Brands and brand equity: definition and management

This article assumes that brands should be managed as valuable, long-term corporate assets. It is proposed that for a true brand asset mindset to be achieved, the relationship between brand loyalty and brand value needs to be recognised within the management accounting system. It is also suggested that strategic brand management is achieved by having a multi-disciplinary focus, which is facilitated by a common vocabulary. This article seeks to establish the relationships between the constructs and concepts of branding, and to provide a framework and vocabulary that aids effective communication between the functions of accounting and marketing. Performance measures for brand management are also considered, and a model for the management of brand equity is provided. Very simply, brand description (or identity or image) is tailored to the needs and wants of a target market using the marketing mix of product, price, place, and promotion. The success or otherwise of this process determines brand strength or the degree of brand loyalty. A brand's value is determined by the degree of brand loyalty, as this implies a guarantee of future cash flows. Feldwick considered that using the term brand equity creates the illusion that an operational relationship exists between brand description, brand strength and brand value that cannot be demonstrated to operate in practice. This is not surprising, given that brand description and brand strength are, broadly speaking, within the remit of marketers and brand value has been considered largely an accounting issue. However, for brands to be managed strategically as long-term assets, the relationship outlined in Figure 1 needs to be operational within the management accounting system. The efforts of managers of brands could be reviewed and assessed by the measurement of brand strength and brand value, and brand strategy modified accordingly. Whilst not a simple process, the measurement of outcomes is useful as part of a range of diagnostic tools for management. This is further explored in the summary discussion. Whilst there remains a diversity of opinion on the definition and basis of brand equity, most approaches consider brand equity to be a strategic issue, albeit often implicitly. The following discussion explores the range of interpretations of brand equity, showing how they relate to Feldwick's (1996) classification. Ambler and Styles (1996) suggest that managers of brands choose between taking profits today or storing them for the future, with brand equity being the `̀ . . . store of profits to be realised at a later date.'' Their definition follows Srivastava and Shocker (1991) with brand equity suggested as; . . . the aggregation of all accumulated attitudes and behavior patterns in the extended minds of consumers, distribution channels and influence agents, which will enhance future profits and long term cash flow. This definition of brand equity distinguishes the brand asset from its valuation, and falls into Feldwick's (1996) brand strength category of brand equity. This approach is intrinsically strategic in nature, with the emphasis away from short-term profits. Davis (1995) also emphasises the strategic importance of brand equity when he defines brand value (one form of brand equity) as `̀ . . . the potential strategic contributions and benefits that a brand can make to a company.'' In this definition, brand value is the resultant form of brand equity in Figure 1, or the outcome of consumer-based brand equity. Keller (1993) also takes the consumer-based brand strength approach to brand equity, suggesting that brand equity represents a condition in which the consumer is familiar with the brand and recalls some favourable, strong and unique brand associations. Hence, there is a differential effect of brand knowledge on consumer response to the marketing of a brand. This approach is aligned to the relationship described in Figure 1, where brand strength is a function of brand description. Winters (1991) relates brand equity to added value by suggesting that brand equity involves the value added to a product by consumers' associations and perceptions of a particular brand name. It is unclear in what way added value is being used, but brand equity fits the categories of brand description and brand strength as outlined above. Leuthesser (1988) offers a broad definition of brand equity as: the set of associations and behaviour on the part of a brand's customers, channel members and parent corporation that permits the brand to earn greater volume or greater margins than it could without the brand name. This definition covers Feldwick's classifications of brand description and brand strength implying a similar relationship to that outlined in Figure 1. The key difference to Figure 1 is that the outcome of brand strength is not specified as brand value, but implies market share, and profit as outcomes. Marketers tend to describe, rather than ascribe a figure to, the outcomes of brand strength. Pitta and Katsanis (1995) suggest that brand equity increases the probability of brand choice, leads to brand loyalty and `̀ insulates the brand from a measure of competitive threats.'' Aaker (1991) suggests that strong brands will usually provide higher profit margins and better access to distribution channels, as well as providing a broad platform for product line extensions. Brand extension[1] is a commonly cited advantage of high brand equity, with Dacin and Smith (1994) and Keller and Aaker (1992) suggesting that successful brand extensions can also build brand equity. Loken and John (1993) and Aaker (1993) advise caution in that poor brand extensions can erode brand equity. Figure 1 The brand equity chain [ 663 ] Lisa Wood Brands and brand equity: definition and management Management Decision 38/9 [2000] 662±669 Farquhar (1989) suggests a relationship between high brand equity and market power asserting that: The competitive advantage of firms that have brands with high equity includes the opportunity for successful extensions, resilience against competitors' promotional pressures, and creation of barriers to competitive entry. This relationship is summarised in Figure 2. Figure 2 indicates that there can be more than one outcome determined by brand strength apart from brand value. It should be noted that it is argued by Wood (1999) that brand value measurements could be used as an indicator of market power. Achieving a high degree of brand strength may be considered an important objective for managers of brands. If we accept that the relationships highlighted in Figures 1 and 2 are something that we should be aiming for, then it is logical to focus our attention on optimising brand description. This requires a rich understanding of the brand construct itself. Yet, despite an abundance of literature, the definitive brand construct has yet to be produced. Subsequent discussion explores the brand construct itself, and highlights the specific relationship between brands and added value. This relationship is considered to be key to the variety of approaches to brand definition within marketing, and is currently an area of incompatibility between marketing and accounting.