Peter Drucker, the renowned business author, wrote, "Business has two basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs."
In his habitually prescient way (he made this comment in 1954), Peter Drucker identified that the creation of customer value — through invention or through brands — is the only sustainable foundation for business.
This comment has never been truer than it is today. In developing economies such as India, the supply of goods and services is increasing exponentially. This puts a premium on a brand's ability to communicate its unique ability to satisfy customer needs.
This abundance of choice can be confusing for consumers, especially as the perceived differences between the products and services have narrowed. Paul Goldberger, the cultural correspondent of the The New York Times, neatly encapsulated this phenomenon when he remarked that "while everything may be better, it is also increasingly the same."
More goods, all of higher quality, chasing limited customer rupees creates an environment in which the sources of value creation have moved increasingly from tangible assets (such as plant and machinery) to intangible ones (such as brands, patents, customer databases and skilled workforce). This is an environment in which the scarce resources are not factories and goods, but rather talented people, good ideas and differentiated brands.
Reflecting this shift in the sources of value creation, the market-to tangible-asset ratio for the S&P 500 (the broad-based index of the 500 largest companies in the US) has risen from 1.3 in the early '80s to 4.6 as of July 2004.
This means that the tangible assets recorded on the balance sheets of these 500 companies that used to account for over 75 per cent of their stock market value in the early '80s now explain less than 22 per cent of the market value of these companies.
Investors recognise that the productive resources of these companies are increasingly represented by assets that do not appear in the financial statements - patents, supply chain systems, distribution rights, skilled workers and brands. Within the S&P 500, there is only one industry sector - utilities - in which tangible assets represent more than 50 per cent of market value.
The migration of value to intangible assets is quite dramatic in India. The analysis of the top 500 companies listed on the Bombay Stock Exchange index shows that intangible assets represented around 43 per cent of the value that investors were placing on these businesses.
The charts alongside are quite revealing: A review of the top 500 largest listed companies in India by market value suggests that only 55 per cent of market value is explained by tangible assets and 2 per cent by disclosed intangibles. What makes up the 43 per cent of unexplained value?
It also poses the question: What makes up unexplained value? To appreciate these issues from a wider context we have also compared the top 500 listed Indian companies with those in the other countries in the US, Spain, Australia, Canada, India and Singapore.
The third chart shows asset split by a sample of economies. Given the growing importance of brands and other intangibles it is odd that an analysis of balance sheets of large Indian companies indicates that capitalised intangible assets (disclosed intangibles) represent less than 2 per cent of their market value.
The results show that Indian companies have a lower proportion of intangible assets recognised or otherwise when compared to other leading economies except Singapore. However, it must be noted that in technology, financial and consumer sectors, the intangible value of Indian firms is high (close to 70 per cent). Even so, Indian companies have some way to go to meet with economies like the US, Spain and Australia, which are largely driven by the value of intangibles. This is partly a reflection of Indian managements' failure to recognise and invest in intangibles and brand assets. By the same measure it is also a reflection of the investment community's failure to recognise and invest in a company's intangible assets.
The importance of understanding the intangible assets that now account for an increasingly large proportion of business value has been reinforced by recent changes in the accounting standards for business acquisitions.
The work of the International Accounting Standards Board resulted in a new reporting standard for "business combinations." International Financial Reporting Standard 3 (IFRS 3), which came into force at the end of March 2004, provides for a single international accounting treatment for acquisitions. Adopting the precedent set by the US Financial Accounting Standard 141 (FAS 141) of June 2001, IFRS 3 requires that "goodwill" be specifically allocated to the intangible assets acquired.
The goal of FAS 141 and IFRS 3 is to require companies to be transparent about the nature and scale of the assets that they are acquiring. It is no longer permissible to report a single "goodwill" figure representing the excess of the purchase price over the tangible assets acquired. Goodwill must be allocated to five classes of intangible assets - technology-based assets (such as patents), contract-based assets (such as leases and licensing agreements), artistic assets (such as plays and films), customer-based assets (such as customer lists) and marketing-related assets (such as trademarks and brands).
The combination of the increasing economic significance of brands and this reform to accounting standards has heightened the importance of a well-informed discussion of the value that brands add to the bottomline.
The goal of this report is to contribute to this discussion by providing an overview of the methodologies for measuring brand equity from the customer perspective, and for measuring how this customer equity translates into superior business value.
To provide momentum to this discussion, Brand Finance has created a comprehensive analysis of India's top value creating brands. To our knowledge, this is the first time that such a list has been produced for Indian companies.
Further, Brand Finance has also rated these brands on their brand power. This is because a brand value reflects not only the potential of a brand to generate income, but also the likelihood that the brand will do so. It is therefore necessary to determine an appropriate discount rate which takes into account market and brand risks.
The Brand Finance Rating panel has developed an approach to discount rate determination grounded in investment theory. This approach was designed to be transparent, objective and reproducible. The analysis considers a number of objectively verifiable key indicators of brand performance. All brands in the market are scored relative to one another to arrive at the relevant rating for the brand being valued.
Having scored all brands against the objectively verifiable criteria, Brand Ratings are determined. These are effectively credit ratings for brands and just as traditional credit rating drives the rates at which banks will lend to corporations the Brand Power Ratings determine the required rate of return implicit in the brand valuation.
The Brand Leverage analysis measures the extent to which the company has used the brand to drive value for the business. In today's business environment where intangibles increasingly drive business value, the brand's value should be comparable or ideally more than the company's book value.
In what appears to be the age of branding, it is surprising to hear of managers' difficulties in securing funds for investments in their brands. A lingering, unanswered question seems partly to blame; do brand-building investments really pay off? Lacking conclusive evidence concerning brands as economic assets that affect the bottomline, brand `investments' remain little more than discretionary `expenses' that are cut at the drop of a hat.
One reason for this paradox is that marketers have struggled to define a credible way of measuring the long-term value that marketing adds to a business. Measurement of the return on marketing investment has typically focused on the short-term uplift on sales as a result of a new campaign, rather than on the creation of a business asset.
The challenge to the marketing profession is to demonstrate that brands are business assets capable of generating superior economic returns for their owners, and worthy of multi-year investment commitments.
To do so, marketers need to show that they have a robust approach for measuring the quality of their brand assets, and for quantifying the contribution that the brand asset makes to shareholder value.
This study aims to provide Indian companies with a board-savvy argument for the value of brands. In essence the problem of convincing the board of the value inherent in brands involves conceptualising marketing as an investment to create a brand asset rather than an expense.
For the first time Indian chief executives can talk to shareholders, investors and employees about the health and long-term outlook of their brands in an objective, factual manner.
A perusal of the three tables on Page 3 — Brand Value, Brand Power Index and Brand leverage ratio — shows that even though IOC is India's top value creating brand, the brand's power index is relatively quite low, only getting a BB+ rating. Hence, IOC is at a higher risk of losing the brand revenues it currently enjoys to more powerful brands such as Bharat Petroleum (BBB-) in future. With brands such as Reliance (BBB-), Shell, and Essar moving into the fray, IOC needs to strengthen its brand power urgently. Further, IOC's Brand Leverage Ratio (Brand Value: Book Value) is only 0.7. This shows that the brand's value has some way to go to match IOC's tangible assets.
i-flex's brand value is lower in comparison to IOC today. However, i-flex muscles its way to the top of the Brand Power Index ratings. It is India's most powerful brand in terms of its ability to sustain earnings into the future with the least risk. Its ability to create a world-class product brand like Flexcube demonstrates it brand power. Further, with a Brand Leverage of only 0.8 (compared to TCS's 3.9) the brand has significant potential for adding business value. If i-flex continues to strengthen its brand power and extends successfully into services where it can extract volume and premium to a greater extent, its rise in the value table will not be surprising.
Among banks, SBI emerges as the most valuable financial services brand at $1.9 billion. However, the brand's power index rating lags at BB+. In a scenario where the banking sector is moving towards consolidation and the emergence of stronger competition SBI will have to get its act together by engaging with consumers and developing products and services which are differentiated. The Brand Leverage Ratio is only 0.3. For a highly customer-driven business, this is quite low. Whether it is a private sector or a public sector, banks in general seem to face a similar problem. The debate in the financial services market is rapidly changing with technology implementation and operational efficiency becoming table stakes.
To break the current supply side parity, players will have to come up with market expansion strategies which are based on unique consumer insights. Brands such as SBI and ICICI occupy the third and tenth slot in value terms and need to realise that their brands have significant potential in creating value for the businesses.
Yet their power indices tend to drift towards the lower end of the table. This signifies a less than optimal ability to hold on to market share and revenues in the emerging competitive scenario. Clearly size is not the only factor that should drive banking mergers in the near future.
There are significant value issues that are at stake with the government favouring mergers in the oil and banking sector. Consider the proposed merger of BP and HP. While both companies are comparable in terms of business profile and their revenues, brand values are significantly different, with BP worth $625 million more than its twin.
Bharat Petroleum's relentless pursuit to engage with consumers through its pioneering and still evolving retailing initiative `Pure for Sure' and its aggressive foray into branded fuels under the Speed brand have yielded significant benefits. Thus from strategic and economic standpoints, these results clearly give a direction on which brands to retain and which to phase out in case of a mega merger. Similar issues are also evident in case of mergers which are being considered among public sector banks.
Among the IT firms, TCS emerges as the most valuable as well as a highly resilient brand. Furthermore, TCS has the unique distinction of leveraging its brand to such an extent that its brand value is close to four times its book value.
Indeed, this is the benchmark for other Indian IT firms and brands across sectors. However, Infosys is within striking distance and with an identical brand power can prove to be stiff competition in future.
Ranbaxy is ahead of its peers like Cipla and Dr. Reddy's in terms of value as well as brand power. With their mainstay generics business getting increasingly crowded and margins under acute pressure, differentiated products under strong brands will be the strategy for the future. To establish a beachhead in their global markets, pharmaceutical companies will have to be on the look-out for under-leveraged brand assets which can be bought or licensed from their owners.
Bharti's Airtel is India's most valuable telecom brand, admittedly in the absence of other heavyweights such as Hutch, this year. While the brand has a high power rating it has scope for increasing it by focusing on revenue maximisation through adapting its pricing plans and aligning its entire organisation towards a unified brand delivery. Like Orange, the brand could also explore the opportunity to leverage its brand by licensing it to the fast growing markets such as China, Africa and West Asia.
In the bigger picture, the tables should serve as a wake-up call to corporate India to recognise brands as significant assets, which are driving business value. We see huge potential for Indian companies to add value to their businesses by isolating the economic value of their brands and appreciating the value drivers and the extent to which they are being leveraged.
The potential to fine-tune brand investments and directing precious resources to where it can earn maximum return is immense even among companies which have adopted a sound marketing philosophy.
Companies need to wake up to the fact that there is considerable scope to use brand assets in varied ways to drive revenues and margins in the future.
Many business heads — and a fair proportion of marketing professionals themselves — are frustrated about the lack of a framework for measuring and managing brand equity in a way that links directly the metrics that CEOs care about.
The goal of this report has been to suggest ways in which this gap can be narrowed. Specific suggestions include:
· Acknowledging that brand equity is an intermediary step towards the larger goal of creating a more successful business
· Accepting the need to express the impact of brands in terms of profitability, growth and risk
· Defining brand equity in a way that captures the potential of a brand to create future cash flow
Marketing Dashboards or Scorecards
One technique for expressing this "mental map" is the creation of a brand dashboard. The goal of a marketing dashboard is to express in a simple, easily grasped format the key indicators of marketing performance.
Techniques vary — at Brand Finance, we favour an approach that includes indicators of performance at four levels: marketing actions, customer attitudes, customer behaviours and market performance.
Marketing Return on Investment
ROMI or mROI is currently a hot topic and rightfully so. The increasing availability of tracking data across a range of media and the ability to cross-tab data from different sources has created a fertile environment for new measurement techniques and progress towards the goal of greater marketing accountability.
Centralised Ownership and Management of Intellectual Property
An increasing number of companies are adopting a more sophisticated approach to the management of their brands, patents and other forms of Intellectual Property (IP). This generally takes the form of the creation of a specific group holding company that assumes ownership of the Intellectual Property assets of the group and charges a royalty to the group operating companies for their use.This approach offers three main forms of benefit — enhancement of the management of these assets; the opportunity for tax planning; and behavioural change on the part of all those that are involved in the financing, development or use of the brand.
Reclaiming a seat at the table
The fact that the finance, accounting and legal departments are already embarked on this path increases the urgency for marketers to claim their place at the table.
Marketing has a unique perspective to offer. It is the only discipline that sees the business from the perspective of the customer and sees the brand in its full context — as the vehicle for customer meaning and not just some piece of intellectual property. The key thing for marketers is to engage in the debate, accepting that the language they will need to use is that of shareholder value.