Intangibles as wealth creators...

Last year, buyers paid 72% of the takeover consideration (on average) for the intangibles in businesses. You might recall that Procter and Gamble Co. paid almost half of the $57 billion (Rs2.72 trillion) for Gillette Co.’s brands alone. Whatever business you are in, your good name plays a significant role in your chances of success. Smart CEOs ensure that they own certain characteristics that are valuable to their customers. Read more at:



What will happen to the small guy..

Ramesh Jude Thomas, President & CKO
EQUiTOR Management Consulting Pvt. Ltd.

A group of us were sitting at a friend’s backyard on the Palms last week pondering on how bad the current situation could get.
The lady of the house, herself a very senior HR executive with a kind heart asked me “But what do you think will be the human cost of all this. So many small people will lose their jobs and businesses”.
At one level she was absolutely right. In a downturn as severe as this, the first people to get affected are the marginal ones. The dispensable ones. The ones that live at the periphery of the economy. The converse is that the strength of an economy really is reflected in the well-being of its marginal members. And what riles me the most is that the thugs that created this situation have all landed safely in their Golden Parachutes, while the rest of the landscape gets annihilated by the bombs that they themselves dropped.
But what about the lady’s question?
I was yearning to say “Nothing dear. They will all survive and do well” But that would have sounded heartless even to her very successful CEO husband who heads a Wealth Fund. Besides sounding completely incredulous at a time like this.
But believe it or not, this is the truth. Let me explain:
In 1991 when India decided to finally relieve the economy from the yoke of Command and Control system, the Left and the Literatti voiced a number of fears. Amongst them was the collateral damage in terms of the hundreds of thousands of small businesses that would go belly up. And why would they die? Because without the protection and reservation that the government had been according them all these years, they would have to fend for themselves against the big boys and the multinational wolves, and the poor things wouldn’t stand a chance.
But guess what?
Earlier this year EQUiTOR was trying to make a case for a private bank to focus on the SME sector in India. During this effort we came across some startling insights on how these poor children of Liberalization had actually evolved. The SME is defined by the Ministry of Commerce as a business that has under USD 250,000 in Capex investments.
The Ministry’s 2007 report on the sector had this to report: Of the Foreign Direct Investment (FDI) going out of India in the current fiscal, 26% of the manufacturing sector’s contribution came from the SMEs . And this figure climbs to 41% for the services sector. A Ripley’s case??
So while the Corus’ and the JLRs make the headlines (and make us proud) it is a guy like Daawat Rice who makes the numbers. LT Overseas (the owners of the Daawat brand) is a family run rice exporter who did a leveraged buy out to acquire a USD 50 mn firm in the US. And here’s the kicker: the debt was partly securitized by the intangibles in the business. They did this to get a “US footprint for expanding their branded business”.
Clearly, the poor little guys we wrote off have now become the pillars of industry. There are a vast number of Daawats out there. They have built their businesses with confidence, backed by a strong fundamentals and resilient assets. Some of them have gone on to become Sensex blue chips (Bharti) and many are waiting in the wings.
I say don’t pity them. Just create an enabling environment and they will be the toast of the economy. What say, gentle hostess?


The Great Indian Brand Ambassador

Ramesh Jude Thomas, President & CKO
Equitor Management Consulting Pvt. Ltd.

“Why is it that we see more of Amitabh Bachhan between programming than within it?” A smart young journalist quipped recently at a branding seminar.
Why indeed? The grand old man of Indian Cinema still endorses over 60 different brands. one for each of his vintage years. He in fact dethroned the mighty Sachin, who was the reigning monarch of the endorsements empire in India till a couple of years ago.
One is often publicly challenged on the role of brand ambassadors. They cost a packet each. According to industry, the average going rate ranges from Rs. 1.5 cores to Rs. 5 crores. They cannot be easy to schedule. They must have very stiff conditions for their contracts. What then explains their immense popularity in India amongst advertising agencies and their clients?
It might be worthwhile to consider how they fit in the older markets of the world.
If you think of the world’s 10 most powerful brands, not one of them uses Brand Ambassadors in those markets: Coke, Microsoft, GE, Intel, Nokia, Toyota, IBM, and Mercedes. Even in India, our most pervasive and arguably most valuable brand name does not use an ambassador.
Secondly, whenever used, there is always a clear connect between the brand values the message, and the ambassador. So Nike uses only those top notch athletes who obviously have a great self belief. Pete Sampras, Andre Agassi, Michael Jordan. This is only common sense. Brand ambassadors by definition are individuals who have mass appeal. Needless to say they come preloaded with their own traits that the audience already connects with. The silliest situation would be to use a brand ambassador whose public persona contradicts the brand message or indeed the brand’s essential character.
Cut to India circa 2001: An ex-Miss World in India is appointed brand ambassador for a corporate group just after she is invited to be on the governing board. Amitabh Bachhan is used as a “brand crisis” ambassador for a confectionery brand. He also endorses pain relievers, pens, suitings, banks, and anything else that you can think of.
Ditto for Rahul Dravid and Saurav dada.
If you think this is in the past, look at Sania Mirza’s bulging bag of labels. Our latest “creative opportunity” is signing up endorsements by the dozen for anything and everything: Tea, fuel, lubricants, jewellery, NGOs, et al.
Why do we habitually cling on to the latest sensation in town without the minimum application of any basic criteria? An answer I got years ago from a friend who had used Sachin to endorse his popular motorcycle brand was quite revealing. “But he can get attention can’t he?” That’s a bit like the logic for liquor brand calendars isn’t it? Damn the message. Or is there one?
The people who take these decisions are all very competent professionals with loads of experience. So I have forever wondered why in most cases brand ambassadors have become an easy substitute for good, old-fashioned application of the mind.
Which then begs the question: Do brand ambassadors have any value at all?
There is no short answer to that one. But fundamentally we need to evaluate a brand ambassador too with the same yardsticks as we would any communication device or idea. .Consider a couple of common sense ones that we would apply in most situations:
Does this brand require one at all? HDFC standard life is one of the most outstanding campaigns I have seen in a long while. Where is the brand ambassador.
What does the brand itself represent? Does the brand ambassador represent something else? Does it contradict the brand in any way? I know people who would switch off watching an outstanding program called Biography on History channel because it used to be anchored by a rather artificial, heavily accented former Miss World.
What is the messaging for a particular campaign? Does the ambassador strengthen the message? Does he/she dilute or contradict the message? Michael Schumacher was a brilliant fit in the Palio campaign.
Are there candidates that can be the medium for my message: Rahul Dravid is immediately and consistently associated with words like dependability and integrity. No financial Institution bothered to use him till a couple of years ago. When a nationalised bank finally did there was no sign of either sentiment in the messaging.
In essence, Brand ambassadors are not communications ideas by themselves. They have the potential to strengthen the power of the idea or the message through what they themselves represent. So if we want to use a brand ambassador at all, the match with the brand and the message must be the primary criterion for evaluation …ahead of face recognition or mass appeal.


Makeover Marketing

Imagine one day waking up and finding that your newspaper masthead looks a little different. You reach for your specs and take a closer look ..
Imagine flying a grey colored aircraft on your next JET airways flight.
Welcome to the world of makeover marketing.

The last decade has witnessed the largest number of changes in corporate or brand identity since Kotler wrote his famous tome.

AT&T is one of the more recent global entities that went under the plastic surgeon’s scalpel. It was bought over by regional carrier SBC. But the company realized that the value of the AT&T brand to the business was significant and could be a major influence on the success or failure of the new organisation. And the company decided that the AT&T brand would continue to bee the front face of its business operations. And thus it was provided a face lift to “represent the values that the new owners would want the business to stand for.”

Why are makeovers done? In our work we have come across varied compulsions. Sometimes it is about 2 organisations merging. Like in the case of Glaxo and Smith Kline, Price Waterhouse and Coopers. Compaq and HP. At other times it is to represent a significant change in the company’s offerings to the market e.g. Samsung, IBM, and still others believed it was time to contemporize their identity like Pioneer, Citibank and Thai Airways. Some companies are obliged to change because a change in ownership structures where the whole or a part of the brand identity is owned by a departing partner. E.g. Hutch. When the Orange brand exited India they took the color property with them. Although as a customer I was not a great fan of the new attire. Which since took the vodafone dresscode.

But there is a rather dangerous and rather widely prevalent aspect to this game. Many organisations are seriously advised to change their Corporate or Brand identity as the fastest and most efficient way of changing brand perceptions. In 1987 Air India spent a fortune through an international Identity firm to change its identity from the Centaur to the Sun. It was announced with great pomp and splendor which included a fly past at Nariman point. Sadder and wiser, a few years later they quietly reverted to the Centaur. The recent Indian Airlines makeover gave me a sense of Déjà vu. As a regular business traveler, for the life of me I cannot tell what difference they are trying to represent through the new identity. There are enough examples of other cosmetic interventions which readers will recall.

Is identity change a mug’s game then and a waste of precious marketing resources? Certainly not. But the starting point is that you must be very clear what you want the change to achieve for your brand and more importantly for your business.

An excellent Indian case is that of Britannia. Armed with a hard headed business strategy and a single-minded brand statement to back it, they hired a design company. I personally believe one of the major contributors to the success of this exercise was that the CEO led the assignment. It received the business focus and the management attention that every branding exercise deserves.

At a global level, a similar case is that of HSBC. Moving from Honkong and Shanghai Bank to HSBC and then on to the World’s Local bank was a clever two stage transition. The first step removed the strong geography bias in the name and clarified their global presence. The second step suggested their sensitivity to local business environments. It gave them enormous return in terms of actual brand asset value just 12 months into the change. HSBC was the second largest climber on the Business Week Brand league table in 2004 after Apple.

In a booming economy and a crowded market, we can expect to see many more changes in identity amongst corporates in India. Take a closer look at the ones that appealed to you as a consumer or a practitioner you might notice a few things:

  • Leadership attention for the brand as a key business asset.
  • Absolute clarity on the role of the brand in achieving business goals.
  • A central defining idea that connects the organisation to its consumers.
  • A professional brand partner with a very high sensitivity for the client’s goals.
Good makeovers are powerful exercises in evolution that influence the individual organisation, as well as its environment. Very simply they must either establish a new truth or a find new way of stating an old truth.

Please don’t mix them up with Botox or Silicone.


Managing Value in an intangible environment

Did you know that a company like GE which is so capital intensive has a brand value of nearly $47 billion? Did you know that TATA brand value is $5.5 billion making it the 57th most valuable brand in the world? P&G recently acquired Gillette for a whopping $57 billion, out of which 45% was paid for Gillette’s brands alone. The total value of the top ten global brands is $390 billion, three times the GDP of Thailand.

If you acquired a business before the early eighties, chances are you would have paid as much as 75% for the balance sheet. Today only a fifth is paid for the same assets. So what are you paying the balance for? If you can't explain where 80% of your business' value originates, someone is going to come along pretty soon and eat your lunch.

If you think it is just pure common accounting sense: what would happen to the cash flows of any of these three businesses, if just the name were to be removed. There are lots of intangibles that have the potential to create value, including intellectual property, business processes, specialized training, skilled employees, customer intimacy, corporate culture, and many others that don't show up on most balance sheets.

Businesses and investors have to figure out how to identify all of the assets that contribute to the creation of value; how to measure them to understand the nature of the value they create; and how to improve their value to measurably grow the bottom line.

The prevalent belief that the growing pressure on marketing performance is all about accountability is dangerous for marketers. Accountability is a major concern, but simply embracing financial terms like "customer lifetime value" and "marketing return on investment (ROI)" won't cut it. Businesses are under pressure not only to improve efficiency, but to model, measure, and maximize the intangibles that create real market value.

Do accounting standards recognise these assets?

One of the fundamental stumbling blocks to better value management has been the recognition of these as business assets by the accounting principles in vogue. The International Financial Reporting System (IFRS) will bring some consistency in the overall requirement to value the brands of the companies listed. This includes valuing all brands bought and sold and a requirement for an ongoing annual re­assessment of the value of acquired brands known as an impairment review where the brand does not have a specified useful economic life.

IFRS as implemented in Europe mandates all listed companies to report the value of all acquired intangible assets, such as brands, on their balance sheets. Complying with this mandatory legislation, the IFRS will have significant long term strategic implications for brands and those responsible for them, so it is essential that the CEO, CFO and marketers get involved in the brand valuation process from the outset.

The CEO and CFO would want to be in charge of the company’s most valuable asset as well as the allocation of resource that fuels it. Previously, intangible assets were lumped together on the balance sheet under goodwill. This goodwill is now being separated out into measurable and identifiable intangible assets, such as brands, copyrights and patents.

One of the primary benefits of applying the financial accounting standards for brands is the opportunity to construct a value contribution model for on­going brand management. It is indeed possible today to identify the value contribution of a brand by geography, demographics, product line, retail formats etc. This would be an invaluable tool in the hands of any management that wants to influence and monitor value creation by design.

The ‘globalisation’ of Indian Brands

Recent trends show the increasing number of Indian companies already flexing their muscles and investing overseas from deals like Corus, General Chemicals, and Jaguar­-Landrover. It doesn’t take a PhD in finance to figure out what assets these companies were bought for. If indeed these companies’ former owners were paid such large amounts (borrowed) for their intangibles, it stands to reason that shareholders would like to know how these assets are being managed for value by their managements. Otherwise it might end up like the businessman who bought his million dollar beach house for the sunsets, but stayed indoors most of the time.

The CEO and Brand Value Creation

If the board’s mandate to the CEO is to create value, it would be ironical if there were no means for him to know where value resides. Enlightened firms like Apple, BMW, Nokia, McDonald’s and Disney have clear mandates for the CEO to manage and protect their most valuable assets.

As such, in these companies, the CEO is actually the CBO or the Chief Brand Officer. Think of the number of legendary brand names which are so closely linked to the leadership of the firm. Only yesterday, the stocks of Apple fell to USD 146 on rumours that Steve Jobs may have had a relapse of his pancreatic cancer.

In the end the difference between performers and the rest would be just three

  1. A management that can identify what creates value in their firms

  2. An organisation structure that is built around these assets

  3. A strong leadership that can drive these assets

Find these three and you will find real and rapid value creation.


What's in a name?

At a senior management workshop on “Value Creating Assets” I asked one of the participants to sell me his name for a consideration. Even with the rest of his colleagues egging him on in the negotiations he refused to relent for a crore of rupees. When I stopped and asked the onlookers whether any of them were game, the room suddenly went silent.

Rewind when P&G bought over Gillette for a sum of $57 billion, a company which was capitalised at $54 billion and whose book value was a mere $6.5 billion. Why did the bean counters at P&G pay18 times the book value and Rupees 13,000 crores more than the market value for this firm?

The answer to both situations essentially lies in the intrinsic value of the names they owned:

The manager believed that without his name, his family, friends and colleagues just would not associate him with his unique character traits and so he would have to hard-sell those traits each time he met anyone. P&G believed that with names like Gillette, Duracell, Braun and Oral-B in their portfolio business would be more predictable and profitable. In fact the Gillette name alone was considered to be worth over $17 billion (~Rs.71,000 crores )

But this is not an isolated example. Last year companies taking over other companies paid a little over 72% of the takeover consideration for the intangibles (more than half of that being for the names)

And its not just companies. Increasingly even countries and individuals are realising that
in the current environment in which we live, very little value lies in our physical assets..

India is a case in point: Did you know that Madame Tussauds wax museum in London attracts more visitors a year than India!! Compare this with a small country like Greece which welcomed 12 million visitors last year four times what India did. Guess what the difference is?

All of us cricket lovers know that there is little to choose in terms of performance metrics between Tendulkar and Dravid. But who gets the big sponsorships? The reason lies in another question. If you go to engage any foreigner in a pow-wow on Indian cricket whose do you think would be the first name in his mind?

But what is it that makes these names so valuable?

Think about it in purely practical terms: in a world where choosing a car is difficult enough, you are unlikely to say my decision is “4 lacs, fuel efficient, easy to park in Mumbai, wife can drive it easily, high manufacturing standards, light on maintenance, good service back up etc..” you just say Santro. Because that one word sums up all that you are looking for.

What owners (and managers) of valuable brands do is to ensure that they “own” certain characteristics that are valuable to their customers (not unlike our manager in the workshop!). Easier said than done you might say. Yes and no. Yes, because it requires a fairly large commitment to the name on the part of the brand owner. Not merely in terms of advertising budgets as many might believe, but ensuring that the entire organisation reflects these characteristics in their attitude and behaviour. And this can be quite an ask. No, because all it requires is top management’s understanding and commitment to their most valuable asset.

Irrespective of the kind of business or activity you are in, your “good name” plays a significant role in your chances of success. Coke (value of name: Rs. 312,000 crores), IBM (Rs.225, 000 crores), Nokia (Rs.127, 000 crores) Disney (123,000 crores) Mercedes (92,000 crores) are among the 10 most valuable names in the world. What is interesting is that that all belong to very different industries.

Back home in India Bombay House announced the value of the TATA brands at US $6
Billion. Arguably the most valuable brand portfolio in the country today, it has primarily been built around a single set of characteristics: for my money these are Integrity and Compassion. If you study of the history of this exemplary group you will notice that most of the businesses were incubated by the TATA name. Which means that although many of these businesses have strong , independent brands in their own right today( TCS, Voltas, Taj, Titan,) all of them leaned on the TATA values to nurture their businesses. This consistency of character is essentially what underpins the enviable value of the brand.

Which brings us to the big question that I am asked at practically every forum “... but how do you actually put a value to brands?”

Brand valuation is a relatively young field. Not more than two decades old. That is essentially because it is only over this period that brands began asserting their independent role as creators of wealth. Many methods have been devised to provide a fair value to the brand asset. The popular ones are Historic and replacement costing, Premium multiples, Market value and Relief from royalty. And they were almost entirely conducted for a brand transaction viz. buying and selling brands, M&As, franchising or internal licensing. It is only since the end of the 90s that owners were valuing brands as strategic assets.

Each of these encountered “defendability” problems because they were either historical or relative measures. It was only towards the end of the ‘80s that large firms began using the Economic Use Principle. Which is to separate out the impact of the brand on long term economic earnings. This is essentially done by arriving at the current value of the forecast free cash flows derived from the brand alone. In plain English, if you had only owned the brand(s) and no other asset what would your company be worth?

What does this mean for Indian firms today? As our industry attempts to integrate into a global market place, our brands will play an increasing role in the succe sses or even survival of our businesses (why is amchi JET Airways valued higher than any airline in the US?) Valuing their brands can help CEOs to assess the long term impact of these assets, understand the drivers of brand value and help them to focus their investments into the most capital efficient drivers of value creation. T his should be a huge support to any board at a time when businesses are looking increasingly attractive but at the same time very expensive and risky.( SAMSUNG is more valuable than SONY today because of a very carefully scripted business strategy built around the value of the brand name)

Given this scenario, I don’t think the day is very far away when companies will be bought and sold primarily around their names. Other assets will only be bundled along only for the quality of support they can provide to the name in the quest to multiply shareholder value. If Indian industry is to claim its rightful share of the Fortune 500 this is something we might want to think about.