ISB Updates
Dean's Lecture on "Driving Profitable Growth via Branding & Marketing Accountability" at the CEO Forum of FTAPCCI
Professor Rajendra Srivastava, Dean, Indian School of Business addressed the CEO Forum of FTAPCCI (Federation of Telangana and Andhra Pradesh Chambers of Commerce and Industry) on July 26, 2018 at Taj Deccan, Hyderabad.
Summary of his address:
Dean Srivastava began by dispelling the myth of equating branding with advertising.
Commodity markets are characterized by free information flow, cut-throat competition (where vendors have copied all product features so that there is no product quality difference), and economically rational customers who are expected to always compare prices. Brands de-commoditize product-markets by creating structural barriers to competition. These barriers create imperfect markets through differentiation and customer loyalty. Having to compete on price is implicitly accepting the defeat that the firm can’t innovate and differentiate.
Brands are multi-faceted and their strength may lie in product design and innovation, the efficiency and effectiveness of the supply chain – or in the customer connect via experience, engagement and emotional attachment. Hence, there is a need to build Brands through multi process excellence rather than choosing any one or two generic strategies like cost leadership, or supply chain efficiency.
Explaining the importance of branding, Dean Srivastava quoted the example of global brand Apple, which helped the firm enhance profitability, provided a platform for global growth, helped the firm persist in challenging times, and offered protection against competition.
If one compares Apple vs. Google, on all short-term performance metrics such as return on assets Apple is doing very well. But, on long-term valuation metrics, such as price to earnings or market to book ratios, investors repose confidence in Google rather than Apple. The reason might be that the vast majority of Apple’s market value is captured by the iPhone - hence Apple is like a one-trick pony which can make it a risky bet subject to digital disruption by rampant competition. A broader portfolio of revenue and cashflow sources would enhance investor confidence.
The audiences were also sensitized about the importance of intangible asset – branding – as nearly 70-plus percent of the value of a firm resides in off-balance assets such as customers, brands, human capital, intellectual property and distribution networks. These intangible assets are not reflected on accounting balance sheets. This fact is re-established if one looks at market price to book ratio of S&P 500 or Indian BSE or NYSE (Avg PBV of BSE = 3.60; NYSE = 3.46 as on 5th Dec 2017). According to some estimations Brand Value as % of Firm Value varies for FMCG at 62%, durables at 53%, services at 43% and for industrial goods at roughly 18%.
Managers also need to understand the importance of price-premiums delivered by brands. Given similar manufacturing and overhead cost structure, a marginal price premium earned by brands will have a significant impact on overall profits. For example, a 5% price premium results in a 10 percent net-margin product market category and will further result in a 50% percent increase in profitability.
There are several ways to build brands. Typically customer preferences for products and services brands are a combination of function + emotion + aspiration. Through reverse engineering, anybody could copy easily the functional aspects (e.g., product features) of a brand, but it’s hard to copy the emotional and aspiration dimensions.
Ultimately, brands are about trust. Tanishq by certifying product quality and offering money back guarantees across their retail network, created trust among younger buyers. This trust was manifested earlier in jewelers where grandmothers, mothers and daughters shopped at the same place to avoid being taken for a ride. These jewelers also not only sold but bought back jewelry. Brands can also be built on unique competencies demonstrated by companies across product markets. Brand Honda was built on a platform of reliability and quality of small engine technology. The food snack brand Balaji is built on providing higher distribution margins for shelf space to kirana store owners. While Balaji never advertises, the kirana stores provide visibility at the point of purchase in exchange for more frequent deliveries and inventory financing.
Some brands derive higher value by having an embedded ingredient brand like Bosch audio systems did with Mercedes Benz cars. Like-wise Teflon extracted value in paints by enabling their direct customers such as Asian Paints make products that were easier to wash clean and that were more scratch resistant. Henry Ford’s Model T was built on efficiency achieved out of assembly line production; as he could build a car in 93 minutes compared to 12.5 hours taken by his competitors.
It is important to align brand promises made to customers with business process to ensure delivery of promised customer benefits. Henry Ford’s innovation in assembly line production helped reduce production time 8-fold, thereby enabling Ford Model-T to elbow out competition based on low prices. South West Airlines orchestrated all their back-end processes to offer the brand promise of convenience and low price. Dell excelled in managing inventory by configuring products using analytics by having just 5 days of inventory while the closest competitor held inventory of 55 days. So the corporate brand DNA of each firm varies. For some pharma companies the brand DNA is R&D, for firms like FedEx the brand DNA is efficiency and reliable delivery, the brand DNA of Coke is its image, while few firms like Microsoft, Samsung and Apple are built on more than two dimensions, hence multi-process excellence is the need of the day.
Commenting on Marketing Accountability dimension, Dean Srivastava said, “Managing brands on short term accounting metrics is passé. It is akin to driving a car looking at the rear-view mirror! Customer, Employee, Owner (CEO) dimensions need to be aligned to build a brand and the most important ingredient to deliver the brand promise is employee engagement. One has to figure out what the customer value proposition is, the segment being served, and how to extract value from the segment.”
Summary of his address:
Dean Srivastava began by dispelling the myth of equating branding with advertising.
Commodity markets are characterized by free information flow, cut-throat competition (where vendors have copied all product features so that there is no product quality difference), and economically rational customers who are expected to always compare prices. Brands de-commoditize product-markets by creating structural barriers to competition. These barriers create imperfect markets through differentiation and customer loyalty. Having to compete on price is implicitly accepting the defeat that the firm can’t innovate and differentiate.
Brands are multi-faceted and their strength may lie in product design and innovation, the efficiency and effectiveness of the supply chain – or in the customer connect via experience, engagement and emotional attachment. Hence, there is a need to build Brands through multi process excellence rather than choosing any one or two generic strategies like cost leadership, or supply chain efficiency.
Explaining the importance of branding, Dean Srivastava quoted the example of global brand Apple, which helped the firm enhance profitability, provided a platform for global growth, helped the firm persist in challenging times, and offered protection against competition.
If one compares Apple vs. Google, on all short-term performance metrics such as return on assets Apple is doing very well. But, on long-term valuation metrics, such as price to earnings or market to book ratios, investors repose confidence in Google rather than Apple. The reason might be that the vast majority of Apple’s market value is captured by the iPhone - hence Apple is like a one-trick pony which can make it a risky bet subject to digital disruption by rampant competition. A broader portfolio of revenue and cashflow sources would enhance investor confidence.
The audiences were also sensitized about the importance of intangible asset – branding – as nearly 70-plus percent of the value of a firm resides in off-balance assets such as customers, brands, human capital, intellectual property and distribution networks. These intangible assets are not reflected on accounting balance sheets. This fact is re-established if one looks at market price to book ratio of S&P 500 or Indian BSE or NYSE (Avg PBV of BSE = 3.60; NYSE = 3.46 as on 5th Dec 2017). According to some estimations Brand Value as % of Firm Value varies for FMCG at 62%, durables at 53%, services at 43% and for industrial goods at roughly 18%.
Managers also need to understand the importance of price-premiums delivered by brands. Given similar manufacturing and overhead cost structure, a marginal price premium earned by brands will have a significant impact on overall profits. For example, a 5% price premium results in a 10 percent net-margin product market category and will further result in a 50% percent increase in profitability.
There are several ways to build brands. Typically customer preferences for products and services brands are a combination of function + emotion + aspiration. Through reverse engineering, anybody could copy easily the functional aspects (e.g., product features) of a brand, but it’s hard to copy the emotional and aspiration dimensions.
Ultimately, brands are about trust. Tanishq by certifying product quality and offering money back guarantees across their retail network, created trust among younger buyers. This trust was manifested earlier in jewelers where grandmothers, mothers and daughters shopped at the same place to avoid being taken for a ride. These jewelers also not only sold but bought back jewelry. Brands can also be built on unique competencies demonstrated by companies across product markets. Brand Honda was built on a platform of reliability and quality of small engine technology. The food snack brand Balaji is built on providing higher distribution margins for shelf space to kirana store owners. While Balaji never advertises, the kirana stores provide visibility at the point of purchase in exchange for more frequent deliveries and inventory financing.
Some brands derive higher value by having an embedded ingredient brand like Bosch audio systems did with Mercedes Benz cars. Like-wise Teflon extracted value in paints by enabling their direct customers such as Asian Paints make products that were easier to wash clean and that were more scratch resistant. Henry Ford’s Model T was built on efficiency achieved out of assembly line production; as he could build a car in 93 minutes compared to 12.5 hours taken by his competitors.
It is important to align brand promises made to customers with business process to ensure delivery of promised customer benefits. Henry Ford’s innovation in assembly line production helped reduce production time 8-fold, thereby enabling Ford Model-T to elbow out competition based on low prices. South West Airlines orchestrated all their back-end processes to offer the brand promise of convenience and low price. Dell excelled in managing inventory by configuring products using analytics by having just 5 days of inventory while the closest competitor held inventory of 55 days. So the corporate brand DNA of each firm varies. For some pharma companies the brand DNA is R&D, for firms like FedEx the brand DNA is efficiency and reliable delivery, the brand DNA of Coke is its image, while few firms like Microsoft, Samsung and Apple are built on more than two dimensions, hence multi-process excellence is the need of the day.
Commenting on Marketing Accountability dimension, Dean Srivastava said, “Managing brands on short term accounting metrics is passé. It is akin to driving a car looking at the rear-view mirror! Customer, Employee, Owner (CEO) dimensions need to be aligned to build a brand and the most important ingredient to deliver the brand promise is employee engagement. One has to figure out what the customer value proposition is, the segment being served, and how to extract value from the segment.”
