How to Measure Brand Strategy
For some time now, marketers have talked about methods to measure the economic effectiveness of their programs and have looked for financial metrics suitable to report their activities to the board. A recent survey by the Columbus Business School indicates their success has been limited. Only 30% of the CMOs interviewed use financial metrics for reporting, and 57% of CMOs use no measure of Return on Marketing Investment to evaluate their achievements.
It is a mystery that marketers don’t look for inspiration and guidance for these metrics in the one place where they are bound to be found - their company accounts. These tables are bland and seemingly implacable, but they are no longer simply the result of accountants ticking and totting up what they find in invoices and ledgers; the modern financial statement is far more than that. Accountants are guided in how they assemble the accounts by globally accepted standards which themselves have been developed to make the annual accounts useful to a variety of users. These include the tax authorities, financial regulators and investors. Over the past two decades, the emphasis has changed from a report that records what happened in the past to information that helps all interested parties to assess how the company will perform in the future.
What should attract the attention of marketers is a growing section in the accounts that records the value of acquired brands and tests these annually to see if their value has altered. The primary driver of value change for a brand is the marketing program, but you don’t read a great deal about this in the supporting commentary: According to the CBS report, marketers are doing little to link what they do to these vital numbers.
A relatively new international initiative might force a change and draw marketers into the cycle of company reporting, willingly or not.
The International Integrated Reporting Committee (www.iirc.org) is currently based in London. Since its establishment a few years ago, it has assembled a very impressive list of globally located individuals to serve on its board and various task forces. It is supported by many of the world’s leading companies and financial bodies.
What is Integrated Reporting (IR)?
Publicly held companies are required to publish reports annually that provide investors and others with information about the company’s past performance and future prospects. These follow a set pattern established many years ago in which the first part is a narrative written by company management. At the very least it contains reports by the chairman, CEO and CFO. Increasingly it also covers sections on each company function and the firm’s international sales. The second section is a statutory requirement that contains the financial reports (income statement, balance sheet, cash flow reports and detailed notes to the accounts).
The Integrated Report is being developed because there is a perception that the traditional annual report is too big (and getting bigger) and fails to provide the information that all the stakeholders require. The IR is a short (no more than 40 pages) and concise summary of a company’s organizational structure and business model; its operating context, specifying risks and opportunities; the strategies it has set for itself and how it aims to achieve these; details of governance and remuneration; metrics illustrating the company’s performance and its future outlook. The integrated report will contain much of the information contained in the current reporting model, but in a compressed, easily accessible format. Because of the development work presently taking place where many stakeholders are participating in building the framework, it will be comprehensive and comparable.
This is not a pipe dream. One only has to look at the IIRC webs site to see the companies and organizations involved in the development of IR to know this is serious indeed.
Central to the report is a description of the business model and how the firm is influenced by and interacts with the external environment.
The IIRC has identified six sets of capital that companies draw on and use to make their businesses work. They utilize these capitals within a context of external factors with which they interact. Significantly for the marketing community, one of these is Intellectual Capital. The IIRC describes this as, “The intangibles that are associated with the brand and reputation that an organization has developed.”
Within the last ten years, the accountants have recognized brands as balance sheet assets when they are acquired in a business combination (M&A). In the not-too-distant future they will extend this to include all brands, including those that companies have built over time. The IIRC needed no urging to include brands as critical resources that drive business performance. Brands will be included in the report as resources that underpin the value of the enterprise. The question is: Who will prepare the brand report and what metrics will be used?
It’s the marketer, stupid.
The marketer is the obvious choice, but it is by no means certain that company management will ask them to perform this duty. When brands have to be valued for inclusion in post merger balance sheets, it is not the marketers who are called upon to value the acquired brand. In fact there is evidence to show that many marketers are not even aware that these values are
included in the accounts. Typically it is a member of the M&A team that values the intangibles, including the brands. They use Relief from Royalty to conduct the valuation; a questionable methodology that is purely financial and which has no marketing inputs at all.
Further, once the accounts have been finalized little attention is paid to this number that sits in the balance sheet except once a year when the accountants have to re-look at the acquired assets to see if they have lost any value in the past twelve months. If they have, this loss in value is a loss in the company’s income statement. No attention is paid to any increase in value that is what you would anticipate of a brand that is being properly supported by professional marketers with an adequate budget. The accountants don’t allow for that.
To make matters worse, the brand value that remains tucked away in the notes to the accounts is not used at board level to report marketing achievements. Imagine an acquired property portfolio being treated in this way. If a company invests in a building, the board would insist on regular reports on how the asset is being maintained and demand information on the return the company is earning from lease paying tenants. Why would it not want similar information about its brands?
Seize the moment
If integrated reporting is going to be globally adopted as the new way of presenting a company’s competitive position, there is a once off opportunity to ensure that brands are dealt with in a way that reflects their linkage between the customer and income statement revenue line. That is how important brands are. It is what customers spend on buying the company’s brands that is the source of turnover. Marketers are therefore in a key position as the guardians of brands to ensure the revenue brands generate never falters, but grows.
How this is presented in the integrated report is what is currently being decided. And there is hardly any marketing voice in those discussions. That needs to be changed and that voice needs to push hard for the inclusion of at least five brand defining criteria:
- Talk finance. Brands conform entirely to the accounting notion of cash generating units. These are “the smallest identifiable group of assets that generate cash flows …” That is what brands are: they each generate cash from consumers and are fully identifiable because they are based on a registered and transferable trademark. The marketing fraternity must ensure that brands are seen in this light in the report so that they will be understood to be measurable assets.
- Value brands. The IR will show the enterprise value construct that will require the identified brand components to be valued. If nothing changes, management will probably use the valuations conducted by the M&A team. Marketers must re-claim this ground by employing credible valuation methods that incorporate brand strength and which view the brand in the context of its category environment.
- Measure return. If a brand is valued using a credible, income based technique, then the value will be the capitalized present value of the future economic benefits each brand generates. Once an asset is valued by a time value of money method (present value of discounted cash flows) expenditure on that asset can be evaluated by employment of the Net Present Value (NPV) tool. Thus, increases in marketing expenditure to achieve increments in value will be presented to the board in a familiar way and will be fully understand.
- Competitive position. Marketers must ensure they are not forced to give too much away in the integrated report; which naturally will be devoured by the competition. Information that is useful but which is available to all players in the category should be the limit of what is included. This might be market share; sales trends, marketing to sales ratios, new launches, discontinuations and extensions.
- Prognosis. The default comment is that marketing will ensure that a successful brand continues on its trajectory and a failing brand will be treated for its ailment and bought back to life; or be discontinued. This is never the true situation because marketers should, (and mostly do) think strategically. This means there are plans in place or being developed to make both short and long term gains. Some of this will be expected to be covered in the report because the success of the company’s brands is inseparable from the future of the company’s financial health. Just what is exposed in the integrated report should be an annual decision by company management. Left to the current non-marketing IR group of specialists, anything is possible.
The International Accounting Standards Board (IASB) has recently included Intangible Assets in its three-year research agenda. This means that the anomaly of acquired brands being balance sheet assets while internally generated ones are not will be resolved. But, because of other priorities, it is anyone’s guess when this will happen. On the other hand the Integrated Report is a reality. It will happen; and soon. Marketing doesn’t have to push for brands to be included; the initiators of the project have already seen to that. How brands are covered in the integrated report is open to debate. Marketers must not be left out of the discussion.
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