Every organisation with an identity has a brand that it must manage and protect in order to survive and prosper. This can be embodied in a globally advertised symbol or expressed by the renown of partners in a firm that bears their names. However it is projected, the importance of brand to the sustainability of an enterprise has never been greater. Independent studies suggest that intangible assets such as brands may soon account for up to 80% of leading corporations’ market capitalisation. Furthermore, 85% of respondents in a recent survey considered brands to be their firm’s single most important asset. Yet board-level accountability for their welfare was claimed in only 50% of cases.
Fully functioning brands create value in a number of ways (figure 1). They define customers’ perception of value and reduce the uncertainty of future demand. They enhance an organisation’s ability to raise funds at acceptable cost. They protect the organisation’s freedom to operate by shaping the opinion of regulators and communities. They attract new employees efficiently, build their commitment and direct their performance.
For good or ill, brand unavoidably drives an organisation’s capacity to create and sustain value. The irreparable damage done to a brand following crisis or catastrophe in the owner’s business may substantially outweigh the immediate and visible costs. A risk management framework without proper insight into the role of brand is incomplete.
So how can one usefully define brand risk, in order to perceive it correctly and manage it well? Is it sufficient to monitor a calculated financial value for your brand, now apparently made easier by the application of familiar accounting principles? Where should you start?
What is brand risk?
It is often misleading to speak of brand risk and reputation risk as being precise equivalents. At Marsh, we have adopted a working model of brand risk that we believe distinguishes between its three interacting elements (figure 2): brand equity risk, reputation risk and structural risk.
‘Brand equity risk’ describes exposures that can undermine a brand’s ability to maintain its desired differentiation and competitive advantage. However these attributes may be defined or measured, they are the components of a brand’s image which actually drive its performance. These attributes will, for example, demonstrably affect the willingness of a customer to pay a price premium, to transact more frequently - or to transact at all.
However, by no means every visible element of a brand’s image is a driver of its equity. It is also important to bear in mind that customers, employees, investors and communities may be stakeholders in the same brand, but are likely to have different, if overlapping, priorities and perceptions. Typically, threatened brand equity elements tend to weaken over time until a moment of crisis. This makes incipient failure harder to detect and harder to reverse.
‘Reputation risk’ groups together those exposures that arise from failure to meet the basic expectations of performance that apply to any comparable organisation operating in the same field. All-too familiar examples would be culpable accidents affecting the safety of individuals, lapses in technical quality or unethical conduct. By this definition, risk to reputation typically applies to factors that are ‘brand essentials’.
Merely complying with norms of performance in these essentials will not create competitive advantage. They are the minimum stakes required to stay in the game. By contrast, bad performance or catastrophe in any one of these areas can quickly destroy the vital bond of trust that exists between the brand and its customers or other stakeholders.
Thirdly, but by no means less important, there is ‘structural risk’. This describes exposures that might affect an entire industry or market segment. Altered attitudes to consumption of a particular product, new regulatory impositions in response to the failure of another organisation, the fall from favour of a particular industry amongst potential new employees: all such occurrences may directly or indirectly weaken the economic performance of your brand. These risks are sometimes referred to as ‘demand adjusters’ because this is their principal potential impact.
The appearance of independent brand valuation surveys has contributed to wider awareness of the importance of brands in wealth creation. Brand valuation can draw the attention of an organisation to the relative importance of its brands as a proportion of total enterprise value. Brand valuation is important in merger or acquisition. It may also be useful in setting value growth objectives and monitoring progress towards them.
The most widely accepted technique is often referred to as the ‘economic use approach’. This methodology applies discounted cash flow analysis to revenue forecasts. A risk-adjusted discount rate is used to arrive at a net present value for the brand’s financial contribution over time. In the UK, it has become possible to recognise acquired brands on the balance sheet, at their acquisition cost or less. Current opinion tends not to favour an extension of this principle to brands that an organisation has developed itself or has owned historically.
While the objective of brand risk management is clearly to protect brand value, the financial consequences of brand failure may be felt elsewhere in the balance sheet. When brand failure loses you a sale, you may lose the whole transaction, not just the brand price premium. The process of financial valuation alone may not provide sufficient information about the complex nature of a brand to enable proper assessment of threats to its future performance. By definition, financial valuation methodologies emphasise the revenue raising aspect of brand, but are generally unable to take complete account of operational context and reputation risk.
Gauging the impact of brand-related risks calls for an estimation of how any act, fact or omission is likely to affect stakeholder attitudes and behaviour. It is normally advisable to identify a range of possible outcomes. Tools and techniques exist to build insight and guide the allocation of risk management resources in the face of uncertainty.
In recent times, corporate social responsibility has been the object of particular attention by opinion formers, government, institutional investors and best practice organisations. There is a growing desire among stakeholders to understand better the social and ethical performance of the brands and businesses they support or accommodate.
The concept of corporate social responsibility goes beyond good customer relations and conventional communication to shareholders. It supplements these established priorities with concern for the wider and longer-term interests of shareholders, employees, business partners and communities. As such, corporate social responsibility covers both the sustainability of an organisation’s activities and the moral acceptability of its actions.
The nature of the interdependence between an organisation and its various significant stakeholders is increasingly acknowledged and understood. A range of studies has sought to model the relationship between a company’s reputation and its shareholder value. While it is difficult to isolate the contribution of specific intangibles to dynamic market-based valuations, enough work has been done to suggest directional correlation.
Analysts appear to agree that companies with good reputations for responsible conduct have lower exposure in a number of dimensions. Other things being equal, customers may exhibit more loyalty, employees a greater degree of collaboration, business partners higher levels of commitment, and communities more trust. From a risk management perspective, it seems clear that the consequences of failures of relationship are not exposures that are exclusive to global companies with a household name. Management would do well to integrate these considerations into brand risk thinking.
Risk management in practice
How might you structure a practical brand risk management approach? In the absence of a known project that requires particular brand risk evaluation, organisations should build brand impact assessment into their overall risk identification process. This is because many cases of brand damage result from other operational failures. The following provides an initial checklist in the four key areas of the brand risk management framework (figure 3). Two of these concern sudden or catastrophic events; two of them concern the slower, erosive risks referred to earlier:
Understanding your brand and the nature of brand risk is the first step towards protecting your brand from possible failure - and towards improving its value performance in the process.
David Abrahams is managing consultant, Marsh Strategic Risk Consulting, London and practice leader, brand risk. Tel: 0 20 7357 1000, e-mail: email@example.com
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