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    A guide for practice

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    448 views31 pages

    Marketing & Sales Practice

    Uploaded by

    BALtrans
    A guide for practice

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    © All Rights Reserved
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    McKinsey Marketing & Sales Practice a a McKinsey&Company Contents Making brand portfolios work McKinsey BrandMatics® systematically improving brand economics When do brand investments pay off? Better branding 31 47 Making brand portfolios work Stephen J. Carlott Jt Mary Ellen Coe Jesko Perey Brands are proliferating rapidly, Companies must nowe bring theme under control. In theory, at least, most marketers recognize that they should run their brands as a portfolio. Managing brands in a coordinated way helps a company to avoid confusing its consumers, investing in oveclapping product-development and marketing efforts, and multiplying its brands at its own rather than its competitors’ expense. Morcover, killing off ‘weaker or ill-fitting parts of the product range—an important tenet of brand-portfolio management, though not one that should be applied at all rimes—frees marketers to focus resources on the stronger remaining brands and to posicion them distinctively. Ie thus reduces che complexity ofthe marketing effort and counteracts the decreasing efficiency and. effectiveness of traditional media and distribution channels. ‘Theory, howerer, is one thing, practice another. Marketers today face heavy pressure to produce growch in an era of fragmenting customer needs, ‘Understandably, they often react by expanding rather than pruning their brand offerings. After all, killing tired brands and curbing tie launch of new ones isn't easy when the remaining portfolio must capture neatly half of a discontinued brand's volume merely to break even. Marketers also worry abont the repercussions of using a portfolio approach and ‘making the wrong call. Companies today are more likely to punish brand ‘managers for missing an emerging opportunity than for failing when they tay to exploit it. For these and other reasons, brands (including sub-brands and line extensions) are proliferating at a breakneck pace in industries such as beverages, consumer durables, food, household goods, and Exhibit 4: pharmaceuticals Among other ills, this explosion makes it harder to define customer segments and positioning objectives consistently Consider, for example, the predicament of automakers that have stuffed theie brand portfolios ‘with dozens of all-too-similar sport utility vehicles. Discerning indeed is the consumer who can pick out ‘meaningful differences among them, Costs reflecr the profusion of brands as well, since companies ‘with too many of them suffer from increased marketing and operational complexity and from the associated diseconomies of scale. a IE marketers are to thrive, they must resist the compulsion to launch new and protect old brands and instead shepherd fewer, stronger ones in a more synchronized way. Anheuser-Busch, for example, uses a coordinated approach: it recognizes that customers shift to different beers (irom lower- co higher-end or fuller co lighter brews, for example}, and its portfolio strategy aims to keep those customers within its family of brands when they do so. Procter & Gamble has phased out more than 1,060 brands lover the past five years as part of a successfal global rationalization. And several other consumer goods companies have achieved rates of revenue igeowth two to five times higher than cheir historic norms and saved 20 percent of their overall marketing expenditures by managing their brand portfolios more effectively. Howe do such companies do s0? In part by establishing clear roles, relationships, and boundaries for their brands and then, within these juidelines, giving individual brand managers plenty of scope, subject ‘co oversight from one person who is responsible for the portfolio as a whole, Top-down goals, such as P&cGs recent desire to prune brands that aren't top-two performers in their categories, aso play an important “Reaghy dre qartencfie Fortes co commune nods compo nang marsha to ams tach Flom 97a, the nanber of ras ese 9 Yee othe ghamace iad. fo pcm nae gd sl etl a ear, ty 48 pc fe aomodel aust and CTs feces fon hoichatd goods sna role—provided that the goals are informed by a deep understanding of ‘consumer needs. In addition, since new portfolio strategies feequently ‘prompe reactions from competitors and have unanticipated consequences, ‘companies will have to change the organization to facilitate quick, ‘coordinated responses for the portfolio as a whole and for individual brands, Robust metrics that highlight unexpected shifts are critical 1 both, ‘The portfolio problem It's easy to see why marketers cesist the portfolio approach to brands Afterall, entrepreneurial brand managers, not postiolio managess, built most of the world’s great ones, such as Tide (P&G) and Cheerios (General Mills), inthe United States, and Persil (Henkel), in Europe. Evea if most of these brands are past of portfolios today, a portfolio approach wasn't necessary when the pioneers were developing smaller numbers of brands, ‘Bus managing them has become more difficult, since companies in ‘maturing sectors have nor only used new brands and products to pursue continued growth but also resisted pruning existing ones, in hopes of maintaining market share, cash flows, and long-lived consumer franchises. ‘Mergers, which became much more common during the 1980s and 19908," compounded the problem. All too often, an acquisicion motivated by che alluce of a specific brand, such as PepsiCo's purchase of Quaker Oats +o obtain Gatorade, alse brought a legacy—from breakfast cereals like Cap'a Crunch to dinner favorites like Rice-A-Roni— hat complicated the portfolio manager's task, Although the search for growth provided the main impetus for launching new brands and sheltering old ones, most industries failed to achieve the desired result, In confectionery, for example, the aumber of brands increased by more than 40 percent in recent years, but overall revenue and volume haven't kept pace (Exhibit 1): most individual candy brands have a smaller market share than they did a few years ago. In addition, an ever- growing number of brands imposes complexity costs affecting the entire life cycle, from product development and sourcing (more R&D resources) to manufacturing and distribution [more labor schedules to coordinate) to sales and channel management (moze training and more brands than the sales force can really focus on) to marketing and promotions {more documentation and more coordination of marketing vendors and agencies). ‘The demanding narute of the solution makes matters even more difficult: restoring order calls for centralization and restcaint, both of ‘hich run against the grain of even the most sophisticated marketing organizations Brand moves that look economically acractive or scrategically tidy may founder because ofthe complex interrelationships berween products and segments or a backlash from consumers. Volkswagen's impressive success a repositioning Seat and Skoda Auro, for instance, raised the bar for some of Volkswagen's core products, such as the Golf. Even Proctor &¢ Gamble had to backtrack on its effort, to replace Fairy dishwasher detergent with Dawn in Germany after its racket shatein dish soaps dropped to 5 percent, rom xa. percent i lsu than two years. Crafting a portfolio strategy To deal with the mess, companies need a flexible portfolio approach sensitive (o consumers and cucrent brands alike, While bold, top-down, declarations of intent do have a place, marketers will be better served. by fisst clarifying the needs that brands could satisfy and then assessing both the economic attractiveness of meeting them and their fi with the positioning of existing brands, Only then should marketers move +o increase the portfolio's value by making steategic decisions on che restructuring, acquisition, divestiture, or launch of brands. Start with the consumer “The starting point for marketers isto define categories as consumers do. Over the past decade or s0, PepsiCo, for example, has recognized that customers choose among all nonalcoholic beverages, not just carbonated cones, to satisfy their need for refreshment, Ithas therefore made acquisitions Gatorade, SoBe, Tropicana), developed new products (Amp, Aquafina), and completed several joint ventures (the one with Starbucks led to the bottled ‘Frappuccino). Strong operating results have followed.) Successes such as PepsiCo's—as well as Kellogg's winning move from breakfasts to nutritional minimeals and Procter & Gamble’s repositioning, of Olay from moisturizing products to all skin- and beauty-care offerings— result from a judicious, deliberate broadening of a company's frame of Neti Quer pn Neer 199 er meses ‘eth mete, Coco Col share incre ah pce froma s pee Theeeev ede ‘Troplearas too eve Fok jue poate Ha he en add, Pp ead ve Ce wade en ‘glee Pepa basher on Sand watson ced aan eps ike reference, The revised view of consumer needs is neither too narrow and category constrained nor too broad and conceptual. Moving gradually ‘often helps companies to strike such a balance; PepsiCo, for instance, initially expanded its frame of reference from cola drinks to all carbonated beverages and only later moved into nonalcoholic, nondairy ones. The fit between the redefined frame of reference and existing organizational capabilities also provides 2 reality check. When an expanded frame of reference implies brand-extension opportunities that a company can’t easily seize by itself, it must weigh the benefits of acquisitions or partnerships to broaden its portfolio against their complexity costs. Within a given frame of reference, marketers need a disciplined way of evaluating their brands’ opportunities. One isto scrutinize “need states” — the intersection between what customers want and how they want it (Exhibit 2), Many marketers think about need states from time to time, but ‘most define their brands by produ (for instance, an economy brand) or Exhbit 2: at hy waned hy wan Comte red eae prem nce mar / / / = van ee mi ster ae tee srmene nce treme consumer segment (young adults, say) instead of consumer needs (“people consume this brand when they want something cheap, don’t care about nutrition, and can't spend time cooking at home”). Although thinking through need states is demanding, it often suggests new ways for existing brands to satisfy the needs of customers, thereby helping marketers avoid the common trap of launching a new brand every time they want to enter amarker. ‘When a global brewer scrutinized the need states of ts customers, for example, it discovered that there was no single “import” segment; a wide ‘range of people bought imports across several need states. Suet findings show that the “one brand per customer segment” approach can be mistaken. Ifthe occasions when consumers use a product largely shape their needs, it is often appropriate to offer the target consumer a number of brands Balance economic opportunity with orand reality Need states are more than descriptive tools: they also represent market opportunities. To evaluate them, marketers must begin by estimating their size. Since need states rarely coincide with conventional market definitions, itis often necessary to piece together known segment-share and channel- mix figures creatively. Category, consumer, product, and packaging trends can point to the likely future size of need states, and potential shifts in the intensity of competition can shed light on future profitability. The resulting profit pool map (E:xhibit 3) reveals attractive opportunities for brands to target. But make no mistake: a profit map is no portfolio scrategy. For starters, to target some seemingly attractive need states, it may be necessary to ‘reposition brands so much that they no longer appeal to their original consumers. Such considerations help explain Toyota Motor’s 1989 decision to launch Lexus as a separate brand and not as a new Toyocs model, By contrast, Mazda Motor’s much-praised Millenia luxury car struggled with its brand identity from introduction in 1994 until it was phased ont in 2003, “To avoid positioning mistakes, marketers must understand each brand's unique contribution to the portfolio, Mapping its current brands against the universe of relevant need states is a helpful starting point. The most valuable insights often emerge when marketers use statistical tools and ‘market research to assess the relationship between the things customers value in a given need state and the attributes that differentiate the brand for them.s Combining this consumer knowledge with conventional metrics such as each brand's market share within a variety of need states as well as the proportion of each brand’s volume that a need state represents} helps clarify the attainable opportunities for each brand and the amount of differentiation or overlap within the portfolio. Many companies mapping out their portfolios find that they have at least one relatively weal brand. Some choose to retain and improve under- performers rather than jettisoning them or targeting them toward new customers, but that approach carries risks. Frequently, companies that hold oon to underperformers can't really support all of their brands and thus have to make small cuts in the resources allotted to each, thereby under Exit 3: ot ret ‘oe tapes ose wats st neeesason an) ‘Such an anal e ale equal he tating poe or formes intl hme erate. fr de mapeg of rane opened wae vepetent the ere of porto sad grand ‘eaegen Tormese on india! rand seater sed sta ool se "Bees baadag” ae 7 ‘mining the performance of their portfolios. One benefit of developing. a ‘profit map is thar it helps catalyze more dramatic action by painting a clear ‘picture of the economic opportunities companies forgo if they don’t take the portfolio approach, Make the tough choices “Marketers generally have two options for achieving their portfolio goals. First, they can restructure their brands by repositioning those that have lost relevance to the target segments, by consolidating two or more mature brands competing for the same consumers or by divesting a brand that absorbs more resources than it contributes and holds litte promise of a turnaround, Restructuring doesn't involve pursuing customers whom a company doesn’: currently serve; rather it means changing the brands that serve its present customers, The other option is to change the portfolio to drive new growth by launching a new brand, by acquiring or licensing one from another company, or by redefining an existing brand to target a new category of customers. Restructuring is scary because it involves modifying brands and consumer attitndes. But though careful management is certainly needed to restructure brands without losing customers, the risk of adding new brands or categories is often greater—and so are the investments. Value-creating brand acquisitions are few and far between. Roughly three-quarters of all new brands fail. And despite success stories such as P&G's recent expansion of the Mr. Proper brand in Germany from a floor= cleaning agent into a detergent, stretching brands into any new category is risky hecause it's easy to go too far and lose their identity. Brand managers are accustomed 0 making headlines through launches or acquisitions, but those tactics are usually the last to consider for a portfolio strategy. Of course, companies can rework their brand portfolios in a number of ways, which are often interconnected—if one brand is repositioned, that ‘may have ripple effects for others—so it isn’t practical to evaluate each brand move in isolation, Marketers must therefore develop and compare a manageable number of plausible scenarios that bundle compatible moves. Each scenario should involve only a few of them (Exhibit 4)3 more than four or five can overwhelm 2 marketing organization and confuse consumers. To define those moves, a company must make decisions about issues sueh as the right number of brands—and which to have—and the advisability of offering umbrella brands with sub-brands beneath them rather than a medley of individual ones, Several cules of thumb help marketers to avoid playing a trial-and-error game. First, they can build their strategies around leading brands, If well-known ones are financially successful, their role in the portfolio shouldn't change mach, but when they underperform its critical to adjust their positioning before recrafting the roles of other brands. Second, marketers must ensure that their sophisticated anc ambitious portfolio ideas are Feasible in view of internal resource constraints and likely competitive reactions, Finally, they should know when a brand is the consumers second choice, Research techniques such as conjoint analysis, can help them learn whether two or more adjacent brands are taking share and margins from cach other or from competitors. For an international inclustrialequipment manufacturer, building the portfolio around a leading global brand has been a straightforward affair in many markets but problematic where the company’s other brands are powerful leaders. In those countries, the company makes styling adjustments and includes features valued locally even though they increase the complexicy of its offerings. I also found that in some markets, it sold similar products for different prices. The resulting cannibalization—people usually bonght the cheaper offering —was costly. By clarifying brand roles, making local adjustments when necessary, and doubling the number of shared parts in products, the manufacturer has raised its portfolio sales by three percent in a stagnant market and cut its development ests by up to five percent. Managing the portfoli Getting strategy right is only part of the battle: companies must also make organizational changes if they are to adapt their brand portfolios quickly to shifting trends, competitive responses, mergers, and new-product launches while also managing the natural life cycle of their brands. Since taking action with one often means doing so with another, companies must appoint a dynamic portfolio manager who can ensure that the whole portfolio moves nimbly. How can a company centralize this kind of authority withour handcuffing the managers of its individual brands? That depends largely on how it constitutes the portfolio manager’s role. The crucial thing is that the person who holds it must have the ability to determine, on an ongoing basis, how well individual brands are fulfilling their part in the portfolio strategy and whether the strategy itself still makes sense. The portfolio manager must, of course, have certain traits and skills, But much will also be required of the organization, including unity of purpose across functions and businesses and robust metrics for tracking performance. Structural options, ‘To articulate and monitor a brand-portfolio strategy, the portfolio manager must have the authority, the marketing skills, the facts, and the analyses to sway the brand managers, Sometimes the chief marketing officer, the vice president for marketing, or a person who rose through the ranks of the marketing organization and then became general manager of a business unit can serve as portfolio manager while still carrying out his or her primary duties. The support team might consist primarily of “swing” analysts who have some responsibility for individual brands but can be called up by the portfolio manager for major events, such as a new= product launch or the acquisition of several brands. At the extreme, brand teams might have a fluid membership. In other cases—particularly in industries characterized by rapidly changing tastes (Fashion), many sub-brands (autos), or rapid consolidacion—a full-time portfolio-management structure may be warranted, One global automobile manufacturer relies on a central organization to coordinate its brand strategy. Pricing is one key area of focus because although each of the portfolio’s car lines has a specific role that its list price reflects, differences in base Features and functions make apples-to-apples comparisons difficult. The central team gets around this problem by creating “virtual” cars with identical features across brands, setting the value of each brand according to its role in the portfolio, and then building in or stripping out standard features to arzive at real pricing, Essential tasks Whatever structure a company selects, itis vital for the portfolio manager to channel the entrepreneucial energies of the brand managers in the right direction and, when necessary, to make chem trim their sails or change Bhoilding agreement. The portfolio manager mast get individeal brand groups to endorse the portfolio strategy formally. Incentives that reward them for the whole portiolio's performance help to ensure thac they don't revise their brands’ strategies when no one is watching. Meanwhile, the portfolio manager should reconcile the portfolio strategy with functional agendas elsewhere in the company. Ie might, for example, be necessary to set up focused R&D initiatives to fill gaps in the brand portfolio, to work with the finance organization to inclde key brand metrics in annual and long-range plans, and to have the sales organization develop a calendar and resource-allocation guidelines. The calendar would be linked to key dates in the strategy’s rollout, and the guidelines would include directions for presenting brands to intermediaries such as grocery stores or car dealers. ‘Tracking progress, Measuring whether each brand is fulfilling its role in the portfolio is crucial, Standard metrics show whether consumers know about, have tried, or ever considered purchasing a brand; their attitudes toward ir for instance, is it “worth paying more for?"); rates for converting prospects into customers and for retaining customers in target segments; and levels of customer satisfaction, Other metrics should be tailored to the strategic goals for each brand. If the managers of several brands in the same portfolio track identical metries, the company often has 2 problem: either the metrics are at too high a level to shed light on the relative performance of different brands, or the brands are positioned so closely together that the strategy needs a rethink. ‘An appliance maker introducing a new, lower-priced line to its portfolio, for example, found it helpful to track product-mix changes by sales channels. It discovered that in some of them, its existing premiam products were positioned close to the new line, a problem that leads to cannibalization and falling margins, ‘This timely channel data prompted the company to stop the bleeding quickly, Well-conceived metrics also clarify major competitive moves. In the value end of che appliance industry, for instance, LG Electronics and Samsung have made advances that are prompring several other ‘manufacturers to rethink the role of value offerings in their own portfolios. Although the annual planning process is a natural time for such dialogues, brand managers should raise red flags whenever these issues appear, particularly if the portfolio manager’ likely response to them includes adding a brand. When market researchers recognize a new consumer trend, the portfolio manager must get involved to avoid a familiar outcome: a number of similar products for similar customers and need states. Marketers are uneasy about rigorous brand-portfolio management, but overcoming this mind-set can pay big dividends. For companies that succeed, setting the portfolio strategy isn't a onetime event: its a living, breathing part of day-to-day business. -Arel origaly pia in? he MeKinny Qa song Number 4.702438 Steve Cart ina ductor and Mary Elon Coe ina principal a Mekinny' Chicago nono Tr sho thank fo McKinsey BrandMatics® systematically improving brand economics Jesko Perrey Halo Riesenbeck Trond Rilber Knudsen Jtirgen Schréder How brands increase the value of companies In most industries, differentiation based on objective performance sharacteristics is increasingly difficult. In the automotive sector in the 1966s, for example, “fast” cars accelerated from > to rockm/h in 10 seconds, “Slower” cars needed up to 27 seconds to reach the same speed- as much as 17 seconds longer. Today, the gap between “fast” and “slower” ars has narrowed to just 4 to 6 seconds. As a result, acceleration time is to longer a key differentiator in the mind of most mainstream consumers, Ic is not surprising then, that companies increasingly rely on brands to spark consumer interest and differentiate their offering from that of the sompetition, This is particularly difficult given the exploding number oof brandls in the market. In Germany, for example, the total number of new products launched has more than doubled since 1990. Similarly, the number of brands on grocery store shelves in the United States has risen from 13,000 to 45,000 in just ten years, The increasing number of brands is accompanied by an unprecedented bulk of advertising, In the United States, on average, people are exposed <0 approximately 5,000 advertising messages every day. However, consumers an only digest so much, In faet, consumers are becoming increasingly immane to large portions ofthe traditional advertising arsenal, For example, one company survey showed that while the volume of corporate advertising srew by a 10 percent average over a three-year period, spontaneous. advertising recall actually fell by 18 percent during the same period. Exhibit 1 ‘The effect of strong brands ~ analysis of 51. brands Total return to shareholders compared to market average, 2000-08 Percentage pnts oe — While the battle for consumers’ attention and purchasing power is fierce, the companies that succeed in establishing a strong brand often capture significantly higher sales volumes, and in many cases, with premixm prices, Moreover, capital markets are known to honor companies with strong brands. A survey on brand economics conducted by McKinsey shows that companies with strong brands achieve an above-average total return to shareholders (Exhibit x). There are basically two characteristics of a strong brand: frst strong brands ‘are anchored in consumers’ minds as a postive, unique image, 1?Oréal, for example, is unambiguous: most consumers can recall the appealing, modem snmercials in which attractive celebrities endorse the brand by saying, “Because I'm worth it!”, Second, a strong brand is also able to convert the consumer's appreciation of the brand into concrete purchasing behavior. This important element is often very hard to secure. For example, a number of electricity companies in Europe have managed to increase consumer awareness of their brands in a relatively short period of time through brand ampaigns. Their advertising efforts, however, have had litte influence on purchasing behavior or in getting consumers to actually change providers. Therefore, despite their high awareness levels, these electricity brands cannot be considered strong brands. To succeed in the inereasingly demanding competitive environment, sompanies need to establish strong brands or further develop their established brands. This comes with its share of economic challenges ‘Overall, advertising spend is increasing, even though consumers are paying increasingly less attention to brand messages and promises. Additionally, differences between (at least) the tangible brand performance sharacteristics within individual product sectors are barely detectable. As a result, companies are forced to scrutinize the economies of their brands. Above all, they need to measure just how strong their brands really are and to estimate the sales potential to be captured by successfully managing/ improving brand strength, Ultimately, the long-term value of any given brand depends on the company’s ability to maintain brand equity, both effectively and efficiently MeKinsey has developed an end-to-end approach to systematic brand ‘management—BrandMatics®, This approach is based on the results of behavioral science research and provides management with two distinctive tools for analyzing « brand’s curvent image in the mind of the consumer and for quantifying the brand's furure potential, respectively. 19 brand potent components in improving brand economics No one would dispute the fact that strong brands can genesate strong ‘earnings. However, what is less clear is how to strengthen brands and manage them successfully over the long term. Top-level management often asks two key questions: How do consumers currently perceive our brand compared to the competition? What concrete sales potential could we apture through a stronger brand? key As has been repeatedly validated in empirical studies, BrandMatics® ean be used to answer these questions, A brand’s image can be comprehensively analyzed using the holistic brand diamond, while the new brand potential ‘method allows companies to derive the level of sales or earnings potential that can be attributed to having a stronger brand. The McKinsey brand diamond: measuring and analyzing brand image Brands are images in consumers’ minds, A brand’s image is composed of a wide range of associations. The holistic brand diamond structures these associations into four categories: tangible and intangible brand attributes, and the superordinate concepts of rational and emotional benefits. Thus, all associations connected with a brand can he documented and made sansparent (Exhibit a): Tangible attributes. Associations in this category include characteristics shat can be perceived by the senses, forming the basis for the characteristics of the brand’s image found in the consumers’ minds. The characteristics can be physical and functional in nature, such as, ‘an engine’s horsepower, a product's design (e.g. the shape of a Goca- Cola bottle), oF a brand's visual presence in advertising or promotional sampaigns (e.g., Absolut Vodka), Incangible acvributes, All the characteristics associated with a brand's identity—origin, reputation, and personality—fall into this category. These include associations such as “a brand with tradition” or a socially responsible brand” (e.g., The Body Shop). The intangible brand attributes are associated with tangible brand attributes. For example, he cowboy at the heart of Marlboro’s brand presence leads to special personality associations connected with this brand—independent, adventurous, and rugged Exhion 2: ‘Structuring the brand image: the McKinsey brand diamond Intangte srage terster Repiewon Setevansson Perens wnat tne ‘Wno and what rand otters "We brand Cconctetion Rational benefits, Perceptions of the rational value delivered by the brand are included in this category. Rational benefits can be found along three dimensions: the product and its function, as illustrated by the benefits, associated with the Volkswagen Lupo's fuel economy or Duracell’s lange lasting battery performances the transaction process, exemplified by the onvenience that service providers such as Amazon.com or American Express extend to their customers or the relationship between the mnsuimer and the brand/supplier, such as the benefits associated with Lufthansa’s frequent Fyer program. Rational brand benefits are often derived directly from tangible brand attributes. For example, the high- speed attribute of TGV trains offer the tangible rational benefit of reduced travel time. Emotional benefits. Consumers associate an emotional benefit with a brand if ic reinforces their sense of self-presentation, image transfer, oF selfrealization. For example, brands can provide a feeling of security (¢5., Volvo) or can be used as a status symbol (e.g., Ferrari). Emotional benefits are often what consumers view as the “take-away” of using a specific product oF service, ie, the value posed by the combination of the attributes and rational benefit elements of a given product or service Asa rule, a successful brand elicits associations from among these four categories. The tangible brand attributes—for example, a superior product concept or creative advertising, presence—and the rational benefits resulting from these actributes, are always critical factors in a brand’s success. ‘A number of analyses show that a brand’s tangible attributes deive its inrangible characteristics in the mind of the consumer. Moreover, we have found that strong, sustainable brands primarily differentiate themselves from other brands via the distinctive emotional benefit associations (upper left part of the diamond) they evoke from consumers, As illustrated by the following retail brand example, consumers link a range of positive associations to the brand and believe that it has a particularly good cost-benefit ratio (Exhibit 3, next paye). In cheir minds, this specific brand embodies its functional and business process benefits just as positively as its public presence. However, no emotional values are associated with this retail brand—apart from its low-price Exhibit 3: Image of + Seong cnet Intangible Selcponematin/mage taster Flan fr pe coratous enstaen (ope cee pasa Prowetunetin SSextwe Trrsactin procens SNe wntng ash dese ensue band ‘Stop rationale Ses inow me ‘angie image. The brand also has no distinctive (brand) personality with which onsumers can identify. The association “purchase adds to (joe de vivre)” is particularly weak. The lack of emotional benefits here means that msumers cannot or do not want to establish any loyalty to the brand, While this brand will win a lot of customers owing ta its low prices, it will gain very few who remain loyal to the brand. ‘The MeKinsey brand potential method: potential The brand potential method allows companies to quantify a brand's potential, and thus calibrate brand investments accordingly. This new method begins with an analysis ofthe consumer purchasing process, which uantifying includes calculating the percentages of target consumers at cach stage of the process along 2 spectrum beginning with those who are aware of a Exhibit 4 of brand performance in the purchasing procoss ‘Speen ‘oun come'ta torn ane cess Sse {eee nen is gue sows Oat Soi afi potrtal pune we ener tbe band ore doee thon diet stay prenass te ba brandy, all the way through to those who are loyal users. Although the actual purchasing process steps often vary among industries, they often inchide percentage variants such as those who are aware of the brand, those familiar with ic (prior to deciding to bay), those for whom it is among the brands more closely considered for purchase, those who have actually bought it, and those who would buy it again. Besides mapping the different stages, the analysis clearly reveals bottlenecks in the purchasing process, and at which process stages the company loses potential ustomers. The example! above illustrates the results of a purchasing process analysis for a European ear brand (Pxhibit 4) Comparing the performance of a company’s brand to the brands of its competitors along the purchasing process then provides further indicators for the specific performance profile of the company’s brand. In this example, while the car brand is likely to be considered for purchase by more consumers than the comparable Mercedes C Class model, the ‘Mercedes brand is more likely to turn potential customers inco actual buyers. Mercedes also shows higher figures for customer loyalty. This demonstrates that although the car brand has a superior starting, point, Exhibit §: dentin performance gaps in the purchasing process cp eampoton ax ae ‘abe eed yond “ * aed pote nC tne “” ae it has fewer loyal customers than the competitor's model (Exhibit 5). Tithe car brand were to achieve a conversion rate as good as that of the Mercedes C Class model, then it would be possible to substantially increase the car brand's sales and earnings. The marketing mix offers 2 ‘wide range of levers to make this happen. In addicion to the brand, the sar brand company could use price or its dealership network density 0 sapture this opportunity. The brand potential method allows companies to isolate the impact of she brand image on the purchasing process from the non-brand factors such as price or distribution, Multivariate analysis methods can determine ‘what effect the brand has on closing the gap to the competition by using an attitudinal brand-strength factor as an input variable. A customer sonversion hrand-vale model is used to derive the concrete sales potential for the individual stages within the purchasing process. For example, by strengthening the image of its ear brand, the company could improve its ustomer acquisition performance by 6 percentage points as well as add 5 percentage points ta its customer loyalty performance. Representing sales “Thc cxampl and he llowlng automa indy example ae hated on an cdo ate conde Wy Exhibit 6 The brand management process foo potential totaling EUR ¢ 66 million and EUR 115 million, respectively, this serves as a target for effective brand management, In contrast to standard brand valuation methods, the MeKinsey brand potential method seeks not only to derive the brand’s monetary value, but also ro enable management ro make hetter-informed decisions concerning target-oriented brand investments, However, if interested in defining the rurrent value of a brand—for brand portfolio decisions, for example— sompanies can use an analogous method along the purchasing process. ‘The systematic, impact-based BrandMatics® approach to securing positive brand economics ‘The McKinsey brand diamond and the McKinsey brand potential method provide managers with two effective analysis tools that arc the Foundation of the systematic brand development approach BrandMaties®, which aims :o deliver optimum eeonomie performance from a brand (Fxhibit 6). The approach covers all of the decisions a company rmust make relating to a brand—from measuring and managing the brand to ensuring continuous improvements and controlling. a ‘Segmenting the market and measuring the brand image Customers in any given market have different needs and are looking for different brand benefits to serve them. This makes it difficult to develop a brand that appeals to all potential customers, For example, Swatch may be a very attractive brand fo some watch wearers, while there are others sho would never buy that brand, Therefore, itis important to proactively target an economically attractive segment of the market with a brand that satisfies this segment’s needs and wants. To do this, companies need to first identify the high-potential consumer Broups by segmenting the market—using, for example, sociodemogeaphie, psychographic, usage-oriented, and/or behavior-oriented criteria—into heterogencous potential target groups that, within, are as homogeneous as possible. The selection criteria should be largely based on behavioral patterns (eg. similar purchasing behavios), and yet guarantee that the sroups can be approached via regular communication channels. There is often a trade-off between these two criteria. For example, a demographic segmentation makes the groups very simple to target because the media are familiar with their users’ demographic profiles. However, demographics are usually not a good indicator of purchasing behavior, as seen in the case of the MeDonald’s brand, which appeals to consumers ofall ages, Exhibit 7: ‘Segmentation example for retail business Once identified, the individual seyments should be prioritized according +o their potential o add value to the company. A tried and trusted method is to prioritize segments based on a combination of both needs-oriented and segment-defining characteristics, such as the purchasing situation, demography, oF valics. This allows companies to identify uniform performance bundles of customers with homogenous needs. For marketing purposes, similaritis in the sociodemographic or situation specific segment stcucture allow clear identification of —and thus accessibility to—the segments. Exhibit 7 illustrates this type of “need state” segmentation approach in the retail sector, Finally, one analyzes how all the respective individual segments perceive the brand image, which is illustraced and structured in the brand diamond, Deriving the brand potential and prioritizing gaps in the purchasing procs In the second stage of the approach, the brand potential is derived for each relevant customer segment through a segment-specifie purchasing process analysis. It aot only allows companies to quantily the brand potential, but also reveals those segments and stages in the purchasing process requiring, ‘che most urgent attention. Concentrating on selected valuable segments and on one or a few stages of the purchasing process allows companies ‘co significantly seduce the complexity and maximize the impact of the analysis. In the case of the ear brand example, the brand potential in the purchase stage is substantially greater than in the other stages, thus further analysis should concentrate on this stage. Identifying the brand’s strengths and weaknesses based on elevant brand drivers ‘After identifying the highest priority gap in the puschasing process, ompanies must focus on how to close it by answering a key question: how should the brand be positioned co most effectively strengthen its image within a target segment and fully capeuce its sales potential? To do this, the brand deivers must first be identified. Brand drivers are the brand elements having the greatest influence on consumers’ purchasing behavior—they ensure that consumers move from one stage in the purchasing process to the next. For this analysis, simple comparisons cf average figures can be used as well asa large number of multivariate processes; Exbibit 8 shows the results of this type of deiver analysis within a specific get group, using a car brand as an example. In this ease, “fun to drive” has the most impact on the purchase decision. In contrast, the element “youth? is ‘a so-called brand liability thar negatively influences the purchasing behavior of an attractive postion of potential buyers and thus prevents a greater conversion. of customers. (Once derived, a strengths and weaknesses analysis helps qualify brand. drivers (Exhibit 9). Through this analysis, a company’s brand is compared ro both the market average and to key competitors: what drivers does the company’s brand have that give it a stsong, differentiated position? For which key brand drivers does the company’s brand lag behind the ompetitors? In this example, the car brand scored lower for the “fun 10 drive” brand driver than both its benchmark steategic competitor and che market average. Exhibit 8: Analysis of the brand drivers during the ‘purchase stage’ Mascnty os Uiinns | Bia abies te smeeaey est bucbanrebehevour Deriving options for action In the next stage of the approach, the results of both the brand driver as well as the strengths and weaknesses analyses are combined to form a matrix that provides options for action, This matrix can he used to derive concrete steps for building up and later managing the brand: © TF. company's brand shows weaknesses in highly relevant or key brand clemenes, then they become the potential starting points for improving, the brand image. In contrast, if key brand elements show particular strengths, then these should be maintained or further expanded, as they are among the key differentiators for which customers buy the product. * Less important brand elements that are particularly strong may help to differentiate the brand, but have only an indirect impact on purchasing, behavior. In contrast, any highly negative brand! element should be quickly ‘eradicated or at least minimized so that the brane’ purchasing process pesformance can improve, Exit 9: Car brand - strengths and weaknesses compared {tw the competition Deviation percent mies rane arvors by ingetance 5 segroe at——_® a poate “hntodhe = ett wit th ar 1 Hein Ne reps ue w mates mage HL “Esti ear © etna ne aT anyone Exhibit 10: ‘Options for action ~ managing the ear brand Differentiation: i eer seacel gy so er) beens : Luanites to mestgate ——_Uabites 1 adores Bente ony his type of matrix can be illustrated by using the car brand as an example (Exhibit v0). The “fan to drive” brand driver—with its high relevance in ‘he purchasing process and its low score compared to competitors—is a pos le starting point for optimizing the brand image and improving the brand economics Defining the overall brand essence and instructions for operational implementation Using the options for action derived from the matrix as a hasis, the next step isto reformulate or amend the central brand essence, as it serves as an anchor forall strategic branding and operating decisions. This essence is distilled from the brand's core or vision. Its often a key brand driver or a synthesis of the various brand driver elements that forms the brand’s image associations, in addition to other strategic factors that may influence the positioning (=., pricing or product/market factors). Whereas the brand essence is communicated by the general brand message internally or by the pay-off externally—as with BMW “The ultimate driving machine” ‘or Kit Kat: “Have a break, have a Kit Kat—the associated brand driver clements are responsible for elements in the value proposition supporting this message. To this end, we must identify the elements thae clearly drive the brand's image in all four dimensions of the brand diamond and, in the sonsumers’ minds, positively differentiate it from the competition, These clements should be selected based on their relevance to the purchasing decision and their strength at the time of selection. In addition, companies should take into account the following softer evaluation criteria: * Consistency with the current brand essence. In determining the new brand essence, companies must determine whether the previous brand concept should be maintained in principle and simply be supplemented, oF whether the brand needs to be completely repositioned. Ifthe new overall brand essence isto he based on its existing strengths, we must ensure that the concept does not include any contradictory brand driver elements. * Differentiation frorn the competition. A brand should always be developed with a certain degree of distinctiveness in actribures that are petecived to be relevant for the consumer. Itean only generate long-term consumer loyalty if it is clearly differentiated from the competition. This means that the brand driver elements must be selected in 2 way that gives the brand a nniqne profile or maintains the brand's existing; uniqueness. + Interne! performance. Simply gearing the brand to the consumers" needs i not enough. In order to consistently and continually fulfill the ‘underlying promises supporting the brand essenee at all consumer touch, ‘points, the company must also ensure the corresponding internal resources and capabilities. In some situations, this may require an intermediary positioning until the necessary internal resources are secured. In all cases, Fompanies must avoid making brand promises beyond what is possible to deliver, ‘The BrandMaties® concept provides tools that do mach more than just fine the overall brand essence and the brand driver elements, The results ‘of the analysis must also zranslate into consistent, operational guidelines for the entire organization. Multivariate analysis methods, such as so- salled path or causal analyses, allow companies to translate abstract brand elements into more concrete measures such as product design or advertising, For this purpose, causal relationships and interdependencies among the brand elements ate analyzed. Exhibit v1 shows this type of path analysis for a specific brand in the automotive market, In this example, che general brand driver for car brands “fan to drive” in effect acts as the anchor for the brand’s eore and vision, thus making it the brand essence. Consumers associate the brand essence “fan to drive” with three brand driver clements. OF these, “people who Jnow about cars” is, in turn, associated with other elements, for example, ‘with “safe car.” The path analysis can be used to examine the strength of impact on relationships between brand drivers and marketing activities on che one hand, and between brand driver elements and brand essence on he other. Ifthe element “safe ear” has the strongest impact on the brand essence “fun to drive,” then probably good crash test scores should be highlighted in the company’s brand communication. However, ifthe element * sporty car” has the most impact, then companies could consider, for example, getting involved in car-racing sponsorships. Successful brand management ultimately depends on companies" ability to ensure that the defined measures are implemented in daily operations, BrandMatics® provides a hineprint for how to implement both external and internal elements: Exhibit 22: Path analysis for the translation of brand essence into concrete marketing activities (extract) Mavieting Tesomes BE uocery er Flee Caracke + External communication concept and spend effectiveness ‘A communication execution concept must be developed to consistently sommnnicate the brand essence and associated brand drivers to external parties va all relevant channels and media. This excention concept, centered on the brand essence, should then serve as the basis for the creative process of all external communications. Likewise, the operational drivers identified during the path analysis should be used to translate analytically derived. =oncepts into the creative implementation ofthe straegy. As 2 rule, these drivers should be clearly described as part of the “creative briefing,” providing «guideline forthe agency designing the communication, The marketing mix should also be designed to target the relevant value gap in the purchasing process. The various media have differing effectiveness in influencing each step of the purchasing process, and this should be incorporated inco the media budget to effectively close the pesformance sap and capture the identified sales potential, « Inieral implementation. The process of generating value throughout the entire company must be geared towards the brand essence and its associated brand promises. For this purpose, the brand essence and core divers should be consistently translated into operational measures within = ritical units using targeted initiatives—for example, key customer touch points such as sales. For example, ifthe brand essence of “quick, uncomplicated shopping” applies toa food retailer, this attribute should be reflected in all aspects ofits operations, including determining the minimum staffing necessary to still mect the customers’ need for quick, uncomplicated shopping. An electrical goods manufacturer who wishes to establish an image of quality should probably prescribe quality standards for the packaging, of irs products, Preparing a brand manual for internal implementation has proven useful. This helps companies translate the brand essence into concrete action requirements for employees at an operational level—ideally not justin the marketing department, but also in all other areas. This ensures consistent performance that meets the requirements of the overall brand essence, Finally, successful implementation also requires the systematic ‘management and coordination of all activities that affect establishing the brand, Since the contextual factors for a brand are constantly changing, 1¢ brand strategy must be regularly reviewed and adjusted. This means that the development of the key indicators identified during impact-based brand management must be constantly tracked. These indicators can also be used in a key figure-based, performance-dependent management and remaneration system. Other relevant brand-management issues concerning brand portfolio management and brand architecture can also he investigated by applying, the BrandMatics® approach. For example, BrandMatics® can be used to provide companies with the insights necessary for deciding whether to pursue brand consolidation, an additional potential lever for improving brand economics. Consolidation should be considered if the strengths and weaknesses analysis reveals that a sub brand is not uniquely equipped to meet the needs of a desirable target segment. Brand archicecture options can be ilustrated in 1 matrix showing brand driver similarities on one axis, and general branding ‘potential/isk (segment attractiveness and brand strength) on the other. The results can then be used to derive initial strategic steps as starting points for further analysis. The multi-stage approach described in this brochure provides management swith the tools to make systematic and analytically-founded brand development decisions and also to test assumptions. Nonetheless, the ability of companies to come up with new, captivating brands and. revitalize established hallmarks will continue to depend on managers" creativity and entrepreneurship. In our experience, as a complement to these two important competences, BrandMatics® is a powerful Ingredient for optimizing brand economics in the increasingly saturated branding arena, ‘Are goal bia Mele n 09, “eon ber Keun iets ie MeKiotey Oil fc; Haj Rinne sear vd Tasgn Scher and ek Peay te pinche Dall! fe, ‘hehy Relig ulna alot Mada ny meamseaen aek “he athe lds tank the Mekinsy Urpin tse Tae esac, Lia Herons Roth Sunder, Ama Heer, Parc Meter and Sere Fie or tei comission fh ‘le Copyrighe® soos Mekimey fe Corpany Al perce When do brand investments pay off? Jesko Perroy JOrgen Schvéder Professor Klaus Backhaus, MCM Professor Heribert Meffert, MCM The brand concept is currently experiencing a renaissance, Successful brand management promises positive cesuts in nearly every industey. But no matter how successful companies wich strong brands may be, brands are not equally important to the purchasing decision in every product or service market. Ifa company wants to inyest in brand, it must first look at how imporsant the brand is to the specific product market, Until aow, however, no fact-based guidance for assessing brand relevance was available Strong brands—major succe: Brands are “in”. With increasing, competition, more companies are counting, ‘on brands to gamer success. In Germany, for example, the number of clearly {denrifiahle brands has risen continually in cent years. More than 56,006 now trademarks were registered in 2000 alone. The story behind a brand can ‘even have an impact on the success of a company, as isthe case with well- known brands such as Goca-Cola, Harley Davidson, and Nike. ‘A McKinsey study conducted in the United States in 2000/2001 shows that the development of strong brands does pay off for a company and its shareholders, According to the study, companies wich strong brands Bait 1 ‘The effect of strong brands ~ analysis of 61 brands using 85 brand attributes {otal return to shareholders compared to market average, 2000 02 Percentage points wos bss anos achieved a total return to shareholders that was 2.6 percentage points above market average, while companies with weak brands, by contrast, ‘were 69 percentage points below (Exhibit 1) The growth af some German companies also demonstrates the ability of brands so create value, Beiersdorf AG, for example, has consistently expanded its Nivea bbrand to include additional skin care and cosmetics products—wich great success, as the stock market proves: the company has increase its total retura to shareholders tenfold since 1990, while the EU FMCG (Fast-Moving Consumer Goods) index rose only fourfold by comparison (Exhibit 2). Exhibit 2: Professional brand managoment fulfils stock market expectations — the Nivea example Tota return to shareholders sewed Yee aser 981986 sees 2000002 and investments do not lead to the desired result every market Encouraged by results like these, many companies have significantly inereased investment in their brands, Cae indicator of this is advertising expenditure. Between 1995 and 2000, spending on advertising in Germany rose by an average of eight percent annally. Ie was not snl the decline in economic activity during, 2001/2002 that this growth came to a temporary standstill, althongh there are market indications it will pick up again. [A breakdown of advertising investmene by industry in Germany indicates that some companies have made above-average investments, particularly in those industries that were deregulated in recent years. Telecommunications, and energy suppliers, for example, increased their advertising investment hetween 1998 and 2000 by an approximate annual average of St percent (Exbibit 5). In telecommunications alone, advertising expendicure in 2000 totaled EUR 14 billion, nearly the same amount as in the automobile industry, traditionally a heavy advertiser Utility companies in Germany also discovered the brand concept for promoting their commodity, electrical power. Following deregulation of xn 3 Inereased Investment in advertising by industry Eu raons em ectiety supply Teecommuneators. —_Fnanci Lrvestmems (heovorn supper) ‘ni acne @j. = is ey Exniit 4 AL fist glance, advertising for electricity appears to be very successful ectioly Mavket dovercing arctan ‘never 2000) ee 2 the power industry, group companies, such as RWE, ENBW, and F.ON, invested millions of euros in broad-coverage advertising campaigns to develop their brands. In fact, among German consumers, power company brands, such as Yello, E.ON, and Avanza, now achieve levels of brand awareness equal to those of traditional consumer goods. Just four months after launch, the B.ON brand achieved an aided recall of 93 percent and an unaided advertising recall of 66 peroent (Exhibit 4). Nor surprisingly, these campaigns received accolades in the marketing and advertising industries—but does this expenditure really translate into economic success? In March 2002, the press reported that the “Mix it, baby” campaign developed by the E.ON group persuaded just 1,100 sustomers 10 switch to E.ON'. This means, the estimated advertising expenditure of EUR 22.5 millioa amounts to canvasing costs of EUR 20,309 per customer. Given the average annual tumover of approximately EUR 600 per customer, itis unlikely this investment will pay off over the customer life cycle Ofcourse, the success of the F.ON campaign cannot he measured only by Ihe number of new customers acquired for the advertised “mixed-power clectricity” product, Since deregulation of the electricity market in 4998, the ompany and its predecessors, VEBA and VIAG, have in fact acquired 752.00 new customers, with or without advertising. Moreover, est publicizing he name E.ON alone creates value that is dfficule to quantify. Thee EON sampaign nonetheless highlights the key issue in any marketing investment decision. Whether it s pricing, distribution, or brand, the marketing lever that is put into operation must be impactful enough to justify the investment. Accordingly, the success of brand investment policy depends on the fact ‘chat brands can be considered relevant only if they actually influence he consumer's purchasing decision. Aa effect merely on the consumer perception of the brand will not suffice. Advertising data from the electric power macket confirms that, although consumers brand awareness has increased in this industry, this has had litle influence on their purchasing behavior; thus, the economic impact of the advertising expenditure remains limited. ‘This conclusion may aot seem entirely new. However, what is new is the ability to quantify brand relevance, which is a “soft” criterion in contrast ro actual advertising expenditure, within a specific product market, Until now, a sound method of analysis to support brand policy decision-making was not available. Brand relevance is based on the degree to which the brand delivers value to the consumer via three specific functions Experts from Germany's most renowned scientific research institute for rn arketing—Markceting Centrum Minster (MCM) of the Westphalian. ‘Withelms-University in Miinster—joined forces with McKinsey consultants co develop an approach for measuring the relevance of brands in vations product markets, Their comprehensive scientific research as well as empirical analyses show chat brands deliver value to the consumer at varying levels along three functions. Brand relevance depends on how important it s that ‘hese functions are fulfilled in a given market, “The approach was empirically validated in an extensive consumer market, survey, Brand relevance was assessed in detail for 4 8 product markets in che German B2C sector, Brand investment decisions for these markets ean now be made on the hasis of factual information, ‘wore apg acho "Verlag hat 7 Match ao Exit 6 Brands are considered relevant if they deliver value to the customer via three specific functions Image beet rans deiner an we rage sen = ar = oe ce Pl = ‘The MCM/McKinsey concept of brand relevance measurement Brand relevance is determined on the basis of the three specific functions, shar brands fulfill in creating value for the consumer: brands increase information efficiency, they reduce risk, and they deliver an image benefit (Exhibit 5). + Inctezsed information efficisnoy. Branded products make it easier for the consumer to gather and process information about a product, Bundling information about the manufacturer and origin of a product in the form of a brand helps consumers find their way in a new or confusing, product environment. Moreover, branded products have recognition value: Fonsumers can repeatedly find trusted brands quickly and easily. Examples include cigarette and detergent brands. ‘Risk reduction. Choosing a branded product reduces the consumer's risk of making the wrong purchasing decision. Brands create trust in he expected performance of the produet, and provide continuity in the predictability of the product benefics, such as in the purchase of a car or th shoive of a tour operator. Exhibit 6 ‘The Importance of brand functions determines brand relevance MCM/MoKinsey band relevance measurement + Image benefit creetion When directed outward to the public, the {mage benef allows consumers to use the brand to cultivate an image for ‘hemselves, such as with apparel. The image heneftis directed inward for the purpose of self-realization or identification with personal values and ‘deals, such as with motorcycles. These two dimensions are usually very

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