Academic journal article The McKinsey Quarterly

The End of Voodoo Brand Management?

Academic journal article The McKinsey Quarterly

The End of Voodoo Brand Management?

Article excerpt

Little is learned from debates about brand investments

Think about brands as webs of resources

Generating feedback loops that increase rather than deplete those resources

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,(*) 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 complex 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.

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. …

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