Valuing your good name - Part 1: The Benefits of Reputation
CEOs and owner-managers, particularly in SME and middle market sectors, are missing out on the real benefits of investing in the good name - or reputation - of their business. They all recognise that a good reputation is a good thing but are suspicious of the apparent costs of the "branding" approach as, increasingly, they feel that so many brands come over as slick and insincere. This paper looks at the issues of valuation and reputation - and the benefits that should be motivating every CEO to take it seriously, not cynically.
We all suspect that it's worth investing in building the good name of our business, either through a formal "brand strategy" or just trying to enhance and maintain our reputation when we can. But how does any business decide how much time, effort and money should be spent on these intangibles? Some people may suggest that companies need make no additional effort to build their good name other than doing all the basics well - good products, good processes, good management, and marketing that focuses on measurable sales generation.
All this is good, but it's not enough. This paper explores some key aspects of building a valuable reputation, shows why it's so hard to quantify, but uncovers some real business benefits in the process.
- No magic formula
- What is reputation all about?
- A question of trust
- Excellence? It's not enough!
- Reputation - the reservoir of wealth
- So what's It All Worth?
- Summary
A second paper "Valuing Your Good Name - Putting Theory Into Practice" looks at cost-effective ways for SMEs to start the brand building process for themselves.
"The only sustainable advantage to any business is its reputation "
- Laurel Cutler former VP Chrysler and director of Foote, Cone & Belding
No magic formula
It must be said straight away that there has been no philosophers' stone to provide a foolproof or easy equation on valuation. However, it is true that substantial work has been undertaken in recent years discussing the issues of valuing the brand or reputation within a business. Whilst these studies have almost all been focussed on publicly quoted companies and have used market capitalisation - as revealed by share price - as a key component in their analysis, they fail to acknowledge that there are now tools (and expertise) available to the non-listed SME that can help develop a financial (as opposed to accounting) valuation framework around organisational know-how, market and reputational strength.
So if you're an unquoted SME with private investors, an owner manager or family business, then you can (and should!) now make the effort to understand the contribution that brand or reputation makes to the overall value of business; even though this has been problematic in the past and likely that any effort or investment in brand-building has appeared hard to justify. We'll look briefly at valuation methodology later in this paper, but for the most part we should focus on what SMEs have been missing out on through their (understandable) reluctance to invest more in their good name.
What is reputation all about?
Reputation is a term historically applied to the perception of a company and its management. A similar concept - brand - came from the realms of product and in many businesses still applies to products and product ranges. Today the idea of a corporate or company brand is bringing the two notions together. The IBM brand. The McDonalds brand. The Disney brand. All of them companies and products. At other times the two remain distinct; for example, Proctor & Gamble and Unilever both have a relatively undefined public perception yet between them they own many of the most well known household and food branded goods. But increasingly it's the company brand which is being seen as the dominant asset; customers and stakeholder communities care increasingly about what the company (and, by implication, its management team) stands for.
We often talk about the identity of a business, its reputation and its brand as if these are one and the same. There are, of course, detailed theoretical differences as well as those historical ones but they need not concern us here; experts can always debate the precise scope and definitions.
It is more pragmatic to take a different approach. Consider this piece of human psychology: your personality is built from three states of mind…
- What do you really think of yourself?
- What do others think of you?
- How do you wish to be thought of?
Equally, these questions apply in determining the nature of your business's personality.
In a highly simplified view, what you really think of yourself is your identity; what others think of you is your reputation; and how you want to be thought of is your brand. The task of every business should be to bring these three together and understand and manage the dynamic between them. The closer to parity, the stronger the personality. Modern corporate brand management does this with a wide portfolio of tools and techniques, but the principle is simple and is a good starting point for SMEs wanting to think a bit deeper than their logo.
For example, you have to manage these three states of mind in both your personal and professional lives. Handle them badly or carelessly in either and you can do irreparable damage to yourself or your business - you might have created a lack of trust, lack of clarity or have somehow misinformed and confused people about what you stand for, what you do, or what you're good at.
A question of trust
In the minds of many (particularly those without the corporate marketing muscle to find out for themselves) "brand" largely engenders cynicism. "Brand" is not always trusted. It's the manufactured public face of business. Meaningless names, logos and registered designs, inane catch phrases, jingles and strap lines.
But most analysts, commentators and practitioners disagree:
"The reality is that, whether you spend time and money on it or not, if you have a business you have a brand"
- Rhys Blakely, The Times, 1st Sept 2003
"Branding is about how people perceive your company and how they feel about you"
- Peter Fiske former Chief Exec, Chartered Institute of Marketing.
"A firm may not consider their image to be important but .... it is to their customers"
- Ben Harris, Chief Exec, New Brand Vision
"A company's reputation comes from everything the company, its employees and others say about the company, how the company behaves and the strategies it tries to enact"
- M. K. Saxton in "Where Does Reputation Come From"
Clearly by whatever name you call it, your good name, reputation or brand is not only important but it also has a big impact on the value of your business and trust is one of the vital elements in maintaining it. Trust is a common word yet actually quite hard to really define or understand. Trust is more than just telling the truth and being open and honest. Can you trust someone to keep a confidence? Will they treat you with respect? Acknowledge your differences? Trust is actually about consistency of behaviours and alignment with values. If you share or accept those values so much the better. So the aim of every CEO should be to get their constituents not just knowing their company but knowing well of it. Trusting it.
Excellence? It's not enough!
So now we have an easy way for an SME to start thinking about reputation (the 3 states of mind and how they need to be aligned) and working with trust as a key tool to maintain and build it.
At this point, and despite the ample evidence of brand value from the corporate world, the middle market cynic is still to be convinced. It all seems a bit flaky. Growing businesses have already been advised that ongoing investment in best practice is the appropriate way to spend money. Surely that's the scientific and proven way to build the business? Be the best with Total Quality Management, IIP, EFQM, ISO and all the other benchmarks of excellence.
With this approach, companies can achieve great operational resilience; but these are no more than necessary steps to take today just to survive in the longer term. Being an efficient, responsive and responsible business are certainly hallmarks deserving of a good reputation, but the truth is that competitors are all embarking on the same journey, many using the same benchmarks. Excellence is a necessity to be a player. It's the ante of any brand or reputation. If you are in the fast food business you must deliver quick, easy, hassle free service in order to simply meet basic customer expectations. The problem is, there are a lot of good well managed companies out there. Too many. So consumers and business partners are increasingly asking instead about what you stand for, what values you hold, what does doing business with you say about them.
In other words ... excellence is not enough, you have to stand for something more. It's back to trust again; to values; to identity, reputation and brand. These are the frameworks that will help you show more, do more, be more. Competitive advantage today means going from pretty damn good to something beyond. Something that is all your own - through differentiation and innovation.
Reputation - the reservoir of wealth
Standing apart, above, beyond your competitors is not easy. Particularly in depressed economic or market conditions, growth expectations are pegged back to zero, costs cut in the usual way and investment in brand-building the last thing on your mind. But your brand framework is going to pull you through and your reputation will continue to deliver customers in shrinking markets - if sales stand still, your market share is growing and this is a great indicator that you have enough to attract the scarce consumer away from alternate suppliers.
"By adding an emotional or symbolic significance to a relationship, a brand creates a basis for staff loyalty and consumer preference. This is the source of a brand's financial value - that it gives the underlying company or product an appeal beyond the functional benefits that it delivers"
- Jonathan Knowles Snr VP Brand Economics
An SME swimming in a crowded pool will struggle to stand out from the other swimmers. He has to build his own pool; and by moving all 3 states of mind (identity, reputation, brand) into a unique and distinctive personality, and keeping them consistent, he can begin to build meaning and trust. He can begin to expand his business. Build a bigger pool through developing innovative new products and services; create an emotional significance to his company name, a symbolic significance that will grow his reputation in a virtuous upward spiral. As it grows it does more to lock out competitors and unlock additional benefits.
The pool becomes a lake; the lake a reservoir. How this can be achieved (and without corporate marketing budgets!) is covered in our paper "Valuing Your Good Name - Part 2: Putting Theory Into Practice" which was published in October 2003. What a strong or leading reputation creates - the reservoir of wealth - is so significant for all areas of the aspiring business that they are covered here as a necessary context for the later discussion of value contribution.
The benefits of brand in the reservoir are controllable, useable, but just like the real thing cannot be left to run dry. Ongoing investment in building reputation, in innovating and brand-building for sustained competitive advantage is a necessity not a nicety. All of the following benefits are proven to arise from the corporate brand model, having been tracked and correlated across most industries and most major brands for many years. Remembering that there is no philosophers' stone or magic equation for an SME, then it's down to logic that the principles of brand and reputation management will deliver the same benefits to smaller companies in their own sectors. It is also the age of the upstart when size and scale need no longer be barriers to entry.
Every middle market CEO should keep this benefits list pinned to his wall. Because his stronger brand will deliver:
- Premium prices
- Increased market share
- Improved bottom line
- Recruitment and retention of the best talent
- Differentiation from competitors
- Best in Show, as well as Best in Class
- Better focused market effort for maximum return
- Easier entry to new markets
- Easier introduction of new products
- Better ride-out of competitor pressures
- More good business development opportunities
- The necessary "credit" to survive making mistakes
- The ability to weather crises and better manage risk
- Higher rates of profit growth (has been shown at 12% difference over weaker brands)
- Higher operating margins over weaker brands
- A halo effect - beneficial perception of all products or services performance
- Greater loyalty from customers, investors and staff
- Less vulnerability to competitor action
- Less vulnerability to market crises
- More strategic pricing flexibility:
- greater inelastic response to price increases
- greater elastic response to price decrease
- improved trade advocacy, co-operation and support
- More ready investors
- More cost effective marketing
- Improved licensing opportunities
- Brand extension opportunities
- A lower perceived risk of doing business with you whether as supplier, customer, channel, investor or employee.
This is not a wish list. It's deliverable, for any company investing in the building and sustaining of their reservoir, using reputation (and innovation) to get distinct competitive advantage.
So what's It All Worth?
The evidence of wealth and the role of reputation in creating it should by now be a lot clearer. We can begin to answer the first of these 2 questions posed by the CBI in their paper: Valuing A Business.
- "How can I make my business more valuable?"
- "How much is my business worth?"
You can make it more valuable by developing your brand and reputation. But what's it worth?
Here lies great danger! Because it's not really that helpful for day to day practical management of the business, we might be tempted - in hard times - to go for the quick wins and hope our reputation is maintained or simply ride on the equity we believe we've already built up. You can ride only so far before you have to top up the reservoir. You ignore this at your peril. This may be feasible in the short term but reputation is always a perishable commodity; if you are not building and maintaining it, it is slowly and imperceptibly decaying and can crumble around you without warning.
"A company's brand is among its most vital and valuable assets,"
- Stephen Cheliotis, brand liaison director, the Brand Council
Almost inevitably your good name is underexploited simply because there are difficulties in valuing it separately from other aspects of the business. This is particularly so as most valuation methods depend on comparing like with like, using industry standard benchmarks and ratios - yet the value of a good name comes from the distinct uniqueness and differentiation that sets the business apart from its competitors. Most likely it will show up somewhere in "goodwill", "intangible assets" and "intellectual capital"; but a variety of elements get put into those categories and basically they all mean what's left when you take book value away from market capitalisation.
So what is the approach that is used to value this greatest of intangibles? On the face of it, it is simple. You take market valuation of the business as a whole, subtract the value of tangible assets such as property plant, stock, machinery and the difference is the intangible assets that will include goodwill, intellectual capital and so on. Buried somewhere in there is the value of your reputation.
The typical methods of valuation use techniques, either singly or in combination, such as:
- PE ratios
- Asset valuation (usually around solely tangible assets), they may adjust for future projects, expectations and risks
- Entry cost valuation
- Discounted Cash Flow
- Industry Rule of thumb
There are many, many more. Each will yield a result with a range of possible values. Successful companies aim to command the premium end of that range. Anything else is to be part of the pack and to have your value, fate and efforts determined by the statistics of your peers and competitors.
Coca-Cola brand - the world's largest - is valued at $70.45 billion!! - Survey by Interbrand and BusinessWeek, 2003
Growth in the role of "intangibles" in the valuation of businesses can be seen from a study that showed market value to book value ratios increasing from 1.5 in the early 1980's to 5 in the late 1990's and early 2000's and currently to have settled back to around 4. Brand valuations are based on estimates of future profits and, hence, depend on assumptions made about ownership, usage, and cost structure. Problems arise from volatility (forecasts in an uncertain and changing market) and separablity (eg. Mercedes brand from Mercedes car from Mercedes management, or the value of the corporate brand separate from a portfolio of product brands).
Large quoted companies with recognised brands effectively have a constantly evaluated market value of the business which can be used to show the premium, if any, over other methods of valuation and the premium, if any, over competing brands. They have measurable strong brands and have shown they can be correlated with measures of market valuation to reveal the premium that the brand delivers. Though deeply technical, elaborate and expensive to pursue (though worthwhile if you're a MacDonald's, Coca-Cola or Orange) the indicators provide strong evidence of the reservoirs we have discussed. Similiar but simpler methodology also drives the SME framework for financial valuation, and we encourage SMEs to make best use of this learning. However it is not yet an approach familiar to most accountants.
Most models for measurement deconstruct the key elements of brand building and track:
- Salience - how aware are people of the brand?
- Perceived quality - how is it is rated?
- User satisfaction - how satisfied are users with the product or service?
- Differentiation - how distinctive is the brand from its competitors?
- Esteem - how well regarded is the brand?
- Knowledge - what does the brand stand for?
- Relevance - how personally relevant is it to the consumer?
This is then used to give an indication of relative brand strength and in turn correlated with analysis of business valuation. The correlations found are significant and are the drivers of the benefits list given earlier.
Summary
This is the first of two papers exploring Reputation. The second - "Putting Theory Into Practice" - looks at ways in which SMEs can begin to construct a cost-effective approach to brand-building, using some basic techniques and tools. In this paper "The Benefits of Reputation", we have acknowledged the difficulties of getting hard and fast measures, but suggest that there is now sufficient understanding for SMEs and middle market companies to develop a brand valuation framework for themselves; and in addition take the learning from corporate studies and apply it logically in considering the wide range of benefits that could accrue if they increase their brand-building investment.
We have looked at a simple but pragmatic model for defining reputation, brand and identity, which proposes that organisations can build strength from aligning their 3 states of mind: how they see themselves, how others see them, and how they would like to be seen. In building and maintaining brand and reputation, trust emerged as a key tool, and it is our belief that this will become an increasingly important factor in the future.
We have listened to the protests of SME chief executives that their preferred investments for development are around business excellence and best practice. While this is laudable, it is also increasingly an expectation. And because many companies are doing it, the bar is raised; companies need to go above and beyond to find something truly distinctive - their own pool to swim in - because excellence is not enough.
If SMEs address reputation building with the attention it warrants, they will be able to grow their business, expand their pool and keep out other swimmers. Eventually they will have created a significant reservoir from their pool - wealth in the form of brand equity, plus an enormous list of strategic and operational benefits resulting from reputational leadership.
Our concluding thoughts are:
- Brand and reputation are your key differentiators to give you a real competitive edge
- Excellence is expected, necessary but not enough
- Brand is about managing the emotional and symbolic relationship with your market and your customers
- Strong brands and good reputations deliver vastly improved business valuation
- Absolute market or business value will get revealed when you float or sell equity in your business, but there are financial valuation metrics you can apply at any time
- The benefits of good brand are many and self reinforcing
- Most importantly, a recognised and trusted company will weather the hard times better and recover faster in the good times.
- Invest in your reputation and brand - you're worth it!
Authors:
Richard Jefferies and Peter Roberts
Managing Partners, Achieving the Difference LLP
September 2003
