Leverage intangible assets for improved brand valuation
Published on 09/02/2003 under Branding
Last month I mentioned a formula developed by Trajectories Group in Irvine, Calif., to determine a value for corporate brands. I followed up with Chip Shafer, CEO of that firm, to find out how it works because I think something like this will help take brand-building out of the magic powder, hocus-pocus arena and put it among the valuable corporate assets you track on a regular basis.
According to Shafer, only a third of Fortune 500 company market value can be accounted for by shareholders’ equity (assets - liabilities + earnings). The rest is called “intangible assets,” which consists of such things as patents, intellectual property, goodwill and brands.
Shafer estimates only about 5% of these intangibles are quantifiable assets such as patents and intellectual property. The vast majority of this value, he says, has more to do with perceptions and expectations about how a company will perform in the future. In other words, it’s the brand expectation people have about your enterprise.
If you get Shafer even a tiny bit riled up, he likens this situation to a corporate scandal that would put the Enron and WorldCom debacles to shame. “Imagine that investors suddenly learn that trillions of dollars in corporate assets are going unreported,” Shafer warns with tongue firmly in cheek. “Accountants have devised a scheme to keep these assets off the balance sheet, and furthermore, no CEO or CFO has actually done an inventory of these assets, much less come up with a way to manage them.” Call the DA, quick!
But seriously, he goes on to point out that shareholders’ equity represents just 1.25% of Procter & Gamble’s total market capitalization, for example. It’s only 7.13% of Dell Computer’s market valuation and 11.18% of Pfizer’s.
Don’t get the idea he’s being critical of these companies, however. Far from it--Shafer says that’s a good thing. The secret to being a highly valued company is to increase the value of intangibles, because it is the most leverageable opportunity a company has. He just wishes we were more disciplined in the way we go about it.
Which leads us to his brand valuation formula: B = (R + M + V) C, where R equals reputation, M equals momentum, V equals vision and C equals connection.
If this seems overly simplistic, it’s only because Shafer’s group is trying to position this decision more on the no-brainer end of the scale than on the brain surgery end. Shafer divides corporate brand valuation into four major components and 24 subcomponents that largely have to do with what you’ve done in the past, what you’re doing right now, what we can expect you to do in the future and how familiar we are with your brand.
The past performance section deals primarily with things that have been done to build trust in your brand. Do we like you? Do you offer high quality? Do you deliver on your promises? Are your customers satisfied? As Shafer points out, reputation is mostly a measure of trust, and trust is a fundamental necessity in all human and business interactions. It bothers him that few companies regularly take measure of how well they are trusted, especially in light of all the recent trust-busting scandals.
The present performance component attempts to determine your momentum in the marketplace. Shafer references the old physics law of mass x speed = momentum. Big companies don’t have to move too fast to have huge momentum, whereas fast-moving companies don’t have to be big to make sizable gains in market position. The objective in this section is to determine how well you are implementing your game plan.
The future, or vision component, looks not only at measures of whether customers and prospects regard you as a forward-thinking company, but more importantly, whether they think you have the credibility to pull off your vision of the future. “Having a clear, compelling vision based on a deep understanding of customer dynamics is incredibly important,” Shafer says. So, not surprisingly, he often finds himself working with companies to fine-tune their competitive promises.
The fourth area concerns connection to the marketplace. It’s more than simple awareness because it deals with familiarity, understanding of company values and the likelihood of doing business with your company. As you can see from the formula, if you score well in all three basic performance areas (past, present and future) but fail to show connectedness to customers and prospects, your brand score will suffer accordingly.
That sums up the basic approach. Research is done online with a comparative sampling of customers vs. prospects. Your brand is compared against a major competitor and the industry bellwether. The final ranking is a numerical value from one to 100. It takes about 60 days from start to finish.
I just read the third annual ranking of the world’s 100 most valuable global brands, which was recently released by BusinessWeek in conjunction with New York-based brand consulting firm Interbrand. A lot of impressive brainpower was used in this effort to calculate a “true economic value of that complex array of forces that make up a brand.”
And if you happen to work for one of those global giants, then you get a nice dollar value to use as a benchmark in tracking the progress of your brand management program. If you don’t, tough luck. Try again next year.
The irony, of course, is that all of the companies listed in the BusinessWeek survey can afford to do their own brand valuation tracking, and they probably do. As for the rest of us, well, you can devise your own version of the Trajectories Group formula and do it yourself, or you can pay them to do it for you.
The important thing, I guess, is that you start looking at the value of your brand assets in component terms that will allow you to do a better job of managing them, and that you track your progress from year to year.
Isn’t it time we all did away with brand management hocus-pocus and started leveraging our intangible assets?