I cannot decide whether I think that JC Larreche’s book “The Momentum Effect” is ground breaking – or banal.  Oddly, I feel the same way about Chan Kim and Renee Mauborgne’s “Blue Ocean Strategy.”  As an alumnus of INSEAD, I am proud to see the faculty achieve such recognition but I wish that I was convinced that their books represented a major breakthrough in business thinking. 

Both books have achieved an impressive degree of traction in the marketplace based on the same basic insight – namely, that business success is based on understanding the sources of customer value, and on crafting your product/service offering in a way that delivers unique value to customers.  I think Peter Drucker made this observation over 50 years ago.

Kim and Mauborgne phrase the opportunity in terms of “creating uncontested market space” while Larreche talks in terms of “shifting from compensating strategy to momentum strategy”.  I find Larreche’s take on the topic to be more appealing because it is explicit about what companies should stop doing (spending their time pushing products that do not offer compelling customer value) as well as what they should do more of (creating “power offers”).

Net net, I am delighted that the “marketing mindset” is once again being recognized as a powerful source of value creation for business.  To my mind, the fundamental challenge of business is how to create a business culture that places equal value on the insights that come from a “marketing mindset” with the operational efficiencies that comes from a “finance mindset”.

I am presenting to an EMBA class at Columbia this evening on the topic of brand equity and marketing accountability.  I am looking forward to it – EMBA students always ask great questions.

The gist of my presentation is that brand equity represents an important bridge between the worlds of marketing and finance.  Marketers intuitively think of brand equity as a measure of the strength of the brand’s franchise with customers; Finance folk intuitively think of it in terms of the incremental profit/cash flow that is generated by the brand.  The two definitions are compatible but they do not describe the same thing.  The marketers view of brand equity represents the potential for value; the finance view represents the realization of value.  In that sense, a marketing definition of brand equity will always be larger than the financial defintion because it does not allow for all of those potential brand sales that failed to occur due to lack of distribution or stock outs or a host of other factors that may prevent customers acting on their stated “intention to purchase” (one of the key measures of brand equity from a marketing perspective).

Should be a fun session.

I came across an interesting post by BNET’s Steve Tobak called “Aspiring Managers: Learn to Act Like Adults” in which he lists the five skills at which managers have to become adept:

• Finance
• Selling
• Presenting
• Negotiating
• Communicating

His comment about Finance was spot on:  “I don’t care if you manage engineering, HR, IT, sales, whatever, you need to learn about finance. Why? Because that’s how companies are run and how business works. Period.”

Finance is the language in which business is “scored” so you need to be aware of how success is going to be measured.  This is especially true for marketers who often mistake their objectives of high awareness, strong brand equity, loyal customers as ends in themselves.  These objectives are important – but their importance comes from the fact that these are the things that ultimately produce strong and stable cash flow.

That is why it is so important to maintain a healthy dialogue between the Earthlings in the marketing department and the Vulcans in the finance department.  Without an understanding of what drives customer value, it is impossible for a company to deliver shareholder value on a sustainable basis.

I admire Millward Brown for its efforts to “talk the language of business” by trying to link brand equity and brand value to overall business value. But sometimes these efforts merely illustrate a lack of understanding for what constitutes a credible case.  For example, when the estimate for brand value exceeds the market value of a company (as was the case with Google, Starbucks and a couple of other brands in their 2009 survey), anyone half proficient in valuation is led to question how much of a “reality check” was done on the data.  For brand value to exceed market value, the aggregate value of all of the assets of the company other than the brand would have to be negative…

The latest example is the announcement that “Millward Brown Shows Stronger Brands Recover From Recession Faster” at the end of September.  The basis for this statement was a comparison of the performance of a portfolio of companies for which “brand contributes more than 30% of earnings” versus the overall market.

The problem is that the data does not prove the claim (any more than if the claim had been that “companies beginning with letters in the first half of the alphabet outperformed the market”).  The 30% criterion means that the Millward Brown portfolio is heavily skewed towards consumer industries  (such as food, retailing, consumer electronics) – and these industries have outperformed the overall market.  Therefore much of the outperformance of the Millward Brown portfolio is likely due to sector exposure, not branding.

To deliver a robust analysis about whether stronger brands recover faster, Millward Brown would have to show that its portfolio of strongly branded companies outperformed a portfolio of companies in the same industries, not the overall market.

Perhaps recognizing that ”the world’s most valuable brands” theme is becoming over-worked, CoreBrand released a brand league table this week with a twist: their league table contains only corporate brands, and ranks them according to the percentage of market capitalization represented by the corporate brand, not by actual value. 

It is a potentially interesting approach.  Leaving aside the methodological challenges inherent in separating out the value of Coca-Cola the corporate brand from Coca-Cola the product brand (the majority of the companies on the list are monobrands – meaning that the product brand and the corporate brand are the same), it would be fascinating to see some data on the extent to which branding at the corporate level is adding value above and beyond what is being done at the product level.  And whether the scale of this contribution varies by industry.

Unfortunately CoreBrand list consists of nothing more than the ordinal ranking of 100 corporate brands on two bases:

• By the percentage of market capitalization represented by the corporate brand
• By the dollar value of the corporate brand

There is no data on either the actual dollar value of the corporate brands or on the actual percentage of market capitalization that the value of the corporate brand represents.   Readers are left to guess whether corporate brand value is 3% or 30% of overall market capitalization.

It is a missed opportunity to add meaningfully to the debate about brand valuation.  This is a shame since the CoreBrand list is based on two interesting premises:

• First, that corporate brands matter
• Second, that it is not so much the absolute value of brands that matters as the proportion that they contribute to overall corporate value

I, for one, would have loved to see some data on the relative importance of corporate brands.  Or some data on how this varies by industry (it is self evident that product brands matter more in certain industries than others – but is this true at the corporate brand level?)

Instead, I am left to scan the list for interesting snippets, such as:

• Is the Hershey corporate brand (ranked #1) really adding proportionately more value than the Home Depot corporate brand (ranked #39)? 
• Is the Yahoo corporate brand (ranked #40) really working that much harder than the Google corporate brand (ranked #88)? 
• And are those corporate communicators at P&G (ranked #54) really contributing proportionately less than their counterparts at Colgate-Palmolive, Estee Lauder and Avon (ranked at #6, #19 and #43 respectively)?

I suspect that most readers will fail to realize that this is a ranking of corporate brand contribution to overall value, not overall brand value.  Any list that includes Hershey, Coca-Cola, Harley, Campbells and Kelloggs as its top 5 can easily be mistaken for just another brand valuation league table.

I am bothered by the discrepancy in the value of individual brands across the Interbrand, Millward Brown and Brand Finance lists.  I am particularly perplexed as to why the differences between Interbrand and Millward Brown lists (both of whom use the “earnings split” method) are greater than the differences between Interbrand and Brand Finance lists (who use different approaches – Brand Finance uses relief from royalty).

I am grateful to Gabi Salinas’ “International Brand Valuation Manual” for casting some light on the reasons why this might be so – her book documents 16 variants of the “earnings split” approach, making it entirely plausible that variances within the application of a single approach might be greater than variances across different approaches.

Gabi Salinas (with whom I had the pleasure of working at Brand Finance), now global brand manager at Deloitte Touche Tohmatsu, has just published her magnum opus on the topic of brand valuation.

The book is very thorough and a surprisingly easy read – a testament to Gabi’s ability to focus on the essential details of what is potentially a very dense topic.  It removes much of the mystery that currently surrounds the topic of brand valuation by outlining the core concepts and profiling the different methodologies in use.

Gabi’s obvious passion for the topic shines through.  Most other authors might baulk at the prospect of comparing and contrasting 40 different brand valuation techniques from more than 60 providers – but Gabi has painstakingly collected all this information and spends 180 pages (nearly half the book) reviewing and commenting on each model.

This dogged perseverence gives immense credibility to the other sections of the book in which she provides a higher level summary of the topic.  I would recommend the following three chapters in particular:

• Chapter 1 – the definition and economic relevance of brands
• Chapter 4 – summary of the main approaches to brand valuation
• Chapter 6 - classification of the 40 models reviewed

The book is a hugely valuable resource to anyone with a professional interest in brand valuation (and that is a wide set of audiences).   Despite the worrying frequency of equations with greek letters, the style is very light and the narrative very simple to follow.

For me, the one thing missing from the book is a clearer sense of how brand valuation fits into the broader topic of marketing accountability.  As it says in its title, the book is a “Manual” – it begins from the assumption that brand valuation is a valid goal to pursue, and provides the roadmap for achieving that goal.

Readers of this blog will know that my strong belief is that brand valuation is, with rare exceptions, a false trail for marketers to follow.  It does not provide definitive proof of the value of marketing, and it involves treating the brand as a separable asset of the business (an assumption entirely at odds with marketing’s goal of getting the brand embedded into all aspects of the business).  The uses of brand valuation are technical in nature, and few fall within the purview of marketing.

To be fair, Gabi did not conceive her mandate to be “brand valuation – what’s it for?” – she defines her remit as “brand valuation – how’s it done?”  She has produced a comprehensive overview of the topic and has documented in admirable detail the specifics of the various approaches and models.

I am just putting the finishing touches to the T2 Fall 2009 newsletter.

It has been a good opportunity to review the highlights of the past 12 months and, specifically, the progress made on advancing our research agenda.  Whatever else you can say about the GFC (global financial correction), it did at least provide an opportunity to push the peanut forwards on a number of projects that typically take second place to client work.

The newsletter reviews the key findings from our research in five main areas:

1. The scale of intangible value as a proportion of market value
2. The categorization and relative importance of intangible assets
3. Brand valuation
4. Brand strategy and post merger financial performance
5. Social media discussion of brand equity and marketing accountability

We certainly tried to follow Rahm Emanuel’s exhortation of “never let a crisis go to waste”…

I led the brand valuation section of the day-long seminar on marketing measurement today.  The seminar was run by Alan Middleton, the pre-eminent marketing professor in Canada and a true force of nature.  It was a huge pleasure to collaborate with someone who is so passionate about his subject, and so voracious in his appetite for new information and perspectives.

The seminar participants were all from the agency side – and all motivated by the desire to upgrade the quality of their interactions with clients so as to evolve from “vendors” into genuine business partners. 

They asked some very perceptive questions – but the defining point of my session was the reaction by one of the participants to the process for performing a brand valuation based on the earnings split approach.  He looked at the matrix we had just created of the drivers of the customer purchase decision and the extent to which they were influenced by brand, thought for a while, then commented ”this all seems rather squishy to me.”   Exactly.  And in a single word, he articulated the huge concern over the subjective nature of brand valuation.

Another day, another city, but the song remains the same. 

I am presenting at the Schulich Executive Education Center at York University in Toronto tomorrow.  I tried to define the remit of my presentation as brand and customer equity measurement but was asked to focus more narrowly on brand valuation.

Readers of this blog will be familiar with the approach I will take to the topic, and the caution I will sound about thinking of brand valuation as anything other than fodder for cocktail party conversations or a specialist tool to support limited and well-defined transactional needs (most of them having nothing to do with marketing).

Given that the participants are all marketers, I thought I would prepare a workbook that will allow us to generate in class a brand valuation based on the earnings split approach.  It should be a great way to illustrate the variables to which a brand valuation is most sensitive.  I will report back.