variety of different approaches.

Tagged as: Brand Equity, Business Strategy, Customer Value

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I cannot decide whether I think that JC Larreche’s book “The Momentum Effect” is ground breaking – or banal.  Oddly, I feel the same way about Chan Kim and Renee Mauborgne’s “Blue Ocean Strategy.”  As an alumnus of INSEAD, I am proud to see the faculty achieve such recognition but I wish that I was convinced that their books represented a major breakthrough in business thinking. 

Both books have achieved an impressive degree of traction in the marketplace based on the same basic insight – namely, that business success is based on understanding the sources of customer value, and on crafting your product/service offering in a way that delivers unique value to customers.  I think Peter Drucker made this observation over 50 years ago.

Kim and Mauborgne phrase the opportunity in terms of “creating uncontested market space” while Larreche talks in terms of “shifting from compensating strategy to momentum strategy”.  I find Larreche’s take on the topic to be more appealing because it is explicit about what companies should stop doing (spending their time pushing products that do not offer compelling customer value) as well as what they should do more of (creating “power offers”).

Net net, I am delighted that the “marketing mindset” is once again being recognized as a powerful source of value creation for business.  To my mind, the fundamental challenge of business is how to create a business culture that places equal value on the insights that come from a “marketing mindset” with the operational efficiencies that comes from a “finance mindset”.

Tagged as: Business Strategy, Customer Value, marketing and finance

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I am presenting to an EMBA class at Columbia this evening on the topic of brand equity and marketing accountability.  I am looking forward to it – EMBA students always ask great questions.

The gist of my presentation is that brand equity represents an important bridge between the worlds of marketing and finance.  Marketers intuitively think of brand equity as a measure of the strength of the brand’s franchise with customers; Finance folk intuitively think of it in terms of the incremental profit/cash flow that is generated by the brand.  The two definitions are compatible but they do not describe the same thing.  The marketers view of brand equity represents the potential for value; the finance view represents the realization of value.  In that sense, a marketing definition of brand equity will always be larger than the financial defintion because it does not allow for all of those potential brand sales that failed to occur due to lack of distribution or stock outs or a host of other factors that may prevent customers acting on their stated “intention to purchase” (one of the key measures of brand equity from a marketing perspective).

Should be a fun session.

Tagged as: Brand Equity, Brand Valuation, Causal Model, Marketing Accountability, Marketing ROI

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I came across an interesting post by BNET’s Steve Tobak called “Aspiring Managers: Learn to Act Like Adults” in which he lists the five skills at which managers have to become adept:

• Finance
• Selling
• Presenting
• Negotiating
• Communicating

His comment about Finance was spot on:  “I don’t care if you manage engineering, HR, IT, sales, whatever, you need to learn about finance. Why? Because that’s how companies are run and how business works. Period.”

Finance is the language in which business is “scored” so you need to be aware of how success is going to be measured.  This is especially true for marketers who often mistake their objectives of high awareness, strong brand equity, loyal customers as ends in themselves.  These objectives are important – but their importance comes from the fact that these are the things that ultimately produce strong and stable cash flow.

That is why it is so important to maintain a healthy dialogue between the Earthlings in the marketing department and the Vulcans in the finance department.  Without an understanding of what drives customer value, it is impossible for a company to deliver shareholder value on a sustainable basis.

Tagged as: Business Strategy, Business Value, Earthlings, marketing and finance, Vulcans

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I admire Millward Brown for its efforts to “talk the language of business” by trying to link brand equity and brand value to overall business value. But sometimes these efforts merely illustrate a lack of understanding for what constitutes a credible case.  For example, when the estimate for brand value exceeds the market value of a company (as was the case with Google, Starbucks and a couple of other brands in their 2009 survey), anyone half proficient in valuation is led to question how much of a “reality check” was done on the data.  For brand value to exceed market value, the aggregate value of all of the assets of the company other than the brand would have to be negative…

The latest example is the announcement that “Millward Brown Shows Stronger Brands Recover From Recession Faster” at the end of September.  The basis for this statement was a comparison of the performance of a portfolio of companies for which “brand contributes more than 30% of earnings” versus the overall market.

The problem is that the data does not prove the claim (any more than if the claim had been that “companies beginning with letters in the first half of the alphabet outperformed the market”).  The 30% criterion means that the Millward Brown portfolio is heavily skewed towards consumer industries  (such as food, retailing, consumer electronics) – and these industries have outperformed the overall market.  Therefore much of the outperformance of the Millward Brown portfolio is likely due to sector exposure, not branding.

To deliver a robust analysis about whether stronger brands recover faster, Millward Brown would have to show that its portfolio of strongly branded companies outperformed a portfolio of companies in the same industries, not the overall market.

Tagged as: Brand Measurement, Business Strategy, Causal Model, Marketing Accountability

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I am just putting the finishing touches to the T2 Fall 2009 newsletter.

It has been a good opportunity to review the highlights of the past 12 months and, specifically, the progress made on advancing our research agenda.  Whatever else you can say about the GFC (global financial correction), it did at least provide an opportunity to push the peanut forwards on a number of projects that typically take second place to client work.

The newsletter reviews the key findings from our research in five main areas:

1. The scale of intangible value as a proportion of market value
2. The categorization and relative importance of intangible assets
3. Brand valuation
4. Brand strategy and post merger financial performance
5. Social media discussion of brand equity and marketing accountability

We certainly tried to follow Rahm Emanuel’s exhortation of “never let a crisis go to waste”…

Tagged as: Accounting, Brand Measurement, Brand Valuation, Business Value, Intangible Value, Intellectual Property, mergers

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This was the title of my presentation today at the town hall of a talented design and branding firm with which I have collaborated on a number of occasions.  Like so many others, they are grappling with the issue of how to respond productively to questions about ROI and the value of their work.

My mandate was simply to talk about the research and analysis I have been doing on a number of topics relevant to the business context and business impact of marketing.  I talked briefly about intangible value, brand valuation, the brand “bonus” and the relationship between brand strategy selection and post-merger financial performance (all topics on which I have shared topline results in this blog).

I hope I provided them with some interesting insights, and some confidence to engage in the discussion about the financial impact of marketing.  At the very least, I left them with a number of financial observations for use in their conversations with clients:

• Tangible book value represents only 21% of the value of US companies, and 33% of the value of Canadian companies
• Brand value represents an average of 15% of market value – but varies enormously by sector (ranging from less than 5% in energy and basic materials to over 40% in consumer goods)
• Strongly branded companies seemed to benefit from a cushion of 3 to 5% during the market meltdown of late 2008/early 2009
• In the two years following a merger, companies that used the more sophisticated forms of corporate brand outperformed those that used the two “expedient” forms of brand strategy by a margin of 5 to 10%

My parting advice to them was to use any request for ROI or brand value as an opportunity to engage in a discussion about the changes in customer and employee behavior that would result in signficant financial returns.  That would do two things:

• Convince the person asking the question that you are focused on improving the performance of the business
• Generate the working assumptions on which a credible model could be based

Tagged as: Brand Valuation, Business Strategy, Business Value, Causal Model, Intangible Value, marketing and finance, Marketing ROI, mergers

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As readers of this blog will know, I have recently pulled the data on the value of publicly-traded companies with a market cap of over $1bn. 

Today I thought I would share some headline data on the ten year (1999 to 2008) average of tangible book value as a proportion of market value by geographical region:

• US and Canada  16%
• Europe  23%
• Middle East and Africa  32%
• Latin America  43%
• Asia  45%

In aggregate over the 10 year period, tangible assets accounted for only 24% of market value across all regions. 

As might be expected, data for June 2009 shows that all regions have seen a decline in the multiples at which their companies trade over tangible book value.  Across the board, the proportion of market value represented by tangible book value has risen significantly:

• US and Canada  21%
• Europe  30%
• Middle East and Africa  44%
• Latin America  44%
• Asia  51%

In aggregate, tangible book value now represents 33% of the $26 trillion in market value covered by my analysis.

Tagged as: Business Strategy, Business Value, Intangible Value

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I have pulled ten years of data on the value of publicly-traded companies with a market cap of over $1bn.  It has been a laborious process – but it is providing valuable insight into how the level of tangible assets/intangible value varies by industry.

I thought I would share some headline data on the ten year (1999 to 2008) average of tangible book value as a proportion of market value:

• Consumer Staples  8%
• Healthcare  10%
• Telecoms  10%
• Information Technology  19%
• Consumer Discretionary  21%
• Industrials  21%
• Financials  36%
• Energy  36%
• Basic Materials  37%
• Utilities  45%

In aggregate over the 10 year period, tangible assets accounted for only 24% of the market value.  This means that three quarters of the market value of the largest publicly-traded companies in the world was due to factors other than the tangible assets on their balance sheets.

Future posts will share some thoughts about what these intangible assets might be – and how their importance might differ by industry category.

Tagged as: Business Value, Intangible Value, Intellectual Property

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I thought it would be interesting to dig a bit deeper into the extent of the increase in the proportion of aggregate market value attributable to tangible assets over the past 12 months.  In particular, I was intrigued to analyze the differing valuation dynamics for financial vs. non-financial firms.

The topline answer is, not surprisingly, that the valuation of financial services companies has seen the greatest change.  Two years ago, tangible book value represented 36% of the market value of financial companies.  In June last year, this number was 47%.  In June this year, it was 57%.

For non-financial firms, the increase in the proportion of market value represented by tangible assets was significant – but much less dramatic.  Tangible book value has risen from 19% of their market value in June 2007 to 22% last year, to 27% this year.

My point is that – whichever way you want to slice the data – intangible value represents the majority of market value in all but a few sectors.  The ambition of this blog (indeed, of Type 2 Consulting more generally) is to support companies as they seek to maximize the contribution of intangible assets to overall business performance.

Tagged as: Business Strategy, Business Value, Intangible Value, Intellectual Property

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I have just completed one of my periodic “deep dives” into the topic of intangible value.  As before (see the May 2009 archive for the previous postings), my initial objective is simply to document the extent of intangible value – how much of aggregate market value it represents, how this percentage varies by sector, and what has been the impact of the stock market decline on the proportion of intangible value.

This time, I decided to use as my data set all publicly-traded companies with a market cap of over $1bn as at the end of June for the past 10 years.  The yielded a data set of 1,488 companies in June 1999, rising steadily to a peak of 4,588 companies as at end June 2007, then declining precipitously to a total of 3,537 companies at end June this year.

The aggregate market value of these companies rose from $17 trillion in 1999 to a peak of $41 trillion in 2007, declining to $27 trillion in June of this year.

The proportion of market value represented by tangible book value (total assets minus total liabilties minus balance sheet intangibles) averaged 24% for the period June 1999 to June 2008.  In other words, only one quarter of the value of the world’s 3,500 largest publicly traded companies was explained by the tangible assets reported on their balance sheets.  In June 2009, that figure increased to 33% – but this still means that intangible assets account for two thirds of market value.

That observation bears repeating:  based on an analysis of the 3,500 largest publicly traded companies in the world as at end June 2009, INTANGIBLE VALUE REPRESENTS TWO THIRDS OF MARKET VALUE.  Based on my experience as a business consultant, I am convinced that insufficient attention is paid to intangible assets during the strategic planning process.

Tagged as: Accounting, Business Value, Intangible Value, Intellectual Property, marketing and finance

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I am in the process of responding to another RFP that stipulates that brand valuation is one of the deliverables.  Given the context,  it is clear that the client does not mean valuation in its financial sense.  What they appear to want is a methodology for brand evaluation.

I hate to pick nits but it is a source of considerable confusion when a term that has a specific meaning to a financial audience is used in a much broader sense by marketers.  Marketers are often guilty of using financial terminology to describe anything that involves measurement - they overlook the fact that many forms of measurement are non-financial (such as awareness levels, repurchase rates, willingness to recommend and so on).

For that reason, I have found it useful to make the distinction between two forms of brand measurement:

• Brand evaluation is the discipline of developing a quantitative (but non-financial) understanding of the strengths of a brand on multiple dimensions and with multiple audiences.  The focus of brand evaluation is understanding the level of customer value that the brand generates;
• Brand valuation is the discipline of determining the proportion of overall business value that is solely due to the impact of the brand on the behavior of key audiences.  The focus of brand valuation is on measuring the level of shareholder value that the brand generates.

 Brand evaluation is a discipline that should be embraced by any organization that wants to understand what is driving customer preference and internal engagement.  Brand valuation is a specialist discipline that is of particular value when an organization is contemplating a merger or licensing transaction, or when it is engaged in a trademark dispute.

Despite the popularity of league tables of the world’s most valuable brands produced by Interbrand, Millward Brown and Brand Finance or of the world’s most powerful non-profit brands produced by Cone, the managerial applications of brand valuation are surprisingly limited.  A brand does not become more valuable simply as a result of measuring it.  What actually makes a brand more valuable is when an organization is able to enhance the preference for the brand among its existing audiences, and how to promote the brand to new audiences.  The financial value of a brand is determined by the behavior of its audiences.

Brand evaluation is about strategy and management.  Brand valuation is about accounting.  My beef with brand valuation is that it distracts clients from the more productive task of identifying and measuring the sources of their brand’s value to customers, partners, and employees (brand evaluation) and on generating ideas for how this value can be increased.

Tagged as: Accounting, Brand Equity, Brand Measurement, Brand Valuation, Causal Model, Marketing ROI

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Vic Cook has posted his research into whether the stock prices of companies with stronger brands fared better in the downturn than those of companies with lesser brands (www.customersandcapital.com).  Whereas I used a classical finance approach (branded companies vs the general market) for my analysis of the brand “bonus”, Vic looks at relative performance within the set of branded companies.

He divides the set of 62 companies (the publicly-traded parent companies of the brands on the 2008 Interbrand list) into four quadrants based, first, on whether brand value represented a greater/lesser than average proportion of market value and, second, on whether the company suffered a higher/lower than average decline in its market value.

I encourage you to read his post in full, but would still like to share the conclusions here:

• The more valuable brands accounted for 33% of the total pre-crash value. The companies that owned those brands incurred losses in their market cap amounting to only 10% of the losses suffered by all firms in the study
• The less valuable brands accounted for 25% of the total pre-crash value. Their owners incurred losses amounting to 50% of the total sustained during the storm.
• The brands with inconsistent performance (defined as being greater/higher or lesser/lower) accounted for 42% of the pre-crash value and 40% of the losses in market cap incurred by all firms in the sample.

Vic ends his piece by saying “One can conclude with high confidence that, as a rule, companies with better brands suffer less than those with lesser brands.”

I find this a compelling piece of analysis that supports the (somewhat counter intuitive) conclusion that brands are a class of asset that has lower volatility than that of other forms of corporate assets.

Tagged as: Brand Equity, Brand Valuation, Business Strategy, Business Value, Intangible Value

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There is something very appealing about the simplicity of the argument that brands provide protection in a downturn.  I have been privileged to share ideas on this topic over the past few weeks with Raj Srivastava (Provost and Professor of Marketing at Singapore Management University), Dave Reibstein (Professor of Marketing at Wharton) and Vic Cook (Professor of Marketing at Tulane).  Both Raj and Vic have forthcoming articles on this topic that are well worth reading (based on the drafts that I have seen).

The articles take rather different tacks – Raj’s focuses on the mechanisms whereby brands deliver a financial bonus, and the need to maintain brand investment in a recession; Vic’s focuses on the magnitude of the bonus delivered, and whether it is a function of the relative importance of brand as a proportion of overall market value.

I will post links to both pieces once they are available.

Tagged as: Brand Valuation, Business Value, Intangible Value

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Today’s breakfast briefing hosted by the Council of Public Relations Firms on “Strategy, Leadership and Communications” went well.  Following a brief presentation of the research findings, we had a lively debate about the role of communications in strategy formation and execution. The research finding that generated the most discussion was that CEOs favor a more active role for communicators in the strategy formation process, but that communicators themselves hold a narrower view of their role, preferring to define it in terms of providing a “sounding board” rather than fully-fledged participation in strategy development.

It helped that the organizers had put together a diverse panel of communicators and strategists from different industries – Chris Atkins (Standard & Poor’s), Ray Jordan (Johnson & Johnson), Herb Muktarian (BAE Systems), Ana Maria Delgado (Organizacion Corona), Emily Yoo (Tokio Marine) and yours truly.  The diversity certainly led to a richness of perspective on the various issues.

I personally was heartened by the extremely articulate views that Herb and Chris expressed about the importance of communicators to define what specific skills/perspectives they were bringing to the top table, and the circumstances under which good communications were most valuable.  Their point was that it was a mistake to believe that the value of communications was intuitively obvious to senior management.

It was nice to hear the Vulcan/Earthling conundrum articulated by others!

Tagged as: Business Strategy, Earthlings, Vulcans

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This is the title of tomorrow’s breakfast session organized by Forbes at which I am a panelist.  The session presents the findings of research among the Forbes Advisory Panel about the role of communications in successful strategy development and execution.  Panel respondents were drawn from three groups – CEOs; senior strategists; and senior communications executives.  Not surprisingly, the importance of good communications was not contested by any of the three groups!

My planned contribution consists of three observations:

1. Since two thirds of the value of companies is represented by intangible value, and since that intangible value is the direct product of human ingenuity, then the business case for keeping those ingenious humans aligned and motivated via good communications is a no-brainer
2. The evidence from the market downturn is that companies with a strong brand/reputation (presumably the ones with the best communications) enjoyed a 4% “bonus” relative to their category peers
3. The evidence from the M&A market is that companies using the more nuanced forms of brand strategy (presumably the ones which put the greatest emphasis on good communications) outperform those using the more expedient forms of brand strategy by around 5% per year in the two years following the merger

Somehow, I also need to work in the observation that marketing is about more than communications.  I plan to remind the attendees that marketing’s mandate is about “conceiving, creating, communicating and delivering customer value” – not just the communications piece.  This final observation may be a little unwelcome since the event is sponsored by the Council of Public Relations Firms…

Tagged as: Business Strategy, Business Value

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Vic Cook, Professor of Marketing at Tulane, has suggested that the scale of the brand “bonus” should be correlated to the proportion of brand value to overall market value.  I had resisted using the actual dollar values in any of the brand valuation league tables because of my skepticism about their accuracy (see “My Brand’s Bigger Than Your Brand”) but I have to admit that Vic’s suggestion is irresistible.  

If we can show that the level of the brand “bonus” enjoyed by a company was proportionate to the relative importance of its brand, this will be strong evidence that brands are a class of asset whose value is less volatile than the overall market.

Tagged as: Brand Equity, Brand Valuation, Business Value, Intangible Value

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My previous post (about whether there is any evidence that companies with strong brands suffered lower than average declines in their market value during the recent market decline) has generated a lot of interest, plus some suggestions for how the analysis could be extended and improved.

One idea was to extend the reference period to three months so as to capture the 2008 low in the S&P 500 on 20 November, and to extend the recovery period to three months from the S&P 500’s 2009 low on 9 March. 

This produces very similar results.  Once again, there is a nice symmetry in that the market decline in the “down” period is now 41% and the percentage gain in S&P 500 during the “up” period is 39%.  And once again, the portfolio of strongly branded companies registered a decline in value that was 6 percentage points less than the overall market (the aggregate market value of the 101 companies in this portfolio fell by “only” 35%).  During the market upturn, there was no significant difference between the performance of the branded portfolio and the overall market.

So there does appear to be empirical support for the intuition that brands provide some degree of downside protection…

Tagged as: Brand Equity, Business Value, marketing and finance

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People like to assert that brands provide some cushion for a company when markets are falling, and help them bounce back faster when the market begins to recover.

The last twelve months provide a wonderful testing ground for this theory in that we have had a period of rapid market decline (Sept/Oct last year) and a period of rapid recovery (March/April this year).   Interestingly, the percentage changes were almost identical – in the first period the S&P 500 fell by 35% vs. a rise of 37% in the second.

My question is “How did a portfolio of strong brands perform relative to the market?”

The answer (based on a portfolio of 102 companies measured relative to the S&P 500) is that strongly branded companies enjoyed a brand “bonus” of around 4% during the market crash.   In the rising market, they outperformed by less than 1%.

I actually constructed a number of different portfolios to see if a portfolio based on any of the major lists of “the world’s best brands” outperformed the market.  I created 9 portfolios in all using the Fortune, Interbrand, Millward Brown and Brand Finance lists, and combinations thereof.

The portfolio that registered the best performance in the down market was one based on the Fortune list of most admired companies (it beat the S&P 500 by 7%).  The portfolio that did best in the up market was a blended portfolio comprising companies that appeared on at least 3 of the 4 lists (it beat the S&P 500 by 15%).   Across the up and down markets, the blended portfolios performed the best.   

Maybe this is another case of “the wisdom of crowds”?  Across market cycles, a portfolio based on a synthesis of the Fortune, Interbrand, Millward Brown and Brand Finance lists outperforms portfolios based on any one of them…

Tagged as: Brand Equity, Business Value, Intangible Value, marketing and finance

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The question I posed in my last blog entry concerned the most appropriate way in which to measure the value of marketing.  To my mind, the best place to start is consider the entire “value added” of a business, then move on to consider what percentage of that value added can reasonably be ascribed to marketing.

Here are some key thoughts to bear in mind:

• All value added is the result of human ingenuity.  Tangible assets are inert – it is only the addition of human capital that makes a business more valuable than the sum of its tangible assets
• A company does not actually own its human capital (that is, the people themselves) but it does own the results of their work in the form of the unique business systems, new scientific discoveries, unique information and desirable brands that they generate
• Certain industries – basic materials and utilities, for example – rely heavily on physical assets, so the relative degree of value added of human capital will necessarily be lower than in industries – such as software - which employ very little by way of physical assets
• Just as the overall value added by human capital relative to tangible assets varies by industry, so does the relative importance of different forms of intangible value.  For example, scientific discovery is the dominant form of intangible value in the pharamceutical industry but, for consumer goods, it is effective brand management

My belief is that a convincing argument for the value of marketing needs to begin by documenting the importance of intangible value in each industry, and then advancing a compelling argument about the relative importance of marketing vs. other disciplines in creating that intangible value.

My next post will try to establish some rules of thumb.

Tagged as: Accounting, Business Value, Intangible Value, Intellectual Property

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Apologies for another somewhat technical post – but it concerns the appropriate metric by which to measure the contribution of marketing. 

A company’s value is typically expressed in two ways – market capitalization (the market value of its equity – the amount you would need to pay to buy all of the shares) or enterprise value (the total of its equity and debt – the amount you would need to pay in order to have outright ownership of all of its assets).   

The success of a company in “adding value” is typically measured in terms of its intangible value, which represents the excess of its market value over its book value.  Book value is defined as the difference between the total assets on its balance sheet and its total liabilities.  Given that the value of the assets on the balance sheet are recorded at the lower of “historic cost or net realizable value” rather than their replacement cost, there is an argument that a more accurate measure of the amount of “value added” is the difference between market value of a company’s equity and the replacement cost of its assets – this is known as Tobin’s Q.  Unless you do this adjustment, you do not know whether intangible value is just a reflection of the undervaluation of the assets on your balance sheet (the difference between their book value and their “true” market value, or replacement cost) or the proof of the existence of assets other than those that appear on the balance sheet.

So far so good?  The picture was relatively clear so long as the only assets on the balance sheet were tangible (either financial or physical).  The situation has become more complicated now that certain forms of intangible asset are allowed to be shown on the balance sheet.  These intangible assets represent specific forms of intellectual property such as patents, contracts, copyright and trademark.  Because these represent legally enforceable ownership rights, the accountants are content to see them recognized on the balance sheet – but only when they are acquired from another company (it is still not possible to show assets that were created in house on the balance sheet).

Given this context, my interest is in determining the most appropriate terms in which the value added of marketing should be expressed.  First of all, should we look at market value or enterprise value?  Second, should we measure the “value added” of a business relative to its book value , or its tangible book value (book value minus the intangible assets on the balance sheet), or Tobin’s Q – or a modified version of Tobin’s Q that restates only the book value of the tangible assets on the balance sheet?

My next post will suggest a couple of different measures that may make sense.

Tagged as: Accounting, Business Strategy, Business Value, Intangible Value, Intellectual Property, Marketing Accountability

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Not exactly the punchiest title for a blog post, but this is the actual title of the paper I presented at the Marketing Sciences INFORMS conference today.  I contemplated using a snappier title like “Does the market care whose logo survives?” as my title but decided against it – after all, this conference is the annual get together of the quantitatively oriented marketing academics and they definitely want the steak, not the sizzle.

I found it both humbling and uplifting to be among people who want to know about how your research is constructed before they have any interest in what the result might be.  There is a purity of approach that is truly refreshing in comparison to the more cavalier “the data supports our line of argument – who cares about its robustness?” attitude that is so common in the commercial world.

As I had hoped, I got some very helpful feedback on how to articulate the motive for this research more succinctly, how to make the analysis as robust as possible, and what were the implications that could be drawn from the results.

Tagged as: Brand Strategy, Business Value, mergers

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Tomorrow I present the preliminary results of the research that I have been doing into whether there is evidence that certain types of corporate brand strategy are associated with abnormal post merger stock returns.  The hypothesis is that the more nuanced forms of brand strategy (that is, those that do not simply involve rebranding the target company with the acquirer’s brand, or maintaining the target company as a standalone subsidiary) result in greater engagement from employees, customers and investors – and that this facilitates a smoother post merger integration process.

The initial results are encouraging – analysis of 215 mergers using the Fama French 4 factors revealed an abnormal monthly stock return of 0.4% on a portfolio comprising companies using the “sophisticated” brand strategies versus a portfolio using the two “expedient” strategies mentioned above.  The number is not huge, but it is certainly enough to merit further investigation and an expansion of the data set.

We have now classified 350 mergers and the excess returns to the “sophisticated” strategies is still there.  I say “seems to be there” as I have just done a simple comparison of the dividend adjusted returns for each company deflated by the relevant sector index.  Based on a simple average of the results, it would appear that the average returns for companies using the “sophisticated” strategies exceeds the returns generated by companies using the “expedient” strategies by 5% over the two years following the completion of the merger.

I am looking forward to the session tomorrow and expect some great suggestions for how this analysis can be extended and enhanced.

Tagged as: Brand Strategy, Business Value, mergers

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Anyone who reads this blog will know that I regard most questions involving ROI as being ill-conceived.  Don’t get me wrong – I am 100% in favor of demonstrating the business impact of marketing.  It’s just that ROI is rarely the best way of doing this.  This goes for social media as well as any other form of media.

My recommendation is that, whenever you are faced with a request for ROI, you ask for clarification.  Specifically, you ask which of the following two questions better expresses the reason for the ROI request:

• “Is it strategically important and economically rational for us to invest in social media?”
• “Would the overall effectiveness of our marketing strategy be enhanced by allocating a certain portion of our marketing budget to social media?”

If it is the first question that you are being asked, you should respond with an articulation of why customer engagement and community building is a vital part of the company’s “go to market” strategy.  You should provide data on the major drivers of the customer purchase decision and the influence that social media has on each of these drivers, and at which points in the purchase cycle it is most effective.

If it is the second question that you are being asked, you can assume that the strategy is not in question, merely the most effective way of achieving it.  In this case, you could propose a media mix model to show the impact of adding social media to the marketing mix on overall purchase volumes and margins.

Is it ever correct to respond to a request for ROI at face value?  Yes, but only when you are being asked to evaluate social media as a standalone sales channel.

Tagged as: Brand Measurement, Business Strategy, Causal Model, Customer Value, Marketing Accountability

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So long, Bob Nardelli.  Today you hand over the reins at Chrysler to Robert Kidder.  You are now 2 for 2 in terms of showing how damaging a Vulcan mindset can be to the management of a consumer business.

First at Home Depot, now at Chrysler, you displayed a lack of insight into the relationship between a company’s economic costs and the level of customer benefit that it delivers.  To you, it would appear that cost cutting is a philosophy.  What earns you my nomination as a Vulcan is your failure to discriminate between “bad” and “good” costs.

“Bad” costs are those that deliver an insufficient level of benefit to customers so that cutting them improves the ratio of customer benefit to economic cost (customer benefit declines but economic cost declines proportionately more).

But you have shown a frightening propensity to cut “good” costs – first in replacing the experienced hardware guys who used to man (yes, generally, they were men) the aisles at Home Depot; and, now, in starving the product development pipeline at Chrysler (did you really believe that having only four new models in the next five years was a viable business strategy?).  Both are classic Vulcan errors – they are based on the failure to understand the nature and scale of the customer benefit that these costs support.

Question: On what planet does it make sense to severely damage your ability to deliver customer service and product innovation?

Answer: On the planet Vulcan where superior beings can navigate unerringly through the aisles at Home Depot and never require guidance about which product they need.  Furthermore, these superior beings regard cars as nothing more than a functional device to get them from A to B.

I have news for you, Mr Nardelli – this is the planet Earth and we humans value things like service and styling.  And we will continue to take our business elsewhere when Vulcan thinking like yours destroys the value proposition of the brands that we once loved to buy.

Tagged as: Business Strategy, Business Value, Customer Value, Earthlings, rational, Vulcans

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This is an esoteric point – but one on which I would welcome input.  It seems to me that there are two ways of looking at the relationship between what a company reports on its balance sheet and the value attributed to it by the market.

The first approach is to take book value (defined as total assets minus total liabilities) and subtract any reported intangible assets.  This gives you the tangible book value as reported on the balance sheet.  You can then compare this number to the market value of the company’s equity to arrive at the percentage of market value accounted for by the tangible assets reported on its balance sheet.  As I mentioned in an earlier post, this number is around 15% for US companies.

The alternate approach is to begin with the financial and physical assets that you know that a company is using in the course of its business – its working capital plus its property, plant and equipment – and define these as the productive base of the company.  You can then compare this net tangible asset number to the total enterprise value of the company (the sum of its market value and long term debt) to arrive at the ratio between the physical assets of the company and its market value.

For reasons too numerous to list here, the results of these two approaches are comparable but the net tangible asset gives higher numbers for the proportion of market value explained by physical assets.

I calculate using both approaches but would welcome any comments or suggestions as to which you find the more compelling approach.

To my mind, the first approach has the virtue of simplicity and comprehensiveness.  The second has the virtue of transparency but cannot be performed meaningfully for financial services companies (due to their massive amounts of short-term debt, and issues to do with the calculation of total enterprise value).

Your views?

Tagged as: Business Strategy, Business Value, Intangible Value

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The past week I have been immersed in a deep drill into the role of brand strategy during M&A.  This is a topic I have written about from a qualitative point of view before (see the links to the published articles to the right of this post), but the time has now come to add some financial teeth to the analysis.

I am defining the question as “is there evidence from the capital markets that certain forms of brand strategy are associated with superior post merger financial performance and valuation?”

I specifically want to test whether the more expedient strategies (those  involve the least thought and/or work) are associated with disappointing post merger performance because they fail to address the human desire to understand how the merged company will be superior to its two constituent parts.

I present the preliminary results at the Marketing Science Institute’s INFORMS conference in 3 weeks so the pressure is on…

Tagged as: Brand Strategy, mergers

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I have just completed a global analysis of the market value of publicly traded companies with a market cap of $500mn or more. The objective is to understand the types of asset that are driving business value across different industry sectors.  Is it the assets that appear on the balance sheet? Or is it the types of intangible asset (technology, art and relationships) that human beings are so good at creating but which do not generally appear on any balance sheet?

Yesterday I mentioned how the importance of tangible assets varied by industry. Today I want to share how it varies by country.

For the global economy as a whole, tangible book value accounts for around one third of market value.  However, tangible book value accounts for pretty much 100% of the value of publicly traded Russian companies (lots of mining, energy and heavy manufacturing there) and close to 90% of the value of Japanese companies.  At the other extreme, tangible book value accounts for only 15% of the value of US companies (reflecting the strength of the US in industries such as telecoms, infotech and healthcare).  Interestingly, the UK, France and have similar results to the US. The figure for Germany, Switzerland, India and China is around 30%.

My two next steps are:

• Generate a more granular understanding of which types of tangible asset predominate in each industry
• Identify the components of intangible value and how they vary in importance by industry

Tagged as: Accounting, Business Strategy, Intangible Value

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I have just completed a major piece of analysis of the valuation of all publicly traded companies with a market cap of $500mn or more. My goal is not to understand whether they are fairly valued or not (if I knew this, this blog would be about fine wine and would be written from my private island rather than rainy New York) – my goal is simply to understand the extent to which their market value is explained by the assets on their balance sheets.

The objective is to ensure that management attention is focused on the assets that are truly driving business value in their industry, rather than the ones that are easiest to see and measure.

As at May 1 this year, tangible book value accounted for [drum roll here] 31% of the market value of the 4,196 companies studied (I excluded all financial services firms from the analysis on the grounds that the valuation of their assets is the subject of so much dispute currently).  That means that two thirds of the value of the global economy is attributable to things that do not appear on the balance sheet.

This number is, of course, an average across all industry sectors.  Tangible book value explains over 50% of the value of energy, materials, manufacturing  and utilities companies but less than 15% of the value of telecoms, healthcare and consumer goods companies.  So while it is appropriate for the former companies to focus primarily on production efficiency, the latter companies clearly need to focus on a different set of priorities.

What sort of things? Well, the international accounting standards board has suggested five types of assets that might account for the excess of a company’s value over its tangible book value – technology, contracts, artistic creations, customer information, and marketing. The next stage of my analysis is to determine how the importance of each of these type of assets varies by industry.

Believe me, it will vary.

Tagged as: Accounting, Business Value, Intangible Value, IP

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I often like to ask my clients this question because it reveals their belief about what a brand can – and cannot – do for their business.

I am always surprised when they choose a strong brand over a strong business model. The evidence from my research (see particularly my article on Value-based Brand Management and Measurement) is that a strong brand magnifies the value of a strong business model, but does little to increase the value of an unprofitable business. Based on a sample of 140 companies over a 10 year period, we found that brand strength increased the value of low profitability companies by 20% versus their more weakly branded peers, but increased the value of high profitability companies by over 50% versus their more weakly branded peers.

The implication of this is that we need to think of brands primarily as a means to magnify the value of already successful companies, not as a means to redeem poorly-performing companies.  A brand’s value is largely determined by the quality of the underlying business.

As an aside, that is why I find the issue of brand valuation so misleading – it encourages you to think of the brand as a separate asset rather than as an integral part of your “go to market” strategy.

Tagged as: Brand Measurement, Brand Strategy, Brand Valuation, Business Strategy, marketing and finance

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I am fascinated by the subject of why the market value of companies exceeds their book value, often by a factor of 3 or more. I can understand why there are differences between industries (a manufacturing company requires more physical assets than a law firm) but what I find particularly fascinating is why these multiples differ so widely between firms within the same industry (and therefore subject to similar economics).

This suggests that something very interesting is going on at the individual firm level. The difference between how effectively or otherwise a firm uses its physical assets is a direct consequence of human ingenuity. This ingenuity is what lies behind the creation of all forms of intellectual property. And it is the quantity and quality of this intellectual property that largely explains the differences between the valuation of companies.

Given that intangible value (the excess of market value over book value) represents 2/3 of the market value of the S&P500, it is an important topic. My ambition is to provide some rules of thumb about the relative importance of different forms of intellectual property across different industries so that companies can start to manage these intangible assets more effectively.

BTW the title of this post is taken from a wonderful passage in “The Little Prince” by Antoine de St Exupery where the Little Prince realizes that, in order to understand what is really going on, he needs to “see with the heart because the most important things are invisible to the eye.”

Tagged as: Business Strategy, Intangible Value, Intellectual Property, IP

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Whatever the rights and wrongs of Rick Wagoner’s ousting from GM, he provides a wonderful example of the difference between Vulcan and Earthling thinking. On what planet is it acceptable behavior to take your private jet to a meeting where you are asking for a hand-out of billions of dollars?

You might be surprised to learn that the answer is “on the planet Vulcan.” From a narrowly rational point of view, it makes sense for Rick Wagoner to argue that ”my time is so valuable that I will not waste it by waiting in line at an airport for a commercial flight to Washington.”

On the planet Earth, however, things are not that simple. A man who is asking for money needs to avoid creating the impression that even a single cent of the money will be used to subsidize his lifestyle as opposed to saving what was once one of the world’s great companies.

It seems obvious – but this failure to consider the human dimension of business is repeated on a daily basis by companies that really should know better.  We do business on planet Earth and that means that we need to recognize that our customers are never satisfied with an answer to just “what will you do for me?” – they also want to know “what can you mean to me?”

Tagged as: Brand Equity, Earthlings, rational, Vulcans

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The natural bias in pre-merger due diligence is to focus on identifying the factors that might jeopardize the success of the merger – the deal breakers. Inadequate attention is generally given to the factors that may contribute to superior post-merger performance – the deal makers.

Rich Ettenson and I are actively doing analysis to test our hypothesis that corporate brand strategy is one of the variables that can significantly influence the success of a merger. Brand strategy plays a vital role in ensuring that customers, employees and investors understand the reasons for the merger, and the future benefits that it will deliver to them. This communication is important because it is the behavior of these three audiences that ultimately decides the success or failure of the merger.

So far, our work has resulted in:

• Categorization of the 10 corporate branding options available to managers
• Classification of over 1,000 mergers into these 10 categories

Now we are looking into whether there is evidence from the capital markets that any of the corporate brand strategies are associated with abnormal shareholder returns over the 12/24/36 months after the completion of the merger. It will be exciting to see if the market is fully efficient in recognizing in the degree to which certain forms of brand strategy facilitate a more effective post-merger integration process.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, mergers

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