A dozen management fads have come and gone in the past decade, but brand equity, first explored by David Aaker in the late 1980s, has exploded in importance. Recognized by Brandweek as "the dean of the brand-equity movement," Aaker now prepares managers for the next level of the brand revolution -- brand leadership.
For the first time, Aaker and coauthor Erich Joachimsthaler describe how the emerging paradigm of strategic brand leadership is replacing the classic, tactically oriented brand management system pioneered by Procter & Gamble. This fundamental shift involves nothing less than a revolution in organizational structure, systems, and culture -- as the authors demonstrate with hundreds of case studies from companies such as Polo Ralph Lauren, Virgin Airlines, Adidas, GE, Marriott, IBM, McDonald's, Maggi, and Swatch. This immensely readable book provides the brand management team with the capability to:
Create and elaborate brand identities (what should the brand stand for)
Use the brand relationship spectrum, a powerful tool to harness subbrands and endorsed brands to form brand architectures that create clarity, synergy and leveraged assets
Identify the customer "sweet spot" and the driving idea that will move brand-building efforts beyond advertising to break out of the clutter
Use the Internet and sponsorship to make brands resources work more effectively
Address the four imperatives of global brand management
Like David Aaker's two previous bestselling books, Brand Leadership will be essential reading for line executives and brand managers in market-driven firms worldwide.
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April 26, 2009
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Excerpt from Brand Leadership by David A. Aaker
Chapter One: Brand Leadership -- The New Imperative
It's a new brand world.
-- Tom Peters
A brand strategy must follow the business strategy.
-- Dennis Carter, Intel
BRAND MANAGEMENT -- THE CLASSIC MODEL
In May 1931, Neil McElroy, who later rose to be a successful CEO of Procter & Gamble (P&G) and still later became the U.S. secretary of defense, was a junior marketing manager responsible for the advertising for Camay soap. Ivory ("99.44% pure" since 1879) was then the king at P&G, while the company's other brands were treated in an ad hoc manner. McElroy observed that the Camay marketing effort was diffuse and uncoordinated, with no budget commitment or management focus. As a result, Camay drifted and languished. Frustrated, McElroy wrote a now-classic memo proposing a brand-focused management system.
The McElroy memo detailed the solution -- a brand management team that would be responsible for creating a brand's marketing program and coordinating it with sales and manufacturing. This memo, which built on the ideas and activities of several people inside and outside P&G, has had a profound effect on how firms around the world manage their brands.
The system McElroy proposed was geared to solve "sales problems" by analyzing sales and profits for each market area in order to identify problem markets. The brand manager conducted research to understand the causes of the problem, developed response programs to turn it around, and then used a planning system to help ensure that the programs were implemented on time. The responses used not only advertising but also other marketing tools, such as pricing, promotions, in-store displays, salesforce incentives, and packaging changes or product refinements.
In part, the classic brand management system was successful at P&G and elsewhere because it was typically staffed by exceptional planners, doers, and motivators. The process of managing a complex system -- often involving R&D, manufacturing, and logistics in addition to advertising, promotion, and distribution-channel issues -- required management skills and a get-it-done ethic. Successful brand managers also needed to have exceptional coordination and motivational skills because the brand manager typically had no direct line authority over the people (both inside and outside the company) involved in implementing branding programs.
Although it was not specifically discussed in his memo, the premise that each brand would vigorously compete with the firm's other brands (both for market share and within the company for resources) was an important aspect of McElroy's conceptualization of brand management. Contemporary accounts of McElroy's thoughts suggest the source for this idea was General Motors, which had distinct brands like Chevrolet, Buick, and Oldsmobile competing against one another. The brand manager's goal was to see the brand win, even if winning came at the expense of other brands within the firm.
The classic brand management system usually limited its scope to a relevant market in a single country. When a brand was multinational, the brand management system usually was replicated in each country, with local managers in charge.
Finally, in the original P&G model, the brand manager tended to be tactical and reactive, observing competitor and channel activity as well as sales and margin trends. When problems were detected, the goal of the response programs was to "move the needle" as soon as possible, with the process largely driven by sales and margins. Strategy was often delegated to an agency or simply ignored.
BRAND LEADERSHIP -- THE NEW IMPERATIVE
The classic brand management system has worked well for many decades for P&G and a host of imitators. It manages the brand and makes things happen by harnessing the work of many. However, it can fall short in dealing with emerging market complexities, competitive pressures, channel dynamics, global forces, and business environments with multiple brands, aggressive brand extensions, and complex subbrand structures.
As a result, a new model is gradually replacing the classic brand management system at P&G and many other firms. The emerging paradigm, which we term the brand leadership model, is very different. As Figure 1-3 summarizes, it emphasizes strategy as well as tactics, its scope is broader, and it is driven by brand identity as well as sales.
From Tactical to Strategic Management
The manager in the brand leadership model is strategic and visionary rather than tactical and reactive. He or she takes control of the brand strategically, setting forth what it should stand for in the eyes of the customer and relevant others and communicating that identity consistently, efficiently, and effectively.
To fill this role, the brand manager must be involved in creating the business strategy as well as implementing it. The brand strategy should be influenced by the business strategy and should reflect the same strategic vision and corporate culture. In addition, the brand identity should not promise what the strategy cannot or will not deliver. There is nothing more wasteful and damaging than developing a brand identity or vision based on a strategic imperative that will not get funded. An empty brand promise is worse than no promise at all.
Higher in the organization
In the classic brand management system, the brand manager was too often a relatively inexperienced person who rarely stayed in the job more than two to three years. The strategic perspective calls for the brand manager to be higher in the organization, with a longer-term job horizon; in the brand leadership model, he or she is often the top marketing professional in the organization. For organizations where there is marketing talent at the top, the brand manager can be and often is the CEO.
Focus on brand equity as the conceptual model
The emerging model can be captured in part by juxtaposing brand image and brand equity. Brand image is tactical -- an element that drives short-term results and can be comfortably left to advertising and promotion specialists. Brand equity, in contrast, is strategic -- an asset that can be the basis of competitive advantage and long-term profitability and thus needs to be monitored closely by the top management of an organization. The goal of brand leadership is to build brand equities rather than simply manage brand images.
Brand equity measures
The brand leadership model encourages the development of brand equity measures to supplement short-term sales and profit figures. These measures, commonly tracked over time, should reflect major brand equity dimensions such as awareness, loyalty, perceived quality, and associations. Identifying brand identity elements that differentiate and drive customer-brand relationships is a first step toward creating a set of brand equity measures.
From a Limited to a Broad Focus
In the classic P&G model, the scope of the brand manager was limited to not only a single brand but also one product and one market. In addition, the communication effort tended to be more focused (with fewer options available), and internal brand communication was usually ignored. In the brand leadership model, the challenges and contexts are very different, and the task has been expanded.
Multiple products and markets
In the brand leadership model, because a brand can cover multiple products and markets, determining the brand's product and market scope becomes a key management issue.
Product scope involves the management of brand extensions and licensing programs. To which products should the brand be attached? Which products exceed the brand's current and target domains? Some brands, such as Sony, gain visibility and energy from being extended widely; customers know there will always be something new and exciting under the Sony brand. Other brands are very protective of a strong set of associations. Kingsford Charcoal, for instance, has stuck to charcoal and products directly related to charcoal cooking.
Market scope refers to the stretch of the brand across markets. This stretch can be horizontal (as with 3M in the consumer and industrial markets) or vertical (3M participating in both value and premium markets). Some brands, such as IBM, Coke, and Pringles, use the same identity across a broad set of markets. Other situations, though, require multiple brand identities or multiple brands. For example, the GE brand needs different associations in the context of jet engines than it does in the context of appliances.
The challenge in managing a brand's product and market scope is to allow enough flexibility to succeed in diverse product markets while still capturing cross-market and cross-product synergies. A rigid, lockstep brand strategy across product markets risks handicapping a brand facing vigorous, less-fettered competitors. On the other hand, brand anarchy will create inefficient and ineffective marketing efforts. A variety of approaches, detailed in Chapters 2 and 4, can address these challenges.
Complex brand architectures
Whereas the classic brand manager rarely dealt with extensions and subbrands, a brand leadership manager requires the flexibility of complex brand architectures. The need to stretch brands and fully leverage their strength has led to the introduction of endorsed brands (such as Post-its by 3M, Hamburger Helper by Betty Crocker, and Courtyard by Marriott) and subbrands (such as Campbell's Chunky, Wells Fargo Express, and Hewlett-Packard's LaserJet) to represent different product markets, and sometimes an organizational brand as well. Chapters 4 and 5 examine brand architecture structures, concepts, and tools.
The classic P&G brand management system encouraged the existence of competing brands within categories -- such as Pantene, Head & Shoulders, Pert, and Vidal Sassoon in hair care -- because different market segments were covered and competition within the organization was thought to be healthy. Two forces, however, have convinced many firms to consider managing product categories (that is, groupings of brands) instead of a portfolio of individual brands.
First, because retailers of consumer products have harnessed information technology and databases to manage categories as their unit of analysis, they expect their suppliers to also bring a category perspective to the table. In fact, some multicontinent retailers are demanding one single, worldwide contact person for a category, believing that a country representative cannot see enough of the big picture to help the retailer capture the synergies across countries.
Second, in the face of an increasingly cluttered market, sister brands within a category find it difficult to remain distinct, with market confusion, cannibalization, and inefficient communication as the all-too-common results. Witness the confused positioning overlap that now exists in the General Motors family of brands. When categories of brands are managed, clarity and efficiency are easier to attain. In addition, important resource-allocation decisions involving communication budgets and product innovations can be made more dispassionately and strategically, because the profit-generating brand no longer automatically controls the resources.
Under the new model, the brand manager's focus expands from a single brand to a product category. The goal is to make the brands within a category or business unit work together to provide the most collective impact and the strongest synergies. Thus, printer brands at HP, cereal brands at General Mills, or hair care brands at P&G need to be managed as a team to maximize operational efficiency and marketing effectiveness.
Category or business unit brand management can improve profitability and strategic health by addressing some cross-brand issues. What brand identities and positions will result in the most coherent and least redundant brand system? Is there a broader vision driven by consumer and channel needs that can provide a breakthrough opportunity? Are there sourcing and logistical opportunities within the set of brands involved in the category? How can R&D successes be best used across the brands in the category?
Multinational brand management in the classic model meant an autonomous brand manager in each country. As the task of competing successfully in the global marketplace has changed, this perspective has increasingly shown itself to be inadequate. As a result, more firms are experimenting with organizational structures that support cohesive global business strategies which involve sourcing, manufacturing, and R&D as well as branding.
The brand leadership paradigm has a global perspective. Thus a key goal is to manage the brand across markets and countries in order to gain synergies, efficiencies, and strategic coherence. This perspective adds another level of complexity -- Which elements of the brand strategy are to be common globally and which are to be adapted to local markets? Implementing the strategy involves coordination across more people and organizations. Moreover, developing the capability to gain insights and build best practices throughout the world can be difficult. The wide range of organizational structures and systems used to manage brands over countries will be discussed in Chapter 10.
Communication team leader
The classic brand manager often just acted as the coordinator and scheduler of tactical communication programs. Further, the programs were simpler to manage because mass media could be employed. Peter Sealey, an adjunct professor at UC Berkeley, has noted that in 1965 a P&G product manager could reach 80 percent of eighteen- to forty-nine-year-old women with three 60-second commercials. Today, that manager would require ninety-seven prime-time commercials to achieve the same result. Media and market fragmentation has made the communication task very different.
In the brand leadership model, the brand manager needs to be a strategist and communications team leader directing the use of a wide assortment of vehicles, including sponsorships, the Web, direct marketing, publicity, and promotions. This array of options raises two challenges: how to break out of the box to access effective media options, and how to coordinate messages across media that are managed by different organizations and individuals (each with separate perspectives and goals). Addressing both challenges involves generating effective brand identities and creating organizations that are suited to brand management in a complex environment.
Furthermore, rather than delegating strategy, the brand manager must be the owner of the strategy -- guiding the total communication effort in order to achieve the strategic objectives of the brand. Like an orchestra conductor, the brand manager needs to stimulate brilliance while keeping the communication components disciplined and playing from the same sheet of music.
In Part IV of this book, a variety of case studies will show how communication strategies using a broad scope of media can be coordinated to generate synergy and efficiency as well as impact. In particular, Chapters 7 and 8 will provide a close look at two increasingly important vehicles -- sponsorship and the Web.
Internal as well as external communication
Communication in the new paradigm is likely to have an internal focus as well as the usual external focus on influencing the customer. Unless the brand strategy can communicate with and inspire the brand partners both inside and outside the organization, it will not be effective. Brand strategy should be owned by all the brand partners. Chapter 3 will present a variety of ways that a brand can be leveraged to crystallize and communicate organizational values and cultures.
From Sales to Brand Identity as the Driver of Strategy
In the brand leadership model, strategy is guided not only by short-term performance measures such as sales and profits but also by the brand identity, which clearly specifies what the brand aspires to stand for. With the identity in place, the execution can be managed so that it is on target and effective.
The development of a brand identity relies on a thorough understanding of the firm's customers, competitors, and business strategy. Customers ultimately drive brand value, and a brand strategy thus needs to be based on a powerful, disciplined segmentation strategy, as well as an in-depth knowledge of customer motivations. Competitor analysis is another key because the brand identity needs to have points of differentiation that are sustainable over time. Finally, the brand identity, as already noted, needs to reflect the business strategy and the firm's willingness to invest in the programs needed for the brand to live up to its promise to customers. Brand identity development and elaboration are examined in Chapters 2 and 3.
BRAND BUILDING PAYS OFF
Because the classic brand management model focused on short-term sales, investments in brands were easy to justify. They either delivered sales and profits or they did not. In contrast, the brand leadership paradigm focuses on building assets that will result in long-term profitability, which is often difficult or impossible to demonstrate. Brand building may require consistent reinforcement over years, and only a small portion of the payoff may occur immediately -- in fact, the building process may depress profits in the short run. Further, brand building is often done in the context of competitive and market clutter that creates measurement problems.
The brand leadership model is based on the premise that brand building not only creates assets but is necessary for the success (and often the survival) of the enterprise. The firm's highest executives must believe that building brands will result in a competitive advantage that will pay off financially.
The challenge of justifying investments to build brand assets is similar to justifying investments in any other intangible asset. Although the three most important assets in nearly every organization are people, information technology, and brands, none of these appear on the balance sheet. Quantitative measures of their effect on the organization are virtually impossible to obtain; as a result, only very crude estimates of value are available. The rationale for investment in any intangible, therefore, must rest in part on a conceptual model of the business that is often not easy to generate or defend. Without such a model, though, movement toward brand leadership is inhibited.
Later in this chapter, we will review studies showing that brand building has resulted in significant asset growth and that investments in brands affect stock return. First, however, we will contrast brand building with its strategic alternative, price competition -- because that is where the logic starts.
An alternative to price competition
Few managers would describe their business context without mentioning excess capacity and vicious price competition. Except, perhaps, for the operators of the Panama Canal, not many companies are blessed with the absence of real competitors. The following scenario is all too familiar: Pressure on prices is caused by new entrants, overcapacity, sliding sales, or retail power. Price declines, rebates, and/or promotions ensue. Competitors, especially the third- or fourth-ranked brands, respond defensively. Consumers begin to focus more on price than on quality and differentiated features. Brands start resembling commodities, and firms begin to treat them as such. Profits erode.
It does not take a strategic visionary to see that any slide toward commodity status should be resisted. The only alternative is to build brands.
The price premium paid for Morton salt (few products are more of a commodity than salt), Charles Schwab (discount brokerage services), or Saturn (subcompacts from General Motors) show that a slide into commodity status is not inevitable. In each instance, a strong brand has been able to resist pressures to compete on price alone. Another case in point is Victoria's Secret, which saw sales increase and profits skyrocket when they stopped their policy of running forty to fifty price promotions each week.
The importance of price as a driving attribute can be overestimated. Surveys show that few customers base their purchase decisions solely on price. Even customers of Boeing aircraft, with reams of quantitatively supported proposals in front of them, will, in the final analysis, turn to a subjective appraisal based on their affinity with and trust in the Boeing brand. One of Charles Schultz's Peanuts cartoons makes this point in ironic fashion. Lucy, behind what looks like a lemonade stand, has reduced the price of her psychiatric services from $5 to $1 to 25 cents. She obviously thinks that such services are bought only on price -- a funny premise in a cartoon, but not how things work in real life. Tom Peters said it well: "In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer's mind."
The Value of the Brand
The value of a brand cannot be measured precisely, but it can be estimated roughly (for example, within plus or minus 30 percent). Because of the wide margin of error, such estimates cannot be used to evaluate marketing programs, but they can show that brand assets have been created. These estimates can also provide a frame of reference when developing brand-building programs and budgets. For example, if a brand is worth $500 million, a budget of $5 million for brand building might be challenged as being too low. Similarly, if $400 million of the brand's value was in Europe and $100 million was in the United States, a decision to split the brand-building budget evenly might be questioned.
Estimating the value of a brand involves straightforward logic. First, the earnings stream of each major product market carrying the brand is identified. (For Hewlett-Packard, one product market might be the business computer market in the United States.) The earnings are then divided into those attributable (1) to the brand, (2) to fixed assets like plants and equipment, and (3) to other intangibles like people, systems, processes, or patents. The earnings attributable to the brand are capitalized, providing a value for the brand in that product market. Aggregating the various product market values provides an overall value for the brand.
The earnings attributable to fixed assets are relatively easy to estimate; they are simply a fair return (for example, 8 percent) on the value of the fixed assets. The balance of the earnings has to be divided into brand-driven earnings and earnings attributable to other intangibles. This division is made subjectively based on the judgments of knowledgeable people in the organization. One key determinant in making these judgments is the strength of the other intangibles. (For airlines, for example, the value of controlling airport gates is a significant driver of earnings.) Another key determinant is the strength of the brand in terms of its relative awareness, perceived quality, customer loyalty, and associations.
Interbrand is a firm that generates brand values using the above logic but with its own refinements. In its June 1999 study of brands with a significant market presence outside their home countries, the values of the largest global brands involved eye-opening numbers.
Sixty brands were estimated to have a value over $1 billion; the leaders were Coca-Cola at $83.8 billion and Microsoft at $56.7 billion. In many cases, the brand value was a significant percentage of the total market capitalization of the firm (even though the brand was not on all its products). Of the top fifteen brands, only General Electric had a brand value under 19 percent of the firm's market value. In contrast, nine of the top sixty brands had values that exceeded 50 percent of the whole firm's value, and BMW, Nike, Apple, and Ikea had brand-firm value ratios over 75 percent.
Among the top sixty global brands, there were some interesting patterns. All of the top ten (and nearly two-thirds of the total) were U.S. brands, a finding that reflects the size of the U.S. home market and the early global initiatives of American firms. Nearly one-fourth of the group (including four of the top ten) were in the computer or telecommunications industry; this supports the premise that brands are critical in the high-tech world despite arguments that "rational" customers buy largely on the specifications of product attributes rather than brands.
The Interbrand study rather dramatically illustrates that creating strong brands does pay off and that brands have created meaningful value. It is an important statement about the wisdom and feasibility of creating brand assets.
The Impact of Brand Building on Stock Return
Although the Interbrand study shows that brands have created value, it does not demonstrate that specific brand-building efforts result in enhanced profits or stock returns. For example, Coca-Cola's brand value may be based on its century-old heritage and customer loyalty rather than any recent brand-building effort. What evidence is there that brand building directly affects profits or stock return?
Everyone can recite anecdotes of how brands like Coke, Nike, Gap, Sony, and Dell have created and leveraged brand strength.
The book Managing Brand Equity presented four case studies that illustrate both destroying and creating brand value. The failure to support customers at WordStar (at one time the leader in word-processing software) and the loss of perceived quality at Schlitz (once a close second among U.S. beer brands) were both priced out as $1 billion brand disasters; the Datsun to Nissan name change was only somewhat less of a brand equity blunder. The creation and management of the Weight Watchers brand during the 1980s, however, was a $1 billion brand success story.
Two studies, both by Robert Jacobson (from the University of Washington) and David Aaker have gone beyond anecdotes to find causal links between brand equity and stock return. The first study is based on the EquiTrend database from Total Research, and the second is based on the Techtel database of high-technology brands.
The EquiTrend Study
Since 1989, EquiTrend has provided an annual brand power rating for 133 U.S. brands in 39 categories, based on a telephone survey of 2,000 respondents. Since 1992, the survey has increased its frequency and the number of brands covered. The key brand equity measure is perceived quality, which has been found by Total Research to be highly associated with brand-liking, trust, pride, and willingness to recommend. It is essentially the average quality rating among those who had an opinion about the brand.
The extent to which the EquiTrend brand equity measure influenced stock return was explored using data from thirty-three brands representing publicly traded firms for which the corporate brand drove a substantial amount of sales and profits. The brands were American Airlines (AMR), American Express, AT&T, Avon, Bic, Chrysler, Citicorp, Coke, Compaq, Exxon, Kodak, Ford, GTE, Goodyear, Hershey, Hilton, IBM, Kellogg, MCI, Marriott, Mattel, McDonald's, Merrill Lynch, Pepsi, Polaroid, Reebok, Rubbermaid, Sears, Texaco, United Airlines, VF, Volvo, and Wendy's. In addition to brand equity, two additional causal variables were included in the model: advertising expenditures and return on investment (ROI).