Ever since the phrase “you manage what you measure” made its way into the dialogue of corporate America, metrics have played an increasingly important role in the management of businesses.  No one can argue the value of timely, detailed, and accurate measures of performance as assessments of effectiveness and guides for decision-making.  Yet, which metrics are best remains highly debatable.

Lately I’ve been troubled by two metrics.  I’d like to outline my concerns and then hear your feedback, as I’m sure not everyone will agree with them.

First, there’s ROI.  While return-on-investment is a legitimate and helpful metric for evaluating the efficiency of an investment in finance and economics, I’m concerned about it as a method for measuring the effectiveness of many business moves.

I see ROI as a tool for use in the capital budgeting process – leaders must make projections of future rates of return of different projects in order to select which projects to pursue.  It also has value when evaluating marketing outcomes at a high level, comparing, for example, two different product launches by calculating the revenue that each new product generated divided by its respective marketing expenses.

However, I question whether ROI is the best way to measure discrete tactical activities.  Christine Crandell, EVP and CMO of Egenera, explains my concern well in a piece published by CMO.com:

“The problem with ROI is that it forces a myopic view on short-term objectives while disregarding the fact that it is very rare for any single marketing activity to be directly responsible for new net revenue.  The focus on ROI fuels a never-ending debate about spending levels for brand-building activities while disregarding the fact that customers typically buy only after being repeatedly touched by a series of separate and discrete marketing activities.” (emphasis mine)

She points to the current debate about the ROI of social media to show how such a focus can be so misguided. She also suggests an alternative:

“…Replace ROI with benchmarks.  Benchmark marketing’s performance against itself quarter over quarter and year over year.  Benchmark against comparable competitors.   Benchmark the number of leads passed to sales that closed, the average revenue per lead, the percentage of the forecast generated by marketing, the percentage of customers actively engaged in advocacy programs, or the number of lead referrals from industry analysts.  And so on.” (emphasis mine)

This approach makes sense to me, as it focuses metrics on specific measures that can be compared apples-to-apples. And rather than simply offering a referendum on an outcome that happened in the past, it provides more direction for the planning of future strategies and tactics.

ROI also isn’t the right metric for measuring much of the work that brand-building practitioners like myself do. Even the most bottom-line oriented business person would be hard pressed to calculate the ROI of identifying the optimal competitive positioning or implementing a customer experience strategy to increase the consistency of value delivery.  Trying to attach a sales or profit result to changes that have such foundational and broad-sweeping effects would be futile at best, misleading at worst.

That’s not to say that measuring the impact of such initiatives is unimportant.  An evaluation of the value created by them is more fitting.  Last year, I wrote a series on brand value creation which outlines the different outcomes produced by a strong brand, including price premium, business process efficiency, and stakeholder engagement. It’s measurements like these that would be a more accurate and direct reflection of brand-building effectiveness.

The other metric that has me concerned is comp store sales.  Comp store sales, which indicates the growth or decline of sales of stores that have been open for a year or more compared to the same period the year before, is the primary means of reporting retail results.  It’s an important measurement of operational performance because it distinguishes between revenue growth that comes from new stores and growth from improved operations at existing outlets.

Problems arise though because a strong comp store sales result this period may reflect poor performance last period, not necessarily good performance in this one.  No doubt, many retailers’ comp stores sales are going to start looking good later this year as we start rolling over the depths of last year’s recession.

Furthermore, longer quarters and holidays falling in different quarters can have a significant impact on comp store sales.  And higher comp store sales can often be a result of price increases, not unit sales or traffic increases.  That’s why I cringe when I see people placing too much emphasis on monthly or quarterly comp store sales, as they did this past holiday season when repeated reports of increases were released.

Perhaps benchmarks make sense here as well.  The focus on comp store sales seems more appropriate if we use the metric to benchmark one company’s results against its primary competitors and against the industry average.  Instead of reporting comp stores sales as a percentage of growth or loss, perhaps it should be reported as a score relative to an index.

Also looking at trends vs. absolutes is more revealing.  If a company has been experiencing a steady increase in comp store sales over multiple quarters and years, it’s clear that operational improvements — not flukes or fads — are driving the results.  Wide variations from month to month or quarter to quarter, however, indicate a much less stable business.  So perhaps tracking deviations from a mean expected increase would be a meaningful metric.

I don’t mean to make measuring performance more complicated – it just seems the over-reliance on one number, whether it’s ROI or comp store sales, can be dangerous.  And in the end, the point of a metric is not the number itself.  Rather, a good metric is a tool by which future decisions are guided.

So to the adage “you manage what you measure,” I would suggest the following corollary be added: “you manage well what you measure well.”

I’m eager to hear your thoughts on this post. Comments are open.

related posts:

• brand value creation
• stuff that matters

Now that everyone has had a chance to digest BusinessWeek/Interbrand’s Best Global Brands report, I thought I’d offer some suggestions for how to use the results. There’s a risk that if someone doesn’t know what brand valuation really means or what it’s useful for, the conclusions and implications drawn from the report could be off.

And while I’m in no way an expert on brand valuation, I have spent quite a few years using the results of the BusinessWeek/Interbrand study, as well as similar rankings from Brand Finance, Millward Brown’s Optimor, and others.

This is what I’ve learned:

DO:  use brand valuation as a way of proving that brands create shareholder value. When a finance-oriented executive questions the need to invest in brand-building, relaying the reports from well-respected organizations like BusinessWeek helps.  These studies provide empirical evidence of the value to stockholders of a firm’s brand-building activities.  And their methodologies are usually very similar to the way other corporate assets are valued — that is, on the basis of how much the brand is likely to earn for the company in the future (see BusinessWeek/Interbrand’s methodology).  So brand valuation allows you to make a rational, quantitative argument for the value of brands and brand building.

DON’T:  focus on brand valuation as the sole measure of the value which brands create. Although a brand’s role in shareholder value creation is impressive, it also creates other financial value – increased sales, market share, and price premium.  And a brand’s value extends beyond numbers to:

• value for customers by simplifying and facilitating purchase decisions (see brand value creation – customer)
• value in internal business processes by optimizing product development, supply chain management, and customer relationship management – and the resources that drive each of these processes (see brand value creation – internal business process)
• value in company learning and growth by increasing an organization’s ability to change and improve (see brand value creation – learning & growth)

It’s important to remember (and measure and manage) these outcomes of brand-building in addition to shareholder value.

DO:  use brand valuation to evaluate M&A and other business strategy decisions. A brand’s value is definitely a factor when valuing an acquisition:  The folks at Coca-Cola paid $4.1BB to acquire Energy Brands, Inc. when the actual business was worth a fraction of that – why?  Because of the Vitamin Water brand.  Coke wanted access to the enhanced water and energy beverage market and what better way to get it than with a solid brand like Vitamin Water.  While brands don’t currently show up as a line item on balance sheets, the intangible value of a brand is certainly an important consideration in corporate planning moves.

DON’T:  use brand valuation to evaluate marketing efforts. Certainly marketing and promotion have a tremendous impact on the strength – and therefore, the value – of a brand.  However, there are too many variables that impact brand valuation for a direct correlation to be drawn between it and marketing effectiveness.  I’ll comment more on these variables in a moment, so the point here is simply that brand valuation is a macro, business metric that’s useful for assessing corporate value, not ROI on marketing.

Instead marketing efforts should be evaluated by marketing measurements according to how well they fulfilled marketing objectives.  For example, if a marketing campaign was launched to introduce a new product, then a consumer research study to measure awareness and trial is an appropriate evaluation.  Or if a promotion is engaged to increase retention, then analysis of CRM data would yield an appropriate assessment.

DO:  use brand valuation primarily on a category-specific basis. Steve McKee, of the book When Growth Stalls and the just-launched FindYourNerve project, best explains it:  “…while the relative value of non-competing brands is fascinating (e.g. IBM is worth more than Toyota), it’s not terribly relevant to either company. And while the absolute value of any one brand–especially those with values in the tens of billions of dollars–is stunning, the most significant measure is how one brand stacks up relative to its competitors in a given category. If a brand is losing ground while its competitors are gaining, then it has something to worry about.” (emphasis added)

DON’T:  confuse brand valuation with brand strength. Company size, distribution/penetration, amount of brand-building investment, etc. affect brand value.  In fact, BusinessWeek/Interbrand doesn’t include airline brands in their rankings because they say “it’s too hard to separate their brands’ impact on sales from factors such as routes and schedules.”  While I don’t agree with the decision to exclude airlines, it does seem to indicate that brand value is inherently linked to business size and scope. So a small company may not rate highly in the rankings despite having a strong brand.  A better measure of brand power, therefore, is the Brand Asset Valuator or other similar tool.

I hope these thoughts are helpful to you.  Feedback is always welcome.

related content:

• brand value creation – financial, part 1
• brand value creation – financial, part 2
• how strong is your brand

Today my series on brand value creation comes to a close with a look at companies’ Learning and Growth.  Previous posts have examined how brands create value for companies from the Customer, Financial (2 posts) ,  and Internal Business Process perspectives.

The Learning and Growth quadrant of the Balanced Scorecard asks, “To achieve our vision, how will we sustain our ability to change and improve?”  The results produced by a strong brand relative to this quadrant may be the most difficult to quantify, but they are perhaps the most significant.   Here are 3 ways a brand creates value by impacting an organization’s Learning and Growth:

1.  When the “brand as business” management approach is engaged, the purpose and values of the organization are clarified.   Using the brand as the North Star for the business, your company not only adapts to outside changes appropriately but also create its own changes and use them to its advantage.

• Patagonia provides an example of a company which uses its brand — their “philosophies” — to be prepared for change. Yvon Chouinard, the company’s founder and owner, says, “What good does having a fixed set of written philosophies accomplish when everything else in the business world is so dynamic?…The answer is that our philosophies aren’t rules; they’re guidelines.  They’re the keystones of our approach to any project, and although they are ‘set in stone,’ their application to a situation isn’t…We have made many mistakes during the past decade, but at no point have we lost our way for very long.  We have the philosophies for a rough map, the only kind that’s useful in a business world whose contours, unlike those of the mountains, change constantly and without much warning.” (emphasis mine)

2.  Your brand can help you actually change the way business is done if you adopt a bold and differentiated brand platform.  Jim Collins, in his book Built to Last, describes how “Bill Hewlett and David Packard envisioned HP as a role-model corporation, known for progressive personnel practices, innovative and entrepreneurial culture, and an unbroken string of products that make a technical contribution.”  So they instituted many practices to manifest this bold vision – for example:

• HP introduced a profit-sharing plan which paid out the same percentage to the janitor as to the CEO and created a catastrophic medical insurance plan at a time when such actions were virtually unheard of.
• Beginning in the 1950’s, HP forsook the hiring of engineers from industry and recruited less experienced but more talented graduating seniors from respected engineering schools.
• Self-imposed rigorous standards led HP to bypass high-volume markets like IBM-compatible personal computers for a period of time because of its commitment to reject me-too or copycat new products in favor of those representing a technological contribution.

Clearly the “HP Way,” as the brand’s tenets became known, drove that organization’s learning and growth.

3.  Your brand can fuel the development of a robust organizational culture, by explaining why you do what you do in a way that gives more meaning to your relationships with customers and stakeholders alike.   After dissecting the factors that have driven the success of some of greatest organizations in recent history, including Apple and the Walt Disney studio, management author Warren Bennis concludes in his book Organizing Genius, “[They] think they are on a mission from God…they believe they are doing something vital, even holy…their clear, collective purpose makes everything they do seem meaningful and valuable.”  Your employee’s work can be transformed into more than churning out products; stakeholders can see themselves are more than functional cogs in the company wheel.  Rather, they can see themselves as contributing to something that has more substantive and lasting impact.

This motivates them embrace and execute change more effectively.  As the consultants who contributed to the late 1990’s turnaround of Best Buy explain, continuous improvement and growth flow naturally out of an emotionally satisfying culture:  “’Why is this important?   What’s in it for me?  Can I be successful?’ To be ready for change, people must develop a compelling conviction that there are positive answers to these questions,” they state.

So a strong brand increases an organization’s ability to change and improve — thus creating long-lasting and far-reaching value.

I hope this series on Brand Value Creation has been a good one for you.  By running it, my intent has been to make the case that brands produce substantial positive results for business.  And, perhaps more importantly, to present a different point of view on what a brand is:  what a company does and how it does it.

The series on brand value creation continues today with a look at how brands create value for companies in their Internal Business Processes.   Although a brand’s ability to create value from the Financial and Customer perspectives is probably the most important, its impact on Internal Business Processes is the most fundamental.

Let me back up a bit.  As a reminder, we’re using the Balanced Scorecard as a framework for identifying all the different ways brands create value for companies.  The Internal Business Processes section of the Balanced Scorecard is intended to help leaders evaluate how well their business is running and whether its products and services conform to customer requirements.

A brand lends itself to such an evaluation if the company has adopted the “brand as business^TM” management approach.

What is the “brand as business” management approach?  It is the deliberate and systematic management of the business around the brand — thinking of the brand as the business.  The “brand as business” management approach is based on using your brand as a management tool, not simply a marketing asset.  It’s about operationalizing your brand — integrating your brand and your core company’s operating system.  (The American Management Association recently published an article of mine which explains “brand as business” in more detail.)

OK.  So that was all to set up the discussion on Internal Business Process brand value creation.  When the “brand as business” management approach is employed, the brand impacts the three primary processes of any business:

• product development
• supply chain management, and
• customer relationship management

– and the resources that drive each.

Processes.  To the business processes themselves the “brand as business” management approach contributes focus, efficiency, and power.

• For example, in the product development process the brand focuses R&D on target requirements and value delivery as articulated in the brand platform.  And the brand is used as a filter at each juncture of the stage-gate process.  Evaluations of the fit and viability of new offerings happen faster and more easily with the brand providing a clear, consistent standard.

A strong brand also reduces the cost of new product introductions and improves the success rate of line extensions, cross-selling, and up-selling by stimulating trial and adoption among existing customers.  As noted in my post on Customer brand benefits, customers are more likely to try a new product if they already have a relationship with the brand.

• In the supply chain management process, a strong brand can give a business more negotiation power with suppliers, manufacturers, and distributors.  Having the upper hand in negotiating inventories, logistics, and payment terms is certainly a desired advantage in the constraints of the current business environment.

• Brands impact the third primary business process, customer relationship management, by helping the company to establish relationships with customers in the first place.  Over time strong brands engender trust, and when customers trust a company, they are willing to give the company information like personal data, insights about needs and preferences, and usage information which enables the company to create better customer contact and service strategies.

Those advantages then help businesses retain customers by fostering relationships which are valued by customers.  And instead of having to rely on instituting switching costs which deter existing customers from defecting to a competitor but which may also pose barriers to customer acquisition, companies with strong brands simply enjoy brand loyalty — which by definition prevents brand switching.

Brands also make customer relationships more profitable — an increase of 5% in loyal customers in some categories delivers 95% greater profitability over a customer’s lifetime, according to brand loyalty expert Robert Passikoff who founded and heads up Brand Keys, a research consultancy specializing in customer loyalty.

Furthermore, Passikoff’s research indicates it takes 7 to 10 times the cost to acquire a new customer as it does to keep an existing one.

Resources.  At the resource level of Internal Business Processes, a brand-driven management approach is about optimization.

• A strong brand optimizes your human resources, for example.  You can experience better results in recruiting because a strong brand attracts a larger and/or better applicant pool.   One fast food restaurant chain experienced a dramatic increase in responses to its help-wanted ads simply by adding visual elements from the brand identity to its advertising.

Companies which employ the “brand as business” management approach use the brand as a means for screening candidates, on-boarding new-hires, and training employees more quickly and effectively.  In “The IBM Way”, former IBM marketing executive Buck Rodgers explains the approach his company adopted, “IBM begins imbuing its employees with its…philosophy even before they’re hired, at the very first interview…Basically, anyone who wants to work for IBM is told:  ‘Look this is how we do business…We have some very specific ideas about what that means.’”

By using the brand to inform, inspire, and equip people, companies produce a workforce that is aligned, focused, and motivated.  In turn such a workforce produces more efficient operations, higher quality output, and increased employee retention.

• A strong brand also optimizes your technology resources and other tangible assets by facilitating relationships with other companies from whom you acquire or with whom you develop these resources.  The greater your brand equity, the more desirable your company is as a customer or partner to these other companies.

Internal business processes and the resources which they draw upon are beneficiaries of a brand that is well-established and well-leveraged.

Make sense?

My next post will be the last in the series — Brand Value Creation — Learning & Growth.  Stay tuned.