Brand is the promise of quality and consistency which provides the foundation for the relationship between an individual and a specific product, service or company. The fulfillment of this promise creates value, drives customers to buy more products, influences the financial community to recommend further investment and helps companies attract and retain the most talented employees.
As the number of consumer choices increase, brand is gaining greater importance in the decision-making process. People use brand to distinguish between two hundred varieties of salsa or to choose from fifty different management consultants. An international survey of senior executives (conducted jointly by Marsh and Templeton College, Oxford in 2000) found that 85 percent of companies consider brands to be their most important asset. From these results, you would think that effective brand risk management would move up the list of senior management concerns. But very few companies have active programs in place to protect their brands.
Strengths Are Weaknesses
Many companies do not actively protect brand because they fail to properly understand the connections between the different elements that define brand equity (the power of a brand—through successful creation of a positive image—to shift demand and change customer behavior). For instance, some companies looking to promote faster growth will consolidate weak brands into fewer, stronger brands. This creates a strong brand value that can protect brand from intensifying price competition and can allow it to serve as a bulwark against the substitution and commoditization risks presented by other companies that offer consumers lower prices. But rapid growth increases the need for brand risk management, because many of the elements that allow a brand to grow also make a company vulnerable. The elements that best illustrate this aspect of brand equity include the following:
Brand stretching. This occurs when one company brand is stretched to encompass many different businesses (i.e., one brand operating in music production, retailing, airline and soft drinks). This diversification strategy leverages the strength of the brand, lowering the cost of building customer awareness, increasing the speed of market penetration and reducing the uncertainty of short-term revenue targets. Where brands are stretched across a number of products or services, however, brand failure in one area can taint perceptions of the brand in other areas. Brand stretching can also be dangerous when it takes the brand beyond its natural boundaries.
Brand alliances. By teaming up with other well-respected organizations, a company can sometimes enhance its brand equity. But brand alliances also expose companies to the risk that their partners’ performance may fail to meet customer expectations, thus damaging the brands of the other alliance members.
Channel switching. Brand equity built through one sales channel can sometimes be transferred to another. That is why some companies, like book sellers and toy stores, can use their strong brick-and-mortar retail presence to make a significant impact on the Web even after a late start. The acceptance of these companies as trusted retailers on the Internet is due to the strength of their brands. The problem is that a failing Web business can undermine what is otherwise a strong brick-and-mortar reputation.
Outsourcing. Information technology allows companies to outsource many activities and refocus their efforts and assets on core competencies. In many cases, this will concentrate the value of a firm into intangible assets, such as intellectual capital or brand. The stampede to outsource, however, poses considerable brand risk, especially where the outsourcing relates to customer service and other functions that may contribute to a company’s brand equity.
Relationship building. New technologies, particularly the Internet, enable companies to build brands faster by providing the consumer with customized and responsive services. Aggressive relationship building tactics led to the rise of a number of Web retailers and Internet service providers. But this ease of access has a possible negative side; given the ease of product and service substitution, consumers will not have to look very far to find a substitute.
The Three Key Components of Brand Risk
Looking closely at how each of these brand equity elements interact within your company provides a useful framework for risk analysis. It enables you to articulate exactly what brand risk is, thus allowing you to develop ways of containing it. Breaking down brand risk even further by dividing it into its key components—differentiators, essentials and market-related factors—is a good way to begin this process.
Differentiators are the key ingredients of brand equity. They are the set of elements that can shift demand in favor of (or against) a company or its products.
Essentials are the foundations of corporate or product reputation. Bad performance can quickly destroy the vital bond of trust that exists between a brand and its stakeholders. For example, no matter how good the food is at a restaurant, if the resteraunt has an enduring reputation for poor hygiene, people will go somewhere else.
Market-related factors are external to the management of the company. For example, changing social values can make products that once commanded premium prices or undisputed cachet seem less attractive.
The relationship between differentiators and essentials can enhance or undermine a brand. For example, safety is normally an essential for cars, but a single manufacturer can make safety into a differentiator and allow the company to thrive in the family sedan market.
Brand Vulnerability Assessments
After you determine how your company can use differentiators, essentials and market-related factors to its possible advantage, it is time to show upper management how you can manage the brand risks highlighted by these elements. A good way to begin is to integrate the results of stand-alone brand vulnerability assessments (BVA) with conventional risk mapping approaches.
BVAs examine the strength and condition of a brand. They look at all dimensions of the organization around the brand wheel (Figure 1, p. 42) and assess their alignment with the brand’s overall strategy. Regular reassessment is necessary because business strategies must shift with the market. When business strategies shift, the whole organization must be realigned. If the implication of this shift for the brand strategy is overlooked, the brand can move out of alignment with the company’s goals. Impairment of brand performance then drives the overall value of the organization down.
BVAs separate brand risk into two major categories: catastrophe risk and erosion risk. Catastrophe risk identifies events that would be immediate, public and severe. These events could involve anything from an oil spill to food contamination to a vehicle component failure.
Erosion risk has effects that are much harder to discern, at least in the short term. They are slow to develop and do not provoke news headlines unless the firm’s shareholder value collapses towards the end of the process. (For example, when a long-established retailer or fashion house suddenly goes out of style.) Other types of events that can unexpectedly erode a brand include:
• A proposed merger or acquisition
• A spin-off or recapitalization
• Major enterprise restructuring
• Outsourcing of a brand-relevant activity
• Brand catastrophic event to a competitor
• A major change in brand-related efforts by a current or new competitor
The Link to Brand Strategy
To avoid the risks revealed by your company’s BVA, the next step is to devise a brand strategy. The strategy that you develop for brand is not something that exists in isolation; rather, it is a direct extension of an organization’s business strategy. While business strategy drives a company’s operations, brand strategy drives all aspects of communications—from how the brand is positioned, to the selection of its name and logo, to the identification and prioritization of key audiences, to the development of internal and external communications.
A strong brand strategy will translate into a strong brand image and increased brand value in the marketplace. In essence, everything a company does affects the strength of its brand. Looking at your communications and experiences along a brand wheel clearly illustrates the importance of understanding how brand affects your relationship with consumers.
Brand valuation is particularly important in mergers and acquisitions. The most widely accepted technique is often referred to as the “economic use approach.” This methodology applies discounted cash flow analysis to a revenue forecast. A risk-adjusted discount rate is used to arrive at a net present value for the brand’s isolated financial contribution over time. However, since most financial valuations tend to emphasize the revenue-raising aspect of the brand, they are generally unable to take operational context and reputation risk into account. The process of financial valuation alone may not provide sufficient information about the complex nature of a brand to enable proper assessment of threats to its future performance.
Getting Brand Risk on the Corporate Register
Now that you have the information you need to get upper management’s ear, the hard part is making sure it is delivered in a language that they can understand. Sometimes the answer to this lies in knowing the basic questions to ask: What impact will damage to your brand have on customers, employees, investors and the community? What steps will enable you to take advantage of positive brand impact and to mitigate potential negative effects?
If they do not know how to answer these questions, then answer them for them. First, through BVAs, show them the technical weakness in brand equity that might otherwise go unnoticed. Second, explain that the severity of other identified risks can be better understood by improving the quantification of exposure and the prioritization of risk management action. This process of getting brand risk on the corporate register can be broken down to the following steps:
Find out who is responsible for managing brand risk. Typically the corporate marketing and communications departments or corporate branding group are accountable to upper management and to the legal department; the latter is often involved in managing the company’s various trademarks and anti-counterfeit programs. Partner with these groups to develop a brand risk management strategy.
Focus on all audiences. Avoid focusing solely on customers. The perspectives of employees, financial analysts, regulators and partners are critical to the development of a comprehensive and effective brand strategy.
Utilize research. Evaluate the positive value of your corporate and product/service brands as a form of insurance, protecting you against other risks.
Many of the components of this risk management strategy will be organizational. Although the risks can be substantial, most brand risks cannot be transferred because they are difficult to price to the satisfaction of both insurer and insured. (Exceptions include product recall and insurance in the event of accidental or malicious contamination. But even these measures will do little to address a long-term decline in market share if consumers lose confidence in a product, particularly if that product can be readily substituted.)
Opportunities for risk transfer and alternative risk financing may grow as insurers become more comfortable with the workings of market research and as brand evaluation models become more sophisticated.
David Abrahams is a managing consultant for Marsh, Inc. Eric Granof is a partner with Lippincott & Margulies.
