How your Brand Drives Your Stock Price by David Aaker, Robert Jacobson, Michael Kelly


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The Impact Brand Equity has on your stock price - even in high-tech.
Please note - this article was written by David Aaker, Robert Jacobson, and Michael Kelly and appeared in the September 26, 2000 issue of Business 2.0. It's posted here since it's no longer available in the B2.0 archives.

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How your Brand Drives Your Stock Price by David Aaker, Robert Jacobson, Michael Kelly

  1. 1. EBUSINESS ON11 3>I V AI H 0110 21HIN V321 z • Brand News Want to give your stock a boost? Then win over the public with a stellar brand strategy. BY DAVID A. AAKER, ROBERT JACOBSON, and MICHAEL KELLY II • 58 s spending to build brand equity a waste of money in the high-tech world? How much of your marketing budget should you invest, if anything? The traditional argument is that high-tech marketing, whether for hardware, software, or Internet companies, should focus on hard product news, particularly product innovations, manufacturing capabilities, and distribution. Most marketing groups within hightech firms find it very difficult to justify SEPTEMBER 26, 2000 BUSINESS2.COM brand building. This skepticism toward brand-building, however, is not universal. Some point to the success of the "Intel Inside" campaign, which began in 1991 and has enhanced margins, trust, positive associations, and sales. A host of tech firms, including Oracle, Cisco Systems, Sun Microsystems, and Bay Networks, have tried to replicate the Intel advertising model. Others, including 3Com, IBM, and Microsoft, have launched signifi- cant brand-building efforts. But these examples, even when associated with stock market success, do not alone constitute hard evidence that brand-building pays o in the high-technology arena. We decided to see whether we could fin a relationship between brand-building activi ties, future profitability, and stock marke returns in the tech sector. We examined quarterly data for the years 1988 through 1997 for nine companies: Apple, Borland, Compaq, Dell, Hewlett-Packard, IBM, Microsoft, Novell, and Oracle. The brand equity data source was the Techtel panel of approximately 1,500 individuals who influence the computer hardware and software purchases made by their companies; they indicated whether they had a positive opinion, a negative opinion, or no opinion of a company. Our measure of brand equity is th e difference between the percentage of respondents with a positive opinion and those with a negative opinion. We studied the association between stock price movements and changes in brand equity, controlling for the effects of other variables on stock returns. Specifically, for each quarterly period we also accounted for market-wide average stock return and the company's earnings. This allowed us to assess whether brand equity supplied incremental information about the financial prospects of the firm. Our analysis of the data shows that building or damaging brand equity will, on average, affect stock return. Every 1 point increase in brand equity is associated with a roughly 1 percent increase in stock return. As a point of comparison, we found that a 1 percent increase in earnings—known to drive stock return—is associated with a 1.5 percent increase in stock return. This stock market reaction to brand equity makes sense. It's consistent with the fact that investors realize that brand is an asset that can lead to higher future-term earnings, a relationship we also observe. When comparing stock market reaction to brand equity changes, we found that substantial gains in brand equity generated increases in stock return averaging 5.5 percent. Conversely, large losses in brand equity
  2. 2. Brand equity matters in high-tech markets—Wall Street notices when companies successfully build their brands. ed by almost 6 percent the day Intel announced that it would replace the defective chips. This rebound occurred despite the fact that the exchange was anticipated to result in a $500 million charge-off. Investors viewed the long-term benefits of maintaining Intel brand equity as superceding the short-term costs. We also found occasions where product problems did not noticeably impact brand equity. One key differentiating feature was the manner in which management handled the problem. Intel's waffling on its floating point problem seemed only to have exacerbated customer reaction. CHANGE IN TOP MANAGEMENT The arrival of Lou Gerstner at IBM in 1993 and the reinvolvement of founder Steve Jobs with What really drives brand equity? Apple four years ago both were associated If changes in brand attitude are associated with stock return, what builds and what dam- with brand equity improvements. These ages brand equity? We did a qualitative analy- changes in brand equity occurred because new business strategies were articulated and sis and identified five influences: these executives were visible and connected MAJOR NEW PRODUCTS Although product introductions generated no detectable brand to the brand. The drop in Oracle's stock in response to the departure of its president, equity changes in general, there were three Ray Lane, is consistent with the view that a blockbuster sub-brands, all supported by change in well-known company leaders. both advertising and publicity, that moved COMPETITOR ACTIONS Brand equity depends the needle—IBM's ThinkPad, Apple's not only on the actions of a company but Newton, and Microsoft's Windows. It's also on the actions of competitors. A sharp interesting to note that the ThinkPad and brand equity downturn experienced in late Newton products influenced corporate 1992 by Hewlett-Packard was in part due to brand equity even though they were likely some hard-hitting comparative advertising to represent a very small fraction of corpoby Canon, which touted the results of a rate revenue. study that showed four out of five people PRODUCT PROBLEMS The Newton hype in the fall of 1993 was followed by a disappointing preferred the Canon Bubblejet's output to customer reaction and was associated with a that of any HP product. fall in Apple brand equity. A strong sub-brand The progress of Windows 95 had a dracan adversely affect the reputation of a parent matic impact on the brand equity of Apple. brand. When Novell's NetWare came under Increases in the brand equity of Windows 95 fire in 1996—and again in 1997—for not (a product having the strategic and tactical working on the Windows operating systems goal of neutralizing the advantage of Apple's and not being Y2K compliant, Novell's brand "user friendly" interface) basically mirror the equity fell. The Intel response in 1994 to a fall in Apple brand equity. defect in its Pentium floating point unit, LEGAL ACTIONS Borland suffered a sharp which caused a fall in its brand equity, pro- decline in 1993 after losing a major lawsuit vides dramatic evidence of the financial mar- by Lotus Development. The U.S. Court of kets' reactions to actions influencing brand Appeals found that Borland had infringed equity. For the period when the chip's flaw on the Lotus copyright to parts of its popfirst became public until the decision to ular spreadsheet program, Lotus 1-2-3, in replace the chip, Intel's stock lost more than its Quattro and Quattro Pro 1.0 software. 11 percent of its value. The stock rebound- More dramatically, Microsoft, having enjoyed generated decreases in stock return averaging 4.8 percent. Firms with small gains or losses in brand equity saw very slight stock return effects, essentially indistinguishable from zero. To illustrate, IBM suffered a negative stock return of 37 percent in the fourth quarter of 1992 after its brand equity decreased 45 percent but experienced a positive stock return of 35 percent in the fourth quarter of 1993 when its brand equity increased by 46 percent. On average, there is more than a 10 percent stock return difference between those doing the best at brand-building and those doing the worst, a number that the most skeptical of CFOs will understand. • • [BUSINESS a high, stable brand equity over a long time period, suffered loses in brand equity because of information arising from the U.S. government's antitrust case. The results from our study support two observations. First, brand equity does matter in high-tech markets, as Wall Street notices when companies are successful in building their brands. On average, brand equity affects stock return and future profits. As a result, high-tech firms should be suspicious of strategic visions that do not include strong brands. Second, building and maintaining brand equity in the high-tech arena requires more than advertising. Blockbuster sub-brands, visible top-managers, competitor actions, and publicity associated with legal and product problems also influence brand equity. These are not things you can delegate to an advertising manager or to the ad agency. It's true that we're making a bit of a leap in saying that the companies used in our study are representative of the entire tech industry. Would our findings hold true for an or a Yahoo!? We're not sure; to run our model requires years of quarterly data, which is currently unavailable for new Internet companies. Yet the fact that during the last half of 1999 substantially increased its brand equity (by around 25 percent) may be one reason that its stock increased sharply while its quarterly loss per share dropped from 43 cents to 96 cents. It is also true that brand equity is only half the story. The stock market reaction to brand equity requires a business model where gains in brand equity translate into higher futureterm earnings, a model that Intel and a number of other technology companies possess. The tailspin of the stock price of Amazon, CDnow, and a number of other companies reflects the skepticism by the market that these firms will be able to capitalize sufficiently on their brand equity. s DAVID A. AAKER (AAKEROHAAS.BERKELEY.EDU ) IS THE AUTHOR OF BRAND LEADERSHIP, VICE CHAIRMAN OF PROPHET BRAND STRATEGY, AND PROFESSOR EMERITUS AT THE HAAS SCHOOL OF BUSINESS, UNIVERSITY OF CALIFORNIA AT BERKELEY; ROBERT JACOBSON (YUSHOOU.WASHINGTON.EDU ) IS THE EVERT MCCABE DISTINGUISHED PROFESSOR OF MARKETING AND TRANSPORTATION AT THE UNIVERSITY OF WASHINGTON, SEATTLE; AND MICHAEL KELLY IMKELLYOTECHTEL.COM) IS CEO OF TECHTEL CORPORATION, EMERYVILLE, CALIF. BUSINESS 2.0 SEPTEMBER 26, 2000