brand value creation — financial, part 2
Why should stockholders care about a company’s brand? That’s the subject of today’s post, the 3rd in a series on the many ways a brand creates value for a company.
I’ve discussed brand value creation from the Customer perspective and from the Financial perspective of immediate revenue generation. I also want to describe brand-driven Financial value creation in terms of market valuation. Specifically, does a brand impact shareholder value and how?
The market share and margin benefits produced by a strong brand (explained in my previous post) certainly impact earnings, which in turn deliver dividends or distributions for shareholders. A strong brand also increases the market value of the business to Wall Street and investors.
Research from Interbrand, Brand Finance, and other respected brand valuation firms, as well as academics from Columbia University Business School, Cornell University’s Johnson Graduate School of Management, and Dartmouth College, has proven the power of a brand to increase share price and stock valuations.
One particularly compelling example: An investigation by Harvard University Business School and Boston University School of Management professors Thomas Madden, Frank Fehle, and Susan Fournier provides empirical evidence of the value to stockholders of a firm’s brand-building activities.
Examining monthly stockholder returns data for the period 1994 to 2001, they found that a portfolio of brands identified as strong (based on a well-known, widely-accepted methodology by Interbrand and used by BusinessWeek for its annual Best Global Brands report) displayed statistically- and economically-significant performance advantages such as stock returns and returns on equity versus the overall market. Commenting on the findings, Fournier wrote, “The effects of brands on shareholder values were powerful and dominant and far outweighed commonly acknowledged factors such as market share and firm size.”
The research even goes one step further, finding that firms which had developed strong brands created shareholder value with less exposure to risk. The professors conclude that their results “support the role of the brand in reducing the volatility and vulnerability of cash flows.”
So it’s clear a strong brand makes a business robust for shareholders — but why?
Brands produce higher market valuations due to:
- stronger customer equity (defined as the total lifetime values of all of the company’s customers) — brands are the primary conduits through which loyal customer relationships are formed, nurtured, and maintained
- development of intangibles — brands drive differentiation and perceived value to customers beyond that which a company’s tangible product or service produces
- more efficient business processes — brands optimize the 3 primary processes of any business (product development, supply chain management, and customer relationship management) and the resources that drive each (this will be discussed in more detail in my next post — I’m using the Balanced Scorecard as an organizing framework for this series and am making my way through the 4 quadrants, in case you’re wondering.)
Questions? Comments? Please share.