The Red Thread The true power of a well-managed brand by Jez Frampton - October 18, 2008
The Red Thread The true power of a wellmanaged brand
“The ropes of the royal fleet, from the largest to the smallest, are braided so that a red thread runs through them from end to end which cannot be extracted without undoing the whole. Even the smallest fragment may be recognized as belonging to the crown.” – Johann Wolfgang von Goethe, Elective Affinities
Introduction Although German poet, philosopher, and scientist Goethe wrote this passage in 1809, the idea of the red thread is global, crosscultural, and enduring. It can even be even be traced back to Greek mythology: Theseus found his way through the Minotaur’s labyrinth by following Adriadne’s red thread. The phrase can be translated into French (le fil rouge), Russian (krasnaia nit), and German (roter faden). It is something to which we can all instantly relate. And yet, perhaps more importantly, the passage is also a favorite of mine because it symbolizes what brand value is all about – or rather what brand value should be all about. It is a simple metaphor that eloquently articulates a business component that can be complex and difficult to understand. Likewise, it is a sharp and vivid visual for the creation of brand value, which, although vitally important to the company’s overall success, is an intangible asset that is deeply misunderstood and misinterpreted. Put simply, the red thread illustrates the true power of a well-managed brand: the generator of demand and long-term business success. Today, understanding the red thread of brand value is even more important to marketers than ever before. The current financial crisis has signaled a new age of business. As we face the upcoming challenges, understanding the red thread of brand value can teach us how to develop a clearer understanding of how your brand creates value, how to better invest to get a better ROI, how to best position yourself for the increasing demands of investment in brand building, and how to get the best out of your most valuable intangible asset – your brand.
zero in less than four seconds. It can pull 7G in turns, like a fighter jet. The down force generated is so great that it could be driven upside down at 50 mph. And yet, the technical marvels of the car itself are not the point here. Rather, it’s the way the racing team uses data to optimize the car and driver’s respective performances in order to win, because the difference between winning and losing can be hundredths of a second. (That sounds a lot like business, doesn’t it?) Indeed, data continuously streams from the car to the side of the track – data about such things as fuel consumption, lubricant temperatures, braking heat, and the driver’s heart rate. The team even has its own weather stations so they can forecast what’s happening at the track level. Meanwhile, back at headquarters, McClaren has yet another team that is responsible for making decisions based on current and potential factors. What is the fuel strategy? When do we change the tires? What happens if there is an accident on the track? What happens if it rains? What happens if there is a crash?
The red thread and the power of the team
Now, think back to the car. Every car is fine-tuned for each individual race. Every surface and every element of the car is also altered to create the best aerodynamics, braking pressure, tire pressure, gear ratios, and suspension. Therefore it is, in fact, not the car, but rather each individual component of the car that contributes to the Formula 1 team’s ultimate success.
Imagine a Vodafone McLaren Mercedes Formula 1 racing car. It is capable of accelerating from zero to 100 miles per hour and back to
Competition on the racetrack is exceptionally fierce. In order to win, every link of the chain of events must be considered – every person, and every moving part. Even variables like wind speed or air density can make a difference.
The way to win is for every
person, every component, and every moving part to hold a piece of the red thread.
The team’s mastery of the data and how it interrelates to create advantage is critical. Also critical is how much the team members understand the detail of each race. On some tracks, the primary requirement may be speed, while on others it is cornering. In all cases, the more the Formula 1 team members know, the more creative they can be, the faster they can react and, most importantly, the more certain they can be of the outcome of their many decisions.
people are experiencing your brand through a similar myriad of touchpoints. Brand value is being created whether you like it or not. It’s all about choice or being chosen. Brand equity is great, purchase intent is wonderful, even consideration has a part to play, but, ultimately, the brand influences choice, which means the brand influences earnings. And brands create competitive strength too, which means security of earnings into the future. And right now, earnings are more important than ever before. So how do we get people to choose our brands and how do we manage value across all of our brands’ numerous touchpoints? How do we influence all these different components to deliver a consistent experience?
Ultimately, of course, it’s all about winning – just as it is in the business world. And the way to win is for every person, every component, and every moving part to hold a piece of the red thread.
What we really need is to understand brand value criteria in the context of business and demand through better metrics. We need to acknowledge that while different departments have different perspectives, we must actively pursue a holistic point-of-view. We need to ensure that everyone from every department holds a piece of the red thread. This means everyone from human resources to accounting needs to understand how the brand generates value in everything the company does. The Red Thread in Practice: understanding the drivers of demand Let’s look at the red thread in practice. I will use a car once again – this time, BMW.
Applying the Race Car Analogy to Brands Although it may seem a little odd to be talking about racing cars in the context of branding, brands are definitely about competition, and competition is about optimizing every second. The impression your brand has on consumers and, ultimately, its creation of value takes place in microseconds. Consider that last visit to your favorite store. The environment, the product, the sounds and the smells all contributed to your view of the brand. At any one point in time, thousands, or millions, of
BMW is a great real world example of a company that truly has a red thread coursing through every decision that is made and every product that is created – from when it is designing vehicles and considering where they fit in its model range, to the design elements and how they are brought across all models, to the importance of safety and how that fits with the brand, through to the vehicle’s launch. The red thread weaves through the little things that matter like customer service, how you feel about the vehicle after your purchase, and the way the door sounds when you close it. It courses through the sponsorship and motor sports that reinforce its values, and the communication that comes together to help you decide and realize you did the right thing. And finally, it weaves through to the journey of ownership and the consumer’s experience of the first service when he or she goes
Brands have the unique ability to move all four of these forces – demand, experience, cost, and time economics. It is the red thread that weaves through them all.
back – perhaps the most important component in whether a consumer buys again. As BMW demonstrates, everyone in an organization should hold a piece of the red thread in his/her hands and understand how the brand contributes to how the organization makes money. Although it is difficult to get all those bits of the business to work together, with a greater understanding of how the brand builds value and some financial proof, that task becomes easier and a bit more focused. Consider Michael Porter’s FiveForces: • Suppliers – maintain quality and supply at the best price • Bargaining – the ability of customers to put the firm under pressure, affecting price sensitivity •Entrants – a brand is a barrier to entry, it costs time and money to create one •Substitutes – brands create a sense of uniqueness around a product or service, making substitution harder •Competition – brands exist at the very “bleeding edge” of competition, driving choice and creating desire beyond the simply rational These five forces show that brand value isn’t just built by consumer interactions, or straight sales. Rather, brands have the unique ability to move all four of these forces – demand, experience, cost, and time economics. It is the red thread that weaves through them all. Ultimately, it is all about this: brands are assets. Your #1 priority: understanding customer demand Still, although some marketers may be aware of the need to prioritize outputs (like demand), as opposed to inputs (like costs), our research in conjunction with the ANA and brandchannel. com, which I will tell you more about in a moment, shows that only 33 percent of marketers surveyed believe that examining demand and what drives it should be a priority. Indeed, in my many years working for Interbrand, I have seen many clients spend an exceptional amount of time examining small processes on a factory floor in the hopes that it saves their company money, while spending a very small amount of time examining brand value and
and how exactly it creates, or generates, demand. Meanwhile, they should really be making the latter a top priority, as understanding the drivers of demand helps brands increase their outputs (demand and customer experience), and simultaneously drive down inputs (costs and time). Coca-Cola is an example of a company that invests in its brand. The company, before the stock market went loopy, was worth around US $100 billion. Of that, five percent (or about US $5 billion) is its tangible asset base. Tangible asset base refers to machines, factories, desks, and stocks of materials. The brand is worth US $67 billion. On that basis alone, Coke should spend 10 times the amount in understanding and optimizing its intangible assets. Certainly, Coke appears to place great emphasis upon understanding customers and demand and, as a result, the brand has remained at the No. 1 spot on Interbrand’s annual Best Global Brands list for the eighth year in a row. But could Coke, the biggest brand in the world, who clearly invests time and money into its brand management, understand more? Could the brand spend more wisely? Could it generate more brand value for less spent? And more importantly, could all of us benefit from getting a tighter grip on our business’ most valuable asset? Major marketing misconceptions We decided to ask marketing and branding professionals directly. Interbrand issued a survey in conjunction with branchannel.com (Interbrand’s on-line magazine and discussion space) and the ANA. We wanted to see if our beliefs about brand and the importance of its contribution to business success really did represent the industry. Our goal was to find out more about the current pressures on the marketing community to deliver results. We targeted these two groups because they represent two ends of the branding industry. Brandchannel.com represents brand enthusiasts. These are academics or individuals who have a profound interest in branding but may not work directly in the industry. The ANA individuals polled represent senior marketers – people who work directly in the field. First, we asked about how well marketers understood the relationship between brand and demand. The point was clear. Half of those polled readily admitted that they didn’t really feel they understand this relationship well enough. Given the importance of brand in choice and sales, we would have expected this number to be much higher. This isn’t about understanding value. It’s about It’s about understanding the demand relationship. Surely this should be
Our survey revealed that the primary issue appears to be the inability to prove the financial benefit of the brand. And yet, this is a misconception. .
a key driver of marketing influence within organizations. [See Graph #1] Second, we wanted to understand how brands influence an organization. The enthusiasts are ever optimistic, but two thirds of the senior marketers – the realists – were telling us a scary story. Two thirds believed that brand is not seen as a central organizing principle. Rather, they told us that the old model of branding prevails. It is still seen as a concept limited to the marketing department, rather than as a driver of behavior and actions across the whole business to deliver a branded product or service. [See Graph #2] Our survey revealed that the primary issue appears to be the inability to prove the financial benefit of the brand. And yet, this is a misconception, as we need to remember that we can easily create metrics and incentives for a brand, which is exactly what we started with Samsung some 10 years ago. (More on that in just a moment.) [See Graph #3] And with 80 percent of marketers telling us that demands to prove a business’s worth are increasing – hardly surprising given the current economic climate, in which everything is being scrutinized – the need to dispel this misconception is especially imperative. [See Graph #4] Here’s some food for thought. When asked if marketers had a quantifiable example of how, when, and where a brand increases value, 93 percent of marketers surveyed told us it would allow them to make more focused investments in branding and marketing, 82 percent said it would help them remove underperforming initiatives, 79 percent said it would give them the influence to convince the rest of the organization to do the right thing and build a consistent branded experience for customers, and 69 percent said it would give them the leverage they need with their board to encourage investments. [See Graph #5] It is clear that if marketers are able to prove the financial benefit of their brand and prove the importance of the demand experience – which they can, as I will explain shortly – then there is a huge opportunity for them to make brand the top of the corporate agenda.
What we can learn from Zara: making demand a top priority A good example of a company that has made examining and understanding the drivers of demand a top priority, and has seen success is Zara, one of Interbrand’s 2008 Best Global Brand’s most surprising success stories. To recap: the 2008 list was published in BusinessWeek in September. This year, the top 100 brands on The Best Global Brands list have a combined value of over US $1.2 trillion. In order for a brand to make the table, it needs to be worth at least US $3.3 billion. Over twenty years of experience have enabled us to evaluate brand in the same way that most other corporate assets are typically valued. The three components of our method are:
1. We start by forecasting the current and future revenue attributable to the branded products, subtracting operating costs from revenue to calculate branded operating profit. We then apply a charge to the branded profit for capital employed. This gives us economic earnings.
2. Role of Brand Analysis: We use market research to establish individual brand scores against industry benchmarks. This is about how the brand drives choice and influences demand.
3. Brand Strength: This is a benchmark of the brand’s ability to secure ongoing customer demand and, subsequently, sustain future earnings. In short, it determines how powerful the brand is in a competitive context.
Given these measuring components, it is no coincidence that three of the top five fallers are financial organizations, one of them being Merrill Lynch. Although when we finalized our report in late June, we had no way of knowing what would happen in mid-September. The fact that Merrill Lynch’s brand value was tumbling in June only proves that brand value and economic value are, as I claim, inextricably linked. But let’s concentrate on the positive – namely, the red thread of Zara, whose brand value rose 15 percent in 2008, which puts it at #62 on this year’s ranking. How did they do it? How much do they apply from the lessons and opportunities I have discussed so far? Unlike Google, Apple, and Amazon, the darlings of the Internet
Zara defines its very own red thread because its global operations team understands the heart of its business just as clearly as those individuals unpacking boxes at breakneck speed in Zara storerooms understand it. Age, whose commitment to building their brands has been well documented, little is known about Zara’s value building approach.
They soon outgrew Sony – the original challenge that Samsung’s executives had set for themselves before the KPI program was initiated.
•It continues to bring the latest looks to main street almost before the models have left the runways.
•It added cargo routes so that merchandise could arrive and be displayed more quickly.
•It requires that stores be restocked twice a week with new designs.
Why do many of us, like Samsung, need to refresh our thinking when it comes to brands? Brands were invented when there was an undersupplied market that provided consumers with little choice. Now, we live in an oversupplied market where there are many choices – at times, too many choices. This fact alone makes what you and I do each day more important now than ever before. We just need, as Samsung did, to prove it.
•It keeps collections small to add an air of exclusivity.
•It has sales managers sit at computers at headquarters in La Coruna, Spain and monitor sales around the world in real time.
•It provides store managers with handheld computers that show how garments rank by sales.
Zara has truly become a global force with operations in 72 countries, and despite the rapid expansion it has remained extremely data-driven and customer-centric. It defines its very own red thread because its global operations team understands the heart of its business just as clearly as those individuals unpacking boxes at breakneck speed in Zara storerooms understand it. In an industry where keeping up with trends is everything and during a time when consumers are being particularly thrifty, it is no wonder that Zara’s ability to give its customers fashion at a reasonable price has sent its brand value skyrocketing in 2008. The Red Thread and Samsung I mentioned earlier the Samsung approach. Samsung had the courage to try something new. It changed the way it viewed and managed its brand and, in doing so, changed its business for the better. For the first time, Samsung made brand value a key performance indicator (KPI) to focus the minds of its top executives. This created a shift in attitude, behavior and business strategy. It enabled the team to focus on the activities, messages and business areas (not to mention a focus on design and experience) – all of which we knew would lead to the greatest increase in brand value. This affects budget-setting, allocation and, of course, provides a simple metric for success: “Did we create brand value?”
Given what’s going on in the world, proving the value of branding initiatives sounds like a pretty good idea. The ability to understand how value is created, how to invest in it, how to speed up that process and understand the return on those investments has to be a good thing. Especially considering that if anything, recent events have proven is that “tomorrow just won’t be like today.” The next big challenge: agent-based modeling In his book, The Nature of Marketing: Marketing to the Swarm as Well as the Herd (Palgrave Macmillan, 2008) DDB’s Chuck Brymer teaches us about fundamental shifts in consumer behavior. He shows how one person can quickly become the voice of one hundred, one thousand, one million, and more. The change is having a profound influence on marketing – emphasizing a need to tap into and build social communities – and replacing its rules with principles that are fundamentally different from anything before. In this world of increasing and dramatic change, I would suggest that the next big challenge today is understanding the future and indeed being able to predict with greater degrees of accuracy. Icosystem, a company we work with in Boston, produces predictive modeling tools. Predictive modeling can be applied to forwardlooking business decision-making to help us better understand how the red thread will react under changing market conditions. We can estimate the interaction between the role of brand, brand strength, and marketing mix decisions to model future markets. Most predictive systems use macro trends, big overarching assumptions that ignore the behavior of individuals. No swarms in the Macro. Icosystem uses agent-based modeling to examine inviduals.
Determining the red thread’s course at your organization and understanding your brand more deeply will transform its role and yours.
If you look at a number of scenes in “Lord of the Rings,” they were created using computer agents. Each individual in these scenes is an entity in the system and exhibits anger, strength, and fear. Everything is programmed in and then the armies are let loose to fight to convey the seemingly random scenes of a battle. With computing power still increasing exponentially, it is within the realms of many companies to have tools like this – for uses beyond the cinematic. I know this because some of you are talking to us about it already.
Determining the red thread’s course at your organization and understanding your brand more deeply will transform its role and yours.
Graph #1
Now, more than ever, CMOs and senior marketing executives need to make courageous moves, manage their brands well, and communicate metrics company-wide. If such actions are taken, it has been proven time and time again that brand value can increase, even during a recession. Put simply, if brand value is held paramount, issues can be turned into solutions. Indeed, as the diagram below clearly illustrates, [See Graph #6, p. 8] the portfolio of those Best Global Brands identified by Interbrand – those brands who made brand value paramount – has consistently outperformed both the MSCI World Index and the S&P 500 Index, which is particularly relevant as economic downturn sets in. And finally, the red thread If you examine the organizations found at the top of Interbrand’s 2008 Best Global Brands table, you will quickly discover that they all have that solitary and illuminating red thread coursing through every single thing they do. Zara, Coca-Cola, BMW, and Samsung all show that brand value – that intangible business component – truly has the power to drive numbers in the right direction: numbers that matter in boardrooms. Does your red thread wind its way from your mailroom, through your legal department, through your operations team, through your accounting team and through your C-Suite? Will you make sure your business pays as much attention to the demand side as the supply side? Will you quantitatively measure the value of your brand by putting key performance indicators in place? Will you ensure that any resulting metrics are communicated throughout your organization quickly and clearly? Will you make sure that you have the data to inspire creative action, focus investment and optimize performance?
Graph #2
Graph #3
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Graph #4
Graph #6
Jez Frampton Jez Frampton is responsible for managing the firm’s worldwide interests and enhancing its strategic and creative offerings. Jez is a member of the Marketing Society, the Chartered Institute of Marketing, the Market Research Society, the Design Business Association, and the Institute of Directors. He is a frequent lecturer on the subject of branding.
www.interbrand.com
Creating and managing brand value
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