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    Brand valuation hp Brand valuation hp Document Transcript

    • 1
    • Brand Tracker Phase III – Brand Valuation A report submitted to Prof. GovindrajanIn partial fulfillment of the requirement of the course Product and Brand Management th On 18 September 2011 By Rakesh Gakare (B10021) Sharath Ghosh (B10024) Shishir Ramkumar (B10025) Siddharth Goutam (B10030) 2
    • Executive Summary During the 1980’s there was spate of mergers and acquisitions wherein a trend was observedthat the acquiring companies were paying over and above the book value of the acquired company. Thisenigma was resolved when experts came up with the theory that the brands have an inherent value oftheir own. This time period was the birth period of the concept of the brand valuation. Brand valuationis the process in which the total financial value of the brand is estimated. There are severalmethodologies that are used for brand valuation but there is no universal methodology that can be usedfor the valuation of all the brands. Interbrand’s brand valuation method comes the closest to being astandardised method to value brands. Interbrand’s method measures brand value under three pillars viz. financial performance of theorganization, role of the brand in the purchase decision and strength of the brand to ensure expectedfuture earnings. For the purpose of our research, a variation of this method was used to estimate thevalue of the brand HP and two of its competitors (IBM and DELL). The annual report of the three companies were analysed to create a model that will give us theestimated economic profits for the next five years as well as till perpetuity. The CAGR which was used toforecast the future cash flows was assumed by analysing industry reports. To calculate the role ofbranding index and brand strength score a survey was undertaken with the help of questionnaire andwith a sample size of 50. The brand value was calculated by multiplying the economic profit or the intangible earningsand subsequently discounting it with the discounting rate derived from the brand strength score. HPwas valued at USD 23980.83 million while IBM was the leader with USD 39980.23 million and DELL stoodat meager USD 557.484 million. From this exercise we recommend that HP should emulate the strategies followed by IBM, IBMshould continue with its innovative policies as well as its strategic acquisition policies and incorporatethe brand in its operational execution and decision making. Dell on the other hand must go for anaggressive brand building campaign to differentiate the brand DELL from its products. 3
    • Table of ContentsExecutive Summary…………………………………………………..…………..…….….….. 3Defining Brand Valuation…….……………………………………….…………………….. 5-9Brand Valuation Approaches.…………………………………….………………….….… 10-12Brand Value Measurement – Interbrand Model ………………………...……..… 13-18Measurement of Brand Value………………………………………………………..…..… 13-18Recommendation………………………………………………………………………………… 19-22Annexure…………..…………………………….…………………………………………………… 23-31Reference………….………………………………….………………………….…………………… 32 4
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    • What is a brand?A brand is an intangible asset. Some see it as a name or logo others say that it is just a symbol of whatthe brand stands for. To the company that owns the brand it is a future generator of cash flows. A brandexists only because of its commitment to its internal values. Without that it is just a glorified productname. Determining the value of the brand is usually a combination of direct and indirect measures. Adirect measurement process is one that arrives at a price based on what it can add to the bottom line.An indirect method is measurement will value the brand based on what it can add to the bottom line.Why is a brand valuable?A brand is associated with tangible and emotional attributes that is intended to associate a good or aservice of one seller in order to differentiate them from other competitors selling the same kind ofgoods or services. This makes a brand very valuable to the company that it belongs toHow did brand valuation originate?There was a wave of brand acquisition in the 1980’s that exposed the hidden value in highly brandedcompanies. This brought brand valuation into the forefront. This included Nestle buying Rowntree,Grand Metropolitan buying Pillsbury and Danone buying Nabisco’s European businesses. The amountbeing paid to acquire strongly branded companies was increasingly higher than the net value of thetangible assets in the books of the companies. This resulted in huge amounts of “good will” arising onthe acquisition of the brands. This goodwill was disguised as a mix of intangible assets such as Brands,Patents, customer loyalty, and distribution contracts.Why are brands valued?Companies are increasingly recognizing the importance of brand guardianship and management as keyto the successful running of any business. The values associated with the product or services arecommunicated through the brand to the consumer. Consumers no longer want just a service or productbut a relationship based on trust and familiarity. In return businesses will enjoy an earnings streamsecured by loyalty of customers who have ‘bought into’ the brand. 6
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    • Most brand valuations models are classified into 2 categoriesa. Research based approachb. Purely financially driven approachResearch based approachThere are several brand equity models that use consumer data to assess the relative strength andperformance of the brand. But the drawback of this is that it does not take into account any of thefinancial aspects of the brands. Thus it essentially does not take into consideration the future cash flowsthat the brand would generate which is the most essential reason for the existence of the brand. Theresearch based methods use consumer loyalty and buying behavior that have an impact on theeconomic performance of the brand. All these models try to interpret and measure the consumer’sperception towards the brand. This includes various perceptive measures such as awareness,knowledge, familiarity, relevance, purchase considerations, preference, satisfaction andrecommendation.But these methods do not take into consideration the effects of certain factors like R&D and the designof the brand. Thus they do not provide a clear link between specific market indicators and the financialperformance of the brand. This is to say that even though there is a high brand loyalty and a high recall,it may not translate into high brand value. 8
    • Financially driven approach1. Cost based approachesThis method defines the value of the brand as all the cost incurred to bring the brand to the currentstate. This is the sum of the developmental costs, marketing cost, advertising cost, sales cost and otherpromotional cost etc. This is not a very accurate method for valuing a brand because there is no directrelation between the costs incurred and the value added to the brand. Also for very old brands like Cocacola which has been in existence for over 100 years, calculating this cost would not be possible.2. Comparable ApproachAnother approach of valuing a brand is on the basis of comparison. But this is very difficult as the reasonfor the existence of a brand is to create differentiation and thus there is no comparison possible.3. Price Premium approachIt is the value calculated as the net present value of the future price premiums that the brand cangenerate over unbranded and generic competition. But most brands are intended not only top charge apremium but also to secure future cash flows for the company by generating demand. The valuegeneration of these brands is in securing future volumes rather than securing premium prices. This is aflawed method for products which do not have generic competition to which the premium price can becompared.4. Economic use approachApproaches that are driven exclusively by brand equity measures or financial measures lack either thefinancial or the marketing component to provide a complete and robust assessment of the economicvalue of brands. The economic use approach, which was developed in 1988, combines brand equity andfinancial measures, and has become the most widely recognized and accepted methodology for brandvaluation. It has been used in more than 3,500 brand valuations worldwide. The value of the brand isthus defined as the net present value of the future earnings generated by the brand. 9
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    • Interbrand’s Brand Valuation Methodology Measures the Measures that Measures the ability FINANCIAL PERFORMANCE BRAND STRENGTH ROLE OF BRAND organisations raw portion of the of the brand to financial return to its decision to purchase secure the delivery investors that is attributal to of the expected Operating Profit = the brand. This is future earnings. It is Net Revenue - COGS exclusive of other reported on a 0-100 - Indirect Expenses aspects of the scale where 100 is product like price or perfect based on Capital Charge = feature evaluation across 10 Industry WACC dimentions of Brand ActivationInterbrand’s approach is on the following 3 economic functions. This is the most adopted respectedeconomic use approach and thus it forms the basis of our work in this part of the project• Brand’s function to create cost synergies• Brand’s function to generate demand for the product and services• Brand’s function to secure future demand and therefore reduce operative and financial risks. 11
    • Interbrand’s method looks at the ongoing investment and management of the brand as a business asset.This method takes into account all of the many ways in which a brand touches and benefits itsorganization from attracting and retaining talent to delivering on customer expectations. The brandvalue obtained can be used to guide strategic brand management so that the businesses can makebetter and more informed decisions. There are 3 key aspects that contribute to the assessment; thefinancial performance of the branded products and services, the role of the brand in the purchasedecision process and the strength o the brand.Interbrand’s measures the brand strength of a brand on 10 parameters such as Commitment,Protection, Clarity, Responsiveness, Authenticity, Relevance, Understanding, Consistency, Presence andDifferentiation. i. Commitment: It is the measure of an organizations internal commitment or the belief in the brand. It is the extent to which the brand receives support in terms of time, influence and investment ii. Protection: This component examines how secure the brand is across various dimensions. These dimensions vary from legal protection to design, scale or geographical spread iii. Clarity: The brand’s value, positioning and proposition must be clearly informed and circulated within the organization, along with a clear view of its target audiences, customer insights and drivers. It is vital that those within the organization know and understand all of these elements, because everything that follows hinges on them. iv. Responsiveness: This component looks at a brand’s ability to adapt to market changes, challenges and opportunities. The brand should have a desire and ability to constantly evolve and renew itself. v. Authenticity: This component is about how soundly a brand is based on an internal capability. Authenticity asks if a brand has a defined heritage and a well-grounded value set, as well as if it can deliver against customers’ expectations. vi. Relevance: This component estimates how well a brand fits with customer needs, desires and decision criteria across all appropriate demographics and geographies. 12
    • vii. Understanding: Not only should the customers recognize the brand but there must also be an in depth understanding of its distinctive qualities and characteristics, as well as those of the brand ownersviii. Consistency: this measures the degree to which the brand is experienced without fail across all touch points and formats. ix. Presence: This measures the degree to which a brand feels omnipresent and how positively consumers, customers and opinion formers discuss it in both traditional and social media. x. Differentiation: This is the degree to which customers perceive the brand to have a positioning that is distinct from the competition 13
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    • Measurement of brand value(for detailed workings please check the excel sheets attached) • A variation of the Interbrand’s brand valuation model was used to calculate the brand value of HP and its 2 competitors Dell and IBM. • For the purpose of the research a questionnaire was designed and 50 respondents were surveyed. This was done to find out the role of branding index and the brand strength score(see annexure for the questionnaire).Financial Analysis • The annual reports of the parent companies of the 3 brands were analyzed to develop the Discounted Cash Flow model. • For the financial years ending 2008, 2009, and 2010 the figures were directly picked up from the audited financial statements and for the year ending 2011, data was extrapolated from the unaudited quarterly reports published. • The overall growth of the industry was taken from an Forrester industry report and keeping that as the base the assumed YoY growth rate for the next 5 years was arrived at. This growth rate was kept same for the 3 brands for the ease of comparison. • All expenses have been treated as a percentage of revenue while revenue, assets and current liabilities were treated as a function of the growth rate. • For extrapolating the expenses for the next 5 years the average value of the last 3 years have been taken into consideration. • The industry WACC was taken as the capital charge to arrive at the intangible earnings. • Total assets – Current Liabilities = Net Plant Property and equipments • (Net Plant Property and Equipments * Capital Charge) – NOPAT = Intangible earnings Year Rate of growth 2012 12% 2013 12% 2014 13% 2015 12% 2016 11% Terminal 5% 15
    • Brand Index • The Brand index is the parameter which leads to purchase of a particular brand apart from price and feature. • A research was conducted where the respondents were asked to rate, on a scale of 1 to 5 where 1 is the lowest and 5 is the highest, IBM, HP and DELL on the 10 parameters on the Interbrand Valuation model mentioned above. • The mean scores for each parameter and for each brand have been taken and multiplied with weights. • 10% weight age have been assigned to each attribute. The weighted average total and subsequently the brand index have been prepared for each brand. • The above picture shows the position of each brand in the brand index. • The closer the value to 0 the more diversified it is and is a Brand. The closer to 100 more commoditized the products are. HP had a score of 61.52 which is close to the industry average (industry average is 62).Brand earnings = Intangible Earnings * Role of Brand Index 16
    • Brand Strength • For calculating the brand strength, the sum total of all the rates for the brands have been taken. • Since brand strength is a relative measure the total of each attribute have been taken and accordingly, by calculating the average of the sum, weights have been assigned to each attribute. • The scores of each brand for each attribute have been calculated by multiplying the weights with the average values. • The sum total of all the attributes gives the brand strength score for the respective brands. • The discount rate is used to calculate the risk associated with the cash flows of the brand. The assumption has been taken that the industry average WACC would be the risk free rate. • The industry WACC that has been calculated taking into consideration the 3 brands is the rate at which the riskiness of the future cash flows for the Technology sector is the least. • The industry WACC has been taken as the average WACC of the 3 brands under consideration. Interbrand uses a proprietary algorithm which calculates the brand discounting factor from the brand strength score. • Here in our research, we have assumed that a brand strength score of 100 would entitle a discounting rate which is equivalent to the industry WACC. • The brand earnings were discounted with the brand WACC to arrive at the present value of the future cash flows with year 0 being 2011.Particulars Brand Strength Score WACCIndustry 100 9.46%HP 60.95 15.52%IBM 61.77 15.31%DELL 59.88 15.80% 17
    • Brand Valuation• All the present values of the future cash flows including the terminal cash flows were added toarrive at the value of the brand in the year 2011 Brands Value (as of 2011) (values in million) HP $23980.83 IBM $39980.23 DELL $557.48 IBM Forecasted 12% 12% 13% 12% 11% 2012 2013 2014 2015 2016 Total Net Revenues 114852 128634 145356.1 162799 180706.7 Cost of Sales 62827 70366 79513 89055 98851 Cost of Sales as a % of Revenue 55% Gross Margin 52025 58268 65843 73744 81856 R&D 7000.768 3551.713 4013.436 4495.048 4989.503 Cost of R&D as a % of Revenue 6.10% Depreciation 4409.666 4938.826 5580.873 6250.578 6938.141 Depreciation as a % of Revenue 3.84% Overheads 25679.56 28761.11 32500.05 36400.06 40404.07 Overheads as a % of revenue 22.36% EBITA 14935 21016 23748 26598 29524 Applicable Taxes 3734 5254 5937 6650 7381 NOPAT 11201 15762 17811 19949 22143 Total Assets 142314.2 159391.9 180112.8 201726.4 223916.3 Current Liabilities 50880.97 56986.69 64394.96 72122.35 80055.81 NET PPE 91433.22 102405.2 115717.9 129604 143860.5 Capital Charge 8595 9626 10877 12183 13523 Intangible Earnings 2606 6136 6934 7766 8620 Role of Branding Index Brand Earnings 1606.60 3782.27 4273.96 4786.84 5313.39 Brand Strength Score Brand Discount Rate Discounted Brand Earnings 1393.289 2844.58 2787.595 2707.576 2606.374 Terminal Growth Rate 26544.06 Brand Value 39980.29 18
    • HP Forecasted 12% 12% 13% 12% 11% 2012 2013 2014 2015 2016Total Net Revenues 142050 159096 179778.9 201352 223501.2Cost of Sales 108053 121019 136752 153162 170010Cost of Sales as a % of Revenue 76.07%Gross Margin 33997 38077 43027 48190 53491R&D 3685.018 987.7843 1116.196 1250.14 1387.655Cost of R&D as a % of Revenue 2.59%Depreciation 3601.114 4033.248 4557.57 5104.479 5665.972Depreciation as a % of Revenue 2.54%Overheads 14872.58 16657.29 18822.74 21081.47 23400.43Overheads as a % of revenue 10.47%EBITA 11839 16399 18531 20754 23037Applicable Taxes 2368 3280 3706 4151 4607NOPAT 9471 13119 14825 16604 18430Total Assets 150521.3 168583.8 190499.7 213359.7 236829.3 Current Liabilities 61971.12 69407.66 78430.65 87842.33 97504.99NET PPE 88550.16 99176.18 112069.1 125517.4 139324.3Capital Charge 8324 9323 10534 11799 13096Intangible Earnings 1147 3797 4290 4805 5333Role of Branding IndexBrand Earnings 705.8212 2335.624 2639.256 2955.966 3281.123Brand Strength ScoreBrand Discount RateDiscounted Brand Earnings 610.9948 1750.204 1712.024 1659.857 1594.911Terminal Growth Rate 15918.79Brand Value 23980.83 DELL Forecasted 12% 12% 13% 12% 11% 2012 2013 2014 2015 2016 Total Net Revenues 71562 80150 90569.39 101438 112595.9 Cost of Sales 58505 65525 74044 82929 92051 Cost of Sales as a % of Revenue 81.75% Gross Margin 13058 14624 16526 18509 20545 R&D 796.616 892.21 1008.197 1129.181 1253.391 Cost of R&D as a % of Revenue 1.11% Depreciation 815.5285 913.3919 1032.133 1155.989 1283.148 Depreciation as a % of Revenue 1.14% Overheads 8520.32 9542.759 10783.32 12077.32 13405.82 Overheads as a % of revenue 11.91% EBITA 2925 3276 3702 4146 4602 Applicable Taxes 585 655 740 829 920 NOPAT 2340 2621 2962 3317 3682 Total Assets 51372.62 57537.33 65017.19 72819.25 80829.37 Current Liabilities 27866.75 31210.76 35268.16 39500.34 43845.38 NET PPE 23505.87 26326.57 29749.03 33318.91 36983.99 Capital Charge 2210 2475 2796 3132 3476 Intangible Earnings 131 146 165 185 205 Role of Branding Index Brand Earnings 78.84535 88.30679 99.78667 111.7611 124.0548 Brand Strength Score Brand Discount Rate 68.09007 65.85816 64.26814 62.16151 59.5871 Discounted Brand Earnings Terminal Growth Rate 579.5523 Brand Value 557.4842 19
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    • Inferences and RecommendationsHP • HP continues to evolve from a product to a services brand. • In the course of its evolution HP needs to show that the innovation it is known for in its hardware will be replicated in its new offers. • The decision/ news that HP is planning on selling off its flagship PC, Laptop and Smart Phones divisions has resulted in a comparatively low Brand strength score to its competitor IBM. This in turn in the mind of the respondents the riskiness of the cash flows has increased • HP in its new communication has to ensure that even with the sale of its flagship divisions and subsequent foray into the services and software division it will still be able to maintain its quality and innovativeness that made it a market leader in the hardware segment. • HP can adopt the strategy of following the market leader as it can emulate the strategies that IBM followed to become the world’s most valuable brand next only to Coca Cola.IBM • IBM leads the pack with the brand value of almost $40 billion which shows that IBM’s evolution from hardware to service to knowledge to innovation has been successful. • IBM’s focus on emerging economies has allowed to tap into a goldmine by providing the infrastructure to its developing clients • IBM’s gamble to go for a social media initiative has leveraged its brand strength component resulting in a comparatively higher brand strength score. • IBM should continue with its strategic acquisitions policy as it leads to incorporation of best practices, intellectual property rights and higher revenue in the organization. • IBM has a low score in the commitment category, shows that the organization should incorporate the brand as it is perceived by the consumers in its operational execution and decision making. This will help IBM stay true to its positioning statement “Lets Build a smarter Planet”DELL • DELL in the recent years has been trying to move away from its market oriented policies and move into brand building. • DELL has lost its dominance in the cloud computing segment to NEC and Fujitsu but still DELL continues to do some exiting work in the social media • DELL’s low score in both role of brand and brand strength shows that DELL is considered more of a product than a brand. • DELL has to an aggressive stance in its communication to its customers to ensure that its consumers start recognizing DELL as a brand rather than a product as it is the brand which will ensure its future cash flows, rather than the product as they can be duplicated and made obsolete by the competitors. 21
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    • QuestionnairePlease select "only" one option per brand* RequiredRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"commitment" *Commitment - the extent to which the brand receives support in terms of time,influence and investment 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"protection" *Protection - examines how secure a brand is across a number of dimensions (legalprotection, proprietary ingredient, design, scale or geographic spread) 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"clarity" *Clarity - measures the degree to which the brand is truly dedicated to understanding anddefining their customer 1 2 3 4 5IBMHP 23
    • 1 2 3 4 5DELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"responsiveness" *Responsiveness - the brands ability to adapt to market changes, challenges andopportunity 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"authenticity" *Authenticity - if a brand has a defined heritage and a well grounded value set as well as ifit can deliver against customers expectations 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"relevance" *Relevance - how well a brand fits with the customers needs, decision and decision criteriaacross all appreciate demographics and geographies 1 2 3 4 5IBMHP 24
    • 1 2 3 4 5DELLRate the following companies on a score of 1-10 (1 being the lowest and 10 being the highest) for"presence" *Presence - the degree of how positively consumers, customers and opinion formers discussit in both traditional and social media 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"understanding"*Understanding - in-depth understanding of the brand distinctive quality andcharecteristics 1 2 3 4 5IBMHPDELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"consistency" *Consistency - the degree to which a brand is experienced without fail across all touch-points and formats 1 2 3 4 5IBMHP 25
    • 1 2 3 4 5DELLRate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for"differentiation"*Differentiation - the degree to which customers perceive the brand to a positioningthat is distinct to its competition 1 2 3 4 5IBMHPDELL Submit 26
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