Shareholder - value - based brand strategies

Companies like Procter & Gamble, Unilever, Xerox, Heinz, Apple and Gillette possess great brands and outstanding brand management competencies, yet they have failed to generate value for shareholders in recent years. What these companies are learning is that having strong brands which consumers value is not enough. Whether strong brands create value for shareholders depends upon the economics of the markets in which they operate and the strategies managers pursue. By underestimating shareholder value dynamics, marketing managers risk misallocating resources and handicapping the firm’s opportunities to move into new markets and find new, more profitable, growth opportunities. This paper looks at how brands contribute to the firm’s strategy and how brand planning needs to be geared to market economics and management’s central objective of creating shareholder value. brands that customers wanted. Unfortunately, their low prices and excessive investment levels failed to generate sufficient cash to build businesses that were viable long term. Recently many dot.com companies followed this pattern in even more exaggerated terms, spending 80 per cent of their capital on advertising and selling at prices below their costs. Hardly surprisingly, this type of brand development eventually led to a massive shake-out in the sector. To understand how brands can add value one needs to start with a model of how the firm creates value. There is now wide acceptance for what strategists call the ‘resourcebased theory of the firm’. This represents something of a shift from the marketing-based idea of the firm popularised by Theodore Levitt in his famous ‘marketing myopia’ article. The resource-based theory proposes that defining a firm in terms of its assets and core capabilities offers a more durable basis for strategy than a definition based upon the customer needs the business seeks to satisfy. In other words, sustained success depends upon more than merely identifying market opportunities; more critically it depends upon having the special capabilities to deliver at lower cost or higher quality than the competition. Figure 1 is a modified representation of the resource-based view of the firm. Starting from the top, the objective of strategy is to create shareholder value, as measured by rising share prices or dividends. In competitive markets the key to creating shareholder value is possessing a differential advantage — giving customers superior value through offers that are perceived as either superior in quality or lower in spicuous in their creation of great brands. Marketers need a more sophisticated understanding of when brand-building investments make sense. The basic rule is that brand investments pay off when they generate returns that exceed the company’s cost of capital. The P&G share price fell when investors believed that management was breaking this principle. Fundamentally, as is shown below, to generate an adequate return, brand investments must increase the level of the firm’s cash flow and accelerate the speed of cash flow, extend its duration or reduce the vulnerability of these flows. The most important drivers of cash flow are whether the brand can accelerate growth or enhance prices. If brands cannot produce these effects, management is better off focusing away from brands to other sources of value creation.