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Success driver brand: It is a fact that it influences the key value drivers, and that as a strategic management system it controls operative cash flow and competitiveness. Image source: ©boonchok - Fotolia.com Fotolia Fotolia

The brand as a business management imperative – What it contributes to the success of the enterprise

Of course: company leaders aim for shareholder value. But why do they exclude the brand from this value creation process? To help them recognize what they are missing, we have translated the power of the brand into the language of finance management.

While most enterprises represent a conventional category such as insurance or banking and offer a functional benefit, strong brands like Amazon or Google satisfy a life scarcity.

 

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Many top managers associate brands with colorful pictures, campaigns, and logos - they think it is a communicative surface, a secondary battlefield. And they assume that the brand world speaks a language of its own and that they can't expect any relevant key figures to come from that direction.
According to this idea, the brand is neither a management task nor part of strategic corporate management. It is a fact, however, that the brand influences the key value drivers – return on invested capital, growth & weighted average cost of capital – and that as a strategic management system it controls operative cash flow and competitiveness.

The basics of brand-induced added value

But how does brand-induced added value work? The designation of a performance, or branding, has always served a concrete purpose: To send the other person a specific message and affect his perception – which in turn influences his behavior. The behavior of all stakeholders (for instance the customer's readiness to purchase and pay higher prices, as well as employee loyalty) affects the business performance of an enterprise, which thus depends on brand perception.


The drawing illustrates this relationship between the brand and shareholder value by means of the key value drivers. Unlike cash-flow observations, it allows us to evaluate the performance and competitiveness of the company.

Abb. 1: Eigene Darstellung ©Benedikt Streb

It follows that management increases the ability to create added value when it is able to improve profitability, create a lasting competitive advantage, reduce capital expenses, and enter a market more quickly. This is where the brand comes in as an instrument for systematic added value.

1st Dimension: Increasing the "peak performance"

The profitability of an investment depends on the unit price obtained, the quantity sold, and the costs. Strong brands provide the customer with an added benefit, which enables companies to earn a premium for their performance and increase their margin. Beyond that, brands engender a feeling of trust which allows companies to introduce new performances with less effort or enter new markets. The desirability of the brand increases the customer's willingness to buy and pay higher prices and at the same time reduces costs, which positively affects the relation of invested capital and proceeds earned (ROIC).

Similarly, a strong employer brand reduces the effort required to recruit the right talent at the same time increases employee pride, which in turn has a positive effect on loyalty and productivity within the company.

2nd Dimension: Securing the competitive position

In our world of abundance, products and services become interchangeable, companies hardly have a chance to position them clearly in the market and to attract and retain consumers. Even technological improvements only provide a short to medium term superiority, but no sustained competitive edge.

Strong brands, on the other hand, evoke emotional advantageousness with customers, applicants, or partners, which is difficult to copy.

While most enterprises represent a conventional category such as insurance or banking and offer a functional benefit, strong brands like Amazon or Google satisfy a life scarcity. They have emotional meaning. This makes for instance a car (product) into a symbol for electrical mobility (Tesla) or an online encyclopedia (service) into a symbol for the liberalization of knowledge (Wikipedia).

These brands create a high level of identification, and the stakeholders consider the company to be indispensable. As a consequence, entry barriers for competitors are raised. But strong brands don't just make fans out of customers and strategic partners, but also attract the right employees and bind them to the company for the long term – reducing loss of knowledge.

3rd Dimension – Reducing capital costs

DInterchangeability burdens margins and causes operative cash flow to dry up. The disruptive business models of startups and digital all-rounders like Google further increase the risk. Capital costs increase. Strong brands affect the evaluation of corporate risk by keeping the demand in the market at a constant level, among other things. They also bind partners, employees, and customers alike to the company even in times of crisis, which in turn positively impacts financing interest.

In addition, company leaders can use strong brands to increase the equity portion by taking advantage of the customers' higher willingness to buy and pay premium prices, thereby stimulating operative cash flow. Star investors like Warren Buffett prefer to put their money on strong brands like Coca-Cola or IBM – Berkshire is currently boosting the Apple share substantially – and 88 percent of financial analysts believe that information about brand development is very important. Accordingly, the brand has an impact on average total capital costs.

4th Dimension: Quicker amortization

Apart from sustainably securing a competitive position, quite often the time to market decides the economic success or failure of a company. An innovative product is not a sure thing, because the target group first has to be convinced of the performance competence, and the product has to catch their attention amid the flood of information. Strong brands enjoy trust and evoke positive preconceptions.
Such companies can enter new business sectors more quickly, because they stand for a specific peak performance. Amazon, for instance, stands for supply and Google for finding – not for a product. This is why customers trust Amazon to deliver not just books but food as well. Apple stands for innovation, design, simplicity, and user friendliness – customers wait for new products, regardless of the category (e.g. iPod, iPhone, iPad, iWatch), they don't have to be convinced of the performance first. This is how strong brands shorten the amount of time needed for companies to earn a profit.

One last question about brand (value) remains
If brands indeed have an impact on all stakeholder groups of a corporation, why then do the conventional evaluation methods of Interbrand & Co. only take into account the customer – and reduce the brand's value and ability to add value to sales figures?

One last question about brand (value) remains

If brands indeed have an impact on all stakeholder groups of a corporation, why then do the conventional evaluation methods of Interbrand & Co. only take into account the customer – and reduce the brand's value and ability to add value to sales figures?

 

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