What is the business impact of strong brands? Why are strong brands so important?
Brands deliver the following key benefits to organizations:
- Increased revenues and market share
- Decreased price sensitivity (or the ability to charge price premiums to consumers and the trade)
- Increased customer loyalty
- For manufacturers, additional leverage over retailers
- Increased profitability
- Increased stock price and shareholder value
- Increased clarity of vision
- Increased ability to mobilize an organization’s people and focus its activities
- Ability to attract and retain high quality employees
- A strong, well-positioned brand extends the life of your organization indefinitely by providing independence from a particular product category, increasing flexibility for future growth (through extension), and therefore, increasing the ability to expand into new product and service categories and alter the product and service mix to keep up with marketplace demands. Without a strong brand, your organization’s life span will be tied to the life span of the products it manufactures or the services it provides.
A number of studies have shown that the percentage of a company’s value that is unaccounted for by tangible assets has increased significantly. From 50% to 90% of a company’s total value is now attributable to factors other than tangible assets. In a 1996 study, the Cap Gemini Ernst & Young Center for Business Innovation (CGI) discovered that non-financial assets account for 35% of institutional investor’s valuation of a company. In its 2000 “Measuring the Future: The Value Creation Index” report, CGI reported that, after rigorous research, they discovered that 50% of a traditional company’s value and 90% of an e-commerce company’s value result from nine factors. The following value drivers seem to be common across most industries (Source: “Measuring the Future: The Value Creation Index.” Cap Gemini Ernst & Young Center for Business Innovation, 2000.):
- Quality of Management
- Employee Quality/Satisfaction
- Brand Investment
- Product/Service Quality
“Neal Foster, a board member at the Financial Accounting Standards Board [said], ‘As we move into more of an information age and service-based economy, the importance of soft assets is becoming more relevant to valuing some companies than brick and mortar. A lot of companies don’t even have brick and mortar.’” An increasing number of methods have emerged to measure non-financial business drivers, from Economic Value Added and the Balanced Scorecard to Value-Based Management and the more recent Value Creation Index (from CGI). Wharton accounting professors recently conducted a study across 317 companies and discovered that 36% of the companies sampled used non-financial measures to determine executive incentive compensation.
Sources: Baltes, Michael, “Measuring Source Non-Financial Assets.” Wharton Alumni Magazine Schultz, Don E. and Anders Gronstedt, “Making Marcom an Investment: Market-driven accounting system splits spending into business-building and brand-building activities.” Marketing Management. Fall 1997, p. 45.
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