Can shareholders trust that management decisions in the area of branding will lead to enhanced financial performance, or is this only a smokescreen? Over the past twenty years, expenditures are becoming prodigious, and companies are currently using an average of three to five percent of their turnover on branding. Furthermore, the estimated cost of bringing a new brand to the marketplace is now over US$100 million with over 50 percent of brands introduced being expected to fail. But, on the other side, a well-positioned and powerful brand provides an effective barrier against competitors, offers customer attraction, and the ability to enhance pricing and channel negotiation power. Given that the risks associated with branding investments and their potential returns are of great magnitude, a more solid understanding of the branding phenomenon and the economic justification for the enormous amounts of corporate and societal resources used in ensuring the sustainability of brands in the minds of customers and investors becomes an urgent need.
In our view, brand thrust is defined as the total financial resources a company allocates to develop, build and maintain the values and signals of its brand (s) including marketing activities and emotional features with its products or services and its combined efforts in representing and distributing its bundle of goods and services, over a defined period of time to its constituency.
By introducing a resource based view on branding and by applying the brand thrust concept we were able to postulate a very interesting question addressing the economic importance of branding: "Are companies spending adequate resources on establishing and maintaining the optimal value of their brands, and can it be measured on their financial results?" The answer to this question could have a significant influence not only from a financial perspective, but also as a basis for the development of new branding strategies, co-branding initiatives (where several brands are used in conjunction) and future investment plans. Kerin and Sethuraman (1998) have already suggested that enhanced branding efforts appear related to higher market-to-book value, but caution that brand value growth at the firm level does not necessarily produce a commensurate growth in shareholder value.
The Effect of Branding on Financial Performance and Hypothesis
The original hypothesis of this research was that there was a reversed U curve function between branding and financial performance. The assumption was that there would be an optimum level of branding expenditures or activities for each company compared to its competitors at any one point in time. If this optimum level were to be exceeded, at any given point in time, the company would be faced with the law of diminishing returns and experience value destruction. Based on the findings of Kerin and Sethuranam (1998) showing that "the functional form of the relationship is found to be concave with decreasing returns to scale", this starting point was of particular interest. Over time, however, the initial hypothesis was modified, and three additional hypotheses were added as follows:
HYPOTHESIS 1
Higher branding intensity causes better financial performance.
This hypothesis is based on the assumption that branding reduces inefficiencies caused by asymmetric information between consumers and firms, thereby ultimately leading to higher market transparency. This prediction assumes that more branding will lead to more relevant consumer information, product trials, and repetitive purchase patterns, enhanced consumer perception, and ultimately will translate into enhanced financial performance.
Management of a particular brand should thereby be able to establish an industry given ratio that their firm can be benchmarked against to know if they are over or under investing in a brand compared to key competitors. If one isolates and eliminates all other key variables, the company with the highest and most consistent branding intensity would enjoy industry dominance over a given time period.
HYPOTHESIS 2
At high levels of branding, additional expenditures decrease financial performance.
This prediction is in line with the law of diminishing marginal returns. Companies expand their branding activities with the objective of pursuing higher returns, but consumers are indifferent or might even react negatively (over-branding) to those additional branding activities. Ultimately it will lead to a reduction of financial performance.
HYPOTHESIS 3
Branding has no effect on financial performance.
The assumption is that management and competitors are expected to make rational decisions with regard to branding and they are operating in a perfect market environment. Any major increases or reductions in branding activities will be matched by competitive moves. Fundamentally, branding might lead to short term competitive and financial gains, but over time these will be eliminated.
The Correlation of Branding and Financial Performance
Our initial research showed that companies active in the financial sector are achieving the highest return on their assets when investing 5-10 percent or 20-30 percent of their turnover in branding, whereas branding in the 0-5 percent, 10 -20 percent or + 30 percent range is leading to performance destruction. It was interesting to note that companies with an appropriate strategic branding position would achieve a return of up to 3-percentage points higher than other companies in the same interval. The adjusted R2 was not as high as for the first group, but was still 0.60. Again, a W pattern (function) could be observed between financial performance and branding.
What could be the probable relationship and explanation for the observed patterns? After extensive discussions and research of the literature, five working assumptions have developed around the W pattern and the concept of corporate brand thrust. Briefly explained, the authors believe that the five observed key phases: (a) Aspiration (b) Brand Focus (c) Stuck in the Middle (d) Brand Heaven (e) Over Branding as illustrated in the simplified graph shown below.
The background for each phase and the financial impact could be explained as follows:
Aspiration
The company is rather narrow and restrictive in its branding activities, and in most cases only has a limited number or no foreign subsidiaries. Management has an undefined branding strategy driven by some unclear brand building aspirations and is thereby achieving a below average return on its branding activities since they are too limited (0-5 percent). Thereby no impact can be measured, ultimately resulting in a negative financial impact. Furthermore, the company has difficulties in achieving scale economies from a branding perspective since the relative investments are too high to achieve an acceptable return. The strategic position is weak and not sustainable in the long run.
Brand Focus
The company starts focusing on branding, and is placing substantial resources (5-10 percent) behind those new activities. Sales are increasing and it is gaining a critical size in the market place. The result is a dramatic increase of its financial performance leading to value creation. Frequently, the company is becoming a segment leader and has a sustainable competitive position.
Stuck in the Middle
The company again has a weak strategic position, frequently due to lack of focus and is stuck in the middle. (Porter, 1990). It is expanding and attacking many new markets or segments. Ultimately, branding expenditure is now approaching 10 ? 20 percent of their turnover. This high investment, combined with their weak strategic situation is leading to a decrease in financial performance.
Brand Heaven
As the company is reaching scale economies with its branding activities in the different markets or segments, it is gaining international synergy (as observed in many U.S. multinationals) with its branding activities. The company achieves a stronger strategic position and their return is again increasing. (This was also confirmed by Buzzel and Gale (1987) … "in stable markets, market leaders on average reap 25 % percentage points more ROI than small businesses ").
Over branding
Once the company has achieved a given size by international standards, it starts spreading out into different and new activities, thereby adding additional branding expenditures and ultimately decreasing its financial performance. Frequently, one can also observe the phenomenon of over branding in this segment.
The branding position of a company should by no means remain static over time. Some companies maintain a status quo over time, but there are also examples in our research database where companies move downwards or upwards. Hence, it is absolutely vital that branding is analyzed in a dynamic perspective, and that academics and practitioners acquire a performance and time driven reference model for branding. The brand thrust concept should be seen as a first step in this direction. The underlying data from other studies also confirmed that a company's' involvement in several or more industries would lower financial performance.
Managerial implications
This research indicates that for most companies a correlation between financial performance and branding is present, and can be established. As a minimum, it has five different and unique phases that cannot be perceived to be a linear function. Another important conclusion for management teams and shareholders is that while there can be a positive correlation between branding and financial performance, in reality this can also lead to value destruction. This implies that the branding position of a company must be regularly and closely monitored and managed from a strategic perspective. To be applied successfully, this would require cross-departmental (Marketing, Finance and Sales) working groups analyzing all relevant internal and external factors, and ultimately reporting back to senior management. Conceptually, this could be achieved by applying the corporate brand thrust concept presented in this article, whereby those findings would ultimately be presented to, and reviewed by, the board of directors of each corporation, and not left to be justified by the marketing team, as is seen in many corporations. The final, and in many ways, the most critical element, is that each company must be aware of its strategic branding position vis-à-vis its competitors, having a conceptual understanding of its current situation and acting accordingly.
Lars Ohnemus has held senior executive positions in a range of multinational companies and is currently a Visiting Associate Professor at the Copenhagen Business School and Baltic Management Institute.
Per V. Jenster is Professor of Management at the China Europe International Business School.
The article is an adaptation of the original one published in International Studies of Management and Organization (October, 2006).
