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SHIN Hyeon-Am

Building Brand Equity

SHIN Hyeon-Am

Feb. 16, 2005

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The concept of "brand equity" was first developed into theory in the mid-1980s by David A. Aaker in his landmark research paper "Managing Brand Equity." The term "brand," which was used only in marketing departments at the time, thus became a discussion topic at board rooms of chief executive officers. That was when the financial community also began understanding the economic and financial aspects of branding.

The merger and acquisition (M&A) boom also peaked at this time, making brand equity a key factor in M&A decision-making. Corporate raiders already knew intuitively that brands were assets that greatly increased the value of target companies. So they bought companies at higher-than book value and then sold them at an even higher price. Philip Morris bought Kraft for six times the latter's book value, emphasizing that it was also buying the value of its brand, not just the company. Brand valuations are not permitted to appear on corporate accounting statements unless they reflect an actual purchasing price, but they still raise corporate value significantly when acquisitions are promoted. This means brand value is publicly accepted.

In Korea, brand equity began gaining attention after the financial crisis in 1997 as foreign capital increased acquisitions of domestic companies. When foreign capital took over domestic companies, they calculated the value of the companies' brand equity and added it to their acquisition price. For example, when Korea Johnson took over Samsung Pharmacy, a domestic drug maker, it paid 29.7 billion Won for the brand value of F-Killer, a home pesticide. Similarly, Gillette paid 66 billion Won to Rocket Battery for the right to use that brand name for seven years. All this was an utterly new concept for Korean businesses, bringing home the importance of building brand equity.

How much is a brand worth? According to Interbrand, a US marketing research firm, Coca Cola ranks first in brand equity, once commanding more than US$80 billion in brand value (it still commands over US$60 billion now). Intel, Nokia, Microsoft all are each worth tens of billion of dollars. Asian companies also fare well with more than US$10 billion in brand value each for Sony, Toyota, Honda, and Samsung.

How does a company build its brand equity? Is it simply the case of spending more money on advertisement? A noted executive once quipped, "I think of advertising as the engine pulling a train. If you take away the engine, the train will roll along for a while but eventually the train will slow." When running a campaign for public office, a candidate will only waste money if he or she doesn't spend enough on advertisement. It's like someone hoping to go to Europe but buys a ticket that takes him only half the way. The moral of the story is that it's not the destination, but the whole journey that makes your trip worthwhile.

Consistency is the key to brand management. Brand-building requires enormous effort, yet changing an existing brand is even harder. Consider the case of laundry detergent Tide, a leading brand-name of Proctor & Gamble (P&G). This product has been improved 70 times since it was first introduced in 1956, yet it has never wavered from its early brand concept of being "cleaner than any soap." This follows P&G's three branding strategies dubbed: Consistency! Consistency! Consistency!

Brands need to be managed by a single manager. It doesn't matter what position one holds: he or she can be either a manager or director. What is important, though, is that the brand manager work closely with the chief executive officer. Again, study the example of P&G, which has a reputation for owning the most powerful brand management system in the world: a single manager takes charge of the whole brand promotion process from product development to market research, consumer behavior analysis, establishment and execution of marketing strategy and evaluation of accomplishments.

How is this system working in Korea? Generally, one department takes charge of brand development and launching. Evaluation of further performance is carried out by another department. Top management frequently shuffles department heads as they are short of trained experts. The consequences from such unstable management are not hard to imagine. People fight to take credit for success, but not the responsibility for failure. No one will perform if responsibility is divided among many people. Unless any single man or woman takes the relevant responsibility, he or she will not perform to their best abilities. Given such a requirement, it's not surprising that Korea has yet to create a powerful brand of its own.

Brands come and go. But a brand is nothing unless it lasts. The power and value of a brand is the best tradition a company can have, says Philip Morris. Thus creating and maintaining a best-known brand is the supreme goal of any company. Making the best product, building a strong network, and securing skilled employee to do all this is part of the strategy for developing a good brand.

Companies often mistakenly link their product success to brand success. But even if a company develops successful products through enormous spending on R&D and advertising, it runs the risk of failing unless it properly manages its brand power. Brand is surely one of the core intellectual assets of a company; it is what distinguishes world-class companies from the rest of the pack. Rome wasn't built in a day. Building brand equity is a painful process of accumulation. All successful brands have gone through this.

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