Brands make up a large part of the value of many successful companies. Yet with a few honorable exceptions, managing brands remains more an art than a science. To be sure, the instincts and judgment of experienced managers have an important part to play, yet such things are hard to communicate and discuss. As a result, brand management decisions often absorb a lot of energy without producing much in the way of insight.

But what if the instinctive wisdom of seasoned marketers could be articulated and quantified—if, in other words, art could be turned into science? We sought to do just that by marrying classic marketing techniques with two approaches: the resource-based view of the firm,¹ a concept that treats firms as collections of strategic resources, and business dynamics, a methodology that takes a systemic view of management issues.

Business dynamics allows managers to document com-plex systems and model their dynamic behavior using special software. Armed with the resulting models, managers can determine which levers to pull to modify a system’s behavior. In some cases, the results have confirmed managers’ instincts; in others, they have yielded surprising insights, such as the futility of copying best practice. Their most potent effect has been to open up crucial brand management questions to rational, informed, and constructive top management debate.

The brand management challenge

Consider the following situation. One of the most profitable products of a European packaged goods company was gradually losing its market dominance, despite heavy spending on a new advertising campaign. The campaign was a popular success, and its slogan became a catchphrase. The product itself, however, was stuck between a fashionable, premium-priced alternative and inexpensive own-label competition. While it was maintaining its position in regions where sales had traditionally been strong and holding up reasonably well in weak areas, its performance was declining rapidly in areas of medium strength.

The board was locked in fervent debate about how to respond. Some argued it was vital to run more TV advertising. Others believed the answer lay in promotional activity. A third group maintained that the best strategy was to cut back on investment and either milk the brand for cash or sell it off. The debate was vigorous, but unproductive. All argued strongly for their convictions, but they had no objective way of telling which of the options would create the most shareholder value.

Brands matter. Companies that are adept at developing and managing them reap the rewards

Such a situation is far from rare. Brands matter. Across a wide range of industries, companies that are adept at developing and managing brands reap the rewards. To the traditional packaged goods giants such as Procter & Gamble have been added a new breed of successful branders, from clothing retailer Benetton to British Airways, from insurer Direct Line to Disney, and from fashion designer Versace to Virgin. These companies have been extraordinarily successful at using their brand assets to strengthen their core business and create a platform for expansion.

Strong branding can generate enormous shareholder value. Few would be surprised that a large share of Coca-Cola’s market capitalization is accounted for by its intangible assets, mainly its brand. But few realize quite how much. On December 31, 1997, Coca-Cola’s market capitalization was $165 billion, while its book value excluding goodwill was $16.2 billion—less than 10 percent of the total. That means that as much as 90 percent of Coca-Cola’s value is intangible. Much (but not all) of that intangible value derives from the brand.

Even at companies where marketing would not immediately be recognized as being at the heart of the business, brands are increasingly creating value. KeyCorp, one of the largest retail financial services companies in the United States, has seen its stock market value double in the past two years. Part of the reason for this growth is that it offers a common set of products and services nationwide, and positions itself clearly with an umbrella brand, Key: KeyBank, KeyCenters, Key Money Management Account.

It is hardly surprising, then, that questions of brand management are often on the board agenda. In consolidating industries such as financial services, merging companies are wondering how to manage portfolios of overlapping brands. In deregulating industries such as telecommunications, electricity, and gas, companies face the challenge of deciding how to invest in building consumer brands. In fast-changing industries such as electronics, companies have difficult tradeoffs to make: should they invest in new and improved product features, or spend on marketing efforts such as advertising and in-store promotions?

Many chief executives wrestling with branding issues have found the experience frustrating. Accustomed to talking about profit, value creation, and expected returns on investment, they suddenly have to grapple with brand image scores, advertising awareness, and repeat purchase levels. They find themselves being asked to make major decisions without a clear understanding of their effects on earnings streams. The results can be disastrous: underinvestment in brands, cutbacks in advertising just as the bottom-line impact is making itself felt, and misjudgment in setting priorities within the marketing budget.

A framework for valuing brands

Executives seeking to meet the challenge of managing brands head on should consider a new approach: dynamic brand value management. DBVM sets out to identify, quantify, and manage the complex system that under-pins a brand’s value. It adds to existing marketing techniques key concepts from two methodologies: the resource-based view of the firm and business dynamics.

DBVM provides a framework for making fact-based decisions about brand value management. It rests on three core ideas:

• A brand’s value equals the net present value of its future cashflows, which are determined by future sales volumes and prices and by the value of the option to create brand extensions (new variants on the basic brand that tap new market segments). All key branding decisions can be assessed in terms of their impact on future cashflows, which means there is a common language for boardroom discussions.
• This value depends on the health of the brand’s key resources. The concept of resources is key to the DBVM framework: resources are the factors that influence brand value. They may be hard, tangible items such as product features or the number of loyal customers, sales outlets, and staff, or soft, intangible factors such as retail display quality, product quality, and staff morale. Some resources, such as retail display quality or customer loyalty, are outside management’s direct control; it can only influence them.
• These resources evolve and interact to create a complex system containing time delays and feedback loops. A virtuous reinforcing loop is created when a product sells well, is taken up by more retailers, and then sells even better; however, the strength of this reinforcing loop diminishes as retail availability approaches saturation. Similarly, word of mouth that a brand is "trendy" may boost awareness and purchase, but in time, as the brand loses its trendiness, rejection may set in.

The application of these ideas makes it possible to quantify the value of alternative strategies (see text panel "Applying DBVM"). Companies using DBVM have found that the process of describing and modeling a brand’s resource system brings to the surface many assumptions that would otherwise have remained hidden. After discovering DBVM, even experienced managers have learned a lot about their business and found it easier to make tough decisions about their brands.

How DBVM improves decision making

Let’s return to the European packaged goods company. Seeking the best response to shrinking market share, managers built a business dynamics model of their brand’s resource system, identifying all the resources involved and quantifying their interactions. In so doing, they made an important discovery. In regions where sales had traditionally been strong, advertising prompted only 20 percent of sales. The remaining 80 percent depended on the availability of the product in stores, the visibility created by high levels of product consumption, and consumer recommendations.

Together, these factors had created a virtuous reinforcing feedback loop (Exhibit 1). High retail availability encouraged trial; high trial maintained the brand’s fashionable image and drove repeat purchase; high repeat purchase enhanced the proposition for retailers and sustained high availability. In the company’s strong sales areas, this virtuous circle required only modest spending on advertising and promotion to keep it spinning. These findings renewed the company’s confidence in its current strategy.

In regions with moderate sales, on the other hand, the extent of free publicity achieved as a result of availability, consumption, and recommendation was much lower, and so the level of advertising support needed to maintain the brand’s strength was much higher. Further analysis of the DBVM model suggested that spending money on prominent displays in key stores would make the brand more visible and help generate the desired word of mouth. Consequently, the most appropriate strategy in these regions was to raise spending on advertising and promotion.

Meanwhile, in regions with weak sales, the brand was struggling against a reinforcing feedback loop that was the opposite of the one before: a vicious circle (Exhibit 2). Although a small consumer base remained loyal, most consumers disliked what they saw as a mediocre brand. The reason? The brand was not stocked in popular outlets and was bought by only a few consumers, most of them older than the typical purchaser in other regions.

The model was used again to predict the likely returns generated by different approaches. It indicated that what might seem the obvious strategy—spending heavily on advertising that stressed the brand’s fashionability and ubiquity—would not change prevailing consumer attitudes. The brand had reached a point where more advertising might be counterproductive. In weak regions, most value would be created by a milking strategy: raising prices and cutting spending.

The DBVM model helped managers understand that brand-building initiatives such as changes in advertising spend, sales effort, pricing, and promotions, which they might reasonably have assumed would have similar effects from one region to the next, in fact would not. Moreover, the effectiveness of each lever would change as brand strength changed, so that what worked in one way in a given region at a particular moment would work differently at another time.

Armed with the findings from the DBVM model, the chief executive revolutionized the company’s marketing strategy. The brand in question was reaffirmed as central to the portfolio, but strategy and investment were differentiated by region. The previously divided management team wholeheartedly endorsed the new approach. To bring it home, performance measures were revamped. The old milestones of market share and profitability had functioned as "lag" indicators, often revealing problems when it was too late for management to respond effectively. The new measures focused instead on the level of the resources that had been identified as "lead" indicators of future performance, such as retail availability and word of mouth.

Surprising insights

Executives quite naturally make different brand management decisions when they can see the impact of these decisions on earnings. DBVM enables them to do just that by quantifying the drivers of brand value and structuring them within a decision framework. Some of the insights it yields, however, are far from intuitive:

It can be a big mistake to take what works for one unique resource system and apply it to another

Copying best practice doesn’t always work. Many brand owners look to brand leaders for guidance on how best to manage their brands; some packaged goods companies try to model themselves on Procter & Gamble, for instance. In reality, brands have different market positions and belong to organizations that have different skills. It can be a big mistake to take what works for one unique resource system and apply it to another. DBVM helps managers sort out which practices are going to work best in specific situations and allows them to simulate the impact of different approaches in a model instead of risking expensive mistakes in a real-life experiment.

Soft variables are critical, and should be quantified. Drivers of brand performance such as salesforce skill, retail distribution coverage, and consumer perception begin moving in new directions long before classic financial measures, and are much better strategic indicators. Yet it is still the "hard" numbers that tend to command most credibility in the boardroom. Marketers have responded by taking sophisticated measurements of a wide range of soft variables, but rarely address the problem of how to make them relevant to managers outside the marketing function.

DBVM succeeds in establishing credible mathematical links between soft variables and hard figures. It identifies which soft variables are the best lead indicators of financial performance, identifies the direction they are moving in, and quantifies the rate at which they are changing with sufficient accuracy for the results to be useful in strategy formulation and review. The absolute level of salesforce skill may be a rather abstract number, for example, but the fact that it has fallen for three straight quarters is a valuable piece of information on which management can act.

A brand has value, but not just one value. Putting a value on a brand perplexes many managers. The earnings stream of a brand is influenced by the way it is managed, as well as by the strength of competing brands. A brand will also be worth different amounts to different owners, depending on the state of their resource systems and on how well the brand fits with the owner’s resources. DBVM can be used to produce sound, detailed estimates of future earnings streams to yield valuations of brands under different strategic and ownership scenarios.

Short-term measures can destroy long-term value. Many brand-owning organizations have a short-term culture. This month’s sales figures are what matters, marketing directors favor initiatives that get results fast, and the average brand manager has less than two years to make a mark. Yet this month’s sales figures incorporate the ripple effects of initiatives going back years. What seems like a good idea at the time often turns out to destroy value in the end. Disentangling the historical chain of cause and effect may not be worth the effort, but a DBVM approach at least allows brand managers to look forward, simulating initiatives and isolating their impact many years from now. This allows them to make and defend informed decisions that maximize long-term value, not just this quarter’s sales.

What this means for the CEO

Chief executives who manage their brands dynamically do three things differently: they think differently about what a brand is and how it works; they pay attention to different types of information; and they set strategy in a different way (Exhibit 3).

Different mindset

Chief executives with a DBVM outlook regard a brand not as a name, but almost as a living entity. They see a brand as a system of interconnecting unstable resources, all growing or declining at different rates, but which must nevertheless be managed (or influenced) as a whole.

These leaders understand that there must be a tight fit between a brand’s strategy, its resources, and the way it is presented in the market. When running a store promotion, say, they will not only ensure that the graphics relate to the visuals in the TV ads, but also check that enough products can be manufactured and distributed to avoid disappointing consumers, and make sure there is enough service capacity to handle the increase in demand.

The new chief executive of two recently merged banks will consolidate their names into a single brand only if they are going to adopt the same set of products and services—and not before both are well on the way to building the necessary resources. Customers expect a single name to be backed by a uniform set of resources, and are likely to be confused if, say, a recently rebranded branch fails to offer them the service to which they are accustomed. The result could be disillusionment and negative word of mouth, which any executive will go to great lengths to avoid.

Chief executives who pursue DBVM understand that everyone in their company has a role to play in building brand value, from the production worker who affects product quality to the front-line salesperson who influences customer perception. They realize that implementing a brand strategy calls for shared values throughout the company, because each small decision by a member of staff influences the brand resource system and hence the earnings stream. They therefore use the dynamic resource model to communicate their strategy to everyone in the company so that all actions influencing the brand are made in the conscious effort to improve its value.

Different information

Chief executives with a DBVM mindset also pay attention to different types of information. They realize that it is possible to understand and measure how brand value evolves, and insist that their marketers justify their plans with financial rigor.

Instead of relying on financial performance measures, they track the lead indicators appropriate to their specific situation. They understand, for instance, that whereas the number of new loyal customers is critical for a recently launched brand, it is the number of loyal customers that are lost that is the telling indicator for an established brand. Where the lead indicators are soft variables such as customer satisfaction or salesforce skill, chief executives insist that they be quantified as accurately as possible.

An asset management firm contemplating a name change, say, should not confine itself to discussing how consumers or pension fund consultants might react. Rather, it should conduct quantitative market research to ascertain how stakeholders perceive asset management brands and what impact a name change might have. The idea is to make measurable what has never before been measured.

Understanding your own resource system can help you to grow; understanding your competitor’s helps you to survive

Naturally, chief executives pursuing DBVM also look at their competitors in the same way. Understanding your own resource system can help you to grow; understanding your competitor’s helps you to survive. You can spot where rivalry will occur, determine how to handle it, and discover how best to undermine rival resource systems.

Different approach to strategy

Chief executives convinced of the power of DBVM approach strategy in a different way. Instead of refereeing long qualitative arguments about what to do next, they ensure that knowledge is captured and quantified as far as possible. They also ask their management teams to develop scenarios that build on their assumptions about the health of their resource systems, competitive activity, and the speed of market change. Using a computerized tool, they can then run multiple simulations of the future instead of extrapolating from the past. As a result, these chief executives can evaluate the impact of various strategies on their brand’s earning stream, and confidently select the most appropriate option.

Dynamic brand value management marks a step in brand management’s transition from an art to a science. For the first time, chief executives can talk to shareholders and investors about the health and long-term outlook of their brand in an objective, fact-based manner. Leaders in any industry who want to make better-informed decisions about brand strategy will find DBVM a vital tool.

Applying DBVM

The DBVM approach can be applied to any brand regardless of industry. It consists of four steps:

Identify and quantify the resources influencing brand value. These can be tangible, such as the number of distribution outlets where a brand is present, or intangible, such as the level of skill of the marketing department. Their importance changes as they are affected by other resources and by management actions; customer loyalty may dwindle because consumer needs are shifting away from the benefits offered by a given product, for instance. We can think of these resources as stocks that are built up or depleted over time.

Understand and map how the resources interact with each other. The number of stores that decide to stock a brand, for instance, is driven by the size and skills of the salesforce as well as by the number of consumers of the product, which in turn is affected by the number of stores stocking the brand. Exhibit 4 shows a simplified resource map of a reinforcing loop.

By making a distinction between stocks (or resources) and flows, this approach imposes a degree of rigor that is helpful in understanding the dynamic behavior of a system. It also distinguishes between what builds up and what depletes a resource, and thus indicates which lead indicators to track or management levers to pull. For a new brand, for instance, it is important to track the number of stores that decide to sell the product, while for a mature brand, it is more important to look at the number of stores delisting the product. The relevant management levers to pull might be TV advertising in the first case and salesforce effort in the second.

Build a business dynamics computer model that lays out the critical resources and the key relationships between them, and uses market data and interview results to quantify these linkages. Usually, this calls for an iterative process that progresses from a simple qualitative model to a more complex quantitative model. It is possible to build simple models using spreadsheets, but this approach quickly becomes unwieldy. Specialist software makes the process of building a business dynamics model much more straightforward.

Use the model to carry out simulations in order to understand and quantify the impact of management levers and assess how various brand strategies might affect short- and long-term earnings streams. Exhibit 5 illustrates a case in which a company assessed four strategies for a particular brand. The simulation produced an earnings stream for each strategy and revealed the impact of different management actions. The company had originally assumed that the time had come to start managing the brand for cash by cutting back on advertising (strategy 3), but management realized that selective investment in advertising and people would generate more value in the long run (strategy 4). They also recognized that the turnaround would call for commitment, since cashflow would turn steeply negative for the first year or so.

While some of the benefits of DBVM derive simply from the identification and mapping of the resources affecting a brand, the use of computer simulation is critical. By using simulation models, decision takers transfer the burden of the arithmetic to a computer, which can do it much better than they can. They then focus on three things that they can do much better than a computer: setting the assumptions that determine what information goes into the model; defining the decision rules that the model uses to process the information; and interpreting the results produced by the model.

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